Two things await the U.S. economy: Another recession ( which will be worse than the 08' meltdown in terms of industrial production, employment, muni-debt bailouts, ARM [adjustable rate mortgage] resets) and a coming currency crisis. The former may not result in such a dramatic decline in the major market benchmarks, but a 15-20% correction from here is very possible.
While the PIIGS are garnering all the market attention - investors should be looking here as we are in worst shape than all of the EU. By year end we will have 14.2 Trillion in gross federal debt, which excludes over 2 T from Fannie Mae (FNM) and Freddie Mac (FRE). Additionally we have well over 100 T of unfunded liabilities if one wants to be realistic, but even the GAO sees these liabilities around 70 T. Whenever M3 has a negative growth rate, an economic downturn has followed (with the exception of 1972 recession when it contracted after the downturn occurred). Real unemployment is creeping up towards 20% - which excludes discouraged workers and miscellaneous items.
I won't even get into the inflation that has already been created and yet to be shown through rising consumer prices and the additional money that will be created out of thin air to once again help the banking system stay solvent, finance our record deficit spending and all the other worthless programs that will be enacted. This can only be done through debt monetization aka direct injection of inflation as tax receipts will fall far short of consensus estimates. The following is my strategy in the equity markets even though I prefer the futures and currency markets.
Short the TLT - They have the longest duration out of any bond ETF out there, approx 28 years. The long bond can't really go much higher but it can definitely go much lower. For those who prefer not to short equities or ETF's, TBT is an Ultrashort 20+ bond.
Before the treasury market really starts to crumble, municipal bonds will do so first. SMB for example is a diversified muni bond fund. But shorting select states such as California, may be the better way to. (EVN, EVX) for example are ETFs focusing on California and New York muni's.
Buy precious metals as they are unlikely to repeat the 08' correction but rather investors are looking at these as the safest havens.
Keep your long equity positions and accumulate or initiate new positions on downturns in the overall market. Numerous companies, namely oil and precious metals stock prices has not moved despite a 300 point rally in gold and many attractive valuations on foreign oil stocks.
Don't buy into TIPS (bonds that adjust for inflation) as this is a sure way to lose money as the use of hedonics in calculating this number, essentially makes if useless. Instead use the best barometers (Gold, Silver, Oil and Food prices) as these numbers can't be manipulated.
Keeping track of the TMS or Austrian money supply is far more telling on the inflation front than all the other aggregates. I say this because the aggregates M1, M2, MZM and M3 ( if you compile it yourself) either leave out items that are money or include items that aren't money. M2, MZM and M3 include small and large time deposits, which aren't money! In order for something to be part of the money supply it must be available for immediate use. Time deposits for example or technically loans to the bank for a specified amount of time.
The TMS however is composed of : 1) Total Checkable deposits, 2) currency component of M1, 3) Total savings deposits, 4) demand deposits to foreign institutions and 5) demand deposits owed to foreign officials.