August 2011 will be remembered as the month when investors around the world woke up to the fact that the emperor (or president, prime minister, etc.) has no clothes.
There are several reasons for the stock market dive we're experiencing, but a loss of confidence in our political and financial leaders is right at the top of the list. No one seems to believe that any of them has the foggiest notion of how to get us off the slippery slope to another recession. They're all delivering a lot of talk but the action is non-existent.
Consider last week's summit meeting between Europe's most powerful leaders, German Chancellor Angela Merkel and French President Nicholas Sarkozy. If a situation ever called for a decisive political response, this was the moment. Economic growth in their countries is grinding to a halt. The sovereign debt crisis is threatening to spiral out of control, taking Spain and Italy with it. There is growing talk of a break-up of the euro zone. Some European banks are rumored to be on the brink of insolvency. Clearly, it's the moment for a 21st century version of Franklin Roosevelt to emerge.
So what did Merkel-Sarkozy offer? Grandiose concepts which have about as much chance of happening any time soon as Somalia has of becoming a stable nation next week. Of course, closer coordination of fiscal and economic policies among all the euro zone countries is a fine idea in principle. But the creation of such a supra-national council with a permanent chair based in Brussels is a long-term project, not a short- or even medium-term fix. As Austrian finance minister Maria Fekter said after the meeting: "I can't imagine economic or taxation policies being exclusively made for us in Brussels." Any such agreement is "very far off," she added.
As for the idea of requiring all euro zone members to amend their constitutions within a year in such a way that future deficits will be limited or eliminated, many countries would probably prefer to go back to their old currencies rather than accept this type of control on their fiscal policy.
About the only proposal from the meeting that has any chance of early implementation is the financial transactions tax which was actually proposed by the European Commission last year but rejected by the member states. The danger is that if Europe goes it alone in implementing the tax, trading will simply shift to tax-free jurisdictions, placing even more pressure on European financial institutions.
While Europe continues to dither, the situation in the U.S. can only be described as vitriolic gridlock. Republican Michele Bachmann, one of the leaders of the Tea Party faction, won the Iowa straw poll last weekend and in doing so sent a message that the far right wing will continue to dictate the party's direction at least until a candidate is selected next year.
The Tea Party influence was further confirmed by the entry into the race of Texas Governor Rick Perry. He had originally been perceived as a more moderate Republican in the style of George W. Bush, but his decision to make the announcement at a South Carolina gathering sponsored by what a Washington Post blogger described as "a hard-core conservative website" raised many eyebrows. A couple of days later, he drew the ire of some prominent Republicans by coming close to calling Federal Reserve Board Chairman Ben Bernanke a traitor. His exact words: "If this guy prints more money between now and the election, I don't know what you would do with him. We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous - or treasonous in my opinion."
This kind of talk from someone who is perceived as a serious contender for the Republican nomination has to be discouraging for anyone who hopes that Congress might be able to find some common ground and take meaningful action to help America's faltering economy. The debt ceiling fiasco left deep wounds and contributed directly to the decision by Standard and Poor's to downgrade the U.S. credit rating. Optimists had hoped that one of the results might be an understanding by politicians of the need to work together more closely for the national good. That dream has pretty much been shattered by the latest events. The political logjam in Washington means that nothing of consequence will happen until after the 2012 election.
So it's no wonder confidence levels are plunging along with the stock markets. There does not appear to be anyone on the world stage with the influence and imagination to lead us out of the current mess. People are fleeing to gold, cash, and government bonds because they don't know how else to react in the face of this unprecedented situation.
What should you do? Forgive me for sounding like a broken record but since many people are still asking that question, let me reiterate previous advice.
Review your asset mix. If you are not comfortable with the current allocations of stocks, bonds and cash, fix it. We may be just at the beginning of a protracted downturn so it is not too late.
Safety first! Government bond yields are at all-time lows. Even the best high-interest savings accounts only pay 2%. But right now your priority should not be getting rich. It should be to preserve what you have. If that means adding some bonds, do so. I continue to recommend the iShare DEX Universe Bond Index Fund (TSX: XBB) and the iShares DEX Short Term Bond Index Fund (TSX: XSB).
Don't abandon equities entirely. The temptation may be to sell all stocks and retreat to bonds and cash. That could be a mistake. Although the indicators are bad, nothing is certain in this world. Last winter, bonds appeared to be a lousy investment for 2011. Now look at them. Surprises are always possible.
Stick with dividend stocks. The equities you keep should be stable, dividend-paying stocks. At least they'll provide cash flow while you're waiting for the drama to play out. BCE is one example. It's a solid company and the yield is a hefty 5.4%.
Don't overplay gold. Gold hit yet another record on Friday en route to who-knows-where. I recommend owning some gold at this time since it is one of the few stores of value that people want to buy (the Swiss franc and U.S. Treasuries being the others). But gold looks very expensive at these levels and even well-known gold bug Eric Sprott has moved some of his money over to silver, which he feels is undervalued. So if you are going to buy gold now, add to positions gradually on pull-backs. They always happen.
Finally, cross your fingers, say a little prayer, or do whatever seems appropriate to invoke external forces to help us out of this looming mess. We need all the assistance we can get and the politicians sure aren't providing it.
