It seems there is a struggle in the economy between inflation and deflation. The Fed has created massive amounts of money, but most of that is sitting as excessive reserves with the banks. It is keeping us from massive price inflation. The economy is trying to get rid of all of the bad investments that happened during the previous boom, but the government is not letting it happen. There is a struggle between recession/depression and high price inflation (say 10% or more). The Fed can choose the latter at any time. It can essentially force the banks to stop holding excess reserves. The Fed can also buy any assets of its choosing.

In a speech that Bernanke made several years ago that earned him the nickname “Helicopter Ben”, he said that the Fed can prevent deflation/depression at any time by credibly threatening to create massive amounts of money. He is correct on this point. The Fed can cause massive inflation (monetary or price) at any time. Right now it is trying to walk a tight rope, but they are running out of room. We will eventually get a depression. Hopefully the Fed will choose that course soon. If not, we will get really high price inflation, and then we will get a depression.

Today there was a report that a ship, which was a U.S. Defense Department contractor, fired warning shots at Iranian boats. We don’t know the whole story yet, but it is evident that the Bush administration is trying to provoke a war with Iran. This would be awful as it would probably mean many innocent lives lost.

After this reported incident, oil shot up a couple of dollars. If there is war with Iran, it is hard to say how far up oil will go. It will depend on how extensive the war becomes. Most likely, oil will at least double in price within a short time frame. We should all hope that more war will not happen and we should do our best to speak out against it. But we can’t be certain what the U.S. government will do, so we should be prepared with our investments.

The best way to cover yourself is with an oil call option, but these are very expensive right now. If you are involved with options, then a call option with a long time horizon would work. You could buy something that expires at least a year out and don’t be afraid to get a high strike price because the reason you are getting it is in case there is a war with Iran and oil goes to 200 or 300 dollars a barrel. Think of it as an insurance policy.

If you don’t play the options market, you can buy an energy fund, but it will not respond nearly as much to a jump in oil prices.

There is a general bias of financial advisors towards stocks. Most financial advisors will tell you that if you are young, the majority of your money should be in stocks because time is on your side. They say that stocks always go up in the long-term.

Financial advisors want you to buy stocks because that is what makes the most money for them and the companies they work for. Of course, this is a generalization and there are certainly some financial advisors that are better than others. But you don’t ask a divorce lawyer if you should get a divorce or a car salesman if you need a new car.

If you lived in Japan and bought stocks 20 years ago and held them, you would still be down today (and that doesn’t even factor in inflation). I am not totally opposed to stocks, but to have over half of your investments in traditional stocks is crazy, especially right now. There are a lot of warning signs in the U.S. economy like a weak dollar, high energy prices, high personal debts, extremely high government debts, and an out-of-control government that taxes, inflates, and regulates us like crazy.

During normal times, I would recommend about 25% of your investments be in regular stocks (not counting ETF’s or specialty stocks/mutual funds). If you are speculating right now, I wouldn’t recommend much at all in stocks unless you have some good and specific reasons that a particular stock is headed up.

Although Barack Obama lost the Pennsylvania primary yesterday, he only lost by a few delegates and it is looking likely that he will be the Democratic nominee. It is hard to see how he would lose to McCain, especially given the unpopularity of the Iraq War.

With the likelihood of an Obama presidency getting higher, what does this mean for our investments? He is tougher to predict than the other two establishment candidates. He definitely has plans to expand the welfare state at home, but it is hard to say what he will do with foreign policy. It is unlikely there would be a dramatic change in foreign policy, but it is possible that the Iraq War could end sooner.

I don’t recommend having much in the way of stocks these days, but if you are going to own stocks, I would recommend energy and defense stocks. With that said, a withdrawal from Iraq would hurt some defense stocks, particularly in the short-term.

Although an Obama presidency may not live up to its promise, particularly in troop withdrawals, it is a possibility. Therefore, you should not be too heavy in defense stocks now. Of course, with a recession likely, you shouldn’t be too heavy in any stocks right now anyway.

