by Shae Smith
‘The Fed said economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” This is the first time since the introduction of the “extended period” language in March 2009 that the Fed has assigned a specific time frame to it.’ – Bloomberg News
Mid-2013… That’s two years from now! And five years after the Fed began printing money and lowering interest rates.
But, that’s not all Bloomberg has to say on the matter.
Bloomberg’s Caroline Baum wrote, ‘Some economists suspect that yesterday’s verbal gymnastics are a prelude to some form of renewed action on the part of the Fed’.
There’s a good chance the Fed is just warming up the markets for QE3. After the dismal failure of QE1 and QE2, surely third time’s a charm. Right?
So, what’s an investor to do? Watch as central bankers let inflation take over the markets? Or do you ‘wait and see’ what happens before you feel it’s ‘safe’ to jump back in?
The endless talk about a bear market would send the toughest investor into the cave.
And in the medium term, things aren’t going to get much better.
This isn’t the bull market of five years ago.
You’ve heard before that this is a ‘post-credit-crisis environment’. But how do you invest in this market?
Sure, we all know about the credit problems. And the week’s action in the market has proved the crisis hasn’t gone.
All those printed dollars pumped into the economy have just left bigger problems.
And Bloomberg’s Baum admits that ‘Today’s economy… appear[s] to be drug resistant’.
The drug of choice has been ‘printing’ the problems away.
But the central bankers could turn the money printing gizmo to full speed and the problem would still be here.
As an investor, what can you do?
Don’t get out of the market – change how you invest
Don’t let the printing presses stop you from investing.
It’s not the time to get out of the market.
It’s just time to change your approach.
Editor of Australian Wealth Gameplan, Dan Denning has prepared his readers for this market sell-off. In a recent Australian Wealth Gameplan weekly update he wrote:
‘Believe it or not, I think the coming years will be much better for investors… The days of front-running the Fed and boosting returns with margin accounts will be over.’
Change is happening in the economy. And how companies spend their cash will be different in the future.
He points out:
‘In an economy with double-digit credit growth, spending power equals income plus debt. Even with incomes growing weakly in the last 20 years, huge debt growth equated to huge spending power. This translated into outsized corporate earnings and higher stock prices.’
Simply put, companies that lived beyond their means in the past won’t be able to do that in the future.
Dan adds:
‘In a low-growth, deleveraging economy, spending power equals income minus debt repayment.’
Low debt companies to add to your watch list
This is the key to Dan’s investing strategy.
Companies with low or no debt are on his watch list.
And because of the lack of access to credit, companies will have lower profits.
They’ll have to be smarter with how they spend their cash. Unlike past years, companies won’t be able to rely on debt for growth.
That could mean lower capital gains for investors. But from now on you’re more likely to invest in companies with sound businesses rather than those that have borrowed billions to quickly expand.
But it will take some time. And investors will have to adjust to this ‘new normal’.
This doesn’t mean you can’t profit!
It’s just changing how you look at companies.
Consider this. Based on market capitalisation, five out of the 10 biggest companies on the Australian market are, wait for it… financial firms! That shows you the impact of credit growth.
Dan has repeatedly told his subscribers that ‘global credit growth is in a long-term downtrend’. Which just convinces Dan further that any company relying on credit expansion will suffer.
And this is where his formula for ‘business and investment success in a deleveraging world’ becomes your future investment tool.
Speculation buys have gone out of the window.
The market has changed. Credit-driven growth belongs to yesterday.
As the market moves on, you need to change your investing style.
To find out the strategy Dan is recommending to his Australian Wealth Gameplan subscribers, click here…
Regards,
Shae Smith.
Assistant Editor, Money Morning
Source: Investing In A Post-Credit World
