My investment strategy is rooted in value. Like a poker player calculates his odds before acting, I measure risk and reward for my investment portfolio. Presently, I believe risks are plentiful, and that the following triad of risks is worse than they are generally perceived to be. These risks shape my investment lens for a number of years to come.
- Political Tinkering: Political intervention ruins the integrity of capitalism, thereby lessening the attractiveness to invest in US stocks. This includes government regulation, overregulation, creating inefficient economic incentives, domestic spending (stimulus bill), bailouts of every kind (autos, TARP), rescuing bank debt holders using public funds (Bear Stearns), breaking contracts to favor special interest groups (unions), and other shenanigans (BofA-Merrill Lynch, Citigroup, Fannie/Freddie).
- Currency: I question the full faith backing of the US Dollar. Promised obligations (Social Security, Medicare, and Medicaid) along with interest payments to service our debt are projected to increase at an exponential rate. Worse, there are less workers contributing to the revenue pool. Further, the more debt the US issues, the higher interest rate it (generally) will need to pay. And around the corner, Social Security outflows are projected to exceed inflows in 2017, further adding to the US burden. Appeasing China and Japan (our largest creditors) seems to be a necessity. In my opinion, for the US dollar to remain in circulation, it will be severely devalued in the upcoming years. Finally, I find it absurd that the US Treasury now purchases risky assets, which are held as collateral for the currency.
- Housing: Now that the subprime mortgage mess has generally passed, the Alt-A & Option-ARM resets are just beginning. It appears that this second wave of mortgage problems will last longer in duration than the first subprime wave. I would not be surprised if housing causes a renewed downward cycle. With rates resetting through the first quarter of 2012, there will be increasingly more homeowners unable to make payments if refinancing is unavailable. I believe rate resets will further depress home prices nationwide.
