But 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 disinflation leads to depressions such as The Great Depression of the 1930's. 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 just recently when China replaced Japan. Many economists believe that the United States has been in deflation since the terrorist attacks in September 2001.

The media banters on and on 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)

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. 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. 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.

Through all of this mess many investors sold out 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. 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 they do to avoid what could be the worst depression of any generation in history? 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 learn how to save a small amount every month.

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.

Once the Federal Reserve announced their intention to pump liquidity at an unprecedented scale they basically sent out party invitations to everyone. When I got my invitation I thought it was obvious to everyone that risky assets would rise in value, including commodities, stocks and other currencies and this will create inflation. How long inflation might last, or how high inflation can 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?

This announcement by the Fed was their invitation to their party. The Fed wanted to inflate 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.

Instead of standing back and keeping my capital 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 capital, courtesy of the Fed. That way I will have more of it, 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 they feel better, consumers have more confidence and they spend. Remember after the crisis hit full blown in late 2008, the media was filled with economist 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.

Like all good things, the Fed's party will eventually end, but by staying at his party I am 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.

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 strategy of "the Cautious Bull" many times before, over the past 35 years. It served me well every 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 capital is put into the market, whether it be stocks, commodities, currencies, bonds - it is at risk.

I also keep 30% of my capital in cash, 30% in laddered bonds 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 be different, I still believe, party on, but I prefer to dance near the exit.

Other related articles you may enjoy or disagree with:
The Cautious Bull Strategy
Watch Out For June
How I Treat My Investing Like A Business
My Strategy