Hello Readers,
I am writing to let you know that my blog has moved. My new blog is on my main website at the following link:
www.gerringwm.com
Please visit my new blog and join as a follower if you are interested.
Thanks,
Eric Parnell
Monday, March 5, 2012
Saturday, February 18, 2012
The Greek Paradox
A default by Greece is inevitable. It is not a matter of if, but when. And it appears that this final outcome may now be drawing near.
The problem for Greece all along has never changed. Greece borrowed too much money. Now they can't pay it back. In order to receive help from its European neighbors in the hope to eventually pay back these loans in the future, it is being required to raise taxes and cut government spending. But both of these policy actions will cause growth in the Greek economy to slow even more, which further reduces their ability to pay back these loans. In short, the problems only become worse over time, not better.
Yet policy makers have insisted on preventing Greece from defaulting for the last several years now. Why? Because a Greek default threatens to create a domino effect that could result in another global financial crisis. This is due to the fact that many banks across Europe hold Greek bonds. If these bonds become worthless, many of these banks may subsequently fail themselves. And the Lehman scenario from late 2008 starts to unfold all over again.
The next key debt refinancing deadline for Greece is quickly approaching on March 20. Negotiations have been ongoing for months now to ensure that Greece receives the latest round of bailout funds from Europe. But as we draw closer to the breaking point for getting something done, the posture of European policy makers appears to be changing. While Greek leaders continue to push feverishly with newly approved austerity promises, European leaders are responding with greater skepticism and complacency. Given the urgency of the situation, this more relaxed stance suggests European policy makers are becoming increasingly resigned to the fact that Greece simply cannot be saved. And instead of throwing more money at a situation that cannot be solved, perhaps it is time to just get on with it already and see what happens.
In many respects, global policy makers have been preparing for months behind the scenes for a Greek default. Their focus has been setting up support for the banking system. Back in late November, global central banks coordinated to opened up currency swap lines to ensure that at risk banks have adequate liquidity access. Then in December, the European Central Bank (ECB) made collateralized loans for 3-years at 1% with virtually no strings attached to banks across the region that needed the funds. And the ECB is set to do offer another round of loans at the end of February just in case any banks need to be topped off with liquidity and balance sheet support. All the while, global central banks from around the world including the U.S. Federal Reserve continue their own aggressive monetary stimulus programs. These are just some of the actions that have occurred recently that have the look and feel of a world that is getting ready for a potential shock. Fully liquefy the system in advance, stand ready to act once the event strikes and hope for the best going forward.
The stock market has thus far been remarkably complacent in the face of this risk, rising seemingly every day and often without much of a reason. This phenomenon, however, is also due to the ongoing distorting effects of monetary stimulus on stocks. Put simply, the stock market becomes artificially inflated when liquidity is being injected into the financial system. But the problem with this distortion is that the stock market quickly collapses once this artificial support is removed. This was why the stock market corrected so sharply starting in late April 2010 and again in late July 2011. In both instances, stocks were detoxing from the withdrawal of monetary stimulus.
At present, the stock market is once again elevating behind the influence of monetary stimulus, but this may not last for much longer. This is due not only because stocks are now vastly overbought, but also due to the fact that stocks have shown the increasing tendency over the last year to decline swiftly and sharply even when they are still receiving the support of monetary stimulus. Last year around this time it was Libya, Egypt, rising oil prices and the Japanese earthquake that sent stocks for a ride lower over several pullbacks in the spring. This year, the unfolding situation in Greece may be the catalyst to spark the latest sell off.
So what can we reasonably expect from investment markets in the event that Greece actually goes into default in the coming weeks? The answer here is far more nuanced than might be expected.
If Greece defaults, the initial stock market reaction is likely to be fairly muted. An immediate sell off followed by an equally quick recovery is a very likely possibility. It would not be surprising after the immediate reaction to even see stocks gradually rise in the subsequent week or two. This is due to the fact that the financial system is prepared for a Greek default. This is the event that everyone is watching and anticipating. And it is directly around the Greece situation where all of the monetary levees have been placed.
Instead, it is in the aftermath of the Greek default where the true danger lies. This is due to the fact that when a major market dislocation like a Greek default occurs, the spark for contagion typically arises from unexpected sources in the end. When Lehman failed back in 2008, stocks did not collapse immediately. Although they thrashed about in the initial days, it took three weeks before they started to fully cascade lower. When Credit Anstalt failed back in 1931 during the Great Depression, the stock market sliced back and forth for over a month before falling off a cliff. In both cases, this delay was due to the fact that the problems that eventually pushed the stock market lower emerged from sources well removed from what was perceived by policy makers to be the primary areas of concern. And given the magnitude and complexity of the current crisis in Europe, there is no reason to expect anything different this time around with Greece. Stocks may not go down immediately, but they may eventually get pulled sharply lower once the true fallout effects eventually start to surface.
