Paul Ferraresi

One of my Finance Instructors that I admired was Nobel Laureate Milton Friedman. He was a monetarist and built the “Chicago School” of Finance. He advised many world leaders and showed that inflation was, is now and forever will be a monetary phenomenon.

As many of you learned in your economics courses – inflation comes about as too many dollars are chasing too few goods.

The money being printed in Washington for TARP, the Stimulus Bill, and the 2009 budget is astronomical. Never in the history of the U.S. has so much money been printed (I wish I would have told everyone to invest in WD-40 to oil the printing machines. We would have all been wealthy).

None-the-less, my role as my client’s advisor is to look out into the future, note trends and have them invest ahead of the crowd. With all this money being created in Washington it will lead to a HUGE increase in inflation very soon (somewhat like a snake eating a rat, it will take a little time to go through the system).

I advised all my clients in December to increase their asset allocation position in metals, especially gold. I am not a gold bug, but, it is obvious what will take place. Last December prices for gold were at $750. It increased to $1000 recently (a 33% increase) and as of this writing is in the mid $900. Experts predict a rise to $1500+ in the next two years. Please do not follow the crowd and get into gold after the price rises (you know buy high sell low). You can, and should have long ago taken a position in gold via stocks, mutual funds or exchange traded funds. I am suggesting that you buy the physical gold. Coins are an acceptable method to do this and you must take possession. Do NOT store them at the coin company.

Remember you will never make money in gold. It is simply a hedging or insurance mechanism. That is, if gold is going up, then other asset classes are going down and vice versa. Make sure you work with a reputable coin dealer.

Watch the short video below that came from Glenn Beck’s show; it does show how dramatic money creation has been recently.

The economic turmoil that now embraces the planet of which we hear is more of a U.S. problem should not surprise anyone. You are witnessing the consequences of reckless indebtedness. The subprime mess was just the tip of the iceberg. The leaders in government were very indifferent as to “subprime” being a problem at all.
A little history….Bill Clinton in 1997 signed legislation to allow (demand) that banks lend money to “less fortunate people” (those who could not afford to pay for a home) in order for everyone to enjoy the American Dream. Alan Greenspan, head of the Federal Reserve at that time, accommodated this request by lowering interest rates. These low rates led to many years of “irrational exuberance” and the stock market finally died in the 2000 tech wreck, 911 made the economy stop and we had a recession. Greenspan lowered rates again, but this time the bubble was not in stocks, rather, in real estate. Fannie Mae and Freddie Mac were given the green light by Congress to accept all levels of credit loans. Wall Street wanted into the act and “securitized” these loans and sold them as “good” loan packages.
In 2001 President Bush presented to Congress his concerns over this sub-prime mortgage program with Freddie and Fannie but it was brushed aside and no investigation or legislation was enacted. In 2005, 2006, 2007 and early 2008 Chris Dodd, head of the Senate Finance Committee and Barney Frank, head of the House Committee on Banking, both fought against adding any more regulation to Fannie and Freddie. Both individuals stood firm and said boldly that these two agencies were strong, did not need any more regulation or oversight. The rest is history.
Now there has been a pattern of excessive aggregate indebtedness for quite some time at the corporate, government and household level, so, everyone is to blame. At the same time the tax code, in this country, encourages borrowing and discourages saving and investing. It seems everyone has a poor attitude of paying back debt. As a result when things begin to go sour on some debt, starting with subprime, the cascading effect was beyond what anyone ever predicted. Very few expected anything this severe, yet, the seeds were sown more than a decade ago (similar to when you watch friends over eat or over drink for a long time…sooner or later they pay the piper for the over indulgent behavior)
Looking ahead for you….unfortunately retail investors and institutional investors make their investments as if they are driving down the highway but looking through the rear view mirror. They all favor what has worked in the past. But, there is a powerful pattern of mean-reversion in the markets (that which is hot today is cold tomorrow and vice versa).
So the idea of looking at markets today and asking… what has been hit really hard, and as a consequence, may be priced at attractive levels. Well, this is contrary thinking to most people, including sophisticated investors. The temptation to buy what has done well recently and sell what has done poorly is the single greatest pitfall in investing and the main reason why a disciplined approach to asset allocation works very well.
With this in mind…..be careful of Government Bonds. These bonds have done very well recently, but, after a short deflationary cycle, which we are in, we will be hit with a huge inflationary cycle. This will lead to higher interest rates which translates into a loss in bond values.
Keep your eyes open to opportunities in emerging markets, gold, commodities, U.S. stocks and REITS. I have not seen deals and valuations like this since 1973-1974 when the DOW was at 570.
Remember you are looking at a 3-5 year investment window timeframe and not a bump up in prices tomorrow. Take advantage of this fire sale in the market now for a reward in 5 years. Or, will you drive down the highway in 5 years from now looking back through the rear view mirror after these items have gone up?! Then, like the masses do…will you buy when prices have gone up? You know the formula for the poor.. “buying when prices are high…and then selling when they are low.”
No, the correct formula is the opposite for the wealthy.

