Current Investment Scenario: Where Shall I Put My Money?

If you are looking to invest your money, you have been likely advised by investment professionals, or led to believe by economists writing in financial magazines, that 'business as usual', that is, investment in stocks, bonds and real estate, is the best option even today. However, this is an ostrich like approach that ignores current investment realities and, if you go by this advice, it will cost you dear in the long run.

What are current investment realities?

The traditional investment options of stocks, bonds and residential real estate are no longer as lucrative or profitable investment options today as they were till a few years ago. Their potentials have already been tapped and they will only be stagnating your money, or putting it at risk. Difficult to believe? Then read on:

Stocks have reached more or less their full price today and investment in them only invites risk. The FED Chairman's trick of conjuring money out of thin air is showing no signs of going away and money still needs a home somewhere. Is a customary portfolio of stocks right choice for investment in this new situation?
Government and corporate bonds have traditionally been seen as safe havens for investment. No doubt, they have reduced risks and preserved equities in the past, but with interest rates at all time low today, can any change in them in the future be for anything but higher? And what will be the fate of bond prices then? Leave alone the future scenario, what returns bonds and other fixed interest rate investments are giving today? Isn't it infinitesimally small?
Residential real estate
Residential real estate prices today are at about 30% lower in the US from their recent highs and this fact has probably led you to think that it's time you bought some. But is it? Real estate prices everywhere are still much higher than their intrinsic value. Even the IMF has expressed concern over the fact of housing being overpriced almost the world over. Therefore, investment in it is going to remain anemic for years to come.

Looming currency crisis

As if the investment realities given above were not enough to create a gloomy scenario, the purchasing power of our currencies are going to take a tumbling next; that too as a result of deliberate policy measures taken by our governments and central banks. You may well ask why our government and central bank would want to reduce the purchasing power of our own currency. Read on to find out:

Lowering the currency value helps increase exports and discourages imports leading to a favourable balance of trade for a country. This happens as domestic prices are reduced making exports competitive and imports less profitable for the concerned country.

A lower currency value allows the government to pay off its debts easily. A skilful manipulation of currency value helps it avoid defaulting on its accumulated debt.

Inflation, that invariably follows currency devaluation, makes life difficult for most citizens and lowers their standard of living. However, it is seen as a necessary price, a collateral damage, in order to boost economy and lead to 'greater good'.

The unfortunate fact is that this novel way of advocating devaluation by invoking the 'greater good theory' induces the voting public to accept lowered living standards without a murmur. French or Greek type rioting, against the loot by our own government, are perhaps not for us.

Why are we hiding from the reality?

Sadly, under the rosy scenario projected by our governments and economists, we are refusing to see the reality and even questioning the accuracy of these observations. However, the fact remains that the governments of the world are not in a position to pay off their massive accumulated debt, unfunded future liabilities, as well as obligations accrued by their financial institutions like banks, pension funds and insurance companies. Many governments as well as their financial agencies are fast approaching insolvency.

It's true that most countries have not defaulted yet. However, an honest analysis of their asset values, income streams and obligations, as well as a realistic assessment of the global economy, is enough to indicate the shape of things to come. After all, who will bail out the financial agencies when their governments fail? Or, perhaps it would be more pertinent to ask, who will bail out the governments when they fail?

Talking of recovery in the economy is nothing more than a hollow assurance and does nothing to change the reality. It's just a ploy to buy time by the governments till, as they hope, some fairy arrives wielding a magic wand, and everything will be set right. Or, perhaps they hope that the calamity will strike someone else's lands, not theirs. Our politicians and economists seem to be past masters in befooling the citizens with these types of assurances.

It will still be difficult to believe all this. After all, there are so many intelligent and informed people in the country - in the government, the financial sector, the academia. If the scenario is so gloomy, why are they not acknowledging it?

