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Tough Time for Investors During the Credit Crisis and Monetary Inflation

Forecasts / Investing Dec 13, 2007 - 08:28 PM GMT

By: Andy_Sutton

Forecasts As the current credit crises continues to deepen, much of the focus is on illiquid assets, seized markets and how the Fed and other central banks will attempt to bail the world economy out of this storm. Much of the debate has centered around whether or not the United States will be able to avoid a recession, whether consumer spending will fall off a cliff, and how likely it is for the economies of emerging countries will be able to decouple and survive a slowdown in the US. While these are certainly important questions to be asking, an even more important observation must be made.

Where does the small investor turn in these troubling times? For the first time in a generation, there is truly no safe haven within the status quo system of investing and asset management. Reliable stores of wealth have been pulled from the table as investors have had to take on increasing amounts of risk recently to garner the same returns as recently as a few short years ago.

For all intent and purposes, the stock market has done nothing in the past 7 months. Particularly in terms of the major indices for long terms investors. Traders have made plenty during that time if they were on the right side of the swift and violent ups and downs of recent market action. However, for the person who faithfully sends a contribution to his or her retirement plan every quarter, the past few months have meant little or nothing. This reality is enhanced by the fact that many traditional investment vehicles offer a mere pittance in the way of dividend income so there is no money coming in while the markets gyrate.

Bond markets have been awful for traditional investors in recent months. For those people looking to buy and sell bonds, there has been much money to be made. However, for the coupon-clipping public, bonds haven't worked out too well as the coupons are worth less and less moving forward. The news that import prices shot up a mammoth 2.7% in October ALONE should underscore the point that a 4% annual yield on a 10-year Treasury Bond is an affront to common sense.

With much talk coming from the Fed about even lower interest rates going forward and the PPT working diligently to buy the long end to create and maintain (hopefully) lower mortgage rates, the bond market is not the place to be for anyone who is looking to maintain a standard of living. Double that for anyone who is looking to increase wealth.

This morning, we saw a 3.2% increase in the PPI for the month of November. Naturally, this was blamed on high energy costs. The spin here is that this is only producer-price inflation and has nothing to do with what people see in their day-to-day cost of living. We will get that report tomorrow. I am sure that when you take out everything that matters like food and energy, the report will be somewhat ‘tame' and totally incongruent with the experiences of Main Street. Why mention price inflation in a discussion about bonds? The fact is that many people use fixed income investments to create cash streams for income in later years. The value of these cash streams is eroding and absent borrowing, part-time employment or drastic increases in Social Security, these people are seeing a dramatic reduction in the purchasing power of their fixed income investments.

There really isn't much of a need at this point to even talk about real estate as a viable investment. There are still a couple locales where the economics of buying rental units makes sense, but prices clearly have a ways to go in terms of correction. Talk of a soft landing is gone and has been for a few months now. The Fed may still try for nominal price gains in real estate, but the state of public confidence doesn't seem to be supporting that right now. In all likelihood, home values will continue to fall and with it the cause of much of the recent exuberance in the economy.

During times of trouble, another traditional response of investors has been to seek the safety of cash. However, as opposed to acting as a store of wealth as it is supposed to, cash money has become the ultimate destroyer of wealth, losing its value at a frightening clip. It is no longer feasible for the average investor to store substantial portions of their portfolio in cash. Savings accounts, CD's, money markets and other types of near-cash investments are also not prudent in significant quantities at this time either. Currency ETF and CD's have provided some protection, but only in the short term. Fiat money cannot be considered a hard asset in the long term.

Where to go for safety? These aforementioned situations will not only continue, but are likely to get worse as central planners around the globe throw more gasoline on this already out of control fire. All major fiat currencies are now suspect as the Banks of Canada, England, Japan, US, and European Union are openly coordinating their monetary inflation. This will help to ensure that they all lose value together. While this may cause the illusion that the dollar is stabilizing, in reality it means that all fiat funny money is falling in lock step. There is little solace in the knowledge that it won't be just savers in the US who will be fleeced in favor of enriching the banks and other financial institutions.


By Andy Sutton

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. He currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar.

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