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August was a wild month in financial markets.  It began with a major panic in the aftermath of the debt-ceiling debacle, as investors digested two critical factors:  First, market participants realized that our political system has become almost completely dysfunctional, meaning progress on improving our national finances and getting the economy back on track is highly unlikely.  Second, the market also began to appreciate that the debt ceiling was a manufactured and phony crisis, but the debt itself is in fact a massive crisis.  The fact that the debt ceiling was raised, which no doubt will occur again and again just as it always has, puts us further along the road that ultimately leads to a day of reckoning.  The early August panic escalated even further when the Standard & Poor’s ratings agency took the once unthinkable step of downgrading the credit of the United States of America.  Finally, the panic was also spurred on by the European debt crisis and the slowing economy, particularly in terms of unemployment and housing (strong corporate profits notwithstanding). 
 
The month ended with a rally, once again induced by the Federal Reserve as it hints at a third round of quantitative easing, or some variation thereof.  This game of propping up the market cannot go on forever.  The Fed also announced that they would keep rates at zero for at least another two years, a continuation of a reckless policy that robs and punishes savers while rewarding the irresponsible – including the government itself along with the banks.  
 
During the early part of the month, many high quality stocks became available at attractive prices for the first time in a while.  Investors should consider focusing on large cap multinationals, as their earnings benefit from both dollar weakness as well as stronger economies abroad particularly in emerging markets.  However, it would also be reasonable to exercise caution before becoming fully invested because of both the awful macroeconomic backdrop and the broad overall market’s still inflated valuation on a cyclically adjusted basis.
 
Precious metals had another good month.  Governments tend not to default as long as they have the option to conjure currency.  Thus while interest rates may defy common sense and stay extraordinarily low for a long period of time thanks to both the Fed and the weak economy, the one path that seems certain is continued dollar debasement.  Whether the economy continues to limp along or we get the aforementioned day of reckoning, precious metals are likely to benefit either way.  The time to sell will be when there is a monetary reset and a true base for sustainable, productive growth.  Silver is less popular than gold right now and investors should consider learning more about the gold/silver ratio, which currently would indicate that silver is even more attractive in my view.
 
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. No Vacation for the Market
 
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.