Preparing Your Portfolio For Deflation
Walking a tightrope but with a safety net
If you want to know how many opinions there are about the economy, just multiply that by the number of investors out there. 2014 marks my 30th year in this business and I can honestly say that this is the most difficult environment I have ever witnessed. Most of this comes from the fact that the biggies, Bernanke and now Yellen, have changed all the rules. Free market capitalism has been tossed aside while they play God, bailing out their favorite cronies and printing trillions of dollars on a whim. Nevertheless, there are still plenty of ways to make money in this market if you know how to proceed.
At the end of the day, all the kings’ horses and all the kings’ men cannot fight the true underlying economic forces that ultimately reign. There is one fundamental rule in economics: for an economy to grow you need more spenders…period.
As I detail in Facing Goliath – How to Triumph in the Dangerous Market Ahead, the aging of America and the entire developed world are a hill so steep that even the Fed’s printing press cannot ultimately climb. The bottom is that the baby boomers are well past their peak spending years, and the generation behind them, Gen-x is far too small to make up their spending.
Not until the Echo-boomers, the children of the baby boomers get into their peak spending years will the economy take off again. The good news is that we have this generation, unlike much of the world. The bad news is that its 5-8 years away. Until then, we will be living with deflation. This is good if you are in the work force making money. This is not so nice if you are retired or out of work.
What is giving witness to this is the bond market. If we were on the verge of a new economic surge, as stocks have been suggesting, rates would be rising. Given the stock rally we’ve seen, the 10 year bond should be above 3%, instead it’s 2.55%. In bond market terms, that’s big money!
There are strategies that investors need to take in order to get the best returns with the least risk possible. We don’t need the best economy possible to be profitable, we just have to know how to play it. I do not believe that we are on the verge of a new economic collapse or a major crash….not yet. I expect the economy to limp along, never really taking off but not bad enough to throw us into another recession. This will keep the Federal Reserve stimulating with continued low interest rates and if inflation doesn’t get above their 2% target, a new round of Quantative Easing.
Stocks will be OK because they take their cue from corporate earnings, which will continue to go higher from continued cheap labor and cost cutting that has left them lean and mean. Certain sectors will do much better than others. More importantly, investors will have to be very nimble in the coming months, taking a “tactical” approach and not buy-and-hold, otherwise known as buy-and-hope!
…… and that’s where we can help. To learn more about The Springer investment approach, which is our powerful proprietary Investment Management Strategy designed to manage risk and deliver returns in any market…and/or get a free second opinion on your portfolio, simply reply to this email, or give me a call for a no-cost no-obligation consultation today at (916) 925-8900.