I have to admit I’m in the bearish camp, thinking we’ll see a double-dip in stocks as well as unemployment numbers. This isn’t a recent change in view from yesterday’s turmoil, but a view I’ve held for several months due to the risks right now. Here are a few of the main points – I’ll start with Greece because it’s been in the news a lot.
Greek debt was recently reduced to junk bonk status (Moody’s), and the debt from Portugal and Spain was cut a few notches as well. The problem with this is that many European banks hold this debt and expect it to be liquid – like they did in the US with AAA CDO’s – so it leads to tightening lending standards and a possible credit crunch in Europe. Recently we heard about the new 750 billion euro bailout package, which might up the credit rating, but has it’s risks as well. The Greek strikes show how difficult it will be for the government to live up to the austerity measures, and the recent regional loss for Merkel shows that the Germans might change their government to get out of this unpopular bailout. The fiscal problems of the governments involved will be difficult to fix (Great WSJ article describing graft in Greece, which is ranked last in the euro-zone for corruption), and the bailout will likely only delay a future default. I wouldn’t be surprised to see Greece back with it’s own currency in the next 5 years, but anything can happen I suppose. I wouldn’t feel comfortable holding the Euro, or the Pound for that matter.
As for the US, the fed more than doubled the it’s balance sheet in 2009 by purchasing mortgage-backed securities along with Fannie Mae and Freddie Mac debt. This cannot continue long-term, and neither can the stimulus packages and rebate-tax credits of 2009. We’re looking at a backdrop of rising taxes with nowhere for interest rates to drop (I wouldn’t be surprised if 10-year government treasuries dropped a bit more on flight to safety, but I don’t want to hold them either). We also have a backdrop of high vacancies and lowering rates in both commercial and residential real estate, along with lowering prices, which will be a continuing constraint on the balance sheets and lending of US banks.
US real estate prices are in a long-term downtrend as the forces of high unemployment, rising average household size (more roommates, living with parents, etc), and the sheer volume of unsold homes both on the market or in default (shadow inventory), push them down. Local governments are also struggling to make ends meet which will push up property tax rates in many areas. Finally, the price of homes in the US compared with median household income is still at unusually high levels.
Currently I’ve got mostly money in GLD and uninvested dollars, along with some money in FXA, FXC, and OTTR. I think gold will go up long-term as central banks expand their balance sheets to fight deflation (US) or to fight government debt problems (UK and Europe). I also like the commodity-linked currencies of Canada and Australia which have better-than-average economies although they have their risks (property bubble in Canada, new mining taxes in Australia). OTTR is simply a utility with a 6% yield – great for a Roth IRA or tax-deffered account – and I like the income theme because I think low bond yields will push more income investors toward high dividend stocks. I’ve held all of these since mid 2009 and haven’t seen a reason to change them.