When I am in a financial investment as risky as stocks I pay attention to the world around me.
Recently I read yet another article about the coming “hyperinflation”. Honestly the media tosses these terms about like the unexpected arrival of the mother-in-law banging on my door this weekend! Just a few months ago it was stagflation and in 2009 it was deflation.
As this chatter makes it tough for most investors when they are in a financial investment like stocks. Stocks are the riskiest investment next to the pyramid scheme that my brother-in-law tried to get me involved in last year. Come to think of it, as a financial investment, there are many similarities.
Still for me I prefer to turn up the music and Dance Near The Exit.
Financial Investment – Too Much Media
The media is filled with, too much “media” and a lot of people spend far too much time listening to it, viewing it and reading it. No wonder they worry about their financial investment.
Don’t get me wrong, it’s important not to stick your head in the sand like an ostrich or be like Alfred E Newman and wear a T-shirt that says “What, Me Worry?”
(If you don’t know who Alfred E Newman is then my apologies)
The problem a lot of people have is too much media. The media hypes on and on about the coming “hyperinflation”. A period in the coming dark ages (perhaps tomorrow from what the media claims) when we will walk around with a wheelbarrow of cash just to buy a loaf of bread and the next day we will need more. Now that would ruin any financial investment wouldn’t it.
It was just months ago that the media was talking about stagflation, which is a situation in which inflation rates continue to rise or are high but economic growth is low and unemployment can stay stubbornly high. It’s a tough period as governments cannot rely on the “usual” course of action – such as lowering interest rates, to stimulate the economy. The 1970’s saw stagflation in many developed economies, including Canada and the United States. Stagflation is not as tough as hyperinflation on a financial investment like stocks, but both can spell disaster for the unprepared investor.
Just 10 months earlier the media was endless chattering on and on about deflation. Deflation is that period in time when there is a general decrease in price levels of goods and services and inflation falls below 0% or goes negative. Many economists believe that deflation leads to depressions such as The Great Depression of the 1930’s. Okay, that would be hard on my financial investment.
JAPAN: 20 Years of Deflation
However the country of Japan appears to have been in a deflationary period for 20 years but has remained the world’s number two economic power until recently when China replaced Japan. Many economists believe that the United States has been in deflation since the terrorist attacks in September 2001. Deflation in a true form is not pleasant for a financial investment like stocks.
THE MEDIA – Too Much Airspace To Fill
The media banters back and forth about terms they have no real knowledge about as they fill up their rapidly expanding 48 hours a day of airtime. They bring on a string of economists and fortune tellers who predict what will happen tomorrow and the media makes everyone worry that on Monday we will have deflation, by Wednesday stagflation and on the weekend hyperinflation will arrive just when I want to fill up my van. (Should have filled it on Monday)
Financial Investment and the 2008 – 2009 Stock Market Crash
The stock market crash of 2008 to early 2009 scared a huge number of investors both small and institutional. This was a credit crisis which could have resulted in a depression far exceeding the great depression. How it will all turn out in the end no one can say for sure but right now I feel pretty good about my financial investment in stocks. In fact many investors wished they had put their financial investment back to work through stocks in March 2009.
Credit Crisis – Is It On Hold?
Many of the problems seem to have been put “on hold” through large cash infusions around the world. But these cash infusions have just added enormous amounts of debt to countries world-wide. US Debt alone is staggering if you think about it (or prefer not to). Debt levels are so high I would question if anyone truly fathom’s the amount of capital indebted. It is definitely in the tens if not hundreds of trillions of dollars.
Cashing Out The Financial Investment
Through all of this mess many investors cashed out their financial investment in stocks in the crash and have stayed on the side lines, earning next to nothing on their depleted capital and in fact, actually losing capital every day that it is not invested thanks to inflation (which by the way the government says is minimal).
Dance To The Music – Stay With The Financial Investment Trend
My approach has been to turn down the noise from the media, turn up the music from the Federal Reserve and stay with the trend.
I know after 35 years of investing that there is rarely any point in fighting the trend. Right now the Federal Reserve has been pumping liquidity into risky assets and has been since the credit crisis. After all what did people expect when it was the Federal Reserve that expressed how they had contained the credit crisis issue in the first place.
What should the Federal Reserve do to avoid what could be the worst depression of any generation in history and wipe out just about every financial investment citizens own? Is it better to kick the can down the road and hope:
A) governments get their act together and realize they cannot spend billions or dollars they do not “have”.
