In order to prosper in your financial life and get through this economic environment with the greatest peace of mind, you must rid yourself of any short-sighted thinking that may negatively impact your financial life. 

Every major downturn has its own unique characteristics.  This frightens investors into making the wrong decision at the wrong time.  For example, over the past 18 months I’ve witnessed investors dump their stock market holdings regardless of how well-managed the companies might be.  

A classic short-sighted decision.    

“But Roland,” you say. “Shouldn’t you move more of your money over to cash until you know the market recovery has arrived?  Isn’t that the safe thing to do for now.”

Nope, and here’s why:  For 95 years now the Federal Reserve has destroyed the buying power of our dollars.  With the massive amount of money that’s been created in recent months, I expect inflation to continue being the dominant, long-term trend throughout my lifetime. 

Cash is the LAST place I want my long term savings to be.  For more on this see my previous posts on derivatives. 

Knowledgeable investors I know realize that putting money in the bank today that could buy a loaf of bread will one day be given back those same dollars but this time they will only buy a few crumbs after inflation has taken its share.   

See, there is a difference between money and wealth.  Money is just the tool society uses to measure and trade wealth.  The true wealth: businesses, stocks, land, real estate, and precious metals cannot be created without limit; money can. 

My suggestion is that you recognize the difference between the two and if you have not done so already, start dipping a toe into the market by taking money and buy up the abundance of wealth that so many of your peers are ignoring. 

Here’s one last bit of common sense that explains why now is not the time for cash:

FINAL NOTE: I could be wrong but the chance we saw the market bottom back in the early part of March grows by the day.  Don’t get too excited yet because the windbags in Washington could quickly change that with a speech or a new piece of legislation.  But please stay tuned - the remainder of the year will likely be filled with many twists and turns.  

The Recent Fed Rate Cut

In my opinion the cut in interest rates is less significant than what the Fed is doing with the creation of money.  Sure, it may have some psychological benefits but what difference does it make if the rate is 0.25% or 0.75%.  It’s the availability of money that’s more important as this will help dissolve the credit freeze.

Money Creation

The Fed has been running full steam ahead with its aggressive expansion of the money supply.  Talk about historic!  Normally that would create a massive growth stimulus and it probably will, however, we don’t know when.  Historically speaking, it typically takes a 12 month lag for monetary policy to be visible on the street level.

Inflation

I don’t anticipate this being a problem (at least for now).  We have the current psychological fears to deal which are deflationary.  However, when confidence recovers and the velocity (the rate at which money changes hands) increases, there is the threat for high inflation.

Market Volatility

The volatility is down from what we witnessed months ago but investors are still hiding and the day-to-day market environment appears to be dominated by traders.  If investors ever start coming out of the closet, I expect we will see some serious upside in the market.  The bargains are clearly there but the public is so scared that another emergency is on the horizon so they stay out of the market.

Strength of Companies

Recently I read this article saying that there are more than 2200 companies around the world “offering profits to investors for free.”  That spells a classic panic.  Companies as a whole are far healthier than what we witnessed them to be in past bear markets.

Gold

The metal has been so manipulated that it is hard to come up with a true free market value.  Gold closed out 2008 at $867.  This is well below the $1011 price we saw back on March 17 which is still well below January 1980 high when priced in inflation adjusted dollars.  Over the course of last year we saw gold-mining shares fall due to the deflationary collapse.  When the dollar takes a severe nose dive, gold should increase in value and could shoot past $1000 again very easily.

Dr. Mark Perry and Brian Wesbury are both very good economists that I like.  This past week the two have been going back and forth on the concerns of inflation. 

On Tuesday Brian wrote this editorial in the Wall Street Journal.  Here are a few highlights:

Today’s problems began seven years ago in 2001, when the Federal Reserve overreacted to the deflationary mistake it made in the late 1990s.  The Fed vigorously pumped money into the economy in order to drive interest rates down rapidly. 

As is so often the case, after the Fed has acted, but before the typical lag in monetary policy has fully played out, conventional wisdom argues that the Fed has become impotent.

. . .

One of the reasons that monetary policy is so loose today is that our economy is addicted once again to easy money and low interest rates.  We hear over and over that the Fed cannot tighten because the housing market and the economy are vulnerable.  This was the same argument made in the pre-Volcker 1970s, when the U.S. bounced from one economic crisis to the next.

Shortly after, Mark countered with this post on his blog and then he added another post to address Brian’s comments.        

My Thoughts:  Both arguments have validity, hence, in the short term, I can argue either way.  In the long term, politicians will be politicians, and as long as there is no restraint (such as a gold standard) there WILL be inflation because it’s a hidden tax, and politicians will take advantage of it.