There are all types of indicators that have been good predictors of where the market is heading. Some of these indicators just leave you scratching your head and wondering about the consistency. One of those indicators is the Magazine Cover Indicator.

It is extremely ironic. By the time a bull market or a bear market reach the front pages of a major magazine, the bull or bear market stops. For example:

Time – Dawn of a New Dynasty – This talks about the bull market in China and the dynamic economy. This came out days before the Chinese stock market started falling apart.

Time Magazine – Home Sweet Home – This was a front cover article talking about the major bull market in Real Estate. That came out the month that the Real Estate markets topped and the real estate bubble started to pop.

The Financial Times had a front page article on “The Copper Rush” in 2006. This occurred right before copper started an enormous decline in prices.

Business Week –February 07 – It’s a Low, Low, Low, Rate World – This was a very bullish article on how the economy is flush with money and the low rates are great for the stock market. It was a very bullish piece. Of course this appeared right before the big drop in the stock market that represented the warning signs that a bear market was on its’ way.

Well Guess what the latest Business Week cover has on its’ front pages? “Why the Market Will Keep Going Up.”

There are countless examples of these major periodical covers and their “predictive” coveres. Vitaliy Katsenelson, an analyst and auther who has appeared on the show a few times, pointed this out in an e-mail this morning. His reply:

Market officially reached the top! How do I know? Easy, BusinessWeek’s cover story (the best contrarian indicator known to man) says “Why the Market Will Keep Going Up”

Tags: Bob Brooks, Business Week, Financial Times, Magazine Cover Indicator, Stock Market, stock market indicator, TIME magazine, Vitaliy Katsenelson

From yesterday’s post on the Stock Market Outlook blog:

This should be an interesting week in the markets. We have the end of the quarter which typically produces some volatility for the market. We also have the very important unemployment report that will be due out on Friday. The unemployment indicator has become one of most important monthly indicators. Although employment is considered a lagging indicator (an indicator that is one of the last to recover), its continued weakness might be signaling a bigger problem. In his weekly newsletter John Mauldin wrote about the unemployment situation from another perspective. To sign up for John’s free newsletter go to www.frontlinethoughts.com

He wrote that it takes the creation of 15 million jobs just to get us back to normal employment around 5%. He makes that estimate by assuming the monthly job destruction will soon becoming to an end. I think that he estimates another 500,000 jobs will be lost. He writes, “that means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month. As an Average!!”

Then he states these statistics:

“If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.”

I equate the destruction in employment much like a perfect storm. The damage has been so great that it will take a long time to recover. Both the Bush and the Obama Administrations allowed the unemployment situation to get this bad without doing anything about it. In fact, I still don’t see anything in the works to fix this problem. The stimulus bill will create mostly government based jobs. However, I don’t think it will create enough to even put a dent in these numbers.

So, do you think that the market already expects the unemployment situation to remain this ugly? Of course, there is the notion of a job-less recovery (which that has never made sense). However, I think that this situation goes well beyond a typical unemployment problem. Can the market continue to remain positive in the midst of so many people being affected by lack of employment? I personally think that we see this problem manifest slowly and at some point the markets feel the impact.

I know that this is far from positive but it is important to see all sides so that you can make prudent decisions with retirement dollars.

Levels to Watch on the S&P 500

From time to time, I like to point out important price levels on the S&P 500.

Above 1080 – Positive

Between 1080 and 1043 – Neutral

Below 1041-Negative

Tags: Bob Brooks, Government, John Mauldin, President Obama, Prudent Money, Stock Market, Unemployment

John Mauldin’s Frontline Thoughts is a must read for everyone. It is some of the best investment writing available and it is free. You can sign up at www.frontlinethoughts.com. Look at what he had to write about the FDIC in his latest newsletter. This should be no surprise. The FDIC is just not set up to take the magnitude of bank failures that we could face.