B) governments do not get elected on the continual ticket of lowering taxes even more, spending even more, which just doesn’t add up. Then they continue to be dishonest with citizens by not telling them you can’t have it all without paying for it.
C) governments finally realizing that this is not “free money”, but money “taxed” from its citizens which is supposed to be used to improve the lives of all its citizens not a select few.
D) citizens realize the folly of entitlement; of such things as paying into a retirement plan for 20 years – a plan based on unrealistic returns on risky assets – and then expect to retire on 60% or more of what they made when working.
E) citizens realize that they are not nations onto themselves. They cannot continue to borrow way beyond their means to repay, hoping their personal GDP will catch up and surpass their borrowings.
F) citizens realize they must accept some responsibility for their own finances and financial investments and learn how to save a small amount every month.
DECADES OF DEBT
Perhaps if all the above happens then somehow over the coming decades (and I do believe decades – but remember this is just MY guess from MY crystal ball) the debt issue will be whittled down. But I digress.
FINANCIAL INVESTMENT IN THE LIQUIDITY PUMP
Once the Federal Reserve announced their intention to pump liquidity at an unprecedented scale they basically sent out party invitations to everyone with any kind of financial investment.
When I got my invitation I thought it was obvious to everyone who could muster money for a financial investment that risky assets would rise in value, including commodities, stocks and other currencies and the plan was to create inflation. How long inflation might last, or how high inflation it could get is anyone’s guess and it is just that – guessing.
With so much debt including personal as well as national, it is hard to say if inflation can reach run away status. But what, me worry?
DID YOU NOT GET YOUR INVITATION?
This announcement by the Fed was their invitation to bring your financial investment to their party. The Fed wanted to your inflate financial investment in risky assets, they wanted inflation, they wanted a lower US dollar and they want this party.
When it looked like the party was going to slow down last Spring, and many “guests” started to go home, the Fed sent out more invitations to QE2 – their second “add-on” party. Like a sequel to a great movie, they coaxed everyone back to the party to inflate our financial investment portfolios further. After all the S&P is still not even back to 2008 highs, let alone the all-time 2007 highs. Select this financial investment link to check out the Federal Reserve Board’s website.
THE PARTY WAS GREAT – INCLUDING THE SEQUEL!
Instead of staying at home and keeping my financial investment of stocks in a mattress trying to prepare for the coming “hyperinflation” I felt in early 2009 when the Federal Reserve announced its “party”, it was better to “inflate” my financial investment in stocks, courtesy of the Fed. That way I will have more of them, if inflation in its many forms, arrives.
By not investing since 2009 I would have lost capital. It is obvious to me that the Fed wants people to get their capital back. When people get their capital back they “feel better”. When their financial investment balloons, they feel better and as consumers they have more confidence and they spend. Remember after the crisis hit full-blown in late 2008, the media was filled with economists who declared the American consumer dead. Well that has yet to happen. The consumer both in the USA and in Canada have been pretty resilient if not downright stubborn.
THANKS FOR COMING
Like all good things, the Fed’s party will eventually end, but by staying at the Fed’s party my financial investment portfolio better prepared for whatever comes next. Has the Fed’s party worked? Well perhaps a bit, but the warning signs are still with us. The housing market is still terrible, some nations in Europe are basically bankrupt although no one is labeling them as such, the debt levels are now higher than in 2008, unemployment remains stubborn, but businesses have had their best years in almost a decade and a half, and many have refinanced their long-term debt at incredibly low levels.
GETTING OUT BEFORE THE BALLOONS BURST
But the trick though will be to know when to leave the party, before all the balloons burst and the lights go out.
I have used the financial investment strategy of the Cautious Bull many times over the past 35 years. It served me well each time. It’s a simple strategy of closing when there is a profit and re-assessing before putting the capital back at risk. Because every time my financial investment is put into the market, whether it be stocks, commodities, currencies, bonds – it is at risk.
FINANCIAL INVESTMENT – PARTY ON BUT DANCE NEAR THE EXIT
My overall financial investment is split 3 ways with 30% of my capital in cash, 30% in laddered bonds and fixed income and the remaining 40% in riskier assets – stocks. By taking profits as they develop, being realistic about the kinds of returns I can make and staying away from penny stocks, venture stocks, buy and hold forever strategies and the like, I have found that most times I “can have my cake and eat it to.”
While this time around it may indeed finally be different, my financial investment is my livelihood so while I still believe, party on, I prefer to dance near the exit.