One of the unintended consequences of this housing market is the punishment conservative savers are taking. Last month we had the rather astonishing release of data from the Bureau of Labor and Statistics telling us for the month, that inflation was at 0 percent. As disconnected as this is from reality, there is a reason the Federal Reserve is chopping rates even further and it is the opposite of what they are telling you. Behind closed doors, they are hoping that you go out and spend and go into further debt. In fact, they are setting up a system where savers are actually punished for not spending. This game and charade of course can only go on for so long. First, let us take a look at the current inflation rate and adjust it to an annual basis:

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The first thing I want to point out is the CPI. You’ll notice that last month, the reported inflation rate was 0 percent even though oil touched about $110 a barrel and has remained at those levels for sometime. Let us first calculate the current annual inflation rate based on the above numbers:

If we add up the previous five months of data, we get 2. Since this is five months of data we’ll have to adjust this for a 12 month calendar:

(2/5)=(x/12) gives us X as being 4.8 percent

So currently the annual inflation rate is at 4.8 percent. You will also notice that we have lost jobs in the previous three months to the tune of 76,000, 76,000, and 80,000. Keep in mind that during the previous three recessions, job losses during peak times reached over 300,000 a month even during the minor recession earlier in the decade. This can be looked at a couple of ways. Much of the data from the BLS lags the actual market. That is why people were predicting a recession in the middle of 2007 even while jobs were still being added. Keep in mind the way these things are calculated they leave out much of what the majority of Americans are facing on a daily basis. For one, the CPI does not calculate mortgage payments and taxes but owners equivalent of rent which understates the current burden of housing prices on many homeowners. Also, energy is blunted in the data so the rise in fuel cost isn’t reflected either. Then, you also get complicated uses of hedonics for healthcare, food, and education which again understate the true nature of consumer inflation.

So with that said, for someone to simply preserve their wealth in the current market they will need to achieve a return of 4.8 percent after taxes. Keep in mind that interest earned in CDs, savings, or money market accounts is taxed so a par rate of return is still not keeping up. But let us take a look of a few major institutions to show you how any saver in the current market is being punished:

The first one we’ll look at is Emigrant Direct. They have offered very competitive rates on their savings accounts and currently they are offering a 2.75% rate of return. You may think this is low but as we’ll show further, this is actually competitive for savings in the current market. The next place we’ll look at is ING Direct:

The current Orange Savings Account from ING is offering a rate of 3%. You notice that their CD offers a higher rate of return but let us look at what is required of this:

In order to achieve a yield of over 3%, you will need to deposit at least $50,000 or more. This isn’t even calculating the after tax amount you’ll be getting. We are simply looking at the current rates going for safe investments. When I say safe investments, I mean accounts that are protected by the FDIC which insurers individual accounts up to $100,000. The next place is your typical brick and mortar place that is also offering an online product like Emigrant Direct and ING. Washington Mutual is offering an online savings rate of 3.25% so long as you have a checking account with them:

You’re probably starting to notice a pattern here. The savings rate for many of these places hovers from 2.75% to 3.25%. Let us look at a different kind of account with Bank of American and their Money Market Savings Account:

Here, you’ll notice that the rates up to $10,000 will only yield you .35 percent. You will need $10,000 or more to get a rate above 1.24%. Bottom line is that if you stick your money into these accounts and let it sit, your money is actually eroding simply because the rate of inflation will eat it away. And this isn’t to say anything about a dollar that is also going down as well:

During the past two years, the US Dollar Index has decline by 21.7 percent. Given that many of the items Americans consume are imported, that means your purchasing power has declined by an incredible pace. If you have any doubts about this just take a trip to Europe or anywhere in the world for that matter.

There may not be a direct correlation from the Federal Funds Rates and the actual payments you make on mortgages simply because market risk is so high at the moment. But the funds rate does have a direct impact on the above savings rate on conservative accounts. What the Fed is telling you is that if you plan on saving your money in guaranteed accounts, you will in fact be losing money. Then you may be saying, what about playing the stock market. Let us look at the performance of the three major indexes:

Looking at these three even after the recent rallies and major intervention actions by the Federal Reserve they are still down on a year to date basis by:

DOW: -4.94%

S&P 500: -6.67%

NASDAQ: -10.60%

Clearly, the market is making it more difficult for people to protect their wealth. The places that have done well are in foreign currencies and commodities. Why are these doing well? Because they are simply reflecting the true devaluation of the dollar and the real rate of inflation that most Americans are feeling. Let us look at a few currencies:

The Japanese Yen is up 9.91% for the year against the dollar. This has a lot to do with the carry trade unwinding and also the extremely low central bank rates over in Japan. If you think we have low rates here, you just need to take a look over there. But there is more to this than just easy rates. In fact, the Euro is holding up strongly as well too because the ECB has held steady with their rates:

The Euro is up 7.68% for the year against the dollar. Now given that Europe may also be facing a credit bubble as big as our own by the reflection of recent writedowns on mortgage backed debt, their currency is perceived at least by foreign exchange markets as more valuable than the dollar.