For the last couple of years, the U.S. dollar has gotten hammered along with housing prices. Of course there was a housing bubble that was created by the loose monetary policy of the Greenspan era at the Fed. The short-term could bring more downward pressure on both housing and the U.S. dollar, but the trend is unlikely to continue for long.

It doesn’t make sense long-term to have a weakening dollar along with falling prices in housing. Eventually the dollar will get low enough that buying property in the U.S. will be a complete bargain, especially for foreigners.

Let’s say that as of today the U.S. dollar and the Canadian dollar are at par. In other words, one U.S. dollar can be traded for one Canadian dollar (this is pretty close to reality right now). Let’s also say that the average U.S. house costs $200,000. Now let’s take an extreme example and say that over the next couple of years the average U.S. house drops to $100,000 and the Canadian dollar rises to $2.00 against the U.S. dollar. In other words, one Canadian dollar will then give you 2 U.S. dollars. It would then cost a Canadian just $50,000 to buy a house in the U.S., whereas before it cost $200,000. You would see Canadians trading in their dollars for U.S. currency and buying U.S. property like crazy. This would either drive up housing prices or drive up the U.S. dollar, or both.

We have seen a crash in the U.S. dollar and drop in housing prices at the same time due to some unique circumstances. The U.S. dollar is the main currency of the world and foreigners are starting to realize that they shouldn’t have so much holdings of U.S. currency. And although housing prices have dropped, they are still much higher than 5 years ago and the drop can be attributed to the housing bubble created by the Fed.

It is possible that the Federal Reserve could have a tight monetary policy (which it actually does right now) and see other central banks have an even tighter monetary policy. But this is highly unlikely in the long-term. Therefore, it is also highly unlikely that both the U.S. dollar and housing prices will continue to drop in the long-term. Nobody knows for sure what the Fed will do, but if history means anything, the Fed will most likely start inflating again and we will see housing prices pick back up in a couple of years.

Exchange Traded Funds or ETF’s are a great tool in today’s world. Although the financial industry is highly regulated in many ways, there are also a lot of advantages to investors that weren’t available a short time ago.

First, transaction fees are often much lower with on-line brokerages. You can manage your own account without having to call a broker. The trades are cheap and market orders for heavily traded securities fill almost instantly.

Now you also have the luxury of ETF’s. As if mutual funds weren’t good enough, now we have ETF’s that track closely to a whole range of investments. ETF’s can be traded just like stocks. If you wanted to set up a diversified portfolio of stocks, bonds, and gold, it isn’t a problem now. You can buy an ETF that tracks the Dow, the S&P, the NASDAQ, or a number of other stock indexes. Then you can buy an ETF for long-term bonds like TLT. Then you can buy an ETF like GLD that traces the price of gold. You could buy $100,000 worth of these three things in minutes and you would pay less than $50 in commission with a decent on-line brokerage account.

There are many other ETF’s that are available now. You can buy foreign currencies or you can buy foreign stocks like EWH that invests in stocks from Hong Kong. Or you can short the market. Better yet, you can buy ultra-short funds like DXD that has approximately a double inverse relationship with the Dow. If the Dow goes down 2%, then DXD will go up approximately 4%. You can also buy silver with SLV. There are many choices that have come about in just the last few years.

These ETF’s are great tools. Study them and see what’s out there and then you can use them for your investing.

This may sound like traditional investment advice, but it is still good advice. You should take advantage of tax shelters like a 401k or IRA. As a libertarian, I am opposed to taxation, particularly on income. Although ending the income tax is a goal of mine, that is not the world we live in right now. Therefore, you should take advantage of the tax laws that you can. If you work for an employer that has a 401k plan, you should participate, especially if your employer matches contributions. If you don’t, you are turning down extra money from your employer.

You should also take advantage of a Roth IRA, particularly if you are young. This allows you to invest your after-tax money and it will then grow (hopefully) without having to pay any more taxes (I am not counting corporate taxes). If you invest $10,000 at the age of 25 and it grows to $1 million by the age of 60, then you will not pay taxes on that one million dollars upon withdrawal. This is a great deal that you should take advantage of.

