Friday, December 30, 2011

Flat 2011 Market Presages Flattening Of Many Portfolios In 2012

The U.S. stock market has gone pretty much nowhere in 2011.  In fact, it's gone pretty much nowhere for at least a decade.  Investors who started picking up bargains in tech stocks after the dot-com crash have little to show for their bottom-picking.  Blue chips with decent dividend yields have done better, especially for those who reinvested their dividends, and especially for those who stayed diversified with fixed income investments.  The bond market continues to rally with the Federal Reserve holding its interest rate target at zero.

The industrialized world has entered a fantasy land where credit can magically be paid off with the creation of more credit.  This is not as unique as it seems.  Previous credit explosions have always ended in tears when governments could not stop the monetary printing presses they started.  Paying your enormous debts with hyperinflated currency feels great until your paycheck starts to deteriorate even more rapidly.

In 2012 I will continue to find ways to defy conventional asset allocation.  Allocating capital to bonds makes little sense in the face of hyperinflationary credit creation.  The only bond exposure I will consider in 2012 (once my remaining California munis mature) is through TIPS and related instruments.  Allocating capital to stocks makes little sense with broad market valuations in excess of their historic P/E ratio of 14.  I will consider more stock investments in the aftermath of a major market decline but not before one occurs.  Even so, I remain a deep value fundamental investor.  Residential real estate in rent controlled locales would be disastrous purchases for new investors if high inflation becomes a reality.  Hard assets like precious metals are okay for my own portfolio as diversification tools, but I am mindful that gold's price is far above its historical average.  Rare earth metals are industrial inputs that will be hurt badly if exports of manufactured goods from China to Europe and the U.S. decline in 2012, as I suspect they probably will.

The eye of the hurricane is passing.  Europe cannot bail itself out.  The Fed's dollar swap lines can keep a drowning Europe afloat but cannot pump water (i.e., too much sovereign debt) out of its lungs.  U.S. government-owned financial assets await new buyers.  Some kind of storm can hit without warning in 2012 and blow a lot of portfolios away.

Nota bene:  Long GDX and FXI with covered calls.  Long some California state munis maturing in 2012.  Sitting on plenty of cash.