Swimming with Dolphins

On a recent family trip to the Bahamas, we were afforded the chance to take a side trip to an island where you swim in a lagoon with dolphins, and, in a sort of grand finale, two of them push your feet and you are propelled up into the air like a water skier with jet packs for about 50 yards. It was exhilarating, and it got me thinking about the nature of dolphins: how many other creatures in the world are so powerful, yet so obviously social and peace loving? Not a whole hell of a lot, I’ll wager.

This brings me invariably back to the markets where our money swims. There are a whole host of powerful creatures out there with a deep desire to take it from us right now, starting with the United States and it’s current economic policy. My long term secular bet that we are in an era of limited returns for many types of traditional stocks and bonds served us well this quarter even though the S&P 500 was down 2.5% and the Nasdaq declined 8%. Heavy cash and fixed income exposure, investments in energy and commodity related stocks and dividends from our large cap holdings helped us make money. Not much—the average account was up .86%, but we’ll take it. Why are we so defensive? Because swimming with dolphins is always better than swimming with sharks.

And the sharks in the water for U.S. investors are contained in the following charts.

The 1982-2000 period of low inflation is over; investment implication—look for securities/assets that work well in inflationary environments like materials-related, energy, real estate stocks, and, of course, cash.

The U.S. is playing a most dangerous game with trade imbalances—we have to either find new things to export or import less; by running record deficits, we have driven down confidence in our currency, and even though we are raising interest rates to keep it attractive to foreign investors and to try to stem inflation’s tide