No Confidence Creates Volatility

August 12, 2011 2:22 pm 2 comments

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It is regrettable that our country is in this position of weakness due to years of government fiscal mismanagement. Consumer sentiment has plunged to the lowest level since 1980, and confidence in our leaders is collapsing. My greatest fear is that renewed weakness in stocks and the economy will create knee-jerk responses from our leaders that will make things much worse in the long run.

The current volatility is demonstrating a lack of confidence, which is creating short-term trends that will reverse. These trends include the collapse in stocks and the rally in bonds. There is so much confusion because not many realized the severity of this debt crisis. If you were to say something like “the economy will suffer weak growth due to our debt load”, you would have an audience. But if you said something like “this is the set-up for a new global monetary system and a default by the U.S. government”, then good luck, you’re in the minority. People will only listen to a certain point, then they either argue with you and spew nonsense or they shut down their minds. Fight or flight. Well there’s a third way, which is reason and common sense.

Our political system has devolved to the point that no reasonable compromises are ever made. Every single party, including the Tea Party, has no clue. Austerity is not a solution to this crisis- just look at Greece, it’s a real-time experiment in why austerity will fail. We need to ease our way into spending cuts because so many Americans depend on the government. Of course we can all criticize people for receiving government handouts, but that doesn’t change the economic reality. I’m giving you the common sense approach to economics, not the partisan “I’m blinded by my ideology” approach.

In the long run, we are in trouble. There is still no plan on the table that will meaningfully change our debt situation. All this bickering does nothing but destroy the confidence of Americans. In the meantime, capital is going to panic from one asset to another.

We are alternating between extreme up and down days; the market is trying to find direction. Can stocks fall another 20% from here? Of course, but it would be one of the great buying opportunities of the past decade. I bought into the panic and it is working out fine. I may lighten up into the close, we’ll see. Just keep an eye on the recent lows because that’s where the battle lines will be drawn.

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  • JF

    Just like gold, you are quite bullish about stocks in the long term. I’m also confident about some miners, what other stocks should we consider buying, especially in world that faces recession and public debt?

    • http://www.expectedreturnsblog.com Moses

      I would be buying resource stocks. 

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