Hard Assets for Hard Times

By Kenneth Schortgen Jr:

In older times, financial planners would say to buy safe assets like annuities or bonds for wealth protection. Realtors would tell us that land is the way to go since they aren't making any more of it, and the business world would try to sell you on the value of the stock markets to grow your investment dollars.

Those financial vehicles are fine, only when used in the proper cycle of the markets. However, with the current recession we are in, NONE of these products are anywhere near safe, nor viable as the government works to create inflation through the Fed's quantitative easing.

So what are we left with to invest in, especially for wealth protection? The answer is tangible assets you can hold in your hand, and that have the fluidity to sell when necessary.

Bill Gross of Pimco, the largest bond dealer in the country, came out this week and said the 30-year treasury is done... history. The actions of the Fed to print money through QE1 and soon to be QE2 will end the market for these long-term bonds.

We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a "liquidity trap," where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan. Ben Bernanke, however, will try - it is, to be honest, all he can do. He can't raise or lower taxes, he can't direct a fiscal thrust of infrastructure spending, he can't change our educational system, he can't force the Chinese to revalue their currency - it is all he can do, and as he proceeds, the dual questions of "will it work" and "will it create a bond market bubble" will be answered. We at PIMCO are not sure.

But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.......read on