What If The Economists Are Wrong?

The second quarter ended with all sectors still off for the year. Bad news finally caught up to what had been a stellar quarter and tipped the scales as the markets sold off on the last day of June and had another horrible triple digit sell-off before the 4th of July holiday weekend.

Morningstar wrote that if we wanted to get a recovery moving faster the consumers who were working had better start spending. This bit of information is about as wrong as one can expect from a respected financial information service. Working consumers are scared still and salting away savings and curtailing their spending. More shopping malls will be biting the dust as more stores, both independent and chain, are closing outlets. In a few months we'll be having back to school sales and I dont expect the news to be good. With national unemployment close to double digits only a slowdown in layoffs is realistically the best possible welcome news. To see a turnaround any time soon on employment is wishful thinking. Employment is the last thing to recover in any economic downturn.

One of the major fund companies dusted off one of their all time conservative growth allocations and used it as a measure against the S&P 500 index over the past 10-years. That conservative portfolio showed a total return of 2% for the entire decade. That beat the stuffing out of the S&P 500 index which lost 39% over the same period of time.

After the boom of the 90s and as we began the 21st century some astute investors predicted that bonds and cash would be the leading sectors going forward. They were right. Equities not only lagged the most conservative portfolios over the past 10-years but begged the question if equities would at any time in the near future become once again attractive to the average investor. A pure bond portfolio returned close to 150% over the same period of time.

The global meltdown of October 2008 only exacerbated what once was a recession that began March 2000 into a full blown depression.

On the heels of this depression lurks a future inflationary period unlike any we've ever experienced. There are those of us who remember Jerry Ford's WIN button, whip inflation now, and the days of Jimmy Carter and his double digit inflation and interest rate years. We'll not only see it again but this time it'll be worse. Much worse.

Uncontrolled inflation will bring housing values roaring back like nobodies business, give everyone a huge pay raise and increase your taxes along with food, utilities and transportation. Add to this the possibility of a new energy law and the current depression may seem like a cool breeze compared to the nasty jolt we'll all get in our pocketbooks. We'll be earning more but living with far less.

Locking in your money in long term bonds, CDs or fixed annuities will just as surely destroy the purchasing power of your money as night follows days. If inflation lasts for the full future decade you can expect the cost of most goods and services to increase by 50%. Putting it another way if you plan on buying a $20,000 car today, it'll cost $30,000 in 10-years. Fixed long-term income investments will destroy your wealth just as easily as did the 2008 economic meltdown with equities.

The best that you and I can do as we approach these uncharted waters is to invest in fixed securities no farther out than 12 months and plan on establishing an investment inflation survival strategy in what may be the most challanging future decade ever.