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For Frugal Investors: What to Do While the Fed Plays Ostrich

From Martin Weiss Research.

The article rehashes a lot of Bernanke's failed and failing policies of a weak dollar coupled with a weak interest rate, which I imagine will continue through to 2012. Here's a list of the damage that's occurred just this month:

"November Producer Price Index (PPI) for finished goods surged 0.8 percent, almost double most economists estimates. Moreover, the inflation is not stemming just from rising energy prices. Overall, the cost of food rose 1 full percentage point in November, equivalent to 12 percent annual inflation. Egg prices led the way higher, jumping 23 percent in November, while the price of fruit jumped an astounding 14 percent.

Think these are one-time, freak price jumps?

Think again, because since the first of this month… the price of corn is up more than 3 percent … coffee is up more than 8 percent … sugar is up 8.49 percent … oats are up nearly 6 percent … while cotton prices are up more than 16 percent — all of this in just 15 days!

The consumer price index hasn’t started jumping yet. But just like night follows day, it will as companies pass on higher wholesale costs."

The important part I wanted you to see is this: what to do about it as far as future investment placement goes.

"With interest rates rising and the Fed continuing to print money and buy bonds, despite a zero percent success rate so far, how can you protect yourself?

First, avoid long-term bonds of almost any kind. The longer the maturity on a bond, the more sensitive its price is to interest rate fluctuations. The surge in rates we’re seeing is crushing bond investors and the pain will only get worse the higher rates go.

Second, consider foreign debt as an alternative to U.S. bonds. Many foreign countries are in better fiscal shape than we are. The European PIIGS nations are an obvious exception. But in places like South America and Asia, opportunity abounds. Explore some of the exchange traded funds (ETFs) and mutual funds that invest there, focusing on shorter-term securities.

Third, to hedge your interest rate risk, consider inverse ETFs that RISE in value when bond prices FALL. You can even buy exchange traded notes (ETNs) that allow you to profit from a steepening in the yield curve, like we have now.

Fourth, remember that all bond market meltdowns present opportunity. If you sidestep the price declines — then scoop up bonds when their prices are cheap and their yields are high — you can lock in hefty returns for the long-term. That’s what I plan to do at the right time, and I recommend you do too!"

I'd also like to add dividend plays (ETFs, indexes, funds) to this list, because recently, this was broadcast on Bloomberg. Because Nouriel Roubini doesn't see the government making any serious moves to rectify our debt and deficit problems, the 2011 and possibly 2012 stock markets are going to plunge--traders and investors are going to send the markets a signal that they aren't pleased with the inaction.

To me, this is the first sign of a coming double-dip recession (actually it would be the triple-dip, or West Virginia (WV) economy I've mentioned some time ago). Obama's latest spending bill was actually a stimulus in disguise, and it won't work just like the first and second one didn't.

So what can you do about it? Instead of going down with the ship, jump to a rising one. Stocks are going to tank, so shift to bonds (short- and medium-term ones at first, then longer term ones as the plunge hangs on--this is precisely when to buy bonds), or ride the positive aspects of sinking stocks by riding the dividend horse--as stocks sink in value, the dividend rises to pay you to hang on in tough times. Real estate is another way--either through home-buying, rental buying, or REITS. Continue to stay away from gold, as selling it is more hassle than it's worth, and it isn't useful in any application--not even feeding yourself.

A new opportunity for stocking foodstuffs may also be coming, but it would take a big miracle to do away with the dollar devaluation overnight--just that alone is the cause of 30-40% of our inflation, and a year or two isn't going to erase it completely. When Wall St. sees real and measurable positive effects on reducing the deficit, then traders will have confidence in and will buy our dollar. This will help to erase that currency deflation, and consequently, our hidden inflation. As this devaluation subsides, retailers will no longer have an excuse for raising prices or shrinking product sizes just to eke out a profit, and food prices should come down, even if a little bit.

Is this light at the end of the tunnel? No--we're entering a darker, deeper tunnel. You have to provide your own light, because the government hasn't paid its light bill for decades. The game of politics is one of job security, and politicians are only interested in staying employed, not solving problems--that's for the next administration. Capitol Hill is only going to kick the can down the road--that's all it knows how to do.

Posted by Cute at 8:21 AM

Labels: economy, financial (non-tax)