Investing in an Uncertain World – The Measurement of Fear

Turmoil in Africa and the Middle East easily confirms that the world in which we live is amazingly unstable. All Americans are tired of our country being the world’s sheriff, but now we see that in the absence of a sheriff … chaos rules.

If someone had told me 10 years ago that in 2011 we would have a Federal Funds rate of 25 basis points, a prime interest rate of approximately 3%, mortgage rates in the 4% range, and a low inflation rate, I would have replied that the speaker was smoking some illegal substance.

However, those conditions do exist.  Additionally, the Federal Reserve will continue to encourage people with money to invest that money.  Over the last few years, the Federal Reserve in general and Dr. Bernanke in particular, have taken a tremendous amount of abuse over their activities in 2008 through 2011.

However, I happen to believe that Secretary Henry Paulsen and Dr. Bernanke will be judged by history as having saved western civilization from complete economic collapse in the fall of 2008.  The only mistake I saw them make was to get Congress involved in September of 2008 via TARP.

Unfortunately, the current administration in Washington and the previous Congress seem to follow a playbook entitled “How to Discourage Business from Expanding in the United States”.  If one made a list of tasks needed to DISCOURAGE business expansion in the USA, this administration has demonstrated their superior ability to accomplish everything on the list in an amazingly short period of time.

Two and one-half years after taking office, it is possible to quantify the fear that exists in the market place today.  Please consider the following:

Quantifying the Value of Fear:

  • In a “normal” American economy, at any one moment there is approximately 2T in money market or other savings type facilities;
  • Since the fall of 2008, that number has been hovering around $9 Trillion;
  • Therefore, the value of the fear in the American economy is equal to about $7 Trillion.

The Trend of Fear:

  •  Recently one financial media article reported that a survey was taken in March of 2009 (the depth of the stock market collapse) and in July of this year.  The results showed that the percentage of Americans worried about their financial future has INCREASED from 53% in March of 2009 to 76% in July 2011.

To Solve the Crisis – Acknowledge and Understand

Two items are needed in order to solve a crisis.  The first step is to acknowledge that a crisis exists.  Sounds easy, but the current administration and apparently a lot of folks in Congress think no real problem exists.

The second item is the need to understand the origin of the crisis.  Sounds basic, but again, our political leaders  (an oxymoron) seem unable to grasp this concept.  Maybe it is because they would have to admit that they were wrong.  I have no patience with either.

Our perspective is that we are experiencing a perfect storm caused by the combination of several missteps that occurred in 1996-2000.

That is why we have created this series on “investing in an uncertain world”.  We look forward to sharing our thoughts with you over the coming weeks.

Our hope is that this will help you know how to invest your dollars to benefit from the forces unleashed by this Perfect Storm.  Call us, we would love to help you.