Playing It Safe In This Environment

This weekend, I have had the luxury of time review more than the usual share of national and international economic news and commentary. Experts range from those predicting the demise of capitalism to the beginning of a new super-bull market and many somewhere in between, provided intellectual fodder for the brain.

As a result, I have determined that no one knows what the hell to do, unless you want to roll the dice and hope for luck. In this environment, my advice is to play it safe with your money with short term corporate bond ETFs such as Vanguard’s Short Term Corporate ETF (BSV), inflation protected securities such as iShares Inflation Protected Treasury Bonds (TIP), higher yield, shorter term corporate bonds such as iShares iBoxx Invest Grade Corp Bond ETF (LQD) and an ETF or two of high rated foreign government bonds. There is no harm in preparing for another round of bear market antics. Or, inflation dictated by a massive government spending scheme.

Which leads me to the Panic of 1857.

Banks were faulted for this deep recession. Crowds of unemployed and professional agitators flocked through the financial district of New York, and throughout the Central Park area targeting banks and the homes of bankers. The Ohio Life Insurance and Trust Company failed, ruining the financial lives of thousands of investors and the insured.

President Buchanan, in December of 1857 noted:

“We have possessed all the elements of material wealth in rich abundance, and yet, notwithstanding all these advantages, our country in its monetary interests is at present in a deplorable condition. In the midst of unsurpassed plenty in all the productions of agriculture and in all the elements of national wealth, we find our manufactures suspended, our public works retarded, our private enterprises of different kinds abandoned and thousands of useful laborers thrown out of employment and reduced to want……

It is apparent that our existing misfortunes have proceeded solely from our extravagant and vicious system of paper currency and bank credits, exciting the public to wild speculations and gambling in stocks. These revulsions must continue to recur at successive intervals so long as the amount of paper currency and bank loans and discounts of the country shall be left to the discretion of 1,400 irresponsible banking institutions, which from the very law of their nature will consult the interest of the stockholders rather than the public welfare……

It is one of the highest and responsible duties of Government to insure to the people a sound circulating medium, the amount which ought to be adapted with the utmost possible wisdom and skill to the wants of internal trade and foreign exchange.”

President Buchanan, meet President Obama.

Historians generally rank Buchanan as amongst the worst of Presidents, primarily for his reluctance to deal with the misery of human slavery. However, in his time, it is likely that the economic distress and poorly timed government policy towards a deep recession (called a “panic” in those days) led to increasing animosity with productive citizens and enterprises and thus exacerbated social tensions that may have prevented a non-violent end to slavery instead of a civil war. Buchanan made tactical errors trying to rectify the recession - especially with currency manipulations.

One hopes that sinister animosities do not fester out of our current situation.

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