Bullish Outlook With Caution as a Guide

Includes: GLD, SLV
by: Mayo Welch

The market is oversold for countless reasons, many of which are good reasons, but at the end of the day the market will rebound. Economically speaking, the United States has acted impeccably when it comes to managing the dollar. It was not by chance that the U.S. dollar became the international reserve currency, and it is not a coincidence that the United States offers up an almost 15% of GDP in humanitarian aid each year. The United States acts as a giving tree and other countries appreciate the pseudo care. So, I think the United States is here to stay and a bet against the United States, for any extended period would be like shooting yourself in the foot.

This does not mean I advocate the way the government is acting. I find it to be quite foolish as did S&P, when they downgraded the United States debt on the basis of, boiling it down to; “Political parties can’t get along.” Not based on the numerical data, which indicates that the government can meet all foreign obligations. As Greenspan has said, the government, through the use of the Federal Reserve, can print money to pay debt so defaulting is off the table.

While Greenspan may be right on the money with his hasty statement he fails to mention the ramifications that printing money will have. Fear mongering, I could point to Germany after World War 1, but really if it were to come down to a “defaulting” scenario in this country, we would react in similar fashion to the Latin America crisis from the 1980s. I doubt we are heading that direction and here is why.

I am not trying to insult other countries, but I am simply pointing out assumptions that are made in socioeconomic thought. Countries, like individuals, are greedy and greed is an underling force throughout the world, Adam Smith uses the reference as “an Invisible Hand” that guides decision making of individuals to maximize their own wealth. So, if this is true, then we should see businessmen and women working to maximize their wealth, and we do. Countries as a whole are not different; look at the military and economic power every country desires one or the other and many desire both.

So, if countries are greedy, then wouldn’t American defaulting harm other countries wealth? Look at China, who owns more than $1.11 trillion of U.S. debt, which amounts to roughly 20% of China’s 2010 GDP. I will admit that the rapid pace of China’s expansion is making the debt a mute point, but examining exports if the United States dollar declines drastically it could have a 5% impact directly related to China’s exports. While a 5% decline may not sound severe to some, the ripples that would be created through other countries could tally several trillion dollars, which would have severe and lasting impacts globally.

It is then highly doubtful that the United States will default or the market will continue a vertical shift south. If anything, it is a buyer’s market. Now on that note, I am cautious of all money where when asked, “How did you get this money,” the government smiles with a grin and says, “We printed it.”

So, I am investing in hard assets; Gold (NYSEARCA:GLD), Silver (NYSEARCA:SLV), and I am looking into land, but so far prices are still erroneously high from people trying to sell at the 2007 and 2006 levels.

United States will remain a growing country, the dollar is not going to default in the near term, but any money that a government has the power to “print” should raise everyone’s eyebrow. My personal portfolio as I am sure many economists will give a nod consists of the following:

  • Bull Market: Gold & silver 10% / Equities 90%.
  • Rationale: You will want to buy stocks during a rally, so you will leverage the real money for the governments fiat money to buy more companies.
  • Bear Market: Gold & silver 30%/ Equities 70%
  • Rationale: You will want to sell equities going into a bear market, however, reading a market bottom is not as easy as watching a rally for some reason. So, you don’t want to be completely out of equities in case the market rebounds quicker than you had anticipated.

Disclosure: I am long SLV, GLD.