Even if you are bearish on the stock market, you can invest in virtually anything. In a 401k, your choices are limited to whatever plan your company chooses. But you can open a Roth IRA with almost any major broker now.

There is a chance that the government could change the law and later decide to tax Roth IRAs. But there are enough people that have them now that it would be politically difficult for the government to do this. Again, nothing is a guarantee, but you should take advantage of what you can. You don’t want to pay more in taxes than you have to.

The price of oil is now around $115 per barrel. It just keeps going up and it seems like nothing can stop it. Oil is a tough investment to call right now. There obviously continues to be a mess in the Middle East (Iraq in particular) and this contributes to a fear of decreased supply. There is also higher demand worldwide as countries like China and India grow.

If you are invested in oil or oil related stocks/ETF’s, then you should beware. If the U.S. goes into recession (which may already be the case), then many parts of the world will probably suffer economically as well. A recession that spans a large part of the globe will weaken demand for oil and could send the price plummeting. The Federal Reserve, despite all of its gimmicks, has actually been tight the last couple of years under Bernanke. The money supply has gone up only slightly and this could trigger the bust following the boom. Of course, much of the boom was artificial that happened because of Greenspan and his inflationary policies.

There is one thing that would make oil continue to go up in price: Iran. If Bush decides to attack Iran, then oil will probably double in price within a short time span. This scenario seemed unlikely a couple of months ago, but now the conversations about Iran have picked up again. Hopefully the Bush administration will not do anything crazy like bomb Iran, but we can’t really be sure given everything that has happened so far.

Therefore, my recommendation is: if you think the U.S. government will attack Iran in the near future, buy oil options, oil stocks, oil ETF’s or anything that would go up with the price of oil. If you think war with Iran is unlikely, stay away from oil investments in the near term. Unfortunately, it is hard to predict what the crazy people in Washington D.C. will do.

It is always a good idea to take profits when you have a successful investment. If you have a well-balanced, diversified portfolio, then this means re-balancing. If bonds make up 30% of your portfolio and they perform strongly in a short time and now make up 40% of your portfolio, then you should sell off that gain and re-balance. You can take the profits and buy the portion(s) of your portfolio that has sunk in its percentage. In other words, if stocks were previously 30% of your portfolio and have now gone down to 20%, you can take the profits from the bonds and buy more stocks to re-balance back to 30% stocks and 30% bonds.

If you are speculating in a particular stock or investment, then taking profits is even harder. If a stock doubles, why not sell half and protect your initial investment? It is hard to sell after an investment has done well because it seems like the sky is the limit. But remember that it can go down just as fast as it went up. Don’t get too greedy. When you have a good investment, take some profits. If you have an online brokerage account, it is even better to set a price target when you buy a stock, fund, or ETF. If you buy 100 shares of a stock at $20, you can put in a limit order to sell 50 shares at $30 and make it “good until cancelled”. Then you don’t have to think and you won’t let your emotions get the best of you. It is always good to be taking profits from successful investments.

Gold continues to hit new all-time highs. This past week, gold went past the $1,000 mark for the first time ever. Much of this increase is due to the weakness of the American dollar. The dollar is in free fall against other currencies. Although it is hard to fight the trend right now as the dollar continues to plummet, gold could very well be in for some hard times in the short-term. Gold is an excellent hedge against fiat currency (paper currency backed by nothing). In times of high inflation and uncertainty, gold is a great thing to have. You should always have some gold and/or gold-related investments in your portfolio.

You should be warned that gold may not do well in a recession. If the dollar continues to fall, then gold will probably continue its run. But it appears that we could be in for a deep recession, where cash will be king. If you hold gold for the long-run, then don’t worry about it. But we could see a sharp drop in the gold price with a severe recession. Don’t get caught speculating with gold or gold related investments if you are not prepared to lose money. Gold is a must for diversification and should be a part of your portfolio. But standing alone, speculating on gold right now is a very risky business.