A dollar spent by the government is always a dollar taken from somebody and diverted from some other activity. The only question is whether the dollar spent is more productive, or satisfies a more desperate human need, than the alternative activity would. If not, the spending is hostile to economic growth and public welfare. There is no free lunch. At best, what people call "stimulus" can only occur if the dollars spent by government are more productive than they would have been if they were allocated privately. I cannot imagine how allocating public funds to the same reckless stewards of capital that made the bad loans in the first place can possibly be a productive use of capital.
All of this would be fairly moot if it we were simply talking about 2008 and 2009. However, my impression is that as the effects of last year's surge of deficit spending taper off, we will begin to observe a more accurate and generally flat reflection of underlying economic activity.
Market Climate
As of last week, the Market Climate for stocks remained characterized by unfavorable valuations and unfavorable market action. The Strategic Growth Fund remains fully hedged. A few side notes - when the long put / short call combinations we use to hedge have the same strike price and expiration, as our S&P 500 combinations do, the combination behaves as an interest bearing short sale on the underlying index, regardless of the level of implied volatility. Time decay is what you pay in order to get curvature (as you do with a straight call or a straight put). It's not a factor when the long put and short call options have the same strike and expiration because their time decay offsets (which is enforced by arbitrage). Also, events like the "flash crash" would only affect us liquidity-wise if we were trying to get size off in a panic. Since we're fully hedged already, and do our best to panic sufficiently before everyone else does, that's not a concern here. Given that we have modestly eased from strenuous overvaluation to still clear overvaluation, coupled with the tendency for oversold markets to become wickedly oversold in their early stages, we have no inclination to "buy dips" here either, though we might place a percent or two of assets into out-of-the-money call options (as a contingency against a brief short squeeze) if the market was to drop precipitously. From my perspective, we remain in the eye of the hurricane here, which we have expected for some time. Suffice it to say we remain very cautious.
In bonds, the Market Climate last week was characterized by moderately favorable yield levels and favorable yield pressures. Given that commodity weakness often emerges in response to concerns about economic weakness and deflation (both which we may observe in the months ahead), our inclination is to gradually expand our exposure to precious metals shares on weakness where possible. Though longer-term inflationary prospects are quite hostile, they are in no way close at hand in my view, and my impression is that it has generally been difficult for investors to maintain a long-term thesis in the face of contradictory shorter-term pressures. So our intermediate-term position leans toward a modest (3-4 year) duration in Treasuries, and a moderate (5-10%) exposure to precious metals shares, while our longer-term expectation will most likely favor a greater allocation to TIPS and other inflation-hedges, with a tendency to accumulate on (possibly significant) weakness.
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