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Let the games begin…

By Mike Minter, CFP®

Over my last couple of articles, I’ve written about some things that concern me and why I am being cautious with client money. I am not going to keep repeating these concerns as I feel like a broken record lately, although I believe they are just as relevant today, if not more so. It isn’t that things have gotten much worse; it is because we are close to running out of the fuel manipulating the markets as the Quantitative Easing or QE2 program ends this month.

The issue with these kinds of programs is that they are short term liquidity recoveries and not long term economic recoveries. Trillions of dollars being pumped into our system will make things feel better for a little while, but when the sugar high wears off, it is back to reality.

Because I feel the following will be a theme that will last for years, you may see me continue to repeat a line I used in my February 2011 article.

“If you remember one thing, remember this… As I have been telling clients for a while now, most of the problems we face moving forward will be debt related and won’t go away anytime soon (here and abroad)”.

So far, so good (just to clarify, when I say for a while, it has been years – pre credit crisis)

Alright, in regards to financial matters remember this too…

“When everyone else is doing something, most of the time you are better off doing the opposite”.

So when I have a client or friend suggest to me that now is a great time to be taking on more debt because rates are so low, I cringe (unless they are in a position where they can pay it off right away). By the way, the majority of people who can pay it off right away don’t have much debt, if any, and don’t want anymore. Maybe we could all learn something from them as there is a reason they are in such a good situation.

“Those who spend too much will eventually be owned by those who are thrifty.” – Legendary investor Sir John Templeton

At least taking on more debt is tougher now after the credit crisis, but what has already been accumulated is still a big issue. Let’s hope the economy starts improving quickly and the deflation threat does not rear its ugly head again as paying off debt could get much tougher.

That brings me back to my quote above about when everyone is doing something. All I hear about are the fears of inflation which immediately makes me worry about the opposite (deflation).

• Grow our way out (tax cuts and less regulation) – Nice concept and popular but realistically it will be tough because the costs to service debts are large and could halt any real progress since spending the tax cuts to pay down debt won’t boost the economy.
  
  
• Tax our way out – Political suicide although eventually tax rates will most likely have to rise.
  
  
• Major spending cuts – Long term a good idea. Short term a form of austerity that will make things even worse.
  
  
• Inflate our way out - It seems like the Fed is trying to do this but inflation (the silent tax) is a consumer spending killer. Besides, if we have too much inflation, then the Fed will be forced to raise interest rates, which is the last thing they want as it will make it more expensive to service certain debts.

It isn’t that there is no way out. It is just anything we do that is effective will adversely affect most of us. Ultimately, this is the problem. For example, there is no way around the fact that we need entitlement reform, but our politicians are more concerned about self serving policies and getting re-elected instead of leading. They join a party and become part of the herd instead of taking a stand for what is best for the country.

"A leader takes people where they want to go. A great leader takes people where they don't necessarily want to go, but ought to be." – Former First Lady Rosalynn Carter

Bottom Line…

The short term liquidity recoveries have come and gone. Get ready for some opportunities as volatility picks up and the games begin…

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