March 22, 2013
By Steve Blumenthal
There is something in us humans that makes us want to call the market tops and bottoms. Far too many investors jump from “investor” to short-term, hot money “gambler”. Perhaps it’s the intellectual challenge, the potential business accolades or the ego. Above all it is about making money. An ill- advised get-rich-quick mindset takes over.
The problem is getting the call right and getting it right consistently over time. Few can do it. I maintain that a focus on risk is the right path. Fortunately, risk can be managed in a relatively inexpensive way. Where are the risks, when are the risks likely to impact the markets and how do you manage the risks within your portfolio?
I believe that the biggest risk we face ahead is tied to the irresponsible behavior of the world’s central banks. Ahead of us is inflation (call it two to five years from now) and rising interest rates – just not yet. Investors who are over-allocated to bonds will get hurt if they are both unaware and unprepared.
Today’s battle is deflation and deleveraging, but seeds for tomorrow’s issues are aggressively planted. The Fed is targeting inflation, as are the global central banks; the Fed will win and there will be consequences. We have forced everyone into the currency unit creation game.
I was on WSJ Live this past week talking about the Fed decision. My two cents was that the Fed has its foot on the accelerator and is traveling 150 miles per hour. They are not stopping anytime soon. Like the beauty after a mountain snow storm, the landscape looks clear. Blind to the risk, the skier jumps in.
Unmanageable debt is the problem and currency creation is the apparent solution. It is snowing currency units and the imbalance (risk of avalanche) builds. Is Cyprus the snowflake that causes the slide? I doubt it. France? Japan? I’m not sure – the point is that risk exists even when it is unseen. It usually is most risky when it feels so safe.
Below I link two pieces: Link one is an interview with the clearest thinker I know on currency manipulation, my friend, James Rickards. The second is a link to some optimistic commentary from Ned Davis as it relates to the intermediate-term trend in equities, along with his current view on sentiment.
- Rickards – “Nobody is stealing from depositors more than Bernanke“
- Ned Davis – Valuable commentary on sentiment extremes
I hope you have some excitement built into your coming weekend. I’m currently 35,000 feet somewhere over the mid-west heading to Snowbird, Utah for a few days of fun with my kids. The soft snow is falling and I hear it is a big storm. We are all over the top with excitement. What a great feeling. Oh, to ski fresh powder. I’m staying ever aware of the risks.
On April 4 and 5, I’ll be in Chicago speaking at a large advisor conference hosted by Dean Zayed and his firm, Brookstone Capital Management. I then fly south to Delray Beach for Randy Verlin’s MAP Annual Meeting on April 24 and 25. I’ll be in Beverly Hills at the Milken Institute Global Conference from April 28 through May 1 and in San Diego speaking at the SSG Advisor Conference May 1 through 3.
I hope to see you if you are in the area.
With warm regards,
Steve
Stephen B. Blumenthal
Founder & CEO
Philadelphia Office – King of Prussia, PA
CMG Capital Management Group, Inc.
steve@cmgwealth.com
610-989-9090 Phone
PS: When I look at the world, I try my best to view it from a probability perspective. I read endlessly and have access to some outstanding hedge fund and independent investment research. Fortunately, if you dig deep enough, you have access to a great deal of information on the internet. This certainly wasn’t the way it was in 1984 when I started in the business.
I believe we are in a challenging low return environment and that most individual investors hold higher return expectations; those expectations will not be met and investors will seek a better solution. In this, I see an unprecedented opportunity for you to grow your advisory business.
With this piece I try to share some information that I have found to be important. To me the evidence is clear, but I most certainly could be wrong.
Whether I am correct or incorrect in my thinking, my overriding belief is that you can create and manage successful portfolios for the period ahead. This environment requires more work (mixing a diverse set of risk drivers and more active beta hedging) than exists in a secular bull market cycle, but also offers you the ability to separate yourself from the 98+% of your competition that is heavily weighted in the old 60/40 stock/bond construction model.
The good news is that the investment opportunity has been greatly expanded and solutions exist. While risk is an inescapable companion in the investment process, I believe it can be quantified and minimized by expanding the asset classes you include in your portfolios.
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