From John’s Letter: A Hole in the FDIC

And speaking of holes, let’s look at a huge one that is looming at the FDIC. Institutional Risk Analytics (IRA) is maybe the premier bank-analyst service in the country. They charge over six figures for their flagship service. A good friend and Maine fishing buddy Chris Whalen runs the show and was kind enough to send me some of his new data, which they have not yet released to the public. You get it here first. (www.institutionalriskanalytics.com)

IRA takes the data from the FDIC and crunches it with their own set of risk parameters. While the FDIC has a little over 400 banks on its current “watch” list, IRA gives 2,256 banks an “F.” They project that over 1,000 banks will either fold or be taken over during the current cycle. To date in 2009, a total of 92 banks have failed across the country, compared with 25 for all of 2008, according to the FDIC there are 900 more to go. Ouch.

How much money are we talking about? The banks rated “F” have total insured assets of $4.46 trillion. So far in this cycle banks that have been taken over by the FDIC are showing losses of 25%!

Turning to a note from IRA: “An important point in the analysis is that estimated losses for failed bank resolutions by the FDIC are running around a quarter of failed bank assets, a level much higher than between 1980 and 1995, when failures cost an average of 11 percent. Our firm’s long-held view of the likely loss rate peak for the US banks in this credit cycle is 2 times 1990’s loss rates or, as noted by the IMF, around 4 percent of total loans. Since total loans and leases held by all FDIC-insured banks was some $7.7 trillion as of Q2 2009, the IMF estimate implies a cumulative loss of over $300 billion.

“If you start with the internal assumptions used by our firm that roughly half of the banks currently rated “F” or some 1,000 banks will fail and/or be merged with another institution and that the loss to the FDIC bank insurance fund will be approximately 20-25% of total assets, then the cost of these resolutions to the FDIC through the full credit downturn could be in excess of $400-500 billion. Keep in mind that in making this alarming estimate we ignore other banks currently in ratings strata above “F” and that some of these institutions may indeed fail as well. Also, our overall “worst case” or maximum probable loss (”MPL”) for large US banks above $10 billion in assets is $800 billion through the current credit cycle.”

Tags: bank failures, Bob Brooks, Deceptive Money, FDIC, IRA, Prudent Money, risk parameters

Do you remember September 2008? It was this time last year when the financial world was literally falling apart. We were a country in financial crisis. There was wide spread fear that even money in the safety of banks were in jeopardy. In all of the unexpected events that occurred that month, I don’t think that anyone thought a money market fund would lose money. However, the Prime Reserve Fund ran into trouble.

In order to prevent wide spread panic, the Government announced that they would back up money market funds with the U.S. Treasury Department Temporary Guarantee Program. This was a safety net that would protect investors in the event that a money market failed (generally speaking).

Well, that program was only intended to be in effect for one year. On September 18th of this year, money market funds lost their safety net. Money market funds, although deemed a safe place for money, can lose money. Every dollar deposited into a money market represents 1 share. So, if you have $1,000 in a money market, then you have 1000 shares. So this $1 per share value is sacred. The value per share of a money market fund should never decline below $1.

Investors preferred money market funds because they were paying higher interest than a savings account or similar account at a bank. Is getting that higher interest worth it in this environment? What if that higher interest rate is only pennies higher?

Contrary to popular belief, we are not out of the woods yet. Thus, it makes no sense to take the risk of not having FDIC insurance for a marginally higher interest rate. For instance, a typical interest rate on a money market right now is around 0.27%. You can get close to that with an FDIC protected savings account at a bank.

Unless you feel extremely confident in the company that holds your money market account, I wouldn’t risk it. There are a few mutual fund companies that I would have faith in when it comes to money markets. That is a few out of hundreds.

What about these money market funds that are offering higher interest rates? You always have to consider the average interest rate given by all money markets. As a rule of thumb, you should always be skeptical if the rate you are being given is higher than the average rate. If the average money market rate is 0.45% and another money market account is offering 1.5%, how are they able to do it?

First, they might be taking unnecessary risk in order to increase the interest rate on your money. Typically, money markets are intended to stay safe. Second, always read the terms and conditions. It more than likely is a teaser to get you to move money versus something that will last for a long time.

