Smart Ways to Think about Our Economic Problems

Did you know that some of the greatest wealth has been grown during times of recession? There are some really smart ways to adjust your economic “thinking” so that you can trust your investment instincts. There are also some smart things you can “do.”

The number one smartest thing you can do is ask questions in a economic-topic Essay. Don’t be intimidated because you don’t know what the writer is talking about. Tell your story. Ask for advice. Get people to argue about your situation. Keep the conversation going and bring the economic gurus down to your level.

Some of very knowledgeable economic watchers participate here. You can tell they are pros, because they never, ever give investment advice.

I, on the other hand — well, you just can’t shut me up. Thus, it’s risky to read on past here.

First of all, let me give you the bottom line — beaten down assets and defensive assets will remain supreme. Write that down, even if you don’t know what it means. That’s your primary filter. As most of you know, I subscribe to a lot of expensive private newsletters. Others are not so expensive. I’m going to quote from some.

Last week sucked in the US stock market. It posted its worst week in five years. As if it weren’t bad enough, the developmentally disabled son of the Bush family, George, announced his economic rescue package, which was so embarassing it sent a shock wave around the world. (It had something to do with giving US citizens $800 to spend shopping at Wal-mart — or something like that.)

As a result, the entire world sold off their markets overnight (Monday).

Europe was thrashed. Europe’s Dow Jones Stoxx 600 index fell 4.1%. That’s the most it’s plummeted since the September 11th attacks. The German Dax fell the most since 2003 (down 5.3%). The CAC 40 (which tracks French stocks) and FTSE 100 (which tracks the U.K.) also sank tremendously.

It wasn’t any better in the Far East. Hong Kong’s Hang Seng Index had its biggest drop in six years – 5.5%. Japan’s Nikkei 225 Index slipped 3.9%. India’s Sensitive Index dropped the most since 2004. Australia’s stock market fell for the 11th straight day.

The world is now convinced that a recession is coming in the United States. And a US recession will cause other economies around the world to slow down.

Furthermore, the Fed can’t cut interest rates fast enough at this point to save the economy. It will take at least 6 to 9 months to affect the economy. Certainly, Congress cannot act in time to avoid a recession by passing out Wal-Mart gift cards. But there are ways for individuals to make money in this global losing streak.

Carry-trades sold off big time last night. The winners once again in all of this turmoil were the Japanese yen, Swiss franc and the U.S. dollar.

Wow! The US Dollar Could be a Hot Asset?

Now, that IS a new way of thinking. That means you can get out of the stock market, if you want, and hold cash.

Normally a slowdown in an economy coupled with interest rate cuts will bring a currency’s value down. However, the U.S. dollar been sold off for several years in a row now. It’s at 30-year lows and much of the “slowdown” has already been priced into the buck.

Here’s the thinking now:

On top of this, central banks from around the world are starting to cut interest rates. The U.K. and Canada have already cut rates. In fact, Canada is expected to cut rates again this week. It may not be long before the ECB has to cut rates in Europe. So with these countries cutting rates, it’s going to take some of the “sting” out of the rate cuts that happen in America.

This means that “going to cash” is not the worst idea in the world. (Although, if you have a lot of cash, I would go Everbank.com and open deposit accounts for some of it in the Yen and Swiss Franc, as well.)

Traders will continue to run to the “beaten down assets” like the yen, franc and dollar as this turmoil worsens. These three currencies are some of the most oversold assets on the planet. So they’ve got a long ways to go. These three currencies could rise for quite some time before they get anywhere close to “fair value.”

The biggest beneficiary of 2008 will be the Japanese yen. The biggest “shocker” of 2008 will be that the U.S. dollar doesn’t plummet hard on “recession” news and interest rate cuts. Right now, these assets are seen as a “safe haven” in this fallout.

So, there’s the trading advice from Pluto — which from this orbit has a pretty good view of Uranus.

Four Things that Must Happen Before the U.S. Markets Can Turn Around

Housing Market Needs to Stop Declining. In short, housing must improve. When will this happen? Housing stocks usually recover many months before the actual housing market does. That’s because the stock market likes to price in what traders think will happen in the next six months….

Oil Prices Must Continue to Fall. High oil is like a tax on the consumer. There are a lot of things you have the choice of buying or not buying…gasoline for your car is not one of them. So as the price of oil and gas go down, this will put more money back into the consumer’s pocket. That will do more good than what will come out of Washington, D.C.

Interest Rates Need to Be Slashed Further. As interest rates drop, credit becomes cheaper. So loans for consumers and corporate America cost less. Therefore the consumer and corporate America can get back into “growth” mode. As corporations can borrow to expand more cheaply, then things will look up again…. [Again, refer to the dollar uptick phenomenon, above. — Pluto]

We Need a Vote of Confidence from Consumers. We’ll see this when they spend. So watch the U.S. retail sales numbers. We won’t have an economic recovery without the consumer being involved. So watch for the Retail Index (RLX) to pick up. Once you see these things improve, wait a few months and then start tip toeing back into the stock market and into high yielding currencies. Take a look at some stocks to buy and get yourself earning money.

Still, remember, it’s always a bull market somewhere. As usual, I see it in the currencies you invest your dollars in.

Also, if you do believe the stock market is heading down for awhile (doh), and decide to go to cash, you can dollar-cost average back in at 10 percent a month and own a lot more stock when it finally turns around.