Headlines are filled with Italian bond yields and the status of Italy’s economy. Berlusconi has declared the economy is in fine shape because the restaurants are full. No surprise that he is on the way out. US share prices are rallying on a vote approving austerity measures by the Italian Parliament. Weren’t we just obsessing about Greece and Papandreou? What happened to Greece? They didn’t get fixed, but the gnat-like attention span of markets has shifted once again. I wonder what it will be next week.
Prices plunge on European worries and rally on promises of short-term fixes. Is this any way to run a railroad? It seems like a perilous environment for investing. If you knew that a European Sovereign debt default would certainly be avoided next week, would you buy calls or puts and for what time period? It is all very murky and unpredictable.
A client called last week and said, “I’m not panicked; I’m just exhausted.” He wanted to sell a portion of his account to get back to the point where he could sleep at night. It struck me that all of the volatility and uncertainty has raised the cash level for sleeping for a lot of investors. It will likely prove wrong as most emotional decisions usually do, but I have to agree with the sentiment: these daily swings of several hundreds of points are wearing thin. My new book The Arrogance Cycle analyzes emotional decisions of individuals and of society. Knowing yourself will alert you to many dangers ahead. Just when you’re sure you can’t lose, you better think again.
Stepping back from the noise, shows Europe in an awful mess that will quite likely lead to recession. Europe is a significant US trading partner. As Europe suffers a contraction, our economy will certainly feel the pressure, and we will approach stall speed. Whether or not we actually stall matters mostly to statisticians. Whether we technically flunk or get by with a D-, does not bode well for our future academic success.
I haven’t seen or studied any periods similar to this one. Global markets are connected and inter-woven in ways they never have been before. The banking systems share common plumbing that suffer common clogs. Without a clear view of the innumerable significant news events affecting outcomes in the market place, playing defense remains our most sound strategy. We will always prefer missing opportunity over missing principal. Solid balance sheets with limited leverage, good dividends, and high returns on equity are our preference.