The irony is that most Americans do not even have a tiny amount of money in commodities or foreign currencies to hedge their bets. Given that we are in a recession short of the technical definition, if the Fed cuts rates again expect the yield on the already inflation lagging savings accounts to go down even further and expect foreign currencies to go up and also, commodities. In this market, it is important simply to preserve wealth as many that are now seeing their equity evaporate in their homes are realizing. Even the stimulus checks that are coming out next month are not touted as savings checks but a way for you to spend even further. If anything, take those rebate checks and put them in a savings account or foreign currency. The Fed wants you to spend and be in debt since that is the last straw of our economy. Yet this is not good for you on a personal level. No wonder why Americans now have a negative savings rate. Conventional buy and hold investing styles are going to be proven extremely wrong in 2008 and if you want any more proof, just look at these scary charts. Be wise and don’t follow the advice of the Fed.

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Having a wealthy mindset does not mean that you have to be living in Pollyanna. If you selectively choose to only read positive information and shelve the negative, you will fail to miss the point of a holistic and diverse investing mindset. Wise investors realize that money can be made in up and down markets. I am shocked by the mindset of some “experts” claiming that all is fine in the current marketplace. It is not. Yet they play a zero sum game that if you do not accept positive thinking, then you are simply doomed to a life of mediocrity. This is not the case. You must confront the brutal facts of the current situation. That is, we are in a recession and certain sectors will have a much harder time in the upcoming years. Let me list a few sectors that will continue to have problems well into the year:

1. Housing

2. Financials

3. Automotive

4. Retail

What we are entering into is a recession that has the potential to be as deep as the one in the early 1980s. The previous two recessions were minor and none of the global factors that we are currently facing existed at the time. This time it is truly different. Peak oil is coming online and global turmoil does not seem like it will be abating anytime soon. We are in a global housing bubble which has not been faced on this planet. And aside from all the decoupling fanatics out there, the United States carries a lot of weight on the global scale.

So how do you keep a healthy mindset in all this? There is a lot of fear out there. If you run from the current information and bury your head in the sand then of course looking at the reality is not going to be helpful. In fact, you may adopt the ignorance is bliss philosophy and pretend everything is fine. Would the government be sending practically every working adult a rebate check if everything was fine? Our economy is based on 70 percent consumption so any slight drop in consumption is enough to stall the entire system.

To benefit from this you have to invest with the understanding of the economic system we are in. This isn’t some minor snafu and people are panicking. The underlying fundamentals for many companies are horrible since they play into the overall scheme of consumption. What you need to do is invest for asset and dollar deflation.

I’ve argued before that having a percentage of your money in gold is important and key in preserving your current wealth. You need to remember that in a deflationary environment, debt is your number one enemy and capital preservation is key. So any debts you may have, start paying them off. This in fact should be approached as an investment strategy. Counter to what has been portrayed in the mainstream media, paying off your debt is not a bad strategy. You may want to consider investing in sound foreign currencies such as the Japanese Yen given the current unwinding going on between our currencies. This should be a portion of your overall portfolio.

I’ve heard many people talk about jumping into housing and financial stocks because they are so battered. But the assumption is that they have taken a beating and are severely under priced. What if they are simply reflecting the actual real value? Keep in mind that we have seen our first annual national price depreciation in housing since the Great Depression. Inventory is at record levels. Prices are still trending lower. Is it the bottom or merely a pit stop to deeper cuts?

And always remember that wealth is a state of mind. I have noticed a psychological phenomenon where people put so much of their personal worth on their housing values. As insane as this may sound, there is this low grade fear permeating throughout our economy that people are no longer “feeling” wealthy. The negative wealth effect is going to take its toll since the reality is we are not as wealthy as we have been spending. Yet this is a great time to prepare and be focused. I also hear from the other camp that some believe we are going to enter into another bubble after this one. Simply put, the buck will stop here for at least a decade or so. We went from a technology bubble to a housing bubble without skipping a beat. The mindset is now changing and it is time to prepare.
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