Backdrop:
And I know that you are often told if you are young investor then just weather the storm and it will be alright. But as a 20 something that has seemed to be ahead of the curve of the direction of this unbelieveable storm that is now upon us, my interpretation is to head to safer ground until the storm passes. Why because we've been ahead of the game a few times now: I have written posts using logic and my very basic understanding of Econ 101 to identifiy the potential for a housing bubble...then we were ahead of the curve when we combined the everyday realities ofsoaring energy and food prices to point out that the average person on MAIN STREET (i hate this term) was already feeling the effects of inflation!
The Federal Reserve finally caught on and to their credit took some action to combat the inflationary pressures of soaring food and energy prices, however, one problem was still left unaddressed and that was the housing bubble. Limited action was taken to help main street solve the mortgage crisis which spilled over into Wall Street. Wall Street felt the effects through deteriorating mortgage backed securities and a rising waves of credit default swaps (basically insurance to investor when toxic securities began to crumble). You may call it karma but our inability to help main street has seriously crippled wall street. In my last post, I tried to highlight this problem and indicate that I believe that even with a much needed bailout package we haven't truly explored all of our options to begin to resolve this crisis and a 360 degree approach my be needed. To make a long story short, I believe the Fed now sees the need for some of the points that were raised in the last post, such as stepping in and being an intermediary for short term lending to companies (basically being a bank & lending companies money b/c the banks don't to and can't do it right now).
If you weren't aware companies are having trouble getting short term loans (for supplies, payroll, etc) and many get their loans through a market called commercial papers. We have previously raised a point in the previous post that the Fed may need to "act" as a direct lender and today, the Fed, concerned that the commercial paper market has dried up look to breathe life back into this market by basically providing companies with short term funding.
Current Environment:
I believe the storm is just setting in because of the aggressive and unprecedented steps that the Fed (some listed above) has had to take along with the most recent words from the Fed Chairman, Ben Bernanke. I know you don't think words are important but when one of the most financially informed persons on the earth believes that the economic outlook has "worsened", economic activity is likely to be "subdued", and the financial turmoil may "lengthen weak economic performance" we must all take heed. I am hear to tell you that the Fed Chairman never wants to scare us but he must paint an accurate picture...and when he uses words like subdued economic activity then we are probably going to experience some serious economic pain for a period of time.
Supporting Evidence:
~ Fed Chairman's recent words
~ Today's global rate cut by the US and other major central banks
~ Commercial paper markets (corporate short term funding) has dried up and the Fed has announced that is will step in and create a market to revive this much need source of funding
~ The economic slowdown and financial crisis is spreading GLOBALLY
~ The bailout will take time help financial firms solve their liquidity problems
~ Rate cuts along with other things historically push INFLATION higher
Problem Solving (Only my recommendation):
~ If you are an older person nearing retirement, you are in a very difficult situation and I don't have many solutions here
~ Middle aged people and people with children: you have a few other responsibilities that will need your immediate attention, so capital preservation will be very important (see below).
~ Young people, I am going against the grain and telling you to be concerned and focus on capital preservation also! Move 401K balances, IRAs and brokerage accounts into safer grounds and due to inflationary concerns that appear to be surfacing I would reallocate your portfolios in this order (if possible):
- Gold (as fears continue this is a global safe house and great inflation play)
- Treasury Inflation Protection Securities (this security give you the Treasury yield and accounts for the rise in inflation)
- Treasury and Money Market Securities (safest investment out there, but inflation will eat away at your savings, eventually)
- Bonds (even bonds have lost money but obviously a better option than stocks)
- Smart Dividend and Value Stocks - At this point I am recommending this only for your brokerage account and don't go for the highest yielding firms b/c they may be the first to cut their dividend (i.e., Bank Of America), which means that stock will then fall sharply. Look for the the stocks that will continue to pay a dividend and increase their payments (Kinder Morgan - Jim Cramer pick, Enterprise Partners - Urb pick, GE - Urb pick are names that will help you pay yourself during this tough economic period)
I'm Out!
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