Fortunately, the market is made up of a variety of asset classes outside of the stock market, and each will have its own unique response to a Greek default if it were to occur. U.S. Treasuries would likely rally strongly as investors seek a safe haven from the crisis. U.S. TIPS, Agency Mortgage Backed Securities (MBS) and Utilities Preferred Stocks would also likely rise under the same influence, albeit at a more measured pace than nominal U.S. Treasuries. Precious metals such as Gold and Silver also provide a degree of portfolio protection. If history is any guide, they would likely rally immediately on the default announcement, pullback sharply once the mass liquidation activity gets underway, and then rally even more sharply once global central banks intervene with even more aggressive monetary support in an attempt to address any fallout.
Of course, European policy makers may eventually relent in the end and postpone the inevitable Greek default to yet another day. This is the reason to maintain stock exposures in the face of such risks even with a stock market that is already overbought. For as long as global policy makers continue to pour more money into the financial system, stocks have the potential to continue rising far beyond reasonable expectations until the policy support is finally removed or the next crisis flashpoint (military action in the Middle East?) rises to the surface. And just as the numerous categories outside of stocks provide support during a crisis event, most also stand to participate to varying degrees if stocks continue to move to the upside.
These remain interesting times. And while 2011 was an eventful year, 2012 may be even more memorable when it’s all said and done. It should be interesting to see how it all unfolds in the coming weeks.
The problem for Greece all along has never changed. Greece borrowed too much money. Now they can't pay it back. In order to receive help from its European neighbors in the hope to eventually pay back these loans in the future, it is being required to raise taxes and cut government spending. But both of these policy actions will cause growth in the Greek economy to slow even more, which further reduces their ability to pay back these loans. In short, the problems only become worse over time, not better.
Yet policy makers have insisted on preventing Greece from defaulting for the last several years now. Why? Because a Greek default threatens to create a domino effect that could result in another global financial crisis. This is due to the fact that many banks across Europe hold Greek bonds. If these bonds become worthless, many of these banks may subsequently fail themselves. And the Lehman scenario from late 2008 starts to unfold all over again.
The next key debt refinancing deadline for Greece is quickly approaching on March 20. Negotiations have been ongoing for months now to ensure that Greece receives the latest round of bailout funds from Europe. But as we draw closer to the breaking point for getting something done, the posture of European policy makers appears to be changing. While Greek leaders continue to push feverishly with newly approved austerity promises, European leaders are responding with greater skepticism and complacency. Given the urgency of the situation, this more relaxed stance suggests European policy makers are becoming increasingly resigned to the fact that Greece simply cannot be saved. And instead of throwing more money at a situation that cannot be solved, perhaps it is time to just get on with it already and see what happens.
In many respects, global policy makers have been preparing for months behind the scenes for a Greek default. Their focus has been setting up support for the banking system. Back in late November, global central banks coordinated to opened up currency swap lines to ensure that at risk banks have adequate liquidity access. Then in December, the European Central Bank (ECB) made collateralized loans for 3-years at 1% with virtually no strings attached to banks across the region that needed the funds. And the ECB is set to do offer another round of loans at the end of February just in case any banks need to be topped off with liquidity and balance sheet support. All the while, global central banks from around the world including the U.S. Federal Reserve continue their own aggressive monetary stimulus programs. These are just some of the actions that have occurred recently that have the look and feel of a world that is getting ready for a potential shock. Fully liquefy the system in advance, stand ready to act once the event strikes and hope for the best going forward.
The stock market has thus far been remarkably complacent in the face of this risk, rising seemingly every day and often without much of a reason. This phenomenon, however, is also due to the ongoing distorting effects of monetary stimulus on stocks. Put simply, the stock market becomes artificially inflated when liquidity is being injected into the financial system. But the problem with this distortion is that the stock market quickly collapses once this artificial support is removed. This was why the stock market corrected so sharply starting in late April 2010 and again in late July 2011. In both instances, stocks were detoxing from the withdrawal of monetary stimulus.
