I Am NOT An Economist!

The Federal Reserve (9/23/09 meeting) stated that inflation is not the issue right now and yet many news items and pundits are on the "Buy Gold. Hyper-Inflation is coming" topic.


The economy recovered from the 2000-2002 downturn and then from October 2002 through October 2007, we experienced a growing and vibrant economy.


This "Great Recession" has been 22 months in the making and job losses may continue through 2010. Even if, technically (two quarters of negative GDP), are interrupted with positive growth in the 3rd quarter, the recession ends in name only.


I have re-read my posts from early-mid 2007 up through the October 2007 high in the stock market, then the short-lived recovery by year-end 2008 and the dramatic drop in wealth through March 9, 2009. Here is what I learned through these gyrations in the economy:


I am not an economist and was optimistic in my writings in mid-2007 that a recession could be avoided. But I, like many others got it wrong. Now I am writing about the reasons that I am optimistic that inflation may not be a problem (at least not for a couple of years or more and not double-digit inflation when it does arrive). I probably should avoid the issue altogether but I will post some of my thoughts and take my chances.


The reason is that, in the end, whether it is a recession, a period of benign growth or an inflationary period, we will recover. This stuff cannot be predicted. The brightest ecomonists and academicians cannot do it. I certainly cannot do it.


I can try to analyze the situation and make some reasoned assumptions but it is a "plan" that is most important. A diversification strategy that covers you, in part, if you are right about a recession or right about inflation. There are products available that do not require excessive risk that will perform acceptably during inflationary periods (i.e. TIPS - Treasury Inflation-Protected Securities; I-Bonds; real estate; and, yes, stocks). There are risks, however. Know them and understand them.


It may not be necessary to give up your risk capacity/tolerance and invest in commodities, high-yield corporate bonds, gold, silver and long-short absolute return funds and other alternative assets (that some investors run to at the wrong time) and, for many people, not even recommended.


CASH - an asset class, too!


If you are considering, maybe 5% of your total portfolio to go into a variety of these alternatives (1-2% in some of the above, for example), then it might make sense. I have written in the past about uncorrelated assets and cash one of the least correlated asset classes to all of these other financial products. I grant you that cash may have the lowest "expected return" but it is a low risk-adjusted asset, too. It also is useful to hold in inflationary periods because, yes, when interest rates go up, so will the rates on money market funds and CD's. In the 1980's, when inflation was double-digit, you could purchase CD's with 14 and 15% annual return rates.


The key is to keep your CD maturities short (1 or 2 years) so that as they renew they can be renewed at the higher rates. This, of-course, works against you if you have a high interest rate and then are forced to renew as interest rates are coming down. Again, being diversified and having some 1-2 year maturities and having some longer durations in bond funds (3-5 years) will help you in all scenarios.


I venture to say that good finanical planning beats economic forecasting.