In a “confidence building” tour de force the Fed chairman Ben Bernanke stated that “the economic outlook remains unusually uncertain”. While some folks would rather hear economic cheerleaders predicting nothing but sunny skies, I appreciated the Chairman’s candor.
The lack of confidence is not surprising given the contradictory opinions floating around markets. Confronted with today’s headlines who can blame people for fearing some toxic combination of any of the doomsday scenarios summarized below?
1. We are doomed: easy money policies and deficit spending will spark runaway inflation
2. We are doomed: foreign creditors will rid themselves of US debt and push interest rates through the roof
3. We are doomed: a “double dip” recession is upon us – recent economic data was weaker than some expected
4. We are doomed: the economy is caught into a long term, low growth, deflationary trap
No wonder that the lion share of recent money flows has shied away from stocks and flocked to the higher perceived safety of bonds (as noted in Dan Dingus’ post August 2010).
Given this “unusually uncertain” outlook we believe it will be helpful to discuss our take on these threats and address the steps we have taken with investment portfolios.
We currently view the risks of inflation, the “dumping” of US debt, and the chance of a double dip recession as being somewhat overrated. On the other hand, while it is dismissed by most, we find the risk of a prolonged, Japanese style, deflationary period as being deserving of additional respect and consideration.
Next week’s article will discuss these scenarios in more detail, each of which is deserving of continued evaluation.
Andrei Voicu is Managing Director and Chief Investment Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at blog@fragassoadvisors.com. Andrei can also be reached for comment at 412-227-3200.