This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, November 9, 2009

A Truism for Turbulent Times

Even since the market bottom, we’ve been hearing quite a bit from friends and concerned clients. Mostly they’re worried about what they see happening in this country, both politically and economically.

This simple observation reveals a truth that we have noticed over the years in just about any issue people face, and that is: People have a natural tendency to extend current conditions into the future indefinitely.

For example, in 1999 stocks had been delivering outstanding returns for several years, particularly from innovative technology/dot-com companies. No one saw that fad coming to an end; they thought it was the new norm. Anyone could make a fortune inventing new technologies, or trading companies that did.

Likewise, in 2005 it was accepted as fact that real estate gained about 15% in value every year. So long as you made enough income to service your mortgages, at least until you felt like flipping, you could and should buy as many properties as possible.

The problem with this tendency is that simply is not the way the world works. Everything cycles; be it stocks, real estate, interest rates, or political tendencies, even temperatures around the world.

One of the most common phrases I hear from traders is that “the trend is your friend.” The problem is that nearly all of those who use it leave out the last, most significant part: “…until it bends.” We saw this with dot-com’s, we saw it with real estate, and now we’re seeing it in the case of gold and a declining dollar.

Currently there is a growing concern among Americans regarding the tendencies of the current administration. Yesterday’s elections have shown that the majority, long-silent, is awake, and it’s angry. In a single night a very clear message has been sent to Washington that politicians who continue to pursue recent fads will likely find themselves unemployed in short order.

The fears of some focus on the US dollar and the idea that it’s going to be worthless. Consider this: If you told someone fifty years ago that the dollar they were holding would lose 85% or more of its purchasing power by today, do you think they would have been concerned?

And yet, according to CPI – which is a conservative estimate of declining purchasing power – the US dollar has done just that. Yet we seem to be getting along just fine. Face it, folks. We’re already living this fear. The dollar is worthless. The sun still came up this morning.

When it comes to inflation, the bottom line is that ever since governments discovered how to dilute money, they’ve been doing it. Historians can trace it all the way back to the Roman Empire when emperors started shaving coins so they didn’t contain as much metal as they were supposed to.

My point is that, since politicians have figured out how to run the printing presses, they’re never going to stop. Pandora’s Box has been opening, and you can’t un-invent the wheel. However, those numskulls in Washington aren’t going to bring the world to an end either.

Plenty of economists point to the hyperinflation that occurred during the fall of Weimar Republic in Germany or the current situation in Zimbabwe. They raise some valid points, but there are many more differences than similarities.

These countries, like all others, did and will continue to cycle. Life didn’t end in Weimar Germany, nor has it ended in Zimbabwe. Adjustments have and will be made, and the world goes on. Cycles like these may be so [unbearably] slow that they’re sometimes hard to see. But then, just because I can’t see my grass growing doesn’t mean I get to forget about cutting it.

Fortunately, we think this is just what’s happened in Washington. Americans got lazy about scrutinizing their elected officials. Now we’ve woken up to find the grass somehow much longer than we like, and with plenty of weeds that need pulling.

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