Almost the entire investment world has their eyes on the Federal Reserve.
- Will they raise interest rates?
- Will they hold?
- What the hell are they going to do after seven years of zero percent interest rates, trillions in quantative easing, and massively distorted markets?
This is the world our central bank has created. They have purloined and suffocated the free markets. And that is the predicament the Federal Reserve has put itself in. The Fed owns these markets and anyone paying attention knows it.
After making the cost of money as cheap as ever (the green line) while creating more base money in our history (the red line) and the markets rising in perfect unison as the Fed corralled every last drop of captive money in the system into financial assets (the blue line), the Fed has undoubtedly created a huge mess that is going to be impossible for them to get out of without a variety of market dislocations.
Unfortunately, some folks think they know exactly how all this will play out: most will be wrong in some ways, and some will be profoundly wrong. The key to portfolio management at this juncture is to stay away from extreme market positioning. Own value and prepare your portfolio by putting a moat around it with key strategic portfolio pillars, rather than reacting to market events when they come.
I devour mountains of research and views and I can assure you that many viewpoints will be entirely wrong on how all this plays out. Just a quick scan of the predictions in 2011 and how they played out is a real tragicomedy. Of course, that was when the Federal Reserve completely took over the markets, destroyed hundreds of hedge funds and mutual funds, stopping at nothing to create their third “wealth effect” agenda just since 2000.
Yet, ever since the Fed went all-in on the markets there has been a misplaced sense of complacency and confidence by your average American that hasn’t paid attention to history. Confidence is misplaced because the Federal Reserve has never finessed their way out of their own extreme policies without complete chaos ensuing.
Indeed, the enormous stimulus and interventions by the Fed over the last 15 years (longer, I know) and their insidious after-effects have escaped the attention of too many good Americans today. After all, the Fed has a perfect record of their “wealth effect” agendas not working out as their artificially-created asset prices keep crashing on the middle class—decimating them and making them poorer as the years roll by, while those at the top keep consolidating wealth and power at the bottom.
To that end, there are millions of portfolios at huge risk today as many folks have been led like sheep into another monetary illusion created by our central bank. If the Fed ever lets you down, perhaps you should seriously consider suing them this time around (and one way or another the Fed will let you down).
Brokerage houses are commenting that accounts are nearly 100% invested, while investments on borrowed money are near record highs, at a time when valuations have almost never been more expensive in history.
If there was ever a time to be a contrarian main-street investor with an overall portfolio plan, it is NOW. Before I go over some value-based contrarian ideas around sound portfolio management at another time let me point out some of the risks right now.
Everything. Okay, there it is. Everything is risky today.
And that is why definitive views are so insane today. While there are some assets that have a margin of safety it is imperative your portfolio isn’t positioned too extreme right now or be Balls to the Wall anything…because that is how you’ll become part of the disappearing middle class in this mess. Unfortunately, for too many today, they are positioned exactly 100% in what may be the riskiest bets of all.
P.S. For the record, I am not a perma-bear. I shouted from the rooftops that an investor should buy as much stock as they could stomach in 2009 when great companies were selling below the cash on their books and/or replacement costs. Meaning, you got great businesses for free! Those were the good ole days. Today, we’ll look back at certain industries and be reminded, yet again, of good ole days.