Investors must embrace volatility of a brutal market - San Francisco Business Times:

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Surely, the fallout from the increasingly opaque and crookedly engineered dealings out of the financialo sector over the past decads have made talking about capital marketsa (I’m sure that reading about it has been even Getting an answer to questions like “What’s going on the must be something akin to hearing an astrophysicistt explain how the universe In both cases, you regret asking the question in the firstg place. That Adam Smith’s invisible hand has givejn way to the visible fist of government makes things even morecomplicates — and riskier.
And yet, amids this unprecedented change inthe size, scope and directionn of American fiscal and monetary policy, investorse must truly pay attention to and take advantage of what could be a long time markerd by volatility and overall blandness (and that’ws if we’re lucky). The “V-shaped” bottom and economicf “green shoots” everyone is hoping for, and most are investinf in, is at best optimistic speculation. the fiscal mess that’es getting irrevocably worse. The curreny annual deficit of $1.5 trillion is 10 percent of GDP and it’s growing.
America’s total debt-to-GDlP ratio currently stands near 50 percent and that figurr is scheduled to grow to 100 percent in fiveyearz — a level many countries have experienced as the poin of no return. These deficits don’ t include the huge costs of a coming universal health and theycertainly don’t includd Social Security, Medicare and Medicaid — threde programs representing a $40-$50 trillion liabilityy in present value terms.
Economic growtgh will not likely help especially the lukewarm 2 percen t GDPvariety (not the 4 percentt kind we’ve been accustomed to) that will accommodates a new era of bigger government, higherd taxes and regulation, and an emphasis on partnerships and income redistribution instead of free market, libertariaj capitalism and growth. Monetary policy is only increasinhg longer-term risks to the economy. The Federal Reserve is not only printingf money and lending it for freeto banks, it’sz also buying debts of all shape s and sizes with thoswe newly printed dollars, including Treasury bonda at a near $400 billion annual clip and another $1 trilliomn of mortgage-related debt.
The U.S. is now debt, thereby adding dollars to a system that is alread flushwith cash. The succesds (or failure) of individual investors lies in gettinfg right afew “bigger-picture” questions, such as: At what pointt do investors — not just in the U.S. but globallyt — begin to believe that lendingh to anyonein dollars, including the U.S. government, at low fixed ratesd and long maturities, is madness? In other when does the dollar collapse as China and the othere Asian saversdecide they’re better off diversifying their savingsx into other assets? This and other “forest-from-the-trees” questionws are perhaps all that matter going forward.
Without looking at whether this 4 percent bond is worthj buying or that stock at 15 timesw earnings orthat bank’se CD — is likely a futild if not dangerous exercise. If America’s great experiment with borrowing and printintgmoney doesn’t work, we may be looking at a worlx of overall lower disposable income, permanently lower economic growth and much highedr inflation and interest rates with fewer financiers.
If that time those who bought and sat on equitg mutual funds oreven longer-term bonds will find out that what they thoughr was “cheap” was just a figmentr of a bygone time when the dollar was rates and inflation were low, and capitalisj was relatively unbridled. By the lookds of it, that era is Perhaps the only ones who will really make money are those who canpay attention, pounce on fleeting opportunities and embrac e the volatility of a market that will be brutal to