Monthly Archives: November 2010

Get out of cash. In 2008 and early 2009, it paid to be in cash. And even this year with all of the problems in the world and the scary amount of debt, it has felt good to be in cash. You were safe, secure in case the world blew up again. So far in 2010, all you have had to deal with is very low interest rates on your money. Well, I’m telling you now that you need to get out of cash, because your cash is about to be devalued and the value destroyed.

The Federal Reserve and the U.S. Government are on a mission to create inflation. They control the printing presses and control the supply of money. If they want to flood the world and markets with money they can and will. And they are.

In addition to the artificially low interest rates they have created, they are engaging in something called “Quantitative Easing.” This is where the Fed buys U.S. Treasury Debt on the open market. Basically, one arm of the government is buying the debt of another arm of the government. But, where is the Fed getting the money? The answer is they are creating it, or printing it. What happens when you rapidly expand the supply of something? Normally the value or price goes down. And the U.S. Dollar value or purchasing power is about to go down in terms of almost everything.

The Fed believes that a little inflation is good and will help joblessness and the economy as a whole. But the idea that our government can control anything related to monetary policy after the dotcom bubble and the housing bubble is completely naïve.

So what is an investor to do? First, get out of Treasury bonds, bond funds or any long-term bond fund you own and this includes municipal bonds. When inflation comes back, interest rates skyrocket and/or the dollar plunges, the value of those bonds will get creamed. Second, if you have cash lying around you need to either invest it or put those dollars into gold or silver, which I believe will become the de facto monetary substitute to paper currencies.

You should also consider upping your exposure into the stock market. Why? Because the Federal Reserve is specifically targeting the stock market. Check out the below quote from Fed Chairman Ben Bernanke from his Washington Post editorial on November 4th as to why he is going to such extremes in monetary policy:

“For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

An extreme example of what may lie ahead is Mexico in the 1980s. Inflation for the decade was something on the order of 10,000%. The peso was worthless and went down 99.99999%, but stocks went up 7000%, holding up some of investors’ value.

Finally, consider real estate. There are very few buyers right now due to credit constraints, ongoing fears and worries about liquidity. But for those investors with long-term horizons, there are excellent opportunities and real estate is an excellent hedge against inflation.

Now is the time to get active and diversify your money into precious metals, real estate and stocks and get out of cash and bonds. If recent history has shown us, we will get little or no warning for a change in psychology of the markets. The problems of Greece have been known for a long time, when their crisis came, it happened with remarkable speed. Get out of cash, you have been warned.