Investing in a World Lit Only by Fire

November 29, 2011

I have been too optimistic about our leaders and about the resilience of markets. Both the Super Committee and the Europeans have failed to deal with the crucial issues of deficits, leverage, and entitlements. Today’s powerful rally is impressive, but I fear it’s a flash in the pan. The financial markets are relentless and so far have refused to be appeased with soft words and hollow promises of future cuts in wages and benefits. I think Frau Merkel and the German Finance Minister Schaeuble are right that it will take a deeper crisis to create the popular support for true austerity. In the meantime, although the U.S. economy is continuing to strengthen, the recovery is built on shifting sand. Across the pond, while the leaders dither, Europe is slipping deeper into recession territory. The odds of a double dip have increased significantly.

As a result, I’m staying close to shore with around a 30% net long position, but I’m not going net short. There are just too many uncertainties. There’s an old saying that may have relevance today: “He who knows not and knows that he knows not is a wise man.” I hope I’m being wise and not just cowardly in hovering near harbor. Fortunately or unfortunately, experience teaches that the likelihood of a market decline is inversely proportional to the size of your cash position and the lowness of your net long, and the likelihood of the decline being reversed is in direct proportion to the amount ...

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