At present, the stock market is once again elevating behind the influence of monetary stimulus, but this may not last for much longer. This is due not only because stocks are now vastly overbought, but also due to the fact that stocks have shown the increasing tendency over the last year to decline swiftly and sharply even when they are still receiving the support of monetary stimulus. Last year around this time it was Libya, Egypt, rising oil prices and the Japanese earthquake that sent stocks for a ride lower over several pullbacks in the spring. This year, the unfolding situation in Greece may be the catalyst to spark the latest sell off.
So what can we reasonably expect from investment markets in the event that Greece actually goes into default in the coming weeks? The answer here is far more nuanced than might be expected.
If Greece defaults, the initial stock market reaction is likely to be fairly muted. An immediate sell off followed by an equally quick recovery is a very likely possibility. It would not be surprising after the immediate reaction to even see stocks gradually rise in the subsequent week or two. This is due to the fact that the financial system is prepared for a Greek default. This is the event that everyone is watching and anticipating. And it is directly around the Greece situation where all of the monetary levees have been placed.
Instead, it is in the aftermath of the Greek default where the true danger lies. This is due to the fact that when a major market dislocation like a Greek default occurs, the spark for contagion typically arises from unexpected sources in the end. When Lehman failed back in 2008, stocks did not collapse immediately. Although they thrashed about in the initial days, it took three weeks before they started to fully cascade lower. When Credit Anstalt failed back in 1931 during the Great Depression, the stock market sliced back and forth for over a month before falling off a cliff. In both cases, this delay was due to the fact that the problems that eventually pushed the stock market lower emerged from sources well removed from what was perceived by policy makers to be the primary areas of concern. And given the magnitude and complexity of the current crisis in Europe, there is no reason to expect anything different this time around with Greece. Stocks may not go down immediately, but they may eventually get pulled sharply lower once the true fallout effects eventually start to surface.
Fortunately, the market is made up of a variety of asset classes outside of the stock market, and each will have its own unique response to a Greek default if it were to occur. U.S. Treasuries would likely rally strongly as investors seek a safe haven from the crisis. U.S. TIPS, Agency Mortgage Backed Securities (MBS) and Utilities Preferred Stocks would also likely rise under the same influence, albeit at a more measured pace than nominal U.S. Treasuries. Precious metals such as Gold and Silver also provide a degree of portfolio protection. If history is any guide, they would likely rally immediately on the default announcement, pullback sharply once the mass liquidation activity gets underway, and then rally even more sharply once global central banks intervene with even more aggressive monetary support in an attempt to address any fallout.
Of course, European policy makers may eventually relent in the end and postpone the inevitable Greek default to yet another day. This is the reason to maintain stock exposures in the face of such risks even with a stock market that is already overbought. For as long as global policy makers continue to pour more money into the financial system, stocks have the potential to continue rising far beyond reasonable expectations until the policy support is finally removed or the next crisis flashpoint (military action in the Middle East?) rises to the surface. And just as the numerous categories outside of stocks provide support during a crisis event, most also stand to participate to varying degrees if stocks continue to move to the upside.
These remain interesting times. And while 2011 was an eventful year, 2012 may be even more memorable when it’s all said and done. It should be interesting to see how it all unfolds in the coming weeks.
Thursday, January 5, 2012
Outlook 2012: Year of Reckoning
As the calendar turns to 2012, it is worthwhile to look ahead at what we might expect from investment markets in the coming year. While a variety of meaningful challenges will carry over from 2011, how these events play out will also bring the potential for attractive new opportunities as we move through 2012.
Investment markets have been in a state of flux since the outbreak of the financial crisis several years ago. Periods of government stimulus fueled euphoria have been followed by phases of unsettled reality that the underlying problems have yet to be fully addressed. At the root of the ongoing uncertainty are the financial excesses that were accumulated during the prolonged economic expansion from 1982 to 2000 and then compounded further in the years since the bursting of the technology bubble at the turn of the millennium. Put simply, there is far too much debt in the financial system today. And the time finally arrived a few years ago where markets began the process of cleansing itself of this debt and moving toward getting back into better fiscal shape. While this process has played out in some areas of the market, most notably the corporate sector and selected households, debt deleveraging has not been allowed to fully run its course to this point. Instead, global leaders and central banks have engaged in policy acrobatics since the outbreak of the crisis to postpone this debt unwinding. While these actions have provided time for the financial system to stabilize, global markets will remain volatile until this cleansing process is finally allowed to play itself out.
