MONEY MATTERS: Treacherous times

By Robert Smith

The Daily Record Newswire

Uncertainty remains the order of the day. As long as Barack Obama is president, the trend will continue. This is because he remains married to his anti-business, pro-tax, pro-spending, anti-growth agenda.

It's hard to use capitalism as a political whipping boy and expect businesses to create jobs at the same time. Therefore, as long as Obama continues to bludgeon us with his class warfare rhetoric, businesses will remain on the sideline and won't engage in major capital spending, without which the economy will not strengthen.

What this means for investors is that market volatility in equity securities will continue because of the bleak economic outlook, the election uncertainties, the ongoing financial crisis and the debt crisis in Europe. So, while the market enjoyed a positive bounce at the end of the year, the overall economy isn't.

At times like this, investors ought to pause and take hard looks at their portfolios. Ask this question: "Will what worked for me in the past really work now, or am I just fooling myself?"

For several years now I have made the argument that with unprecedented borrowing and money creation by the government, we are navigating uncharted and treacherous waters. Therefore, what can we reasonably expect from traditionally popular investments?

Stock mutual funds

The only thing -- I repeat, the only thing -- that is propping up the stock market is the Fed and its quantitative easing programs. In its simplest form, quantitative easing is money creation. When the Fed prints money, the stock market goes up. When the Fed stops printing money, the stock market falls.

Because 2012 is an election year, the Fed will be under tremendous pressure to accommodate the current administration and create more money. This may result in a stronger stock market in 2012.

However, this won't last because excess money creation brings with it the dilemma of inflation. While inflation may grow slowly at first, with sufficient money in circulation it will become inexorable. When inflation becomes more pronounced, both stock and bond markets will suffer because of much higher interest rates that result.

So, in the short term, printed money could propel stock mutual funds higher. But the highs may not last long and the lows could be deep and daunting.

Bond mutual funds

In the near term, more money creation could be salutary for bonds as well. It can paper over the very serious and intractable problems in Europe. This may temporarily stabilize financial markets.

However, nothing undermines bonds and bond funds like a good bout of inflation. This is definitely not the place to be when incredibly low interest rates start to rise.


Don't buy now, because the bottom isn't here yet. In the year that ended in October, residential real estate prices dropped more than forecast.

The S&P/Case-Shiller index of property values in 20 cities across the U.S. dropped 3.4 percent from October 2010. And the real estate market is bracing for another wave of bank foreclosures that will likely keep pressure on housing prices for the foreseeable future. Therefore, any type of housing recovery won't happen for awhile.

In the good old days of constantly increasing home prices, a 5 percent or 10 percent increase of a home's value could quickly double the value of a 5 percent to 10 percent down payment. Now, a 5 percent to 10 percent decline of a home's value will wipe out 100 percent of an investment. This is a bad idea.

The better alternatives

Keep more money in cash. Even though 4 percent inflation more than eats away money market gains below 1 percent, investors are protected from catastrophic loss. Also, given the right opportunities, money can be redeployed quickly.

Add more gold to your holdings. Gold now has gone up in value 11 years in a row. That is very unusual for any asset. The correction we are in now is normal, and it may continue for a while. Therefore, if it goes down a little, I would buy a little more. If it goes down a lot, I would buy a lot more.

Income-producing commercial real estate

I make no bones about the fact that I would rather own real assets. It makes little difference whether it is gold, silver, timber or farmland. The great thing about high-quality commercial real estate with triple net leases is it pays to wait. I think we all have a lot of waiting in front of us in 2013, 2014 and 2015 before the situation gets any better.


Robert Smith is president of Peregrine Private Capital Corp. Contact him at 503-241-4949 or at

Published: Thu, Feb 2, 2012