Risks in the midst of a “Muddle Through” Environment 10/13/12

Talk by:

Dr. John M. Simms, Jr. Ph.D., CFA, Chief Investment Officer of Piedmont Trust Company

My Rating A-

This was the second time I have heard John give a talk at the AAII Charlotte Chapter and each time his talk was enlightening, full of data and charts and good words of advice. Speaking as an individual investor, he gets to the point, outlining all the risks we see.

John started of his talk showing the latest Barron’s cover Dow 14,165 Almost there… a rather bullish cover – the kiss of death to a bull market!

Risks:

The economy is struggling under weight of too much debt. State and local government finances are stressed by pension and healthcare costs. Global growth is slowing (collapsed)  and forward earning estimates assume continuation of record profit margins; a questionable bet. Fed has launched QE infinity, and while growth is elusive, fed is now leveraged more than Lehman! Entitlements and stimulus have created public debts and promises to pay we cannot afford to honor. Fiscal cliff will create further potential to slow down growth and possibly even push us into a recession. The US dollar is safe haven in light of Europe’s debt crisis.

Investment opportunities:

Gold still represents a hedge against poor policy. John pointed out that GLD had climbed 15.5% since he last visited us, and he intends to continue to hold his position in gold. My thoughts are to also continue to hold gold but will drop it when my technicals give a downward signal.

He likes alternative strategies that hedge downside risk. He is right in that it has been frustrating lately but he feels it will come handy in time.

Volatility is low and hedges are cheap, but don’t expect them to stay that way forever.

You can’t borrow and spend your way to prosperity. Although I feel you cannot “reduce taxes” your way to prosperity either.  History says to expect default, currency depreciation and deflation. That worries me as I think very, very few people will really be prepared for this when it happens. There is a possibility that none of this will happen and the clouds will lift away. I would not bet on it however. Both parties are taking us to the edge of the debt crisis. And then when the two parties are stalemated, there is Bernanke and QE3. Mr. Bernanke “owns” the stock market. Of course the banks are sitting on a huge amount of money (over 1Trillion dollars) and much is not entering the economy at all. Popular investments like China and Government bonds , popular income producing assets like REITs, dividend stocks, high yield bonds, emerging market debt may be due for a rest or worse. Exercise caution…

John went through pages and pages of charts. Correlations between asset classes have risen quite a bit over the past 10 years. I noticed he had managed futures as an uncorrelated class, and I asked him about that. He said they do not use managed futures at Piedmont Capital. This is an area I will explore for myself, and take another look at being cautious….