Stock Market (redux)

[Tim Liston]

Those of you who read my posts know that I have been pretty gloomy about our economic prospects and particularly about equity investments (the stock market).

Today I am joined by the world's 7th largest bank, the Royal Bank of Scotland. They are predicting a outright global crash brought on by uncontrollable inflation. They believe that our faltering global economy will prevent central banks like our Fed from raising the fed funds rate to fight inflation.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/18/cnrbs118.xml

Other media outlets are starting to pick this up and report it, CNBC, Yahoo, thestreet.com, etc.

Since Bernanke made his hawkish statements about the dollar a week or two ago, the credit (bond) markets have price in a future half-point increase in the fed funds rate. But IMO that's not gonna happen, as RBS also believes. The factors that, probably correctly, called for the Fed to dramatically reduce the fed funds rate, have not abated.

Now I'm not telling you what TO do but here's a few things you CAN do if you have a lot of equity and bond exposure and want to play it safe. You can sell some stocks, starting perhaps with the cyclicals. You can sell some bonds, particularly the long-duration issues. And inflation, of course, causes the price of commodities to increase. If you don't have any commodity exposure, there are a lot of interesting Exchange Traded Funds (ETFs) that you might consider. You buy and sell them just like regular stocks. The have become very popular over the last few years.

GLD – tracks the price of gold.
USO – tracks the price of oil.
DBA – tracks the price of a basket of agricultural commodities (there are several of these)
PIO – owns a portfolio of water-related assets (which JO claims is “the next oilâ€

[ryan costa]

currency is basically backed by the value of everything produced in the geographic domain of that currency.

surplus profits or savings or capital have to be moved into wave 2 before wave 1 collapses.

Inflation is the increase in price of commodities or basic consumer goods. But investing in commodities is a way to "beat" inflation. You can tell your investment is paying off when it increases in price after you buy it.

We are probably heading into some new kind of Stagflation.

Maybe the Federal Reserve will lower interest rates into some kind of negative interest rate.