Your local Central Bank is preparing an “Exit Strategy”, should you?

Last year was the Year of Government Intervention. In many countries around the world, that meant a significant shift of debt burden from the private sector to the public sector.

This year, developed country governments are looking at budget deficits for many years to come.

The “bond vigilantes” have not been able to wield much influence in the face of quantitative easing (QE) programs. They are wise not to bet against an adversary who can create high powered money with a few keystrokes on the computer.

The FED believes it is avoiding the mistake of 1937 by continuing its loose monetary policy. However, it is less clear that other big economies have the stomach to keep expanding their monetary base and government deficits. In Europe, Sovereign Debt levels are rising to unsustainable levels in several EU countries. Germany is trying to indicate that it will not bail out Greece but the fate of the Euro may hang on just such a bailout.

All the speculation is interesting but the action will take place behind closed doors. For the average investor, what is one to do?

This year, like last year, the key will be to watch the IRP System. 2010 is likely to be a volatile year. Big investors like the FED, Sovereign Wealth Funds, Hedge Funds and others are unlikely to give clear signals of their intentions because they will only hurt the value of the assets they are trying to sell into the market. We are entering a period where traditional analytical techniques (which depend largely on extrapolating past trends into the future) will be of even less value than normal because the change in money flows will be largely government (politically) directed rather than a business response to changes in the economic outlook.

So, you do not necessarily have to prepare an “Exit Strategy” but you should be watching the various asset classes in your investment universe to make sure you money is well positioned.

So, what is the IRP System telling us this week?

From a global perspective, the top asset classes have shifted positions a bit but remain unchanged. Emerging markets and Metals are still the preferred asset classes. In the US, the Gold ETF outpaces all the other sectors (although in our Global ETF Portfolio, Silver is the better bet). Consumer Discretionary and Technology are slightly ahead of Energy but the trends are not particularly strong.

For Commodities, Sugar and Natural Gas are leading with Base Metals in a weakened third place position. Silver is again looking better than Gold.

As for currencies, the system suggests going long the Korean Won and short the Euro and Japanese Yen. The NZ dollar is running a bit stronger than the pack and the British Pound is running weaker with the other currencies in a trading range.

To sum it up, more risky equity assets, commodities and select currencies are still worth holding. The technology sector is still strong and Pharmaceuticals are improving (discounting a possible failure of ObamaCare?). There is no need to rush for the exit this week but a number of our positive indicators are less robust than they were only a month or two ago. Be prepared to make adjustments to your portfolios in the next few months.


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