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As we watch the roller-coaster ride that the markets are on, we consider the
next moves. Where do you put your money? In these unsettling and uncertain
markets, where are the "bubbles" waiting to pop and...where are the markets
waiting for a true bullish run?
First, in what investing venues should you be wary? What markets look bearish
or (at the very least) don't look bullish? In short...what should you consider
avoiding today?
Let's take a look at the major choices...
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Real Estate- this market is still reeling and there is no potential
for a strong upturn any time soon. The inventory of unsold properties is
still too high. Buyers are justifiably still wary and sellers are still
struggling with unsold property. Lending standards are tightening and the
market is still focused on unusually high foreclosure rates and troubled
mortgages. It is a buyers' market to be sure but it may be one for years
to come. For now, prudence tells us to be ultra-cautious here and wait
for more data to come in during the coming months to give us a better picture
before diving in.
-
Stocks- this is a schizophrenic market since lately it has been
so typical for bad stocks to go up and good stocks to go down. In addition,
many sectors are bad long-term investment while a few are acceptable. As
I have told my readers in the recently-released 3rd edition of "Stock Investing
for Dummies", stay focused on "human need" stocks (food, water, energy,
etc.) and be very wary of everything else. There is still plenty of downside
risk in cyclicals, construction, consumer discretionary, technology, manufacturing
and retail. The political policy and economic environment is not conducive
to a strong rebound any time soon. In the long run, bad stocks will go
down and good stocks do go up. However, the short-term irrationality of
the markets give investors false signals. Caution is the primary concern.
-
Bonds- Should you put money into debt instruments? There's plenty
of variety here. Corporate bonds, municipal bonds and US treasury bonds
are the usual choices. In spite of the recent shake-outs in this area,
there are still pitfalls. Corporate bonds have a higher interest rate but
they are riskier since the companies that issue them get money to repay
this debt from customers (voluntarily getting money by selling goods and
services) and these customers are spending less these days. Municipal bonds
are a little safer since they get paid by forcing taxpayers to cough up
the money (through income taxes, real estate taxes, etc.). However, government
agencies that issue municipal bonds (state, county and local governments)
have (as a group) been spending beyond their means. Most states (47 out
of 50) have budget deficits and their ability to repay their liabilities
is suspect. Treasury securities are much safer but their interest rates
are very low. Even 10-year treasury bonds are running at about 3%. Treasuries
may be an acceptable choice for the short-term but they are not a safe,
long-term place for your wealth. Why? Inflation is certain to coming roaring
back during the next few years.
-
Mutual Funds & ETFs- Mutual funds and ETFs are basically "conduits" and
are only as safe as what they invest in. Mutual funds and ETFs that are
in "good investments" do well long-term while those in "bad investments" tend
to do poorly long-term. As I have written earlier in this essay, consider
mutual funds and ETFs that are tied to securities (such as stocks) that
are in "human need". Those mutual funds and ETFs that are tied to the general
stock market are risky and I mention some vulnerable sectors in the prior
segments on stocks and bonds.
-
Cash- This has been the safest place during the past 9-12 months.
Everyone should certainly have a portion of their money in this vehicle
(such as having a savings account that serves as an emergency fund). Unfortunately,
the interest rate is generally under 1%. As with bonds, you risk losing
purchasing power when inflation comes with a vengeance. In other words, "cash" and
cash equivalents are not a good place to be long-term.
-
Commodities- Available in a variety of vehicles for both investors
and speculators, commodities had a mini-"boom and bust" period during the
twelve months of 2008 but they have been on a long-term bull market since
the beginning of the decade. This is a risky and volatile area but I am
generally bullish on this sector (more on this later in this essay).
Yes...there are more areas to consider (collectibles, etc.) but these are
the areas that are most acknowledged as conventional venues for investment
and speculative purposes. Next, let's consider what economic conditions we
are facing currently (or expected):
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The US economy is in a soft depression right now. Business failures, job
losses, bankruptcies, foreclosures and other difficulties are at troublesome
levels and this has resulted in severe economic contraction.