I saw an offer from Discover Bank for 1.55%. The terms and conditions read as follows:

Rates may change after account is opened.
Expenses might reduce yield.

They don’t call it fine print for nothing.

Just remember the most important thing that you can do as a prudent steward is reduce risk in all that you do.

Tags: Bob Brooks, Deceptive Money, FDIC, financial crisis, Government, interest rate, money, money market funds, mutual fund companies, Prime Reserve Fund, Prudent Money, risk, shares, terms and conditions, U.S. Treasury Department Temporary Guarantee Program

The experiment known as “Cash for Clunkers” appears to be a real failure. It was there to spur interest in auto sales and start priming the pump again. It did for a while…a month or so. Now we are back to the reality of the automotive markets. They are still in a very tough place.

Michael Panzner wrote in his excellent daily blog (which should be on your reading list):

“September’s light-vehicle sales rate will fall to 8.8 million units, consumer auto site Edmunds.com said. That would be the lowest rate in nearly 28 years, tying the worst demand on record.

After the cash-for-clunkers program boosted August sales to their first year-over-year increase since October 2007, demand has plunged. In at least the last 33 years, the U.S. seasonally adjusted annual rate has only dropped as low as 8.8 million units once — in December 1981 — with records stretching back to January 1976.”

Well, I don’t know about you, but it makes me feel real confident to know that I own a part of GM.

This is the concern with everything the politicians are doing to “fix” the problem. They are big band-aids. Panzner goes onto pose the question – Will the housing market do the same thing? If you think about it, they have rolled out the same type of incentive programs that have done nothing but put a band-aid on the real estate markets. There is already plenty of evidence that those programs are not working. I really do hate to see this Administration’s Plan B.

If you look at the evidence, it is pretty clear that the politicians in Washington (for the most part) are about one thing – HUGE governmental control and power over everything. The problem with socialism is where it leads. First, socialism is the great destroyer of capitalism. Capitalism is what this country is founded upon. It is at risk of becoming extinct. Socialism is the transition phase between capitalism and communism.

Now, you might think that it is overboard to even remotely mention communism and America in the same sentence. It is not so questionable when so many of the President’s czars have supported communism in some form. It is a very well-documented fact. The main concern should be the drastic steps this Government has taken to control this country. Yes, there have been many times before when power hungry politicians have tried to attempt this transformation of this country. However, it has never worked completely, although every attempt has destroyed some element of capitalism.

From all appearances, this group of politicians is marching towards socialism again. Will they succeed? Thus far, there have been significant blows to capitalism. Nothing has been done to help and empower the small business owner which is at the heart of capitalism. This government, with the help of the former administration, has gained an enormous amount of control over the financial and banking sector of this country. It was just announced last week that the government will be releasing their new controls over how much everyone makes in the banking industry. Don’t forget, that includes most of the big financial services companies since they are all “classified” as banks now. I guess we never saw that coming.

In my estimation, it will come down to healthcare. The American public has sounded its voice against Government run healthcare. There is no question about it. To pass a bill right now would clearly go against the will of the America people. However, they are marching forward at great speed because the politicians know that they have a window of opportunity.

I would suggest that if they pass this bill right now it is a sign that their agenda is in full motion to move this country into socialism and destroy capitalism as we know it. No politician in their right mind would go against the will of the American people. It is the highest sign of power and arrogance. So, my guess is that you will have your answer in the next 30 or so days. That is the window for these politicians.

The IRS is getting overly aggressive with their auditing process. Now, they are simply auditing by mail. Yesterday, I had the opportunity to interview IRS expert and author Dan Pilla. Dan is considered one of the foremost authorities on the IRS. In a recent article that he published he wrote:

“The correspondence audit is nothing more than a mail-order audit. The process involves the IRS mailing a letter notifying you that you’ve been selected for audit then asking that you provide by return mail certain documents and information to verify the questioned items in the return.

