5 Great Deceptions, 5 Protective Strategies for Today’s Markets

Just a few days ago, I had the privilege of speaking to several hundred people at the World MoneyShow in Orlando. The gist of my presentation?

That five “Great Deceptions” are lurking out there … and that individually and collectively, they have the potential to wreck your portfolio.

The good news? I also outlined five protective strategies to help you avoid getting slammed.

Since I recognize that you may not have been able to attend the show — and because I believe this information is so important — I want to share the meat and potatoes of my presentation with you now!

Today’s Five Dangerous
Great Deceptions

Let’s start with Great Deception #1, the idea that the economy is on a roll. I believe the truth is that the recovery is sorely lacking!

December consumer spending was unchanged. January consumer confidence fell to 61.1 from 64.8, while a key manufacturing index for the Chicago area slumped to 60.2. Sure, we’ve seen a slight uptick in certain sectors … but nothing like what you’d expect if growth were coming back strongly.

Then there’s Great Deception #2 — that the job market is roaring back. The truth is that we’re not gaining much ground. If you include discouraged workers, part-time workers who want full-time work, and so on, you see that the real unemployment rate is way up around 22 percent!

The much-publicized unemployment rate of 8.3 percent doesn’t tell the true story.

Meanwhile, only 63.7 percent of Americans are active in the labor force. That’s the worst “participation rate” going all the way back to 1982, showing just how widespread the labor market malaise is.

So what is Great Deception #3? That the housing market is recovering strongly.

There too, the truth is we don’t have much progress to report …

November house prices were DOWN 3.7 percent from a year ago. December pending sales of used homes were DOWN 3.5 percent. December new home sales were DOWN 2.2 percent on the month, while full-year 2011 sales were the worst in U.S. history. And existing home sales for January missed analysts’ forecasts.

Worst of all, a key index that measures purchase mortgage application activity just slumped to lows last seen in October and September. Those readings, in turn, were the worst since 1996! Purchase apps are a forward-looking indicator, and this deterioration suggests buying demand is once again falling … right as we head into the crucial heart of the spring home buying season!

Great Deception #4 is one of the most dangerous of all — the idea that the U.S. debt load is NOT a major threat. I believe the cold, hard facts say otherwise.

Case in point: The Congressional Budget Office (CBO) just raised its 2012 deficit forecast to $1.1 trillion — making this the fourth year in a row we’ll rack up more than a trillion dollars in red ink. The total federal debt is now on track to hit $21.6 trillion in 2022, compared to around $15.2 trillion now.

Worse, the cost of carrying all that debt is on the rise …

The CBO forecasts that our net interest burden — the annual cost of servicing the debts we’ve already accumulated — will almost triple to $624 billion per year! Think about that: We’re going to be spending more than $600 billion on interest to domestic and foreign creditors rather than actually doing something useful with the money. What a waste!

Lastly, there’s Great Deception #5: European officials are truly “solving” the European debt crisis. I can’t believe some pundits are still trying to toe that party line after all we’ve seen and heard over the past year or two.

Sure, the powers-that-be announced yet another Greek bailout deal after marathon weekend negotiations. But the deal requires average Greeks to make huge financial sacrifices just to make life easier for foreign creditors and banks. And even if by some miracle, Greece manages to hit every single one of the financial targets spelled out in the deal, the country will STILL be left with too much debt 10 years down the road. That makes default all but inevitable!

Why No Market Impact Yet?
Blame the Money Printers!

Despite all these deceptions, stocks are generally rising on anemic volume … gold and oil are generally climbing … and bond prices are generally rising.

So what gives? Simple. QE!

Central banks around the world continue to flood their economies with money.

QE is shorthand for quantitative easing, which itself is just Wall Street jargon for central bank money printing. Take the European Central Bank. It talks a big game about inflation fighting. But its balance sheet has exploded to 2.7 trillion euros from 1.9 trillion euros in only half a year! That’s an increase the likes of which we haven’t seen since the depths of the 2008 credit crisis.

Here in the U.S., the Federal Reserve recently said it would keep its Operation Twist scheme going into 2012. Policymakers also pledged to keep short-term rates low through late 2014, instead of the old target of 2013. The move was dubbed “QE 2.5” by the well-known Pimco bond fund guru, Bill Gross.

Meanwhile, the Bank of England just boosted its “QE-UK” program by another 50 billion British pounds to 325 billion pounds. And the Bank of Japan just increased the size of its “QE-J” program by another 10 trillion yen to 65 trillion yen. It’s a massive, worldwide printing party, and it’s inflating asset prices across the board.

Your Crucial Five-Point
Strategic Plan

So what can you do? What essential strategies do you have to implement to protect yourself — and profit — in this market environment?

First, maintain hedges against downside risk. This is a market where you need to have some protection in place, in the form of inverse ETFs or cheap long-term put options, because the negative fundamentals could overwhelm the impact of global money printing at any time.

Second, invest in select stocks and sectors that can hold their own in “down” markets, and really outperform in QE-driven “up” ones.

Third, don’t just “chase yield” in this era of rock-bottom interest rates on safe investments. Instead, seek higher yields from lower-risk segments of the fixed income market. I like some of the Master Limited Partnerships and short-term corporate debt.

Fourth, find cheap, unloved assets that you can actually buy and hold because the downside risk has largely been wrung out. Natural gas certainly qualifies in my book!

Fifth, be ready to shift on a dime when the money printing wave shows signs of receding. Back when we got QE2 here in the U.S., stocks racked up steady gains for eight months … then promptly puked them all up in just two WEEKS when the printfest came to an end. Something very similar will likely happen again.

If you’re interested in more details, then give Safe Money Report a try. You’ll find specific recommendations that follow the strategies I just laid out. Many of them are already spinning off handsome gains, and I don’t want you to miss out on your fair share of them!

Until next time,

Mike