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FENCE SITTING…

As this is being written, the political and ideological standoff about the debt ceiling has not been resolved. The likely resolution, if it comes, will simply get us past this snag but will not do much to bridge the great divide between political sides that reflects the even bigger divide between the American People.

We must remember that this is a fight against a 50-year trend toward Big Government, and not simply a squabble between Republicans and Democrats. It is also a moral fight more than an economic one, and it is not a fight that anyone can win between now and the next election. It will be a long, hard, struggle for several years to come. I hope that our political leaders understand all of this. Our founders certainly understood the importance of the moral issue, which is why they asserted our unalienable right to the pursuit of happiness and not to the possession of property.

In a country where 51% of Americans pay zero taxes or actually receive payments from Uncle Sam, and 1% of Americans pay over 40% of all taxes, it is easy to forget the moral basis of our constitution’s principle of true freedom. In a country where the level of debt has increased from 42% of GDP in 1980 to 100% today, it becomes doubly difficult for politicians to reach the painful conclusions about fiscal policies that are morally constructive and framed in self-determination and meritocratic fairness. This is the true issue about our debt ceiling, and while the country convulses and contorts in deciding whether we can go back to the moral principles of our foundation, we are still faced with the challenge of preserving and growing your wealth.

At Cadinha & Co., our process necessarily takes into consideration many of the “imponderables” involved in constructing an array of possible scenarios. We assign probabilities to the various scenarios and success probabilities to various asset classes. Presently, we like the probability of success for common stocks in carefully selected, well-managed and well-financed companies. We trust these corporations to continue earning money and paying their stockholders. Unfortunately, we don’t have that level of confidence in Government securities.

We believe there is a high probability that the Federal Reserve will continue to “print” money and apply continued downward pressure on the dollar. Accordingly, our decision to hold Canadian instruments, gold, and silver in portfolios is a logical byproduct of this conclusion.

Cash and high quality short term corporate bonds are our next preferred allocation. We believe that there is a fairly high probability that cash and short-term bonds will outperform many other asset classes in this environment. Furthermore, a poor policy decision in Washington will quickly make cash King again. Obviously, we don’t have any insight on what our political process will decide, but the uncertainty surrounding our future will serve as a governor over economic growth. Increasing government regulation will stifle many sectors, so allin-all, we see a rather stagnant, sporadic pattern between now and the next election.

European financial stress will also be somewhat of a “wet blanket” over growth, as the potential of another contagion keeps lenders very cautious.

Perhaps cash is already King (and we have our fair share), but rather than bet the farm on that conclusion, we’re most comfortable sitting on the fence looking for more signs that will tell us which way to jump. We see the American economy (and the world economy) at a “tipping point.” We simply must be prepared to “tip” as well.

About the Author


Harlan J. Cadinha
Founder, Chairman and Chief Strategist
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