No One Knows

I'm a firm believer in fundamentals--in business, in personal life and in investing. Fundamentals are important because they are foundational; the structure on what everything else stands. When you have strong fundamentals and disciplines, you create a stronger, more accurate decision making environment. I will go to the earlier of my grave or the poorhouse believing that true investment fundamentals includes BOTH fundamental analysis and technical analysis.

While a facile command of fundamental and technical analysis is a laudable goal, that goal must exist within a very critical axiom. In fact every investor should recite as his/her daily investment mantra: "No one knows". I wish I had understood this simple, yet powerful, concept earlier on. It's not only applicable to investing but any topic you choose--including your health. As anyone who has faced difficult decisions regarding procedures/regimens knows, you're going to get divergent views. And when your health/life are on the line, those divergences are frightening. You only antidote to "no one knows" is knowledge and YOUR assessment of the risks involved in making decision x v. decision y.

In financial health decisions, one sees those divergences daily. On Friday, we had a whole new symptom to ponder: the falling dollar (You can read a professional's summary here. http://www.thestreet.com/_dm/markets/commodities/10324098.html.) Now I do not pretend to be qualified to explain to you all that it means; but I am qualified to tell you that you should have a rudimentary understanding of what that means. When asset classes have changing relative relationships with other asset classes, there's a bit of a yin yang dynamic unfolding that you should understand. What's bad for one is good for another (in terms of pricing). If the dollar is getting less valuable (relative to other currencies/asset classes) then something with intrinsic value, such as gold and oil, gains in value. Oil declines when the dollar is strong because it is priced in USD (less $'s to buy oil relative to other currencies.) and oil gains when the dollar declines (more $'s are needed because the dollars are valued less relative to other currencies).

So what does that really mean? For one, inflationary pressures will rise. Commodities will cost more for more USD's are required to buy a barrel of oil. There's another malefic result of a dollar going lower--higher interest rates. Why? Our bonds are USD denominated; therefore, if the dollar is going down relative to other currencies and asset classes, investors (and remember more than 50% of the holders of our bonds are foreigners) will require a greater return for those assets in the form of higher interest rates. Now just to mix it up and keep it interesting, you have some fundamental factors influencing oil: (1) OPEC's threatening to decrease supplies; and (2) increasing inventories.

But there's a beneficial result too....American made goods get cheaper and greater exports mean a reduced trade imbalance. Also, if you have ETF's understand the currency in which the share price is denominated. It will affect your returns. In general, Asian and European currency denominated ETF's will benefit from the dollar's falling. Those ETF's will gain in from the dollar's demise.

My point is not to give you any guidance but rather to coax you into developing an understanding of these dynamics and how they weave themselves into the tapestry of the investing climate. They are really important. I think that the best place to educate yourself on the business cycle and which asset classes do well or poorly is George Dagnino's site: https://peterdag.com/s_files/mLcn829S3eP2.pdf If you do nothing in your investment life do this.... Print out, read, and re-read that pdf. I would also urge you to look at his chart of the month. For fans of Bill Cara's site, you will see that George deploys stochastics to inform of the probabilities of moves in the market.

Remember, everyone has an opinion about what the stock market will do, where we are in the economic cycle, what the dollar, oil, gas, soy beans.....fill in the blank. There are several divergent opinions among great luminaries which means you need to tread carefully and understand YOUR risk environment. How? You must equip yourself to separate the wheat from the chafe. You can reduce your perplexions as a new investor through a basic command of economic cycles and of the asset classes that do better or worse at each stage of the cycle. When you do your head scratching, reach for the investor prayer beads and recite your mantra: "no one knows." No meaningful turn in the market or the economy is ever clear until you look in the rear view mirror. Until then, it's just blind mice trying to make sense of the elephant. Nevertheless, you'll be armed with knowledge to make informed decisions that are right for you.