The mounting crisis in Europe may finally bring global markets to this reckoning phase in 2012. Europe faces the following dilemma. Seventeen countries across Europe share the common euro currency. To join the currency union, each country ceded control of their monetary policy to a central authority in the European Central Bank. As a result, each country only controls its fiscal policy. Since the outbreak of the financial crisis, a growing number of countries across the region are increasingly buckling under the weight of too much debt. First, it was smaller peripheral countries like Greece, Ireland and Portugal. Now it is much larger core countries like Italy, Spain and even France. But none of these countries can take the traditional steps of devaluing their currency to stimulate growth and manage their debt because they share the euro with other countries. Thus, the only other option is to engage in austerity, which is to raise taxes and cut spending to increase revenues to service their debt. But the problem with austerity is that it stifles growth, which leads to reduced tax revenues over time to service the debt. So investors lose confidence that these countries will be able to continue to make debt payments in the future. Consequently, the value of this debt falls since investors no longer want to own it. This increases the borrowing costs for these countries, as they have to pay a higher interest rate so that investors will still buy their new debt. The result is that less money left over to service existing debts, pushing the value of this debt down further. Adding to the problem is the banks, which are the primary holders of the debt of these countries. With the value of this sovereign debt falling, the capital levels at these banks effectively evaporate, which threatens their ability not only to lend money but also to even stay in business. And this is where the threat of another 2008 Lehman Brothers type crisis begins to take hold. Putting all of this more simply, European banks are facing bankruptcy from holding the debt of European countries facing bankruptcy, and the primary place for these European banks to go for support are the European countries that put them into this bind in the first place. As this circular dilemma spirals, it appears increasingly likely that we may finally enter a reckoning phase as we move through 2012. Several countries warrant particularly close attention in this regard. These include Italy, Greece and Hungary, all of which are leading candidates at the moment for unexpected shocks that could lead to a contagion episode in the financial system.
The fact that global financial markets may finally be forced to face these debt demons in 2012 would be positive from a long-term perspective. Certainly, any debt unwinding episode will likely come with a fair amount of short-term market turbulence. But until markets are forced to fully engage this debt cleansing process, we will continue to experience persistently wild and unpredictable volatility. Once this deleveraging process is finally allowed to play itself out, however, the economy would be refitted and the basis would be formed for the start of a new secular bull market (think 1945 or 1982). Once the turbulence subsided to arrive at this end point, this would be a very positive outcome moving forward.
Given the prospects for a reckoning event in 2012, the question becomes how best to position portfolios for such an episode. At the same time, portfolios must also be positioned to benefit if global policy makers continue to act aggressively to further delay the inevitable deleveraging process. Thus, the focus in portfolio construction is on asset classes that stand to benefit from either outcome. Leading among these are four primary categories.
The first is U.S. Treasury Inflation Protected Securities (TIPS). If a contagion event were to occur, U.S. TIPS would likely benefit from investors flocking to safe haven Treasuries for protection. However, if monetary policy makers continue to successfully delay the deleveraging process through further aggressive stimulus, U.S. TIPS would also benefit from the asset inflation that would likely accompany this additional money creation.
Next is Agency Mortgage Backed Securities (MBS). During a crisis event, Agency MBS would also benefit due to the fact that these securities are now essentially backed by the U.S. government. The fact that they offer a higher yield relative to comparable U.S. Treasury debt is also a plus. On the flip side, if monetary policy makers inject more stimulus, Agency MBS would likely be a direct beneficiary as the U.S. Federal Reserve has openly stated that this area of the market would be the main focus of any further asset purchases (QE3) in an effort to lower mortgage rates even further.
The third is Utilities Preferred Stocks. If a financial crisis were to erupt, these securities are among the best protected given the fact that regulated utilities will continue to receive the steady cash flows from customers that will still pay to keep their lights on. Conversely, further monetary stimulus to delay the debt unwind would consist of keeping interest rates near zero, and since these securities have yields in the 5% to 8% range, these securities would remain particularly attractive from an income generation and real returns perspective.
The fourth is Precious Metals including Gold and Silver. A European crisis would put the survival of the euro currency, which is the second largest currency in the world, into serious doubt. As a result, demand would increase for alternative safe haven currencies, and both Gold and Silver are appealing in this regard given their hard asset characteristics. And if policy makers instead act with aggressive monetary stimulus to thwart a crisis, the resulting currency devaluation and associated potential for inflation would also support strong demand for hard asset protection.
Two additional asset classes serve the purpose of weighting portfolios toward the potential for one outcome over the other.