This all seems harmless enough. In fact, when properly handled, the correspondence audit is generally a more preferable way to handle an audit than the face-to-face examination.

That’s the good news. The problem is that most people simply do not know how to handle any kind of audit, correspondence audits included. Because of that, they end up paying more taxes than they owe. This is because we know that the IRS’s audit results are wrong 60% to 90% of the time, depending on the issue.”

You really need to know how to handle this in the event that you are one of the lucky ones. Remember, the Federal Government needs revenue and they are aggressively going after people for money that in many cases is not even owed.”

I would encourage you to listen to the audio from yesterday’s program. For a link to the article, click here.

Tags: Audit List, Bob Brooks, Dan Pilla, Deceptive Money, federal government, IRS, Prudent Money

I wanted to share some of the media coverage that is featuring Prudent Money. Some of the links below deal with my book, Deceptive Money, and some with general thoughts on investing and handling money.

The New York Times: Books to Help You Save, Spend, Understand Finances

The Chicago Tribune: Losing Fear of Budgeting Will Set You Free

Church Solutions Magazine: Church Can Help People Get Out of Debt

The Pocono Record: Books to Help You Save, Spend, Understand Finances

Santa Rosa Press Democrat: Young Investors Cautious Despite Stocks’ Rich History

MainStreet.com: The Best Paperbacks to Save You Greenbacks

Tags: Bob Brooks, books, budgeting, church Solutions Magazine, Debt, Deceptive Money, finances, MainStreet.com, Prudent Money, Santa Rosa Press Democrat, The Chicago Tribune, The New York Times, The Ponco Recors

A recent article in the Dallas Morning News states that we just don’t have anything to worry about going forward regarding a “double dip” recession. A double dip recession is one where you go through one recession, the recession concludes, and then it comes back again. Of course, that would mean that the stock market would come tumbling down again as well.

September 14, 2009 edition

“I can now report that it’s time to lift up your melancholy spirits and go find something else to worry about. Double-dip recessions are very rare events.”

“Since WWII, there are really no examples-except 1980-82….”

The writer also points out that, “you would think a 50% upside prance in the stock market would be met with some measure of confidence rather than such an undercurrent of distrust.”

The biggest mistake that the media is making in the reporting of this recession is comparing it to normal recessions and normal cycles. The writer would need to go back further than 70 years to take a look at the full length of the Great Depression to get a better comparison. No, I don’t think that we are spiraling into a depression. I do think that in the least a double dip recession is a high probability.

People are distrustful regardless of the rise in the stock market. There is rampant unemployment, a foreclosure crisis, and consumers faced with mountains of debt. That is not even considering a Congress that is trying to ruin this country through socialistic policies.

To get a good comparison, you can’t look at post WWII recessions. It would be a lot like comparing apples to oranges. This is what makes this situation so dangerous. Yes, people are distrustful. At the same time, people are also hopeful. They are hopeful that the worst is behind us. If that doesn’t turn out to be the case, confidence will be destroyed and that will be the biggest problem the markets and the economy face. Today, at least confidence is on life support after a grueling 2008.

Levels in the Market

I haven’t covered significant levels in the stock market in a long time. (Click here for a description of what I mean by levels.) For the S&P 500, we are starting down a few key levels that are right in front of us. It is a range of levels between 1042 and 1062. The ability for the stock market to get above 1062 and stay there would be a very bullish event.

Isn’t a rise of 55% in the stock market a bullish event in itself? Only if the bear market is over. Thus far, the levels necessary to declare the intermediate trend change from a bear to a bull have not occurred. It would take the S&P 500 getting over and staying over the level of 1119 for that to occur.

Tags: bear market, Bob Brooks, bullish, Cycles, Dallas Morning NEws, Deceptive Money, Foreclosure Crisis, Great Depression, Price Levels, Prudent Money, recession, S&P 500, Stock Market

New Stock Market Alert : Unprecedented Times Create Unprecedented Events

Healthcare reform is a hotly debated topic and one that could change everything in America if passed in its current form. Yesterday on the Prudent Money Show I interviewed Grace Marie Turner, President and founder of the Galen Institute, on her thoughts on the President’s latest speech and what lies ahead. This is an important topic for more reasons than just the state of healthcare and the cost to the taxpayer. There is a lot at stake. Grace Marie regularly testifies before Congress and advises senior government officials, governors, and state legislators on health policy.

