Financial Outlook 2010

January 7, 2010


Program: Financial Outlook 2010

This is from an Investment Panel I participated in at San Mateo Rotary. Enjoy.

Chuck Cattano: Chuck discussed the Dollar Carry-Trade and implications of our "near zero" interest rate policy. Investors can borrow U.S. dollars for .25%, and then invest those dollars globally seeking a higher return. Have you noticed the relationship between gold and the dollar over the last year? When the dollar fell, gold went up; when the dollar rose, gold fell. This is because hedge funds have been borrowing dollars at .25%, shorting the dollar, investing in gold, stocks, and commodities; when the dollar strengthens, they must cover their "short" dollar positions , close out long gold, stock, commodity positions to close the trade.

But there is a problem. What happens when the game ends? When the liquidity party is over, will the exits be too crowded? Our "near zero" interest rate policy has helped reflate assets but it brings with it negative externalities and uncertainties: the specter of inflation, debasement of our currency, uncertainty of creating a new bubble, liquidity concerns. So, what can you do?

Take a sober look at this, consider maintaining bond money in high grade corporate bonds or short term CA municipal bonds. Mid/long term Treasury securities could suffer their own "lost decade"; short term Treasury securities "should" be OK, though can still lose value if sold before maturity (or they could lose value to inflation). Cash will not hold up to inflation, which seems a matter of "when" not "if". To maintain a sufficient hedge against inflation, consider equities in the ag, oil, oil drilling, natural gas, gold, gold and minerals sectors, as well as a healthy dose of large cap stocks that pay nice dividends and are defensive.

Buy the future, but also buy what is needed!