Investing In Dangerous Times: 'A Dying Country'

Monty Pelerin / EconomicNoise.com

Those that read this site regularly know my pessimism regarding the future.

People frequently ask: “What do I do to protect myself and my family?” or “What should I invest in?” While this discussion will not provide you with specific answers, it should provide a framework that may be useful.

Investment Advice

Investment advice is not provided here. I am not licensed to do so. Even if I were, investment advice needs be tailored to each individual’s circumstance. That is impossible to do properly without some hours of consultation to understand goals and the particulars of a situation. The face-time can be reduced via comprehensive questionnaires and informational data, but it still should occur so that your advisor can gauge that your answers are consistent and proper. At least as important is your assessment of him/her.

Good financial advisers are difficult to find. They may be “certified” and conscientious, but these may not be sufficient in these interesting times. For most, their training is adequate to provide reasonable strategies for clients. However, the world has changed as Mohamed El-Ehrian observed with his “The New Normal.” Most advisers were trained for a different world.

After the economic crisis, many were “re-schooled.” The last couple of years have represented a return of good stock market performance. Advisers may feel comfortable in that sense. An important point in meeting with a financial adviser is to for you to understand his worldview. Does he believe these are normal times? If not, what does he expect to happen? Will he work to achieve your strategy or will he want to impose his own on your portfolio? How comfortable are you with delegating that strategy?

You should get answers to questions like these before you begin presumably a long-term relationship.

Forecasting

I provide my view of what the future holds. However, recognize that this is my opinion only. I have no special sense that enables me to see tomorrow with great clarity.

Forecasting is not an analogue where you can say, “If this, then that.” Humans, governments, corporations and central banks are purposive actors who adjust behaviors as conditions develop. Current or historical behavior should not be extrapolated forward with the assumption there is validity gained by doing so.

Economic forecasting is tenuous and a fool’s errand. The proper term is “economic opinion.” As John Kenneth Galbraith wisely quipped:

The only function of economic forecasting is to make astrology look respectable.

With Mr. Galbraith’s caution in mind, let me add a few of my own:

1. No one can see the future clearly.
2. While reasoned, my forecast may be no better than your own, regardless of how you arrived at it.
3. Knowing what might happen is not enough for investing success. You can be correct on what is going to happen and still not capitalize because your timing is wrong.
4. Forecasting accurately is extremely difficult and subject to luck. Forecasting timing is even harder.

The World Has Changed

The first thing to recognize is that the world has changed. It is unlikely to return to its prior state. Whatever old market nostrums worked in the past are likely not to now.

The most dangerous rule-of-thumb that I can think of is “buy and hold.” It ranks right up there with “real estate always goes up,” “this time is different” or “that’s impossible.”

No rule-of-thumb, no matter how well it served in the past, should be accepted at face value. Everything should be analyzed against what are changed conditions. The past is gone. Do not make too much of it in your considerations of the present and the future.

A Dying Country

A dying country is not a dead country. It is in a process of decline. It is sick, but possibly not terminal. Its past economic growth rates are not possible and its GDP could even shrink. The economic pie will likely grow slower than the population, meaning real incomes will shrink.

That is the condition of the US. In fact, it is the condition of much of the developed world. There is no Great Depression, although one could occur one quickly as a result of a crisis. The US underlying economy is akin to the stagnation of Old Europe, or perhaps the “lost [two] decade[s] of Japan”

This economic purgatory is characterized by a Main Street that has not recovered, low employment and little to no growth. A financial system collapse was narrowly averted, but the underlying risk still remains.

continue article at EconomicNoise.com:

http://www.economicnoise.com/2013/07/16/investing-in-dangerous-times/