If you have a retirement account or planning or investing for retirement, stop what you are doing and read this note, and get ready to ask your advisor if you have one. If you do not, you need to think or seek advice.

This note was triggered after we have looked at how the fed has recently played its hand, and we think we are reading Ben's hand correctly.

You may have noticed that the Fed and the treasury moved in a direction of buying equity in banks. People may have viewed this as helping resolving the credit crisis, building confidence, building capital base, etc. All of this is possible, but what about the one element that have not been mentioned so far.

To understand, let us go back to the Japanese crisis. Their crisis was a deflation, and they did not understand it until they hit the wall by setting interest rate to zero, and therefore could not put it a lower level.

They then understand that they had a problem of deflation. What did they do?

They started accepting weaker collateral, and bought share of banks to protect bank lenders collateral.

The latter is exactly what the Fed and treasury are doing, and I think it is what they have in mind. They seem to have realized that what they have is a deflation similar to Japan.

Japan did not understand the problem, and it is the reason they did recovered so far after more than a decade now.

But let us look at the question that matters to you the investor (retirement account savers, and if you are in a retirement).

How could your money grow in a world of zero-interest rate?

Using the current investment paradigm, if indeed we have a situation like the situation Japan, you account will be be stagnant or lose money, because in a context of zero-interest rate, one is in a deflation. Therefore investing in capital gains will lead to losses as prices decrease in such context.

The other choice one typically have is to put their money in a cash account. This as well is not a good strategy, because your account will not earn in dollar terms.

This can be devastating particularly for people already in retirement. Usually interest earnings allow them to cushion against depletion of account size.

This is also a bad situation for those in building years, as there is no compounding.

What to do? First ask your financial advisor to test him or her. Most likely he will be clueless or will be giving arguments that it would not happen.

However, insist on an answer in the sense of what if (to at least test the guy or gal!)

The second things you do it to learn different ways to invest. Those tools involve (in addition to playing the short of markets using inverse funds for instance) non traditional ways such as making money selling option premium, and other less known tools, in addition to building other source of income that require some little work but which are passive in nature.

Send us an email to enroll, and also to put your name in the list of those who will receive reports on how to make money in the zero-interest rate and deflationary world.

Email: marketwarnings (at) gmail (dot) com.


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