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When to reduce your stock and bond market exposure

Nov 29, 2011, 9:37 a.m.

A foreboding and rapidly approaching day of reckoning hangs over our once great nation, as our leaders from both political parties continue a decades-long pattern of ostrich-like averting of their eyes to engage in self-serving actions that invariably fail to address the numerous unsustainable problems that have befallen us. As each successive administration embraces the flawed fiscal and regulatory policies of their predecessors in a blind attempt to defy the inviolate laws of economics, our nation has chosen to merely perpetuate a ruinous course of action that can only end in financial calamity.

As the above chart clearly shows, we have been living well beyond our means as a nation for many years, indebting ourselves, our children and grandchildren into a fearful bondage of debt slavery. Today, just the annual interest due on our national debt is greater than the entire combined debt our country incurred over a period of 200 years from its founding up until the mid-1970s. Perhaps worse still, the combined amount of our public debt and all private debts now exceeds the total amount of currency in existence, and as all new currency can only be created by incurring new debt, it has become a literal impossibility to ever pay off our national debt (if we ever even wanted to try to do so).

From an investment and financial market perspective, the consequences of this financial schism from reality will translate into ever higher taxes, both through traditional direct taxation and through the hidden taxation of inflation. This combination one-two punch of higher taxes and higher inflation can only impair business investment and dampen economic activity, and when this recognition sinks into the psyche of the professional investment world, our stock and bond markets are going to dramatically stagger and slump, likely below even the precipitous levels reached during the 2008 financial crisis.

For investors seeking for the preservation of assets amid these disastrous financial conditions, there may be precious few safe alternatives. Perhaps the soundest strategy, however, would be to diversify one's holding by reducing exposure to the stock and bond markets and increasing investments in tangible assets, commodities, and real property. Precious metals invariably perform well and preserve their relative worth in tumultuous market conditions. Commodities, while often volatile and subject to reduced demand during economic upheavals, will benefit from rising prices in nominal dollar terms due to surging inflationary pressures, and thus represent a form of valuation preservation. Further, real estate prices have been beaten down since the 2007 housing crisis, increasing their attractiveness as investment properties. And while poor economic prospects will likely cause property prices to suffer as well, at least you have the benefit of enjoying your property regardless of its relative market valuation. This consolation, while not ideal, is at least far superior to the total losses incurred when paper investments such as stocks and bonds decline, leaving you with nothing but tears, frustration, and certain hardship.

While dire, upsetting, and disturbing, the only thing worse than current investment prospects is an attitude of denial like that displayed ad nauseum by our national leadership. Far better to adopt a defensive investment position in tangible real assets that seek to reduce potential losses and preserve valuations even amidst the certainty of trying times to come. To be forewarned is to be forearmed.

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