Thursday, July 7, 2011

Economic and Investment Outlook for the Summer of 2011

I do not like to make predictions.  If there is just one thing to learn from Austrian economics, it is that humans act freely.  It is impossible to predict what every individual on this planet is going to do.  This makes it impossible to accurately predict what the economy will do and what investments will do.  The best we can do is to forecast what people are likely to do based on current conditions.

With all of that said, I would like to review some possibilities of what is to come for the rest of the summer.  QE2 has ended.  I thought there was a good possibility of another major downturn in the stock market and the economy.  A stronger U.S. dollar would most likely go along with this scenario.

It looked like this might play out a few weeks ago.  The Dow Jones dipped below 12,000.  Then, all of a sudden, it popped back up.  As of this writing, the DJIA is over 12,700 and not showing much in the way of weakness.  Meanwhile, gold and silver have been up significantly in the last few days.  While, this doesn't make a trend, it does make it look more probable for gold to go up again and look for new highs.

I think things could easily go either way right now.  QE2 is over and the market knows it.  Greece and other European countries are on the verge of default.  In the U.S., the unemployment picture does not seem to be getting much better.  These are all potential arguments for a sharp downturn in the economy in the near term.

On the other hand, there is just as good of an argument for stocks and commodities to go higher while the dollar continues to be weak.  The debt is out of control and there is little promise of it getting any better.  We also have to remember the biggest elephant in the living room.  The Fed has tripled the monetary base in less than three years.

Although the increase in the monetary base has mostly gone into the banks as excess reserves, it is still a tripling of the money supply.  This money is available to people.  In addition, the banks could start lending it at any time unless the Fed increases the reserve requirement substantially.

So as far as which way the markets will turn this summer, flip a coin.  There are good arguments for both scenarios.  I still think the best strategy is to have a majority of your investments in the permanent portfolio as outlined by Harry Browne in Fail Safe Investing.

For speculation, I recommend additional investments in commodities and perhaps a small short position in the stock market.  The reason for this last part of the strategy is because if the stock market continues to go up, then I suspect it is mostly because of the big increase in the money supply.  This means that commodities should go up even more because commodities tend to do very well in an inflationary environment.

If there is a sharp downturn, it would not surprise me to see commodities go down, but at least you would have a small short position in the stock market to help offset any losses in your commodities.  And again, this is just for speculation.  If you are a conservative investor, just stick with the permanent portfolio.  You will sleep better at night.

1 comment:

Technology Consultant said...

One should learn from the mistakes committed by the Greece government & should plan to overcome the crisis.