What a week!! S&P (Standard & Poors), a company that specializes in assigning credit ratings to corporations and companies (sort of like a Free Credit Report.com for big companies and governments), came out this week and officially stated that the future outlook for the US is negative. This means that they see problems in the future as it relates to our country being able to pay its debts! My use of exclamation marks are to express my amazement, not to celebrate or underscore my unbridled enthusiasm at the impending fiscal disaster we are facing. But come on, this is historic stuff. I understand that it's scary and disheartening, but we are firsthand witnesses to unprecedented economic occurances. In addition to the S&P downgrade, the head of HSBC bank came out this week and stated plainly that Americans are in debt denial. I know I have promised to avoid politics but all of these historic developments have forced my hand. We as a country, must wake up to the fact that we are out of money. We owe nearly 15 trillion dollars and are forced to pay interest on that ghastly amount every year. We are adding to that debt to the tune of 1.6 trillion a year. You are going to hear so much political nonsense on both sides of the aisle as it relates to this budget issue. The truth is simple: cutting spending isn't cruel, mean, heartless, greedy, or unfair. Reducing our spending is a necessity. Let me ask you a simple question: what good are we to ANY ONE of our downtrodden or needy citizens if we default on our loans and experience catastrophic fiscal collapse? This is not a political issue. It's a reality issue. Anyone that tells you ANYTHING else is either uninformed, illiterate, dishonest, or attempting to use this disaster as political leverage. Focusing on any other issues in the political arena at the moment would be the equivalent of arguing about the color of paint on the walls while the house is on fire. Both parties must get serious about this issue unless they want to relegate the US to third world status. It really is that simple.
Despite all of this bad news, the market goes up. It may sound strange, but the market is going up because of our problems, not despite them. The weaker the dollar gets, the more investors will migrate from federal and municipal bonds into stocks with the hope of making money faster than our currency is depreciating. Also, many money managers, myself included, are terrified of the unavoidable interest rate hikes that are coming our way. You see, as the dollar continues to weaken, the fed will be forced to raise rates to keep our debt attractive. In an effort to get out ahead of this, we are abandoning our bonds and migrating to stocks and commodities. This migration is forcing the market higher.
I cannot tell you how many times I have been laughed at over the past five years whenever I expressed my belief that gold would rise to $2,000 an ounce. Well, we have hit $1,500. I have talked about gold ad nauseum in this blog so I will keep it short. This meteoric rise is simply due to the diluted US dollar. I'm not forecasting $5,000 gold. However, I'm certainly not confident in our politicians' intestinal fortitude that will be needed to reign in this riotous spending. Until that happens, stay long gold. This same scenario holds true for oil. While the threat of Middle East unrest resulting in supply disruptions has certainly propelled oil higher, the falling dollar was already pushing it in that direction.
If you want to be a real market geek, pay attention to the VIX going forward. Just type in VIX in whatever tool you use to look up stock market prices. The VIX is the volatility index. It measures the number of Put option contracts that are being purchased. Put option contracts are just instruments that pay off in the event that a stock goes down. It's like placing a bet that a stock is going to lose. The VIX is historically low which has me worried. As Warren Buffet says, "be greedy when everyone else is afraid, be afraid when everyone else is greedy." This economy and country are on very shaky ground and everyone is being VERY greedy. I'm not freaking out and selling every stock we own. However, we continue to proceed with caution.
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