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A Bored Santa Claus

12/27/2011

One of the benefits (maybe the only benefit?) of having a childless Christmas is time to read, and I spent this one studying Currency Wars:  The Making of the Next Global Crisis by James Rickards.

It is not an easy read and is dense with historical detail.  We tend to think of WWI and WWII as the pivotal events of the last century.  Instead, Rickards takes us thru CWI and CWII, for Currency Wars I and II.  There are numerous examples of near-violence and bullying, especially by the U.S.  He also discusses the “game-playing” by governments to plan moves if another nation starts a currency war.  Make no mistake:  A currency war is a very bad thing!

Of course, the relationship with gold is an important factor in any discussion of currencies, but certainly not the whole story.  It is simplistic to say we can stabilize currencies simply with some direct linkage to gold.

The take-away for me is that Modern Portfolio Theory is fine as a risk-on/risk-off portfolio management tool but not as a “buy & hold” tool.  The alternative is more active market-timing, which introduces a whole new risk, i.e., how do you know when to pull-the-trigger to get in or get out of the market?

This week will be as boring as last week, with portfolio managers around the globe on vacation.  The weak Santa Claus rally doesn’t reflect any news.  Indeed, it reflects a lack of news, especially out of Europe.  The market wants to rise.  Unfortunately, when Europe returns to work next week, there will be more headlines, and the U.S. stock market will suffer again.

Today’s futures market suggests the Dow will lose 20-30 points at the open; no big deal.  However, this minor loss would break our string of four up days in a row, the first since September.  On Thursday, there is another sale of U.S. debt.  If the sale goes badly in this lazy market, we could see a significant sell-off.

My advice this week is to take the week off and enjoy some holiday beverages!  I’ll bet Santa Claus is doing the same . . .

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