One of the most vexing questions plaguing investors these days is whether or not we’re headed for price deflation or price inflation. There are two offsetting influences…that will undoubtedly determine the direction of price growth.
History has shown that credit contraction is one of the harshest sources of deflation. The most recent Federal Reserve survey of senior credit officers showed that nearly 70% of surveyed banks have tightened their mortgage-lending standards. Stinginess among lending institutions is largely responsible for the 16% decline in our nation’s $22 trillion housing stock. Margin lending has been cut in half, forcing leveraged investors, like hedge funds, to disgorge marketable assets. The pullback in housing and equities, combined with plunging commodity prices, helped push consumer prices lower recently. Yet without the impact of food and energy, prices were essentially flat.
Persistent deflation is bad for the economy. Faced with declining sales and fixed interest obligations, companies will find it increasingly difficult to stay current on their debts. Consumers, facing similar challenges, will defer spending. Deflation fears have prompted lenders to require yields approaching 17% when purchasing below investment grade bonds. Offsetting the downward pricing spiral is unprecedented monetary and fiscal intervention in the form of stimulus and bailout programs.
The Fed’s balance sheet has expanded by $1.3 trillion in the past year. The Treasury has backed banks and money-market funds, has taken in the government sponsored mortgage companies and is toying with…bailing out the big auto makers. Eventually, this monetary expansion will push prices higher. Meanwhile, the Treasury market suggests prices will decline before they expand. The break-even inflation rate between inflation-protected Treasury notes and fixed-rate Treasury notes is nearly minus – 0.5% for the next five years. We recommend that investors brace for transitory deflation this year that will give way to inflation in 2010 and beyond. Take positions now to benefit from inflation and a dropping dollar.

An associate of ours, Kim Barmann, in New Mexico sent this report. I wanted to share it with you to emphasize the importance of staying vigilant in saving money.

$ People Are Saving Less

• The Commerce Department reports that Americans are saving at the lowest rate since the Great Depression.
• Personal savings stood at a national level of negative $6.2 million in January.
• About 40% of Americans say they are saving nothing for retirement. One reason: Over the past year, inflation rose 4.3% while salaries rose only 3.4%.
• One in four Americans told the Employee Benefit Research Institute that they have no saving at all.

$ Retirement Is Coming Later and Later

• The percentage of Americans 55 or older working full-time increased from 54.2% in 1993 to 64.4% in 2005.
• Nearly one in four people between 65 and 74 was still in the labor force in 2006, compared with just one in five in 2000.
• A recent study indicates that 17% of workers have suffered a reduction of retirement benefits offered by their employers in the last two years. Of these, only one-third say they are saving more for their retirement as a result.

$ Student Debt Is Piling Up

• Tuition cost have climbed 60% since 2000, and the average graduating senior now owes more than $20,000, according to the National Center for Education Statistics-twice as much as graduates owed a decade ago.
• Nearly a quarter of recent grads owe in excess of $25,000.
• While student debt rose 8% from 2005 to 2006, starting salaries rose only 4%.

These are the statistics. Break away from the crowd and do NOT be one of the statistics. Call us if you want to stand out from the crowd.

Planning for long term care is not a fun subject to work on. None the less if you are looking at yourself or, parents living past age 85, then planning should start around age 40. There are many options to solve this looming crisis (many times written about in this blog), but, the usual solution is to wait until it happens. If you wait, then, there will be few options available and your family wealth is wiped out needlessly.

The chart below is provided to begin an educational process for you. Get professional help, plan early, implement your plan. If not… will you be like the “grasshopper” or the “ant”? Ah yes, discipline or regret…

Paying for Lifetime Community Care

Click on image below to see full-size:

(From Journal of Financial Planning, February 2008)