There are several reasons for the stock market dive we're experiencing, but a loss of confidence in our political and financial leaders is right at the top of the list. No one seems to believe that any of them has the foggiest notion of how to get us off the slippery slope to another recession. They're all delivering a lot of talk but the action is non-existent.
Consider last week's summit meeting between Europe's most powerful leaders, German Chancellor Angela Merkel and French President Nicholas Sarkozy. If a situation ever called for a decisive political response, this was the moment. Economic growth in their countries is grinding to a halt. The sovereign debt crisis is threatening to spiral out of control, taking Spain and Italy with it. There is growing talk of a break-up of the euro zone. Some European banks are rumored to be on the brink of insolvency. Clearly, it's the moment for a 21st century version of Franklin Roosevelt to emerge.
So what did Merkel-Sarkozy offer? Grandiose concepts which have about as much chance of happening any time soon as Somalia has of becoming a stable nation next week. Of course, closer coordination of fiscal and economic policies among all the euro zone countries is a fine idea in principle. But the creation of such a supra-national council with a permanent chair based in Brussels is a long-term project, not a short- or even medium-term fix. As Austrian finance minister Maria Fekter said after the meeting: "I can't imagine economic or taxation policies being exclusively made for us in Brussels." Any such agreement is "very far off," she added.
As for the idea of requiring all euro zone members to amend their constitutions within a year in such a way that future deficits will be limited or eliminated, many countries would probably prefer to go back to their old currencies rather than accept this type of control on their fiscal policy.
About the only proposal from the meeting that has any chance of early implementation is the financial transactions tax which was actually proposed by the European Commission last year but rejected by the member states. The danger is that if Europe goes it alone in implementing the tax, trading will simply shift to tax-free jurisdictions, placing even more pressure on European financial institutions.
While Europe continues to dither, the situation in the U.S. can only be described as vitriolic gridlock. Republican Michele Bachmann, one of the leaders of the Tea Party faction, won the Iowa straw poll last weekend and in doing so sent a message that the far right wing will continue to dictate the party's direction at least until a candidate is selected next year.
The Tea Party influence was further confirmed by the entry into the race of Texas Governor Rick Perry. He had originally been perceived as a more moderate Republican in the style of George W. Bush, but his decision to make the announcement at a South Carolina gathering sponsored by what a Washington Post blogger described as "a hard-core conservative website" raised many eyebrows. A couple of days later, he drew the ire of some prominent Republicans by coming close to calling Federal Reserve Board Chairman Ben Bernanke a traitor. His exact words: "If this guy prints more money between now and the election, I don't know what you would do with him. We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous - or treasonous in my opinion."
This kind of talk from someone who is perceived as a serious contender for the Republican nomination has to be discouraging for anyone who hopes that Congress might be able to find some common ground and take meaningful action to help America's faltering economy. The debt ceiling fiasco left deep wounds and contributed directly to the decision by Standard and Poor's to downgrade the U.S. credit rating. Optimists had hoped that one of the results might be an understanding by politicians of the need to work together more closely for the national good. That dream has pretty much been shattered by the latest events. The political logjam in Washington means that nothing of consequence will happen until after the 2012 election.
So it's no wonder confidence levels are plunging along with the stock markets. There does not appear to be anyone on the world stage with the influence and imagination to lead us out of the current mess. People are fleeing to gold, cash, and government bonds because they don't know how else to react in the face of this unprecedented situation.
What should you do? Forgive me for sounding like a broken record but since many people are still asking that question, let me reiterate previous advice.
Review your asset mix. If you are not comfortable with the current allocations of stocks, bonds and cash, fix it. We may be just at the beginning of a protracted downturn so it is not too late.
Safety first! Government bond yields are at all-time lows. Even the best high-interest savings accounts only pay 2%. But right now your priority should not be getting rich. It should be to preserve what you have. If that means adding some bonds, do so. I continue to recommend the iShare DEX Universe Bond Index Fund (TSX: XBB) and the iShares DEX Short Term Bond Index Fund (TSX: XSB).
Don't abandon equities entirely. The temptation may be to sell all stocks and retreat to bonds and cash. That could be a mistake. Although the indicators are bad, nothing is certain in this world. Last winter, bonds appeared to be a lousy investment for 2011. Now look at them. Surprises are always possible.
Stick with dividend stocks. The equities you keep should be stable, dividend-paying stocks. At least they'll provide cash flow while you're waiting for the drama to play out. BCE is one example. It's a solid company and the yield is a hefty 5.4%.
Don't overplay gold. Gold hit yet another record on Friday en route to who-knows-where. I recommend owning some gold at this time since it is one of the few stores of value that people want to buy (the Swiss franc and U.S. Treasuries being the others). But gold looks very expensive at these levels and even well-known gold bug Eric Sprott has moved some of his money over to silver, which he feels is undervalued. So if you are going to buy gold now, add to positions gradually on pull-backs. They always happen.
Finally, cross your fingers, say a little prayer, or do whatever seems appropriate to invoke external forces to help us out of this looming mess. We need all the assistance we can get and the politicians sure aren't providing it.