As always, it was very interesting talking with Grace Marie and getting an insider’s look on healthcare reform. We started out the interview with her description of the March on Washington which occurred Saturday. The media has grossly underreported this event. It was intended to send politicians a message that we don’t want their kind of healthcare reform.

If you listened to the media, you would have thought that 15,000 to 20,000 people attended. Grace Marie said that over 1.5 million people showed up to voice their concerns. Her opinion in a nutshell was that healthcare reform passed by this administration with or without a public option would be horrible for this country. Further, her biggest concern is that President Obama will shove this through and force his agenda on a country that doesn’t want it. The aftermath of such action could spark a revolt in this country.

It is important that everyone gets a good understanding on what this could do, not only to your health, your money, but also to your country. If you believe that Government needs to stay out of the way when it comes to healthcare decisions, then go to www.donoharmpetition.org, sign the petition and send a message to Washington you want American families, not politicians, to control our health care decisions.

To listen to the audio of yesterday’s audio, click here.

Make sure and tune in to 91.3 KDKR at 3:30 for Thursday’s edition of the Prudent Money Show.

Tags: Bob Brooks, Government, Grace Marie, health policy, Healthcare Reform, March on Washington, politicians, President Obama, Prudent Money, Prudent Money Show, state legislators

Welcome to the 3rd edition of the Prudent Money Carnival.

Prudent Money selects the blogs to post here from a multitude of submitted blogs. The selections are based on criteria that Bob Brooks determines. The goal is to allow only those blogs that compliment the Prudent Money message. We hope you enjoy the blogs that we have selected for you this month.

Debt

Michael Bass presents Helpful hints for Debt Settlement posted at Debt Prison.

Flea presents Getting Out Of Debt posted at Be A Survivor.

Investing

Ashley presents Money Saving & Goal Setting posted at Saving Money Today.

Debt Wizard presents Savings and Timeframes posted at Money Tips. Help With Money.

Congress

Wenchypoo presents Cash-for-Clunkers Amounts ot Money Laundering posted at Wisdom From Wenchypoo’s Mental Wastebasket.

Phil for Humanity presents 7 Reasons Why Cash for Clunkers is a Bad Idea « Phil for Humanity posted at Phil for Humanity.

Credit Cards

Pinyo presents What is a Good Credit Score? posted at Moolanomy Personal Finance.

PT presents Credit Card Tips for Students posted at Prime Time Money.

Finance

Darwin presents Cash for Appliances is Coming – Hold Off on that Purchase! posted at Darwin’s Finance.
Other

R.J. Weiss presents Formula for Success – 10 Points from a Former President posted at Gen Y Wealth.

That concludes the third edition. I want to thank everyone for their submissions. Be sure to submit your blog article to the next edition of the Prudent Money Carnival

Tags: Bob Brooks, cash for clunkers, credit cards, Credit Score, Debt, debt settlement, Deceptive Money, Finance, goals, Investing, Prudent Money, savings, success

It was announced that GM will give consumers a “no question” asked money back guarantee within the first 60 days of purchase. They are rolling out the plan because they want to show the public that the consumer can have confidence in the quality of their cars.

Things must be worse than expected if GM is giving a money back guarantee. I wonder who owns that company? Oh yea, it is the Government. This shouldn’t be a big surprise since the Government is involved with GM. Beyond this being a bad idea, there is one main reason why car companies don’t offer the ability to return cars after they are purchased. Once they roll off of the lot, they lose thousands of dollars in depreciation. If a lot of those cars come back, they stand to lose more of OUR money.

