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.
You seem prone to extreme extrapolations, this (extrapolating from the Fed’s seemingly half-hearted attempt to stoke low single-digit inflation to hyperinflation) being the most recent example. You embraced the sky-is-falling position on the Gulf oil spill over the summer as well.
Although, on the other hand, when Jim Cramer accurately predicted the sky was falling in October of ’08, you took the opposite approach and called the bottom, 4000 or 5000 Dow points early.
Yeah, sometimes I can be a little extreme. I admit I was wrong on the Gulf spill. And as October call in 2008, that was right around when Warren Buffett said that the market was a buy as well.
Also, I really don’t like Jim Cramer and think that he has hurt a lot of investors, and that dislike sometimes colors my views.
That said, October 2008 was in hindsight a pretty fantastic time to invest in stocks. And the goal is not that it is happening tomorrow, but that people need to plan for what will be inflation. I specifically make the point that you won’t know when it happens, but that it will happen quickly. My message is to prepare now.
I appreciate the criticism. Keep me on my toes!
I agree cash sucks, I hate what the fed is doing, etc. The cost of capital, as determined by the market, is a precious part of the puzzle.. but I disagree with the idea that inflation is definitely going to happen, and I especially disagree with the idea that it could happen quickly.
Inflation is not just about there being too much money. There also has to be under-capacity. So, for the price of natural gas to go up, there has to be a relative shortage. Our hyper connected global economy is pretty amazing on fast it fixes shortages.
Extreme example: You could increase the money supply by 500% right now and I don’t think it would budge natural gas prices.
I think the output gap is kind of misleading. We have had instances in our economic past where there was a lot of capacity yet inflation was running strong. I’m of the belief that inflation is and always be a monetary phenomenon.
Yeah, that’s a valid perspective, but if inflation is as much a monetary phenomenon as you believe then surely it can be reversed/contained with monetary policy, as well (if it ever does happen).
I see very few instances of “tightness” nor ability for companies to raise prices. I also see healthy profit margins. If one company could raise prices, then 10 other companies with artificially low cost of capital would jump into that market. I see “masked” deflation right now. No one is admitting it. I have no idea how it will end but I think a rapid reversal of it is a less likely outcome.
Check these links out:
http://jeffmatthewsisnotmakingthisup.blogspot.com/2010/11/dont-tell-ben.html
http://jeffmatthewsisnotmakingthisup.blogspot.com/2010/11/open-letter-to-ben-bernanke.html
http://www.cnbc.com/id/40135092/
I enjoy his blog, too. He cherry picked some extreme examples that I just don’t see in day-to-day stuff. Walmart is still selling their $.83 loafs of bread that didn’t even exist 3 years ago. Prices at walmart have stopped falling but they’re not where they were pre-recession.
SurferX,
I’m inclined to agree with you. See my response to Jeff Matthews’s post cherry picking the Google raise as an example of inflation.
Aaron quotes Friedman’s line about inflation, but a look at American history over the last few decades suggests otherwise. It wasn’t just monetary policy that drove inflation in the 1970s, for example, but wage & price spirals. We don’t have that now, with our high levels of unemployment and underemployment. American labor in general has no pricing power now; Google developers are just extreme exceptions to that.
I just read that Google was the 5th highest paying tech employer. Their bonus/raise caught them up to #2.
So, my (worthless) prediction is as follows:
hellacious hyper-inflation – 10% chance
moderate inflation like we had in 80′s and 90′s – 40% chance
barely any inflation (like now) – 30% chance
actual deflation – 20% chance