Stocks would benefit in the short-term from the further delaying of the deleveraging process. But given the fact that global policy makers have been resolute in trying to squelch the debt unwind, the probability associated with this outcome remains meaningful. In order to help neutralize the risk associated with these stock exposures, it is worthwhile to emphasize the more defensive areas of the market including consumer staples such as food and household products as well as utilities. Not only will these categories provide the potential for upside if the stock market rises, but they also provide the best downside protection if the market were to plunge into decline. And if a financial crisis were to fully explode, the opportunity would eventually present itself to purchase high quality stocks at extraordinary discounts. Thus, maintaining a considerable cash allocation within this targeted stock allocation is worthwhile so that the powder is fully dry to capture these opportunities as they present themselves.
U.S. Treasuries would benefit most in the short-term if a crisis episode were to unfold. Although yields are already low and uncertainty remains about the fiscal outlook, U.S. Treasuries continue to provide an idea destination for safe seeking investors during times of crisis. For example, Long-Duration U.S. Treasuries gained +31% in the second half of 2011 versus the stock market that was down over the same time period. These securities also provide an ideal way to hedge against a rising U.S. Dollar and its associated impact on Gold and Silver, which is an added plus for maintaining positions to this area of the market.
It promises to be another interesting year in 2012. Financial markets may potentially reach a reckoning point that while difficult may finally put the current crisis behind us. At the same time, we are likely to witness a continuing wave of revolutionary change in many parts of the world including most notably the Middle East. The threat of new military conflict remains meaningful, particularly with Iran highlighted by recent activity in the Strait of Hormuz. And 2012 will also bring another Presidential election here in the U.S. These are interesting times, and 2012 promises not to disappoint in this regard.
Best wishes for a healthy and happy New Year.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
Investment markets have been in a state of flux since the outbreak of the financial crisis several years ago. Periods of government stimulus fueled euphoria have been followed by phases of unsettled reality that the underlying problems have yet to be fully addressed. At the root of the ongoing uncertainty are the financial excesses that were accumulated during the prolonged economic expansion from 1982 to 2000 and then compounded further in the years since the bursting of the technology bubble at the turn of the millennium. Put simply, there is far too much debt in the financial system today. And the time finally arrived a few years ago where markets began the process of cleansing itself of this debt and moving toward getting back into better fiscal shape. While this process has played out in some areas of the market, most notably the corporate sector and selected households, debt deleveraging has not been allowed to fully run its course to this point. Instead, global leaders and central banks have engaged in policy acrobatics since the outbreak of the crisis to postpone this debt unwinding. While these actions have provided time for the financial system to stabilize, global markets will remain volatile until this cleansing process is finally allowed to play itself out.
The mounting crisis in Europe may finally bring global markets to this reckoning phase in 2012. Europe faces the following dilemma. Seventeen countries across Europe share the common euro currency. To join the currency union, each country ceded control of their monetary policy to a central authority in the European Central Bank. As a result, each country only controls its fiscal policy. Since the outbreak of the financial crisis, a growing number of countries across the region are increasingly buckling under the weight of too much debt. First, it was smaller peripheral countries like Greece, Ireland and Portugal. Now it is much larger core countries like Italy, Spain and even France. But none of these countries can take the traditional steps of devaluing their currency to stimulate growth and manage their debt because they share the euro with other countries. Thus, the only other option is to engage in austerity, which is to raise taxes and cut spending to increase revenues to service their debt. But the problem with austerity is that it stifles growth, which leads to reduced tax revenues over time to service the debt. So investors lose confidence that these countries will be able to continue to make debt payments in the future. Consequently, the value of this debt falls since investors no longer want to own it. This increases the borrowing costs for these countries, as they have to pay a higher interest rate so that investors will still buy their new debt. The result is that less money left over to service existing debts, pushing the value of this debt down further. Adding to the problem is the banks, which are the primary holders of the debt of these countries. With the value of this sovereign debt falling, the capital levels at these banks effectively evaporate, which threatens their ability not only to lend money but also to even stay in business. And this is where the threat of another 2008 Lehman Brothers type crisis begins to take hold. Putting all of this more simply, European banks are facing bankruptcy from holding the debt of European countries facing bankruptcy, and the primary place for these European banks to go for support are the European countries that put them into this bind in the first place. As this circular dilemma spirals, it appears increasingly likely that we may finally enter a reckoning phase as we move through 2012. Several countries warrant particularly close attention in this regard. These include Italy, Greece and Hungary, all of which are leading candidates at the moment for unexpected shocks that could lead to a contagion episode in the financial system.