The executives of GM state that they are confident in the program and don’t expect many of these cars to be returned. I think they are going to find that they are completely wrong in their thinking for several reasons. First, buying a car is an emotional decision in many cases. If you have buyer’s remorse, you can easily return the car. In addition, it is just too easy for anyone to just change their mind. Second, the consumer who potentially faces unemployment has nothing to lose. As unemployment continues to get worse in this country, people who participate in this program are less likely to hang onto their more expensive new cars. Finally, I wouldn’t want to give anyone a way out on a big ticket item in this environment.

I don’t think this has anything to do with GM wanting to give consumers a vote of confidence. I think this is a car company that is desperate and dying. If they really want to prove a point how about a 6 months money back guarantee? Let’s face it, the chances of something breaking in the first 60 days are slim.

I can’t wait to read the fine print. More to come…

Tags: Bob Brooks, Deceptive Money, depreciation, GM, Government, Prudent Money, Unemployment

Car Dealers get IRS Surprise

Leave it up to the Government to roll out a program and not adequately communicate the details. It was made clear that anyone who received the $4,500 cash for clunkers hand-out was going to get that tax-free. Of course, they didn’t mention that car dealers would be taxed on the $4,500.

Now there are two sides to this story. In a perfect world, car dealers would ask the questions and make sure that they knew the potential tax effects of the transaction. However, we are not in a perfect world and rely way too much on what is told to us. Thus, if it was important to point out in the program that the $4,500 was not taxable to the consumer, why then not go ahead and mention that the dealer would pay tax on that money?

Well, one could only wonder. I doubt that it would have removed the incentive for dealers to participate. At the same time, why take that chance? The Government wanted this program to be a huge success. They needed to move cars. After all, we are all in the automotive business. What is good for GM is good for those unions (see campaign supporters). If any of these auto dealers didn’t allot for taxes, this could end up being a real problem.

For those of you who might think that I am being too harsh, I know your argument. The Government really provided an opportunity that the car dealers would not have otherwise had. At the same time, there was no reason why the Government couldn’t have spelled out ALL of the details. As a car dealer, would you be extra incentivized if you thought you were getting a tax free bonus on that $4,500? Did the Government make something appear a certain way when it was not? You can be the judge. This did catch a lot of car dealers by surprise.

If the politicians cannot keep Medicare, Medicaid, Social Security, effectively run the cash for clunkers program, etc.; how in the world are they going to run a healthcare program? Oops, I better not write that – Big Brother is watching.

Tags: Bob Brooks, car dealers, cash for clunkers, Deceptive Money, GM, Government, IRS, Prudent Money, tax effects

All that glitters is gold. With gold back above $1,000 an ounce, everyone thinks that it is the investment you cannot miss. With the Government printing money faster than they can run the machine, inflation is almost a surety. However, there is another side of the story on gold. Humphrey O’Neil, a writer from the 30’s, had a famous quote, “When everyone thinks the same way, everyone is usually wrong.”

Put another way, when something is this obvious, it usually isn’t the right strategy. I think that there is a another side of the story to gold. I wanted to share something that Vitaliy N. Katsenelson wrote on Gold. It is an excellent article.

Five Reasons to Avoid the Gold Rush (updated)

1. For investors (not speculators) it is very hard to own gold, because you cannot attach a logical value to it. Unlike stocks or bonds, gold has no cash flow and has a negative cost of carry – it costs you money to hold it. It is only worth what people perceive it to be worth right now. The argument I commonly hear is, “What about all those Enron’s, Lehman’s, Citigroup’s, etc. that either went bankrupt or came close? What was the value of those?” If the lesson learned is not to own stocks but to own gold, it is the wrong lesson. The lesson should be: own companies you can analyze (the aforementioned companies were unable to be analyzed) and diversify – don’t put your all net worth into one stock.

2. The gold ETF SPDR Gold Shares (GLD) is the seventh largest holder of physical gold in the world. If its holders decide to sell (or are forced to sell; think of hedge-fund liquidations), who will they sell it to? This is extremely important, as the presence of GLD changes the dynamics of the gold price, both to the upside and downside. If gold keeps climbing, the ease of buying will drive gold prices higher than in GLD’s absence. In the event of a significant sell-off, there are not enough natural buyers of physical gold. It is a bit like a roach motel – easy to get in, hard to get out.

