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Investment Advice: Consumers are Broke and Inflation is Running Wild

By: Steve Johnson

6/9/2008 - 43 Comments

In the first quarter of 2008, our nation’s net worth declined $1.7 trillion dollars according to the Federal Reverse.

This is the second straight month that the nation’s net worth has declined. America is getting poorer and consumers are cutting back because they have less money to spend. The housing market and credit crisis that started back in August of 2007 has resulted in a major reduction of personal wealth.

The ‘old economy’ has passed away and a ‘new economy’ has been born.  This is very important to understand if you plan on preserving your wealth in this time of national decline.  

Consumers are Broke

The best investment advice that I can give you is that consumers are broke. The consumers that have lead the economy for the last decade with money from their increasing home equity values and credit cards are no longer going to drive the economy.  If you are still investing in them, you are making a mistake.  Here is a list of declining sectors of the economy:

  • Housing / Construction Sector
  • Retail Sector
  • Manufacturing Sector
  • Financial Sector
  • Service Sector

The only consumers that are leading the economy today are the growing middle class of the Asia nations like China and India.  They have rising currencies and a lot of savings to increase their standard of living.  If you want to invest in consumers, consider investing in companies that sell products to these consumers.

Inflation is Running Wild

The second best investment advice that I can give you is that inflation is running wild. The weakness of the dollar and the increase in global demand has already pushed inflation to double-digits in many parts of the world.
Venezuela (22pc), Vietnam (21pc), Latvia (18pc), Qatar (17pc), Pakistan (17pc), Egypt (16pc) Bulgaria (15pc), Reference Article: OECD warning as stagflation goes global

Oil is breaking new highs every other day, reaching $139 per barrel on Friday, while the national average of a gallon of gas just broke $4.

But, it’s not just oil that is quickly rising. Food commodities like corn, rice and wheat are also at records highs.  Raw materials prices, like steel, metals and plastics are also exploding.

Preserving wealth in a time of wealth destruction is very difficult, but can be done.  Investing in companies that supply food and supplies to produce food are likely to increase.  Precious metals like Gold and Silver are also good placing to store your money for a few years until this period is over and the monetary policy leaders of the world find a way to control and subdue inflation. 

Investing is Much More Difficult

It was much easier to invest in the ‘old economy’.  All you had to do was follow the conventions wisdom of investment advice, ‘max your 401k and diversify your investments’. That advice no longer works in the ‘new economy’. The massive growth period of the last decade that was produced by globalization has come to an end.  The world is now globalized and moving ahead without us, just as it did when Japan’s economy contracted in the 90’s. America has lost its leadership in the financial world as US financial firms continue to report billions of dollars of losses

The politicians cannot really do anything to stop the decline, although they will try as Nixon did in the 70’s.  They will talk and talk about their new ideas and stimulus packages until there are blue in the face, offering many people hope.  Yet oil prices are likely to stay elevated and the dollar is likely to continue to weaken, while inflation continues to climb.  The best thing the Federal Reserve could do to fight inflation would be to move the interest rates to 8% - to match the realistic inflation, but I highly doubt this is going to happen.

The next few years are going to be difficult to hold a constant net worth and even harder to increase your net worth.  Investment advice is going to turn to wealth preservation as more and more investors get burned by bad loans that result in falling stock and bond prices. 

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