By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
Show me an effective Bush Administration economic stimulus package and I'll show you a finger-friendly Cuisinart.
Who does President George W. Bush think he's kidding?
The $600 bucks he wants to hand out isn't going to do squat - and the securities markets know it, which is why they're selling off so steeply as of late.
As much as I'd like to put the blame on Bush for the financial-markets mess we're dealing with now, it really wouldn't be fair. Instead, everything points to former Federal Reserve Chairman Al "Irrational Exuberance" Greenspan as being the key cause of this toxic financial soup. This puts his former sidekick and eventual successor - Fed Chairman Ben S. Bernanke - in the unenviable position of having to bring the country in from the rain.
Unfortunately, he can't do it.
Government Inflation Stats Need Inflating
Despite the party line about so-called "core inflation" holding the line, Washington is badly out of touch with reality, and has been for a long time now. It's bad enough that the core inflation figures factor out "volatile food and energy prices," as the reports always state. That's almost a ludicrous thought: After all, the higher costs of food, gasoline, heating oil, air conditioning and electricity hit us squarely in the wallet, too. But, as we've been saying for years, even the core inflation numbers the government has been relying upon have understated the true effects of inflation.
Thanks to Greenspan - and years of cheap capital - the home equity market has been pillaged like a band of Vikings ran though it. The average family carries $8,500 to $12,000 in consumer debt, scattered across six to eight credit cards. Breakfast costs 60% more now than it did at this same time a year ago. Oil has nearly doubled, and medical costs are skyrocketing.
Then there are the soaring default rates and bankruptcies, which are escalating at rates we haven't seen in years.
Unfortunately, Team Bernanke may be out of aces, which is why investors must take matters into their own hands.
Without subjecting you to a lecture on the finer points of economic theory, let me just say that taking the stimulus package the Bush Administration is currently contemplating and bringing it to bear on the current economic conditions is tantamount to bringing a knife to a gunfight. It's outdated and is the wrong tool for the battle at hand.
Here's why: The Fed's current tactics presume that healthy financial institutions will be able to counter inadequate consumer demand. This is why the central bank has been working so hard to keep such "big boys" as Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER) afloat.
However, using the words "healthy" and "financial institutions" in the same sentence is perhaps the ultimate oxymoron, because it was the financial institutions that got us into this mess, and they're anything but healthy right now.
At best, some of these players are turnaround candidates.
But, healthy? No way...
Personally, I'm livid that my tax dollars are being deployed to bail out some of these financial institutions, when the markets clearly want to let them die a painful death. Nor am I happy that big companies are using tax loopholes and other financial maneuvers to dodge hundreds of millions of dollars in state and federal income taxes. That's money that you and I will have to make up.
But what really burns my jets is that Wall Street paid out some of its biggest-ever bonuses for last year. Now the newly flush members of the Armani Army are shopping for homes in Aspen and the Hamptons, while many working- and middle-class homeowners are struggling to avoid defaulting on their subprime mortgages. The rest of us are trying to figure out what we're going to do with the $600 we're each going to get from the Bush anti-recession stimulus plan.
Don't get me wrong: The money's nice; but it won't help much.
Clearly, the money rules have changed. And getting rich is the best revenge even as our esteemed leaders muddle around in a politically charged stupor.
Here's how...
Profit Plays to Make Now
First, build a base. Invest as much as 50% of your assets in a category of investments we refer to as "Base Builders." That's one of three asset classes - the other two being "Global Growth" and "Rocket Riders" - whose names are self-explanatory. Invest as much as 40% in Global Growth and up to 10% in the more-speculative Rocket Rider investments.
These are holdings that not only provide a significant potential upside, but also have automatic safety brakes built in. The Vanguard Wellington Fund (VWELX) is my favorite example. Since 1929, it's captured most of the market's upside, including a fair number of years with returns of 20% or better. But the fund has avoided replicating the worst of the downturns because of its 60-40 split between stocks and bonds.
Second, dial up dividends. Studies show that dividend-paying stocks are less volatile, and the consistent reinvestments along the way can build up a thick layer of financial armor that will actually boost your returns when the markets eventually do recover - as they will.
Certainly, dividend-paying stocks such as General Electric Co. (GE), Johnson & Johnson (JNJ) and Bristol Myers Squibb Co. (BMY) are great, but a dividend-harvest strategy like that utilized by the Alpine Dynamic Dividend Fund (ADVDX) can dramatically accelerate the process in down markets.
Third, run the reverse. Include at least a small percentage of "inverse" mutual funds or exchange-traded funds (ETFs) in your portfolio mix. In case you're not familiar with inverse investments, these are funds that appreciate in value as the broader market drops. Not only can they help stabilize your portfolio during the increasingly volatile stretch like the one we're attempting to navigate now, they can also really put a smile on your face when the going gets rough. One of our favorites is the Rydex Inverse S&P 500 Strategy Investment Fund (RYURX).
And fourth, and last, grab some "Global Titans." Make sure that you are focusing the more-conventional portions of your portfolio on the so-called Global Titan stocks that we've discussed with you so many times before. Companies such as Yum! Brands Inc. (YUM), PepsiCo Inc. (PEP) and The Boeing Co. (BA) derive big portions of their revenue from overseas. Not only can these securities overcome the weak U.S. economy, they can capitalize on the faster growth of key overseas markets as China.
It's a formula for double-barreled profits that will clearly have a bigger benefit than a capital-infusion plan that nets each of us $600.
News and Related Story Links:
- San Jose Mercury News:
Stock Markets Plunge Worldwide.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.