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Opportunities in a High-Debt, Low-Growth Era

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George Santayana once said, “Those who cannot remember the past are condemned to repeat it.” I wonder what the Spanish-American philosopher would say if here were alive today? Very recently, the blatant disregard for fiscal prudence reached a pandemic state.

Most of the “developed” world spent the greater part of the last 30 years on a debt spree that would make Imelda Marcos blush (I wonder is Barack Obama is related?). This debt binge was part of the reason the developed world, well, developed. In fact, debt is an integral part of economic life for, without it, growth would be sluggish at best. Individuals, businesses, and government, in the aggregate, typically spend more than they make and this fuels prosperity.

However, the greater the debt and accumulation period, the longer it takes to unwind. And during the unwinding period, the economy will tend to be more lethargic. Excess debt is the chief reason for the recent near collapse and current woes of global financial systems.

That which took 30 years to create will not be corrected in 15 short months. Moreover, here at home, the Fed is out of ammunition. As a result, America is somewhat at the mercy of consumers and businesses and, of course, the rest of the world. Yes, the rest of the world.

Europe? Well, there’s no need to rehash that except to say that according to the IMF, Europe is the world’s largest economy. China has an up-and-coming bubble with inflated real estate prices and a plethora of bad bank loans for starters. It seems that “keeping up with the Joneses” has gone global and debt has been the ticket, which brings me to my point: How do you protect client assets? Where are the opportunities found in such a grim scenario?

I once thought we’d see high inflation as the U.S. monetized its debt. While this may still occur down the road, the greater likelihood in the near term is a prolonged deflationary period. Though risky assets may have intermittent jumps, the trend is likely to be down. Therefore, cash is king, high-quality, shorter-term bonds are sensible, and inverse funds and the VIX are the engine that might just fuel portfolio growth. Stocks, well, I’d be very careful there.

Thanks for reading!