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Labor Day “Labor of Love”

Yes, I am officially off work today. But the wife and kids are asleep so no harm in checking the latest insight on the markets.
 
I can see that many of my fellow investment commentators are not taking the day off either and there is plenty to discuss as we prepare for the week ahead. Below you will see the articles that caught my attention this morning along with my comments added underneath.
 
One of the common themes you will see from my comments is the lack of clarity at this time. Meaning will it be a slow growth economy or double dip? There is data supporting both meaning there is no conclusion to the matter. The prescription for that is a balanced approach that is not too long or too short…it’s just right with an eye to modify the strategy as clarity over the economy emerges.   
 
If the economy expands, then rates go higher.

If the economy moves towards deflation, then Fed will do everything possible to reflate, causing inflation down the road and rates go higher.

If the economy muddles through with slow growth for a long, long time, then yes, rates will stay low.

2 out of 3 likely scenarios point to rates moving higher.
 
As always, Dirk goes deeper into these concepts than just about anyone. Great insight! I'm glad he's on my team.
 
Your "not so deep thoughts" are actually quite deep. Lets go back to the creation of the Fed. Have they fulfilled their charter to keep prices stable since inception? (no, inflation is higher since they came on the scene). Have they helped create a more stable economy? (almost laughable to think about that one).

I usually dismiss conspiracy theories immediately, but the one about the invention of the Fed by the banking cartel to serve their interest certainly seems to have some credence. Check out the videos on the Creature from Jekyll Island on YouTube. When they start talking about how the Fed was created to help them keep their profits during good times, then spread their losses to the public during bad times...you will start to have an eerie feeling that this may be true.
 
Going back to the top of the article, it reminds me of Adam Smith. Nations should do what they are best at. Any form of protectionism will fail. Along those lines we tried to hang on to our manufacturing jobs way too long in this country when it was clear that was a doomed proposition. We needed to have more educated engineers and MBA's and Drs. Yet so many of those now in our US universities are actually foreign born students. Meaning we are not churning out enough talented workers of our own. The end to this tale is that we will be handing over the reigns of the #1 world power to China soon enough. And perhaps in our #2 role we can become like Avis rent-a-car "We're #2...but we try harder".
 
Deep Value Abounds
The logic behind your approach is solid during most times for the market. And will certainly pay off if we do have a slow growth economy or better.

But if we do slip back into recession, then all bets are off. The market will decline at least 20-30% from current levels if that is the case and small caps will take MORE than their fair share of lashings.
 
I appreciate the balanced view of the recent data (the good, the bad and the mixed) because there is far too much 1 sided reporting these days. But when you blend "good, bad and mixed" together it comes out mixed. Meaning there is no clarity on whether we have a slow growth economy or recession in front of us. All those claiming 100% certainty on this issue are kidding themselves.

So even though I currently lean towards the muddle through growth camp, I sleep with one eye open that we slide past that into recession. That calls for a balanced investment approach that is prepared to shift if either outcome prevails. Those leaning too far in either direction may end up paying dearly for that "poor posture".
 
No doubt international diversification is much easier now with ETF's then in years past. But investors will fall into the same trap they always do. They will chase past performance.

Time after time developing nations have HUGE rallies one year and then dismal performance for 2-3 years (rinse and repeat). Yet of course everyone piles in just as the rally dies.

You could say that a "Dogs of the Dow" style approach may be the best way to go with international investing. Buy the ETFs during the underperformance period and soon enough you could riding a big rally.
 
Best,
 
Steve


Disclosure: No positions mentioned.