-
Debt levels in most areas of our society are still at historically very
high levels.
-
The size, scope and cost of government at all levels have hit all-time
highs (and growing).
-
Taxes at the state/local level are currently increasing and federal taxes
are set to increase either next year or in 2011 (depending on our politicians).
-
Many countries are modernizing their economies (such as China and India)
-
Demand for goods and services have fallen due to economic contraction
and the de-leveraging of debt. This has caused temporary "deflationary" conditions.
-
A current government report tells us that medicare and social security
liabilities are soaring past $50 trillion and are heading into financially
difficult times during 2010-2017.
Given all the above, what should people consider to keep growing their money?
What sector will be the beneficiary of current (and expected) economic conditions?
The short answer is a simple one: COMMODITIES.
Why?
-
Demand. According to the World Population clock (found at the U.S.
Census Bureau website), the world population on 7/1/08 was 6,710,926,117.
A year later, the projected population for 7/1/09 is expected to be 6,790,062,216.
That's an increase of almost 80 million people in just twelve months. 80
million! At this rate, the world poulation will surpass 7 billion by 2012.
Billions of people to feed, clothe and shelter. More people that want more
stuff such as food, water, energy, materials and so on.
-
Supply. The supply situation for many commodities are tightening.
Due to a variety of factors- weather, government restrictions, the credit
crisis, etc. the natural resource sector has limited or falling production
that will not be easy to increase in the coming months and years. Many
commodities are facing conditions where their production may be peaking
in the next few years. Total world oil production, for example, peaked
in 2005 and has been steadily decreasing ever since. The recent financial
and economic turmoil has only exaserbated the situation. Grains, base and
precious metals are also experiencing production decreases. Old copper
mines are being depleted and there have not been any new major copper discoveries.
The bottom line is that commodities are not in abundance right now and
it is a huge and serious question about adequate future supplies to meet
growing demand.
-
Inflation. Yes...economic conditions have been "deflationary" but
understand that prices have falled (or not risen) due to 'supply and demand" factors
as consumers have drastically pullled back their spending which in turn
as forced businesses to contract. As businesses contract, they ultimately
have to lay off workers who in turn spend less due to income loss. It becomes
a vicious cycle. Therefore, market forces in these conditions have driven
prices lower but "lower prices" are not "deflation". The terms "inflation" and "deflation" are
really references to the money supply (our currency). Our government (through
our central bank, the Federal Reserve) has issued TRILLIONS of new dollars.
This massive money creation and massive spending can not be done without
consequences. All of this "over supply" of dollars will ultimately permeate
our economy. The bottom line is that our economic necessities -- food,
water, energy, etc. -- will rise in price.
-
More government spending. Those massive so-called "stimulus plans" by
our government and other governments (such as China) will artificially
push up demand for natural resources as infrastructure projects and other
spending programs kick in.
-
Government restrictions. Many governments (including our own) are
expanding regulations and taxes on business and production. This will have
a net negative effect on production.
To summarize:
More people + more demand + less supply +
more inflation + government spending + government restrictions
equals...
An inevitable, historic commodities super boom
The prices of commodities will hit record highs in the coming years. This
is why I tell my readers and students to focus their portfolio on those areas
that are tied to "human need" (such as commodities). Millions will get hurt
by what is coming but those that are prepared can not only avoid losses but
could potentially make fantastic gains. To find out more, check out my newest
mini-seminar, "How
to Cash in on the Commodities Super Boom" (available as a mini-seminar
audio report).
Be patient, displined and focused and you will survive and thrive through
what will be most likely an inflationary depression that is heading our way.
Stay tuned...
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Paul
Mladjenovic, CFP is the author of Stock Investing for Dummies and his
national investing & financial seminars are at 
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