‘Faith and Credit’ go only so far
The U.S. stock market’s complacency that the debt ceiling will be increased is a matter of dire concern and even though the U.S. stock market is hitting all-time highs and real estate markets are in a mini boom, the root cause of all the U.S. economic problems remain unrepaired, but undeniably in need of fixing.
As we watch the U.S. dollar ticking like a time bomb with unknown timing, the possibility of it exploding would have a devastating impact on the economy because we regard the U.S. dollar as the “stock price” of the U.S. government since there is nothing else but the ‘faith and credit’ of the U.S. government standing behind the value of the dollar. The stock price of the U.S. government has been plunging since July of this year and unfortunately, it’s very likely that it will continue for some time.
The U.S. stock market is overvalued but I am a long- term optimist and still an investor. Today, however, we have to look worldwide for new and hopefully sound business investments, but they are there. Unfortunately, most of the investment advisory industry seems to have forgotten that there is a greater danger of poor performance by not owning certain stocks, or even the danger of a large stock market selloff.
And perhaps even greater yet is the danger that faces their clients, many of whom are likely closer to my age bracket than theirs, is that they may in fact outlive their money.
For me, that is the single greatest risk in existence today and this thought brings me right back to the theme you may have heard from me before. Yes inflation, as calculated by the governmental bodies, remains at historically low levels but from someone who learned this business in the 1970s and 1980s, you learn that inflation can change rapidly.
I do not intend to watch my personal wealth disappear before I need the pine box and a hole in the ground and I most certainly do not intend for my portfolio to kick the bucket before I do.
It is very obvious in today’s financial world that prices are actually rising and governments are not being truthful about the extent of their increases. At the same time, in order for the U.S. to be capable of paying interest on its rising debts, the Federal Reserve is keeping interest rates very low.
Personally and corporately, I have decided that our investment portfolio should be protected from inflation and have selected real estate, agriculture, resources, infrastructure and gold as the protector of our wealth. But let me quote the person whose values and investment theory I follow carefully – Warren Buffett – who said at the time of the October 2008 stock market collapse:
“Over the long term, the stock market news will be good. In the 20th Century, the United States endured two world wars and other traumatic and expensive military conflicts, the 1930s depression, a dozen or so recessions and financial pains, oil shocks, a flu epidemic etc., etc.”
We at Dundee Goodman remain in the same position that has existed for many months as far as the U.S. economic position. The government officials and the media present the view that the situation appears to be improving.
As a symptom of the recent failing political system, the U.S. government shutdown should have been savaging the markets and U.S. dollar. Thank goodness for the President’s working group of “Plunger Protection on Financial Markets!”
Created under President Ronald Reagan in the wake of the 1987 stock-market crash, the Plunger Protection Team (PPT), as some called it, was intended as a government vehicle of market stability, a group assigned the responsibility of maintaining orderly financial markets. Headed by the U.S. Treasury Secretary and the Chairman of the Federal Reserve, the PPT has often intervened largely to prop the stock market, as seen with the S&P downgrade in 2011 of U.S. Treasury securities. Former Fed Chairman Alan Greenspan, also indicated PPT actions had been taken to buy the U.S. dollar and to sell gold and oil during the Iraqi crises.
What happened overnight with the U.S. shutdown was a circumstance that had to be watched by the PPT., Supportive actions for stocks and the U.S. dollar, and continued selling of gold were extremely useful, but market fundamentals eventually will prevail.
The stock market has essentially recovered; real estate – by virtue of mass purchases on total debt – appears to be in a rebound. Unemployment has stopped increasing because of “drop outs,” but it is still all a Russian Potemkin Village made to look good while the reality is that “the U.S. economy is in a much more dangerous and precarious place today” than it was five years ago.
Ned Goodman is president and CEO of Dundee Corporation.
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