I must be getting pretty good at investing — a couple of weeks ago I suggested to my wife that she move the equity portion of her 401k into cash, at least for the rest of the summer. … And she actually followed my advice!
In my view, if the old Wall Street adage “Sell in May and Go Away” isn’t true this year, then it will never be (assuming it ever was in the first place).
I see at least three potential sparks that might cause an “economic brushfire” this summer.
The first is the termination of QE2 at the end of June. This is when the Federal Reserve removes the respirator from the U.S. economy and we see if the patient resumes breathing on its own…. But if the patient continues to have difficulty breathing, going back on the respirator may not even be an option (at least in the same fashion as before).
This is because Secretary Geithner told Congress today that the U.S. has officially bumped up against the debt ceiling. Presumably, therefore, the Treasury can no longer hold bond auctions, at least until Congress authorizes an increase in the ceiling.
With no bond auctions, the Federal Reserve has no bonds to buy. …Unless they go out on the secondary market and buy them from, say, the Chinese. But it’s hard for me to see how buying back U.S. bonds from the Chinese would stimulate the U.S. economy. After all, any smart investor is going to want to receive more than he paid for his investment.
Now someone might say that I just showed how ignorant I am of how the government, global economy, and monetary policy really work. And they’d be right. I must confess that I know almost nothing about what this all means. After all, when the government shuts down because of the lack of a budget, it doesn’t actually shut down.
And when the government has tapped-out its credit line it doesn’t have to stop borrowing. Geithner has already indicated a number of workarounds (such as suspending investments in federal retirement funds) he can use to continue borrowing until the ceiling is raised. These workarounds can last until August 2. But that’s it (he says).
So the second potential spark is the debt ceiling issue. Now, no media source I have seen actually expects the ceiling not to be raised (any more than they expected that a budget deal wouldn’t be made earlier this year). But they do expect a lot of ideological brinksmanship resulting in a last minute compromise a few hours before the deadline.
Up to that time we can presumably expect threats, amplification of rhetoric, and in general the type of behavior that leads to an increasing sense of angst and uncertainty. In the markets this sense of angst and uncertainty manifests itself as volatility.
Add to this the third potential spark which is the ongoing confusion over the future of the European Union, and it creates enough stress to send even the head of the International Monetary Fund running naked down the hall after a parlour maid.
So I told my wife it might be a good idea to go overweight on cash for the next couple of months. Come September, much of the above should (hopefully) have played out and we’ll have a better view of the outlook for the remainder of the year and on into 2012.
As for me and my investments, well… that’s why options were invented.
