What Is The Fed Doing?

Yesterday's decision by the Federal Reserve to "do nothing" has given us a swooning stock market today. Why? Because the Fed's indecision to do the right thing (i.e. raise interest rates) is a signal of lack of will to the financial markets. Not surprisingly, financials held ground yesterday, while industrials dipped, and commodity-related securities rallied in the face of more inflation. Today oil topped $140/barrel due to a weaker dollar, and combining the United States' lack of will to find its own oil reserves, the U.S. market has fallen.

Imagine that the market is a coiled spring that has been wound down to the floor by the heavy weight of negative sentiment, inflation expectation, high oil prices, a weak dollar, a weak economy, and an impending dead-heat Presidential election in which one candidate espouses higher taxes, and the other does not (leading to much market uncertainty). This is all bad, right? Yes, and now it's all baked into the current stock market pricing mechanism. Any improvements on any of these fronts will lead to a higher stock market. In particular, a Fed willing to combat inflation through monetary policy would be welcomed by the market, and we would experience market rallies, even with an added threat to the banking system.

Part of the value of dispensing financial advice is not just about "what to do", but sometimes more often "what not to do". Selling into a weak market is a "no-no". There may be some exceptions to this, but they are rare. Buying into a weak market is a "yes" provided an investor has a long term perspective. So for anyone sitting on the sidelines, it's time to start picking at this market, buying temporarily weak sectors or high-quality out-of-favor companies at low prices.

If you have friends that are paralyzed by this environment, have them give us a call. This type of environment is typically when we receive the most referrals.

Politics As Unusual

Well, here we are. Barack Obama has just killed the Clinton political machine, and is now the presumptive Democratic nominee. The battle is now on for the political "center" between John McCain and Barack Obama. McCain is "experienced"; Obama is "shiny and new".

I usually attempt not to proselytize about my own views, but rather to give a likely view that could have *big* consequences for the U.S. economy, taxes, investments, U.S. entitlement programs, and foreign policy.

This November of 2008 is a tremendous tipping point for our beloved nation. This election gives us an opportunity to actually solve some tremendous structural problems in our country. So when you're listening to speeches, reading papers, and making your decision, look for honest debate and concern for the following topics...

1) Comprehensive Energy Policy which focuses opening the floodgates of America's economy to solve our energy reliance. 30 year depreciation and huge tax incentives would be a good start here, and the government should *not* choose which technology wins. The market needs to figure it out. A true solution will focus on new supplies of oil AND new technologies. It's not an either/or option.

2) Entitlement Reform for Social Security, Medicare, Government Pension Plans. These plans need to be fixed ASAP, since we're running out of time, our greatest ally. Kicking the can down the road only robs us of time. There are many countries that have solved their similar problems, but we can't do it here? Failure to act threatens to continue to browbeat our currency, affect our Treasury markets, and could erode our standard of living over time.

3) Taxes. Marginal Tax Rates which stay low, or introduce a Flat tax. Dividend and Capital Gains taxes need to remain low. Raising taxes is the death knell for growth, innovation, and morale.

4) Foreign Policy. Like it or not, 2008 is yet another referendum on the Bush Doctrine. People forget that we already experienced one of these in 2004.