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The stock market continued to decline in September as the economy deteriorated and the European debt crisis escalated. Greek bonds are now priced for default. If such a default is disorderly, as was the case with Lehman Brothers in 2008, then a major financial system meltdown will be triggered. The epicenter will be European banks as well as contagion to other peripheral European sovereigns, but very few asset markets would be spared. For this reason, along with unsustainable record high profit margins, investors should strongly consider reducing equities exposure (except for stocks that are extraordinarily undervalued).
 
 
Late in September the precious metals markets followed the equities markets down. Gold and silver’s decline occurred after the stock market wipeout, indicating that forced selling compelled some investors to dump their winners and then once that occurred a vicious cycle ensued in which leveraged hot money also began to sell. The good news is that this decline likely eliminated many of the weak holders and could set the stage for the next advance to new highs. It also allows investors to purchase more at attractive prices.
 
 
The fiscal and monetary situation on both sides of the Atlantic is a mess. Policymakers continually try to fight economic weakness and artificially prop up employment, housing and the stock market. Each time they do this the problem actually becomes worse, even if temporarily those actions allow us to continue to muddle along beneath the ongoing excessive debt burdens. If any of those areas were allowed to find their respective bottoms via the free market and if debts were actually allowed to be restructured and bondholders accept losses for the risks that they knowingly accepted in pursuit of higher returns, then we would have a cleansing process that would allow for a real and sustainable recovery. 
 
 
It is obvious, however, that this scenario is wishful thinking. The worse things get, the more we can be assured that the Fed will initiate a third round of quantitative easing (as the market was disappointed by Operation Twist, yet another gross distortion of the free market). All roads point to currency creation. Right now the focus is on Europe and so the dollar has actually strengthened somewhat, hurting gold and silver. However, the finances of the United States are even worse so the market will ultimately turn its attention toward the dollar again.
 
 
Michael H. Berlin, CFA, CPA, is the founder and portfolio manager of MHB Equity Partners, a value-oriented private investment partnership. He previously worked at Lehman Brothers, and before that at Ernst & Young. Mr. Berlin holds an MBA from Columbia and a BBA from Michigan.
 
 
Michael can be contacted at mberlin@mhbpartners.com and at (631) 629-4928      
 
 
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.