The Investment U E-Letter: Issue # 542
Wednesday, June 7, 2006 A Stock Market Crash in 2006? Four Investment Safe Havens For The Ailing Market
By Dr. Mark Skousen, Chairman, Investment U
Watch out below! We could well be headed for a Ben Bernanke crash…
This coming crash could hit all sorts of financial assets - stocks, gold, commodities and real estate. In fact, it's already happening… And my recommendation last month to move to "cash" (earning 5%) and prime rate funds (8%) has proven good advice. The summer of 2006 is eerily similar to 1987, Alan Greenspan's first year as Fed chairman. What happened in October 1987? The stock market fell 23% in a single day. I remember it well, October 19, 1987, my 40th birthday. Fortunately, I warned investors six weeks before to "sell everything," but few followed my advice. The stock market collapsed in 1987 because the new chairman talked tough about inflation and raised interest rates. The Treasury secretary also said he supported a weaker dollar. It was not what the markets wanted to hear. Once again, a new chairman has taken over, and on Monday, he gave a speech warning that his new Fed policy-makers would not tolerate current inflationary pressures. "We will be vigilant," he said. Not surprisingly, the market fell sharply. And more is on the way. Fortunately, there are some safe-haven investments available in case of a stock market crash in 2006… Tight Money and An Inverted Yield Curve First, what's the cause of this financial crash? For one thing, Ben Bernanke has slammed on the brakes with a tight-money policy. He has followed his predecessor, Alan Greenspan, by raising rates further; but even more importantly, he has slowed the growth of the money supply (M2) down to a crawl. (See the chart below.) 
A year ago, M2 was growing at a healthy 6% rate. Now, it's down to 1.2%. This topping out of the money supply is a clear indication that the Fed is serious about fighting inflation. Moreover, there's talk that the Fed will raise rates by 50 basis points to 5.5%, creating an inverted yield curve (meaning short-term rates will rise above 5%, the long bond rate). The last time that happened was in early 2000, and the stock market fell out of bed. The impact could be felt in the next few months, creating a slowdown in the economy from 5% to under 3%, maybe 2%… a drop in corporate profits… a fall in stocks, gold, and perhaps even oil. The bottom line: trouble on Wall Street. For all those gold bug pundits who said that Bernanke was soft on inflation, remember that he made his reputation as an economist for his work on "inflation targeting." Every country that has adopted this "inflation targeting" rule has seen a slowing down of inflation. Ben's reputation as "Helicopter Ben" - from his eagerness to seemingly print and drop dollar bills from the sky - was made in the context of a fear of another Japanese-style deflation in the U.S. Clearly, this fear is no longer present. Inflation, not deflation, is the prime concern. Preparing For the Coming Financial Crash Your best protection right now is cash and prime-rate funds: - Treasury bills are yielding 4.5%.
- One-month bank CDs are yielding 5.04%.
- The best money market funds are now paying 4.7%.
- Prime rate funds, whose monthly dividends are linked to the prime rate, are now yielding close to 8%. (Take a look at Van Kampen Senior Income Fund (NYSE: VVR), yielding 8.1%.)
For more aggressive traders, perhaps a good bit of money can be made on the short side, or in bear funds. Good investing, AEIOU, Mark P.S. In troubled markets, high-paying dividend investments can be attractive. This month, Oxford Club Investment Director Alex Green introduced members to five new recommendations, in what he calls the Perpetual Money Portfolio, made up of diversified income-producing investments. In all, the portfolio generates 96 dividend checks a year… learn how here. Today's Investment U Cribsheet - In a previous issue, I reviewed some leading economic indicators most relevant to Fed rate policy. Find out what they are and which investment you should maintain in your portfolio in: Leading Economic Indicators: The #1 Indicator the Fed Fears the Most.
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