3. In the past, gold had a monopoly on the inflation and fear trade. Not anymore. Now you have competition from Treasury Inflation-Protected Securities (TIPS), currency ETFs, short US Treasury ETFs, government guaranteed/insured FDIC checking accounts, etc. TIPS suffer from the flaw of the CPI being measured and reported by the US government, which has an inherent bias to understate inflation; returns of commodity ETFs are skewed by price differentials between financial derivatives and spot prices of underlying commodities; returns of leveraged ETFs diverge significantly over the intermediate and long run from the underlying index; FDIC reserves are being depleted with the every-Friday-night bank bailout (but believe you me, the US government will not let FDIC go bankrupt, even if it means it has to raise taxes and impose draconian fees on the banking sector).

The bottom line is this: none of these investment vehicles are perfect. In fact many have significant flaws but despite their flaws they attract money away from gold, thus undermining gold’s monopoly on the fear/inflation/currency debasement trade. (I’ve discussed this in greater detail in my book).

4. If, because of points 2 or 3 above, gold fails to perform as expected, the perception of what gold is worth may change dramatically.

5. Over the last 200 years, gold was really not a good investment. It may have a day in the sun, but it may not. And the cost of being wrong is fairly high.

Though gold bugs make it sound as such, gold is not the only or the best alternative if the worst fears come to pass. The best way to deal with the risks of dollar devaluation and high inflation – with a much lower cost to being wrong – is, instead, to own stocks of companies that have pricing power of their product. When inflation hits, they will be able to raise prices and thus maintain their profitability. Also, companies that generate a large portion of their sales from outside the US will benefit from the declining dollar.

Gold bugs look at gold as a currency, but it is not one and unlikely to be one in our lifetime. Here is why: there is not enough of it around, so even if world government were to adopt a fractional system (currency in circulation as a multiple of gold reserves), they will never go for it, because central banks and governments will never give up their monetary tools – inflation is a very addictive tool to fight growing monetary obligations.

There is a wild card in the price of gold, though: China (John Burbank made that argument at the Value Investor Congress in Pasadena). If it decides to switch partially from owning US treasuries to owning gold, the price of gold will skyrocket.

Tags: bankrupt, Bob Brooks, Deceptive Money, FDIC, gold, Gold Rush, Government, inflation, Investment, Prudent Money, Treasury Inflation-Protected Securities

Financial writers love to vilify the mutual fund industry for the fees that are charged in mutual funds. Fees are an easy target. Who doesn’t like to get upset with the big company that is getting rich by charging excessive fees without delivering much in return?

The notion is that you should not invest in the managed mutual funds that have larger expense ratios. Instead, you should invest in mutual funds with as low expense ratios as possible. They argue that these fees add up over time which in turn lowers your over-all return.

By looking at expenses only you miss the forest for the trees.

You have to look at the expenses versus what you are getting for those expenses. In other words, is the money manager who is charging higher expenses providing you value for those higher expenses?

I will be mentioning two funds in this piece. However, please know that I am not in any way making a recommendation. These are for illustrative purposes only. The Yacktman Fund has an expense ratio of .99%. The Vanguard Wellington has an expense ratio of .27%. If you go by the notion that you always avoid higher expense funds then you would not invest in the Yacktman Fund.

However, between 12/1999 and 12/2008, the Yacktman fund has grown by 70% and the Vanguard Wellington Fund grew by 34.63%. Did the higher expense ratio hurt the Yacktman investor in any way?

The bottom line – It is prudent to pay attention to fees. However, the bottom line after fees is what makes the most difference and not the fee itself.

Tags: Bob Brooks, expense ratios, expenses, Fees, mutual fund industry, Prudent Money, Vanguard Wellington Fund, Yacktman Fund