Goodbye Summer, Hello Election Season

Sept 5, 2012

As the quiet of August and a summer of barbeques, vacations, and swimming fade, the election BS is in full swing as both the Donkeys and Elephants battle it out over who can sling it the highest. The Donkeys are offering free everything to everyone, while the Elephants are offering who knows what.  While the battle ground should be about policy and the economy, the focus has been on the really important items such as which candidate was born in Kenya, which candidate drives around with domestic animals on his car, and which candidate feels your pain more.  At the end of the day, in my view, it will come down to which candidate makes the American voters feel like he'll deliver more to their particular cause, and both will fail to address the key issues facing America today.  Mr. Obama would like us to look more like a bankrupt European country, and while it may not take another four years of his policies to get us there, he may get his wish-and I don't mean that in a good way.

Speaking of Europe, ECB President Mario Draghi missed the Fed confab in Jackson Hole last week saying he had "too much work."  This morning Mr. Draghi announced that the ECB wouldn't be changing their main interest rate, hodling it at 0.75%, and that they will engage in permanent and limitiless bond buying to achieve that goal.  The ECB has become the first central bank to officially adopt what has already become the unofficial policy of most central banks:  permanent and limitless quantitative easing.  Our Fed unofficially adopted this policy, and now that the ECB is on board it would seem that Vanguard's estimate of massive currency deflation beginning in 2016 is baked into the pie.

The equity markets will love this new ECB commitment, even though it has been anticipated for some time.  After we get the initial equity bounce on the news of this announcement, which could last as long as a couple of months, long term investors are going to need to consider where to put their capital for long term protection.  Unfortunately, when currencies grind down to nothing, financial assets don't offer the level of protection required to keep up with inflation.  Real estate, timber, agricultural land, and other hard assets that have the ability to generate inflation adjusted positive cash flows offer the greatest protection.  Additionally, gold and other stores of value also offer some protection. 

Our own Fed Chairman spoke last Friday from Jackson Hole, and offered more of the same.  Mr. Bernanke said  "The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."  Helicopter Ben-he still hasn't seen an economic problem that easy money couldn't solve. 

In spite of a middling economy and uncertainty in Europe, the S&P 500 has risen 12% so far YTD.  For investors who are confused as to how the market could be so strong in spite of a weak economy, consider that most bear markets and recessions have been started by Fed tightening action.  In this environment, a slow but not yet declining economy, the threat of Fed tightening is virtually zero.  Additionally, this Fed has repeatedly stated that they would be inclined to continually stimulate versus any other action.  With an economy that has minimal need for more easy money, the Fed's largess flows directly into the capital markets, creating a "wealth effect" that hopefully stimulates the economy.  In other words, while President Obama dismisses the concept of trickle down economics, Mr. Bernanke and the Fed rely upon it completely. 

It's finally here!!  College Football season has arrived!  I feel like Navin Johnson celebrating the arrival of the new phone books.  As always there have been a number of changes in coaches, players, league alignments, etc, from last season, but at the end of the day the product is the same.  Great Saturday entertainment.  While I think the Trojans have a tough road to get to the title game given their need to beat Oregon twice in a month and their lack of depth because of NCAA sanctions, I'm still picking them to make it to Miami!

Have a great day

Ned