Inflation Is Coming

 Stocks: I am out of the market. The easy money is gone and the next two years will be volatile. I would still make any automatic stock investments in say, 401ks or IRAs and the like, but there are better places for your money.

 Outlook: Short term out look is volatile. Sales tax revenues where down last year 85 to 87 billion dollars. Oil is running between $82 and $85 a barrel even tho gas stock piles are high, at that price level it depresses growth. Home prices are down just over 2% and home ales where down 11% in January in spite of the home buyer stimulus. And the big banks are playing in the stock market like they did last year trying for the same results that can not happen at the current stock price levels. So economic volatility.

The worst place for your money, besides C.D.s over the next few years? U.S. Treasuries. The government is over spent beyond my wildest imagination and the powers that be have not got a clue. I could go on and on about why the mess is what it is, I could even go on about what to do about it. As I have no power to change the course of government spending it would only be an essay on economics and a waste of brain power. Better to spend our energies on what we can do to make money in spite of politics.

Inflation: With all the trillions of dollars being spent by our government and the other governments around the world inflation is the only predictable outcome (sometime in the next twenty four months it will start). We had the same problem in the mid 1970's, that is, higher oil prices shifting huge sums of money over seas. Today the numbers are even larger and growing. Take the huge negative balance of trade with China and other Asian economies, add the rise in oil prices, plus the trillions of dollars for funding wars in Irac and Afghanistan and you have the shifting of the USA from a lender nation to a huge debtor nation. Now add the old national debt balance of three trillion, plus trillions of dollars in economic stimulus (funded by selling US treasuries mostly to foreigners) Plus the intrest paid on that debt, and you get a serious national debt hole. Did I leave out all the unfunded national liabilities, social security, health insurance, retirement plan guaranties, Freddie mac, Fannie may, student loan guaranties, FDIC, and on and on. I get two times the GDP, or a $30 trillion debt hole. Currently we had a debt to income ratio of one to one (1 to 1 or 14.3 trillion GDP to 14.3 trillion national debt ). Add the unfunded liabilities and the actual National debt is closer to two to one.

What does all this mean? You can predict that the future, looking two to five years out will be lots of price inflation, higher interest rates, a weaker dollar and high commodity prices. To much money chasing to few goods and you get inflation. No two ways about it it is very predictable. (See economic history 1973-1986 for a similar situation). A week U.S. dollar means a flight to saver investments and right now that is gold, and other commodities that rise in price at the inflation rate or faster then inflation. I could go on but you get the idea.

What can you do? The following are good investment bets for the foreseeable future.

Income producing real estate: Real estate values rise with rent increases, rents increase with inflation, and increasing construction cost, plus borrowed money for the loans is repaid with inflated dollars. When people realize their money is loosing value they look for investments that protect that value, real estate is one of those choices. Real estate danger? short loan terms could find you refinancing during high interest rates.

NOTE: There are some $60 + billion commercail loans in trouble so be careful that you have a steady income stream on commercal real estate deals, or stick with residential properties where finding new renters for vacant units is easier.

Gold: will increase in price because it is a flight to financial safety metal and there is growth in world industrial demand. All most all commodities go up in price with inflation so gold stocks and other commodities stocks will increase along with the commodity prices.

Brazil investments: Brazil is energy independent, (almost) they have huge off shore oil reserves and it is a eco-green energy country, plus they have a diversified economy, their economy will prosper. If you like international investments Brazil looks good long term.

Speculators: For those who like to speculate, there are bets against the dollar and other world currencies plus commodity and precious metal option trading that can be done form your home computer. I'm just not that good at timing and like I said before, I like some control over my bets.

What am I going to do? I like to control my investments so I will be doing real estate investing for the next ten years. I have lived through three of these down turns during my life, I have seen first hand the results of high oil prices, reckless government spending and a failure of government to take long term corrective action. This isn't insight, it is history repeating it's self.

 I am also waiting to collect Social Security until I am age 66 as it is indexed for inflation, well historically anyway.

I have also seen the effects all this has had on the economy and the effects on peoples wealth.

People with cash can pick up assets at bargain prises from those who go broke or who have to sell. People who own income property will gain from inflation as rents increase and investors look for inflation protected investments. (I'm buying now) When things finally return to the new normal some five to ten years later, income producing properties will have kept pace with inflation or slightly better, plus the mortgages will have been paid down with cheaper inflated dollars. People with fixed asset investments suffer. C-D rates go up as banks scramble for money (reference 1982).

Wage Earners: The most wage earners can hope for is a pay raise, good luck on that.

Intrest rates:  People with cash will be able to lock in high interest rate on savings accounts when savings rates go up. People with adjustable rate loans (as are most commercial loans) will need to refinance to lock in fixed rates when the interest rates start up. For example, I have a real estate loan with a balance $413,000 at 3.75% (adjustable to the LIBOR rate). When rates go up, that loan will cost me about $1,500 more per month. I will re-finance to a 7% fixed rate when my adjustable rate hits 4.5% on the way up to even higher then 7%. That will keep my payment the same as they are now.

  In conclusion: You can make money during inflationary periods if you are prepaired. Get a book on making money during inflationary times at your local book store. I suggest ignoring the doom and glum parts and look for the opportunities. The book maybe historic in nature, but you are only looking for ideas, so history can be a good thing.