In a crazy world of over-population, hunger, ferocious competion, fiat (printed) money and democracy under attack by forces unable to compete, we look to the markets to try and find direction. Depending on which way one faces, the wind blows in different directions. If we listen carefully, we might hear what the markets are saying. Somebody once said that money is like a stream....it flows in the direction that is easiest for it to move.
So lets look at some facts. After a horrendous crash in 2008, equity markets have rebounded. How did this happen? The huge credit bubble that burst has been replaced by an even larger credit bubble in a desperate worldwide attempt to head off deflation. World population has grown from one billion 100 years ago, to 7 billion today. When trillions of dollars are showered on growing populations, frantically competing for diminishing commodities, the result is rising prices and inflation. In inflationary climates, logically, the rich get richer and the poor suffer. Where is this most apparent? In the markets. And of course, one of these markets is the equity market. One of the best hedges against future inflation are equities. The proof is in the pudding. Wall Street bonuses are once again on the rise. A warning... inflation is like war. You know how it starts, you dont know how it ends and how many bumps will be encountered along the way. Ask Obama and NATO. Expect volatility. Its the nature of the beast, inflation being part psychological.
Fact: Large amounts of fiat currency are being printed. In a fiat money system, money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it. As populations begin to lose faith in the purchasing power of their local currency, cash flows in the direction easiest for it to move. The price of gold (the alternative to fiat currency) has gone from $270 an ounce to $1475 an ounce in about 10 years. At the same time, the US dollar has taken quite the dive. Conclusion: The markets have major doubts about the US dollar continuing to be the worlds reserve currency, and secondly, gold should be considered not only as a commodity, but as an alternative currency.
Fact: The US Bond market is ten times the size of the stock market. Money has been flowing out of this market for at least 6 months. Interest rate yields (for our purposes we will use the term "interest rates") are slowly rising as bond prices fall. This market appears to be discounting future interest rate rises as inflation and growing debt join the party. Conclusion: Long term bonds should be avoided at all costs. Inflation or a loss of confidence in the US dollar type scenario can potentially play havoc with this huge market.
Fact: The USD has been losing value since the early seventies. At the time, President Nixon ended the gold standard for US dollars, effectively placing money creation in the hands of congress. I remember (even though I am only 29 years old LOL) that to own a million bucks in those days was a big deal. So while the cat was guarding the milk and with a continuous four year election cycle, humanity took control and huge amounts of debt were created, culminating in the crash of 2008. The system is clear to all. The US borrows money from others and repays the debt with devalued dollars. Some might say that if the mafia did this, they would all be incarcerated. Apparently legality is all that separates the different mafiosa. And CNN has the audacity to constantly point a holier than thou finger at all and sundry. To clarify, in 1970 a single USD purchased 4.37 Swiss Francs. Today it buys less than one franc (.90) Conclusion: Diversify into different currencies according to risk appetite and country of residence.
Fact: The majority of commodities and international contracts are denominated in USD, it still being considered as the worlds reserve currency. As the dollar is devalued so commodity prices rise. Anybody remember oil at less than 10 Dollars a barrel? Or for that matter, copper at 40 cents a pound (today $4.50)? Conclusion: Expect more of the same.
Bottom line, the name of the game is diversification. Cash, considered to be king until just recently, is in danger of being dethroned by inflation. And don't forget to discuss risk appetite with your advisor.
Why does a slight tax increase cost you two hundred dollars and a substantial tax cut cut save you thirty cents? - Peg Bracken
So lets look at some facts. After a horrendous crash in 2008, equity markets have rebounded. How did this happen? The huge credit bubble that burst has been replaced by an even larger credit bubble in a desperate worldwide attempt to head off deflation. World population has grown from one billion 100 years ago, to 7 billion today. When trillions of dollars are showered on growing populations, frantically competing for diminishing commodities, the result is rising prices and inflation. In inflationary climates, logically, the rich get richer and the poor suffer. Where is this most apparent? In the markets. And of course, one of these markets is the equity market. One of the best hedges against future inflation are equities. The proof is in the pudding. Wall Street bonuses are once again on the rise. A warning... inflation is like war. You know how it starts, you dont know how it ends and how many bumps will be encountered along the way. Ask Obama and NATO. Expect volatility. Its the nature of the beast, inflation being part psychological.
Fact: Large amounts of fiat currency are being printed. In a fiat money system, money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it. As populations begin to lose faith in the purchasing power of their local currency, cash flows in the direction easiest for it to move. The price of gold (the alternative to fiat currency) has gone from $270 an ounce to $1475 an ounce in about 10 years. At the same time, the US dollar has taken quite the dive. Conclusion: The markets have major doubts about the US dollar continuing to be the worlds reserve currency, and secondly, gold should be considered not only as a commodity, but as an alternative currency.
Fact: The US Bond market is ten times the size of the stock market. Money has been flowing out of this market for at least 6 months. Interest rate yields (for our purposes we will use the term "interest rates") are slowly rising as bond prices fall. This market appears to be discounting future interest rate rises as inflation and growing debt join the party. Conclusion: Long term bonds should be avoided at all costs. Inflation or a loss of confidence in the US dollar type scenario can potentially play havoc with this huge market.
Fact: The USD has been losing value since the early seventies. At the time, President Nixon ended the gold standard for US dollars, effectively placing money creation in the hands of congress. I remember (even though I am only 29 years old LOL) that to own a million bucks in those days was a big deal. So while the cat was guarding the milk and with a continuous four year election cycle, humanity took control and huge amounts of debt were created, culminating in the crash of 2008. The system is clear to all. The US borrows money from others and repays the debt with devalued dollars. Some might say that if the mafia did this, they would all be incarcerated. Apparently legality is all that separates the different mafiosa. And CNN has the audacity to constantly point a holier than thou finger at all and sundry. To clarify, in 1970 a single USD purchased 4.37 Swiss Francs. Today it buys less than one franc (.90) Conclusion: Diversify into different currencies according to risk appetite and country of residence.
Fact: The majority of commodities and international contracts are denominated in USD, it still being considered as the worlds reserve currency. As the dollar is devalued so commodity prices rise. Anybody remember oil at less than 10 Dollars a barrel? Or for that matter, copper at 40 cents a pound (today $4.50)? Conclusion: Expect more of the same.
Bottom line, the name of the game is diversification. Cash, considered to be king until just recently, is in danger of being dethroned by inflation. And don't forget to discuss risk appetite with your advisor.
Why does a slight tax increase cost you two hundred dollars and a substantial tax cut cut save you thirty cents? - Peg Bracken
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