The Markets Keep Moving

In our June newsletter (Heads or Tails) I mentioned that I was nervous about the Federal Reserve not dropping interest rates. Well, they have. At first it seemed that the new Fed Chairman was going to play a game of chicken between his views and the U.S. Economy. Well, that scenario never did fully play out, thank God. As I see it, the Federal Reserve had to drop interest rates to spur on the current economy at a time when everybody doubted themselves. They could lower rates and restore confidence or wait and create a large ugly mess. Also, by waiting they would have allowed the economy to slip into a recession just as inflation was picking up. That, if you recall, is called stagflation and it isn’t pretty. Now, by lowering rates they will spare themselves the punishment of having to lower interest rates 2 to 3 points later.

Speaking of inflation; be aware that the odds are tilting in that direction and in a big way. If you have not already refinanced your home mortgage to a fixed account then you should seriously consider doing so in the next six months. In short, the U.S. government, states, municipalities and individual Americans are spending too much money that they don’t have. Our trade deficits are increasing, not decreasing, and all of this is inflationary. We are paying for a war with borrowed money and at the same time pushing through more benefit programs with enormous future price tags. Also, no increase in federal taxes to offset these current and future expenses is on the horizon. Politicians are asleep or in denial and this means things will get worse before they get better.

The government is stating that all is well and we will grow ourselves out of this dilemma. I quote from the Treasury Economic Update as of 8/03/07:

“The U.S. economy and the job market are healthy, with sustained job growth, low unemployment, and rising wages. Solid fundamentals will support continued growth in household spending and business investments.”

“Household spending: Consumer spending has been affected by increased energy and food prices and weakness in the housing sector, but the job market is healthy and should continue to boost incomes and support household consumption.”

“Real Wages Increased 1.3 percent Over the Past 12 Months. This translates into an additional $444 above inflation for the average full-time production worker.”

These financial stats sound great until you factor in reality. For instance, while job growth occurred the Treasury fails to tell us that most of these jobs were in the lower end of the service industry and not in the higher paying manufacturing sector. Household spending has been affected as the Treasury states, but they don’t go into detail on the ramifications of increased energy expenses nor do they discuss what can happen when consumers are underwater on their mortgages; when their mortgage loans exceed the value of the house. This real estate drop could be the starting spot for consumers to finally slow down in their spending since they won’t have easy access to money. Possibly the start of a different economic cycle and the real reason the Federal Reserve dropped interest rates! Also, while real wages may have increased a little for the average full time production worker that will not affect the economy at all. The reason? Higher gas prices, higher insurance and medical expenses, and credit card debt quickly ate up that increase and then some.

It is crucial to look at the big picture and in this case it is the global economy. We remain convinced that investing on a global basis with companies that make consistent earnings is the way to go. When these companies pay dividends and have global exposure that really gets us excited. We also love dealing with mutual fund managers who have years of experience and are value oriented.

Hoping for the best is not a financial planning option! Hope is not a plan. Plan for the best but be prepared for the worse. That is why we have added several elements of protection to all our portfolios.

We all know that the equity markets offer great protection long term against the ravages of inflation but with that comes enormous volatility. What if there were ways to cut down dramatically on that volatility and also to place some guarantees in your portfolio, wouldn’t it be in your best interest to do so? That is all I am saying. Review with us your portfolio, your entire portfolio so we can make sure that you will sail through any rough waters with a minimal amount of discomfort.

We have taken many steps with our current clients that have protected them in various ways and will continue to do so. You may wish to let your friends and family members know that your planner is the planner with a plan!