Saturday, September 17, 2011

Investing Has Become The Lady Or The Tiger

There's an old story wherein a prisoner is forced to choose one of two doors to open. One has a girl behind it, the other has a tiger*. That's the way I feel about my 401k right now. Safe and stable bonds or volatile and growable stocks? Under ordinary circumstances, I go with Dave Ramsey and pick stocks for the long run. I've still got a long way to go before I retire - 10+ years, but now it's harder to make that choice.

With the Euros about to collapse and their banks clearly underwater, there are lots and lots of voices of doom out there. Even my favorite stock analyst, the brilliant Jim Jubak, is warning of an impending crash. Then there are articles like this, which go more towards the way I'm thinking.
I have been amazed that (the Europeans) have managed to limp along this far, but if they don't do something aggressive pretty soon, their entire banking system is going to collapse. Time is definitely against them and, as I say, if something big and bold isn't announced this week, I expect massive red ink in world equity markets. The epicenter will be European bank stocks.

So, to sum up my expectations, I believe that not only will we get a bold new round of QE from the Fed this week, but other central banks will join the party. (The Bank of Japan and Swiss National Bank are already printing money in an attempt to weaken their currencies.) If that happens, I believe that assets (stocks, bonds and commodities) will rally rather dramatically, at least for a while, with the length and size of the rally depending on the individual idea/asset.

If no QE is announced, and we basically see nothing done, it will probably be safe to short stocks for investors who can handle that strategy. Markets would be pummeled until the central planners (i.e., these bankers) are forced to react to the carnage.
The forces at work here are unpredictable, irrational and orders of magnitude larger in importance than your normal market influences.

Dow Chemicals has just announced a new process for manufacturing light plastics. Invest in Dow! Uh oh, Greece declared bankruptcy and Portugal, Italy and Spain are close behind. Sell everything!

The only thing I can think to do is spread my investments out as widely as possible. These are not ordinary times. Trying to predict what politicians and central bankers, both clinging to broken models of the world, are going to do next is impossible.

As a closing aside, this is another argument for small government. As government power has grown, more and more power has gone into a smaller number of hands increasing instability and unpredictability. Investing has become like riding Space Mountain at Disneyland - a rollercoaster in a dark room where you can't see the tracks ahead of you.

* - Presumably, he wants the door with the girl, but there is the possibility that he's a gay member of the World Wildlife Fund, in which case he wants the tiger.


Jeff Burton said...

re bonds - think rates can fall much further? If not, what happens to principal when rates rise? Think about that before jumping into bonds.

K T Cat said...

Jeff, I quite agree, which is why diversifying seems like the best strategy.