However, don't forget that they are part of the system and have their own vested interest. Employed in the government or the financial sector they are drawing a generous salary along with handsome benefits and inflation adjusted pension as rewards for their loyal service. Why will they forgo all this?

The academic people lend their credentials to increase the credibility of the companies helping them secure lucrative contracts and ensuring steady flow of rewards to the academia. They give what the clients want - a positive, safe and saleable report, in the interest of the directors and the investment community, rather than an objective assessment. As for the employees, they are always happy to follow a policy of 'go along and get along'. Acquiescing in the prevailing wisdom and toeing the party line is always profitable… and safer.

Besides, there is the sense of complacence, a propensity to avoid uncomfortable facts and unpleasant prospects. Denial is a psychological mechanism to cope with difficult situation, however intelligent, educated and knowledgeable we may be. Deliberately taking cover under ignorance, or acquiescing in the prevalent wisdom emanating from people who are out to pursue their own agendas may be foolish, but it is easier than facing the reality.

Do we mean to say that people in positions of power, authority and responsibility are deliberately lying? Yes, we do. At best, they speak half truths, omit unpleasant facts, or just keep a mum. Is this really so difficult to believe seeing that they have so much of their own and their organizations' self interest at stake?

Confidence helps. Keeping voters and investors confident is a crucial part of the government's and financial organizations' strategies. Many financial institutions, pension funds and even governments are effectively insolvent. Yet, they don't declare bankruptcy simply because they are able to generate enough confidence with the help of prevailing wisdom and some creative accounting.

Self interest is a dominant motive in our life, only our perceptions and interpretations of it may differ. The observations of the Federal Reserve Chairman and Treasury Secretary are not above the collective self interest of the system, and listening to them, or reading them, is only receiving half truths - simply because it is their job to generate and maintain public confidence.

Why don't people see through all this?

People have the herd mentality. Like sheep, we tend to move in packs and associate ourselves with comparable social class, age group and value system. It makes life easier and more comfortable. Our own beliefs appear to be validated because our associates, friends and colleagues share them. That's why we become part of the majority, the herd, and are led like sheep, by the opinion leaders to whichever direction they are taking us. This gives the satisfaction of being safe, if not correct, and that's why information disseminated and opinions expressed by the mainstream media get accepted without so much as a thought, leave alone critical evaluation.

So, where shall I put my money then?

The safe heavens for investment these days are: commodities, tangibles, and natural resources like agriculture, precious as well as base metals, and energy. All these are real assets - still relatively underpriced but undeniably necessary. What's more, most of them are scarce while the demand for them is constantly increasing in a world that has 6.5 billion consumers and is still counting. Most underprivileged groups in the emerging markets of the developing countries are crossing the threshold to middle classes and, with dramatically increasing income, are giving a spurt to demand.

It requires no great intelligence to understand the importance of stocking up on tangibles, like precious metals, when our paper money is fast becoming worth less, thanks to our governments and business leaders.

More so, as there are no signs of change in the direction of economic policy. US Fed Chairman is still giving clear indications that the policy of massive money creation without any tangible security, given the sophisticated name of 'Quantitative Easing', is going to be continued. After all, this is the magic wand the fairy has given him. Sadly, what follows is the clear prospect of a devalued dollar giving rise to unprecedented inflation.

So, what transpires after all?

The central theme this piece tries to drive home is that we, the individual investors, are not able to see the implications of the current direction of our economic and financial system while our financial professionals and investment advisors are deliberately ignoring it due to their vested interests. Consequently, we are all too frequently making investment decisions that are going to prove counterproductive in the long run.

As governments vie with each other to devalue currencies unmindful of the inevitable consequences, it is only reasonable for us to make some wise decisions that would lessen the negative impact on our finances. As a silver lining in the dark cloud, these decisions may make us prosper even in the adverse financial situation.

Individual investors don't have to wait till investment professionals realize the folly of their 'head in the sand' approach. We have reached the situation where waiting any more can be financially lethal.

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