The fact that global financial markets may finally be forced to face these debt demons in 2012 would be positive from a long-term perspective. Certainly, any debt unwinding episode will likely come with a fair amount of short-term market turbulence. But until markets are forced to fully engage this debt cleansing process, we will continue to experience persistently wild and unpredictable volatility. Once this deleveraging process is finally allowed to play itself out, however, the economy would be refitted and the basis would be formed for the start of a new secular bull market (think 1945 or 1982). Once the turbulence subsided to arrive at this end point, this would be a very positive outcome moving forward.
Given the prospects for a reckoning event in 2012, the question becomes how best to position portfolios for such an episode. At the same time, portfolios must also be positioned to benefit if global policy makers continue to act aggressively to further delay the inevitable deleveraging process. Thus, the focus in portfolio construction is on asset classes that stand to benefit from either outcome. Leading among these are four primary categories.
The first is U.S. Treasury Inflation Protected Securities (TIPS). If a contagion event were to occur, U.S. TIPS would likely benefit from investors flocking to safe haven Treasuries for protection. However, if monetary policy makers continue to successfully delay the deleveraging process through further aggressive stimulus, U.S. TIPS would also benefit from the asset inflation that would likely accompany this additional money creation.
Next is Agency Mortgage Backed Securities (MBS). During a crisis event, Agency MBS would also benefit due to the fact that these securities are now essentially backed by the U.S. government. The fact that they offer a higher yield relative to comparable U.S. Treasury debt is also a plus. On the flip side, if monetary policy makers inject more stimulus, Agency MBS would likely be a direct beneficiary as the U.S. Federal Reserve has openly stated that this area of the market would be the main focus of any further asset purchases (QE3) in an effort to lower mortgage rates even further.
The third is Utilities Preferred Stocks. If a financial crisis were to erupt, these securities are among the best protected given the fact that regulated utilities will continue to receive the steady cash flows from customers that will still pay to keep their lights on. Conversely, further monetary stimulus to delay the debt unwind would consist of keeping interest rates near zero, and since these securities have yields in the 5% to 8% range, these securities would remain particularly attractive from an income generation and real returns perspective.
The fourth is Precious Metals including Gold and Silver. A European crisis would put the survival of the euro currency, which is the second largest currency in the world, into serious doubt. As a result, demand would increase for alternative safe haven currencies, and both Gold and Silver are appealing in this regard given their hard asset characteristics. And if policy makers instead act with aggressive monetary stimulus to thwart a crisis, the resulting currency devaluation and associated potential for inflation would also support strong demand for hard asset protection.
Two additional asset classes serve the purpose of weighting portfolios toward the potential for one outcome over the other.
Stocks would benefit in the short-term from the further delaying of the deleveraging process. But given the fact that global policy makers have been resolute in trying to squelch the debt unwind, the probability associated with this outcome remains meaningful. In order to help neutralize the risk associated with these stock exposures, it is worthwhile to emphasize the more defensive areas of the market including consumer staples such as food and household products as well as utilities. Not only will these categories provide the potential for upside if the stock market rises, but they also provide the best downside protection if the market were to plunge into decline. And if a financial crisis were to fully explode, the opportunity would eventually present itself to purchase high quality stocks at extraordinary discounts. Thus, maintaining a considerable cash allocation within this targeted stock allocation is worthwhile so that the powder is fully dry to capture these opportunities as they present themselves.
U.S. Treasuries would benefit most in the short-term if a crisis episode were to unfold. Although yields are already low and uncertainty remains about the fiscal outlook, U.S. Treasuries continue to provide an idea destination for safe seeking investors during times of crisis. For example, Long-Duration U.S. Treasuries gained +31% in the second half of 2011 versus the stock market that was down over the same time period. These securities also provide an ideal way to hedge against a rising U.S. Dollar and its associated impact on Gold and Silver, which is an added plus for maintaining positions to this area of the market.
It promises to be another interesting year in 2012. Financial markets may potentially reach a reckoning point that while difficult may finally put the current crisis behind us. At the same time, we are likely to witness a continuing wave of revolutionary change in many parts of the world including most notably the Middle East. The threat of new military conflict remains meaningful, particularly with Iran highlighted by recent activity in the Strait of Hormuz. And 2012 will also bring another Presidential election here in the U.S. These are interesting times, and 2012 promises not to disappoint in this regard.
Best wishes for a healthy and happy New Year.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
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