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Embracing or Avoiding Risk

January 28, 2011 – 6:04 pm

GDP growth is a broad gauge of the health of our economy it is reported every quarter and is revised twice right up until the next quarter’s first report. The number for the fourth quarter of 2010 came out this morning.

The number is backward looking so in that respect it is not much help for investors who always have to look forward. However, looking backwards gives you a sense of a trend. Trends generally sustain themselves until some large event changes the game. Currently, we are in an upward trend from a pause in that trend that occurred in the middle of 2010.

Now that the upward trend has been reestablished you are now going to hear in the news talk about unstainability. Is the economy able to maintain growth as the Fed starts to withdraw its excess liquidity? I think it can and will until something dramatic happens.

The dangers I see are as follows: outsized inflation, a currency war, large scale municipal bond defaults and a blow up in the Middle East. These worries are in order of probability in my opinion. Also, none of these things could happen and something from left field could sneak up on us. The problem is how do you protect yourself while at the same time maximize returns as an investor. You can protect yourself from inflation and you can stay away from certain bonds but even then it all depends on how fast things happen.

Note that I did not list foreclosures or housing as a possible catalyst to change our economic outlook. The reason is that it already did a couple years ago and I doubt it will get much worse. Still there is a slight concern.

Investing is like being a mouse in a room full of mouse traps; you better watch your step at all times.

Good Trading
Steve Peasley

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