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Where Income Investors Should Put New Money Right NowBy
Tuesday, June 22, 2010
Since the middle of last year, I've been saying the economic recovery is a charade and the big bounce in the stock market that started in March 2009 was nothing more than a huge short covering rally, triggered by the largest government stimulus package in world history.
As soon as the government pulls in its stimulus, the house of cards will collapse again. Let me explain...
In October 2008, British Prime Minister Gordon Brown was the first politician to bail out a national banking system. He announced a full takeover of the most troubled banks with $400 billion of government money. The press hailed him for his bold action, and the stock market jumped 8% on the news. Gordon Brown was the hero of the hour. Other European countries followed his lead. Eventually, George Bush did, too.
Now, the tables have completely turned...
Two months ago, voters in Britain turned against Gordon Brown. They couldn't stand the national debt he'd burdened them with. His party lost the election and he was forced to resign from politics.
Last week, the new British prime minister, David Cameron, told the country the government deficit is unsustainable and debt is the most urgent issue facing Britain. In response, he's going to cut government spending "savagely."
David Cameron realizes the British people are tired of government spending and huge debts. The only way he'll survive as prime minister is by cutting the budget and reducing the national debt.
Germany, France, Greece, Ireland, Spain, and Italy have all recently announced government austerity plans. This means they're making cuts to government spending budgets, increasing retirement ages, and firing thousands of government employees.
Now, the austerity bug has reached the shores of America. You've probably noticed the ballooning Tea Party movement and all the attention Kentucky senatorial candidate Rand Paul's been getting. The Tea Party even held a march in the sleepy seaside town I live in the other day. Voters can no longer stand the way the government wastes money, using trillions and trillions of borrowed cash it'll never be able to pay back.
How long before more U.S. politicians react to this sentiment and Congress announces austerity measures, too?
The stock market has fallen 9% in the last two months. My hunch is, the market is looking into the future and discounting more saving and less spending at all levels of society, even the government.
The best way to profit from this situation is to simply buy the investments that help people save money, and sell the investments that depend on people spending money.
This is not an environment for owning retail stocks or economically-sensitive commodities, for example. As Britain, France, and the rest of the world's largest economies cut back on spending, corporate profits will fall and demand for commodities like copper, cement, oil, and steel will decline.
Meanwhile, as the world fixes its balance sheet and replenishes savings, people will need somewhere to put their money. They'll keep it in the safest income-generating investments they can find, like government bonds, cash instruments, and other safe fixed-income investments.
Over the last year, Steve Sjuggerud and I have suggested dozens of safe, high-income investments like virtual banks, tax-lien certificates, preferred stocks, and more.
Now's the time to protect your capital from a continued decline in the market. And if you want to make new investments, you should look through the DailyWealth archive and review these ideas. As the world embraces austerity, these investments will grow in popularity.
Make sure you beat the rush.
Good investing,
Tom
Further Reading:
To get an idea of why investing in tax-lien certificates is such a good idea right now, make sure to read Steve's amazing "This is a True Story" essay. Click here to access it.
Like the rest of Europe, Britain's wild government spending is causing its paper currency to go into the toilet. You can read more on this situation in Tom's latest "boots on the ground" piece from England, titled Britain's Giant Property Bubble.
Market NotesGOLD STOCKS JUST HIT ANOTHER NEW HIGH
After the market's horrendous performance in May, it's tough to find an asset sitting at a yearly high right now. One of these investment rarities is an asset we've told you about repeatedly in DailyWealth: Gold stocks.
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