Christmas Eve Tidbits

Barron's had a couple of very dark things this week. First Marc Faber had this comment in the context of the Thai baht episode from earlier this week; "Excess liquidity has created huge imbalances and economic distortions that one day will have to be corrected, and I am afraid not in a pleasant way."

This got me thinking and then I read the cover story which gave a pro and con (not being sarcastic, I thought they did balance it out) as to whether the US will give way economically under pressure from the various deficits and imbalances. From the cover story; "Warren Buffett, for one, argues that America is well on its way to becoming a sharecropper society -- hocking its family jewels to finance insensate consumption." Merry Christmas?

A lot of liquidity was created a few years ago, an awful lot. There are arguments on both sides as to whether this was excessive or not and then even amongst the folks who do agree it was excessive there are different schools of thought as to what the consequences will be.

To be crystal clear, and I have thought this for a while, if there are to be any consequences from the liquidity created they will merely be disruptive not devastating. I do not think the dollar will cut in half from here, I don't think interest rates will go to where they were in the early 1980's and it will not mean the end of the American way. My idea of disruptive would be yields in the nines, give or take, maybe a 15% hit in the dollar and some other things that are clearly uncomfortable but not catastrophic...if it even happens at all.

Here's the thing. If the end is nigh crowd turns out to be correct we will all be hurt to some degree. If Kudlow is right, no one gets hurt. Therefore spending time on the everything's-coming-up-roses outcome is a complete waste of time. "The greatest story never told" does not hurt me, my money, my clients' money, you or your money.

I think it behooves anyone to spend time on the ideas that make Dr. Roubini look like a Kudlowite and think about how you would diversify in the face of something horrible. If you are diversified now this probably means just increasing exposure you already have.

Again, I do not think Armageddon is coming, not even close but I want to understand the things that could be harmful.

New subject; reader Sami left a great question on my prediction video. He says he understands my comment that if the market goes up 20% next year I think I will be close but he asks if I am right about negative 3-4% will Ibe close to that and is that ok?

The portfolio as it is constructed is, I think, built for success in down a little. On Friday the S&P 500 was down 0.53% according to Yahoo Finance. The generic portfolio I maintain on Yahoo Finance was down 0.17% on the day. I am overweight cash, underweight tech (and by extension underweight beta) and have a yield that is close to 3%. Most client accounts have exposure to 8-12 foreign countries; the odds are one or two of them will be up a lot (although I may not be able to predict which one or two those might be), maybe more. I still have the now smaller position in the double short ETF.

I think Friday could be a microcosm, in fact a 30-40 basis beat on down days like Friday have been common for the last six months and 15-25 basis point lags happen on days the market does really well. FWIW days with very small moves could be beats or lags with no real predictability.

Further, if the dollar declines I would probably get a boost from that too. So to answer the question I hope I am structured to be up a little if the market is down a little. Obviously this may or may not be successful but this is my game plan for now.