Recently we’ve seen significant volatility in the markets. In my opinion, this is a reflection of more people becoming aware of and concerned with our enormous national debts and the very shaky economy we have had for some time now. The downgrade of US bonds was the catalyst this time. Continued borrowing in an effort to solve the problems created by excessive borrowing is absurd. It cannot continue without creating more fundamental weakness in the economy. While the economy of the US and much of the world is being harmed – this actually does not necessarily mean that the Dow will continue downward.

If I’m correct the economy will be in an even worse mess than it already is in a short time. However, due to the overzealous printing of new money and spiraling spending and borrowing, we could very easily see high inflation, as well as continued economic turmoil. Inflation and prices could become so high that virtually everything goes up in price (even the Dow). How would this look? Increased unemployment and sluggish business growth, combined with much higher prices for food and other basic items. This would then lead to increased crime and even less ability for municipalities to keep basic infrastructure intact.

Not sure if inflation is higher? Have you seen the price of a gallon of milk lately? Stamps? Not sure infrastructure is a problem? Go visit Detroit, or Springfield MA, or Bakersfield CA or Fresno. The state of America’s economy reminds me of the classic cars that con artists sometimes try to sell: a fresh, cheap paintjob over a shell that is being eaten from within by rust and an engine once capable of speed now weak. Like those cars, America is in serious trouble in many areas, unemployment and declining competitiveness in huge areas of the nation while isolated pockets such as Washington DC are shiny and thriving.

If we look at the overall economy and the Dow over the last two years we have a good example of how the market and the economy do not necessarily move in tandem. Over these two years the Dow went up 15%. Now some (typically government) statisticians will point to various numbers to claim that the economy is better. Is it really? Who do you know who is doing much better than a couple years ago? Do you know of people or businesses who are struggling? How about in general around your community? Do you see the signs in businesses that you know that all is rosy and things are back to the “good ole days”? Unlikely. In general, most Americans, and many outside the US, are feeling the pinch of a weak economy: jobs are still scarce for many and business is struggling in many areas. Unemployment remains very high – even the meager numbers handed out by government often only show the number of people actually receiving unemployment benefits – they do not typically reflect the astronomical number of people who have simply given up and stopped searching for a job and do not reflect the baffling number of new government jobs. These government jobs of course count as employment but are not only not an economic help at all to the producers/ taxpayers but a drain as they take an average of three Americans to pay the salary of one government worker.

Sadly, government has ballooned in size over the last many years, increasing the burden on the producing citizens who must pay for the (now millions of) non-producing government workers. With this explosion in government also comes an eruption in regulations: hundreds of various government entities controlling larger parts of our lives and the way businesses are run. Ask your doctor, your roofer, landscaper, lawyer, mechanic or techie if business is easier or harder today than five or ten or twenty years ago. Across the board, regardless of industry, you can find stories of those who are now less free and more burdened by regulation, making them less efficient, less profitable and less able to employ staff. Massive government also increases corruption: more business becomes driven by who one knows or how well one knows how to navigate the regulations rather than the quality of one’s work, product or service.
What is the bright side? By understanding these types of issues we can plan for various economic and market conditions. Big-picture, we can work to improve the economy and tell our elected representatives to what is needed to improve the economy (hint, it’s not making more laws and regulations or printing and borrowing more money).

The good news is also that there are many hard working, adaptable and able people. Many people who were harmed by the financial turmoil of the last few years have emerged stronger, with new careers, new innovations and new knowledge. America as a nation has been beat up economically and our politicians continue to make terrible economic moves, but Americans as a people are still some of the brightest, most adaptable and efficient people in the world. Great businesses can exist in any environment. During the great depression some great innovations, companies and fortunes were built. Now more than ever it is key to invest in companies with sound management and ownership structure. There are also opportunities in certain investments which could perform well if inflation increases dramatically. For example, businesses related to hard goods, metals and other commodities and certain other categories could benefit from high inflation. Most of all, there is amazing opportunity globally. Our world is changing rapidly and, like all times of great change, there will be remarkable fortunes made and lost – there will be those who are harmed and those who come out ahead. I for one will work as hard as possible to help as many people as possible come out in the later category.

Bruce Fenton started in the investment business in 1992 with a major Wall Street firm and founded Atlantic Financial Inc. in 1994, one of the first full service investment companies to use the Internet, a company which focuses on helping investors in a changing global economy.

This was prepared for informational purposes only. It is not an official confirmation of terms. It is based on information generally available to the public from sources believed to be reliable but there is no guarantee that the facts cited in the foregoing material are accurate or complete. Changes to assumptions may have a material impact on returns. Past performance is not indicative of future results. The views and opinions expressed in an article or column are the author’s own and not necessarily those of Cantella & Co., Inc.
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