This past week started strong as the major indexes finished up for the first few days of the week.  However, things took a turn for the worse when another earthquake shook Japan.  In addition to the tragedy in Japan, the conflict in Libya heated up, and a potential government shutdown loomed.  All these factors combined led to a week of low trading volume as investors waited to see how everything would play out.

Source: Yahoo! Finance.  Data through 4-8-11

Total Returns %

1 Week

YTD

Dow Jones Industrial Average

+0.03%

+6.93%

NASDAQ Composite

-0.33%

+4.81%

S&P 500 Index

-0.32%

+5.61%

Russell 2000

-0.69%

+7.30%

U.S. Aggregate Bond Index

-0.38%

-1.13%

MSCI All Country World

+0.66%

+4.79%

Oil and gold prices have been skyrocketing based on the international unrest, with gold approaching the $1,500 per ounce mark, after hitting its historic high earlier in the week.  Speculation is also driving oil prices as traders doubt supply will be able to meet demand.  Oil prices have risen above $111/barrel to the highest level since September 2008. 

Another event involving oil that hasn’t received much press is the upcoming Nigerian elections.  Nigeria’s oil fields are vulnerable to attacks that have historically added to ongoing political turmoil.  The US imports over 10% of its oil from Nigeria, far more than from Libya, so such developments are definitely worth watching. 

Needless to say, the ongoing saga that is the US deficit will be in the headlines again this week as the debt ceiling is fast approaching.  The debt ceiling is really a no win decision as it either increases the hole we are already in, or the country will default on its debts; both are obviously terrible outcomes.  The latter is an obvious terrible outcome as a default on debts will damage our nation’s credit rating, and increase the amount the nation pays in interest to service its debt.  The former is a terrible outcome as our debt to GDP ratio is already over a critical threshold.  In a fairly recent book “This time is different; 800 years of financial folly” from Carmen Reinhart and Kenneth Rogoff, they reference that, historically, countries who have debt to GDP ratios over 90% experience slow growth.  Slower growth than we already have could be an economic kiss of death.  

With a $14.6 trillion GDP, and $14.264 trillion of debt as of 4/7/2011, our debt-to-GDP ratio sits at 97% (more than 90%).  Keep in mind the debt figure I’ve referenced is public debt and does not include unfunded wars and entitlements, which pushes the debt-to-GDP ratio to well over 300%.  Historically, debt levels of this type have significant consequences.  My suspicion is that those consequences are already being seen in fights over pensions, police at local government budget meetings, less social services, and in general having to make do with less.

Are your investments protected against our country’s current monetary policy?  Do you have investments that will hedge your portfolio against high inflation?  Call me to schedule a free review of your current investment portfolio – 913.693.7918.

John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals.  For more information, visit https://www.chladekwealth.com.

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