Brexit and investment strategy

Brexit Cameron and MerkelAs I write this the Dow 30 is down almost 500 points due to the shock to world financial markets of the vote by the British to leave the European Union. Here is the transcript of Dean Baker’s analysis given on PBS’s News Hour.  Baker believes that this is, in part due to strong anti-immigrant sentiment. Among the (perhaps) unintended consequences is the ease with which young Brits were able to seek and take jobs anywhere within the EU. It will also adversely affect the 2.5M British expats living on the continent.

What I expect to see is what I predicted to my client this morning where we see each other poolside mornings. I told him the Dow could plunge as low as 500 points today. If you are an investor with a well diversified portfolio of stocks, bonds (both domestic and international) and other asset classes is that your holdings’ values will dip as their underlying prices dip but you will not lose the number of shares you own. If you sell during this downturn perhaps speculating that the slide will continue, you will lose your shares, as well as their value.

Smart investors (and their smart advisors) will not sell holdings during this downturn but will examine their asset allocation to see which of them have been affected. This will be evident in the change in their proportion to the entire portfolio. If you, as other smart investors do, hold cash as a distinct asset class, you will have the liquidity to buy more shares to bring those holdings back to their target allocation. In this process you will be buying shares that have a (hopefully temporary) market discount. Please consult your advisor for confirmation of this general outlook. If you have any questions, please don’t hesitate to call. (520) 623-3646. Thank you!

Krugman on inflation, deflation and economic growth

03-28-09_1041Oligarchy and monetary policy

Krugman finds evidence of hoarding in the latest report from the International Monetary Fund. The concentration of income causes cash to lose circulation; thereby facilitating economic stagnation. Generally accepted economic principles maintain that robust economies are those with large amounts of cash in circulation. It is my understanding that cash in circulation can even be measured in terms of it’s velocity. Krugman believes that an “oligarchy”;  just .1% (0ne tenth of once percent) of the population has the most to lose with increasing inflation since the value of hoarded cash erodes with it. Rising inflation is also a stimulus for spending since today’s dollar will buy less tomorrow. Other economists such as Dean Baker and Mark Weisbrot at the Center for Economic Policy Research (cepr.net) are unequivocal on this topic and Weisbrot has observed that rapidly growing economies such as Brazil experience inflation at high single digits without ill effects. Krugman rightly asserts a social injustice element as he observes that monetary policy that places low inflation uppermost causes persistent high unemployment. He counterpoises the interests of the rich against the interests of millions of unemployed and finds that the needs of the masses trump the desires of a tiny few. Politically, however, advocating higher inflation can be a difficult sell in middle America. Workers, especially retired workers on fixed income are easily alarmed at the suggestion of eroding purchasing power and historically are not altruistic enough to endure it for the sake of the jobless.