The American saver is under attack. People who hold anything other than a nominal amount in CD’s, money markets or savings accounts are not keeping pace with purchasing power and therefore losing money to taxes and inflation. Yet, millions of Americans hold over $10 trillion in these accounts. In this low inflation environment, many are missing out on one of the best opportunities in a generation and essentially stepping over dollars to pick up pennies.
As Pimco’s bond guru Bill Gross recently stated:
”To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders whose assets don't anticipate future inflation. The real interest rate -- the rate adjusted for inflation -- is the most hidden and unobserved. It is low, even negative, and will continue to be low. (Interest rates will stay this low) for a long, long time, I think. Short-term rates will stay there for at least two years and maybe three, because of high unemployment, excess capacity and, at the moment, an inherently low inflation rate. There would be no rationale for the Fed to raise interest rates other than to counter an attack on the dollar.”
I couldn’t of said it better myself, and that’s saying something since I’ve usually got words to spare. However the threat is very real. Low rates are killing savers and people on a fixed income, and that’s just what the government wants to happen. Ben Bernanke and his financial puppeteers (the guys who are printing the money) are telling us to take our money out of savings and invest it, or be guaranteed a loss.
Many feel that this will generate inflation. That is not the case… at least in the short term. Deflation is the real threat. That’s why the Fed is so vehement about printing money. Assets are being destroyed faster than the government can inflate. I have been watching the fed funds futures contract expiring in December 2011 which closed yesterday at 0.34%. Essentially, this futures contract suggests that the Fed will not make any changes to its monetary policy in 2011 and there will be virtually no change in the fed funds rate for at least the next year. Rates are going to stay low for a long time, the Fed has told us that, and people had better know where to put their money or be guaranteed a loss of principle.
So what do you do with your money? As I have said in past commentaries, you must be invested right now. Not necessarily in high risk assets, but in selected income and dividend payers. This low inflation rate environment coupled with the Fed’s commitment to keeping rates low has created one of the greatest low risk opportunities of our lifetime. We continue to focus on high dividend paying stocks and high yielding short term corporate bonds. Even today we can still get great yields, 8-10% range, that also participate in the market upside.
So how does one approach this market? Often investors tend to forget or try to ignore the simple fact that the market goes through market cycles: rising bulls and falling bears. They all like to believe that falling markets are a rarity, and if you would just buy-and-hold (buy-and-hope) that everything will be just fine. Since 1966, some 45 years ago, the stock market has gone through nine market cycles, and currently into the 10th. It works out that an average market cycle is less than five years in length. That means the average investor is going to go through six, eight, ten or more market cycles.
Only a flexible active allocation has demonstrated to add true value over market cycles. A Fixed allocation or buy-and-hope approach, simply rides higher on the incoming tide, and falls along with the outgoing tide, kind of like playing craps. The proof is in the pudding, as this approach got crushed during the crisis 2 years ago and has little to show for the past 10-12 years, now called the “lost decade”.
In the sharp contrast, a “hands on tactical” or active allocation strategy, much like our Top-Down Tactical TDT™ strategy seeks to outperform during rising market by being invested in the leading asset classes and avoiding the laggards that drain performance, and then preserve those gains during the inevitable market declines by having a defensive risk management strategy and a personal exit strategy.
All in all, things look good right now and I continue to be positive on the market. However, it won’t last forever as we are building yet another bubble market. When this bubble bursts, it will be ugly, just like before. That brings an interesting dilemma as we know that we must be invested while remaining conscious of the inevitable Tsunami ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.