Where To Put Your Money In These Uncertain Times? (GLD, USO, FXF, UUP, FXY)

Individual investors hoping to prepare themselves for a comfortable retirement find themselves in an incredibly perplexing environment. The return on stocks over the last decade has been negative. It has been a lost decade, in which investors would have been better off putting their money underneath a mattress than investing in a stock index fund. Bonds have performed wonderfully over the last 10 years, but now bonds are being called a "bubble." Who wants to put more money into an asset class that is, according to the pundits, in a bubble? Nasdaq investors circa 2000 surely can attest to the riskiness of this proposition, as can residential housing speculators in the latest meltdown. Simply put, over allocating into bonds right now is probably not the most prudent thing to do. A very frightening trend is taking place in the capital markets today of which many retail investors may not even be fully aware. Correlations between asset classes are at all time highs. For retirement investors, this phenomenon is the real enemy, more so than dismal stock gains or a so called "bond bubble." What is taking place right now is that a majority of asset classes are moving in lockstep. This has not occurred to the same extent with bonds versus stocks, but it could. Dangerously high correlations can be witnessed, however, between stocks and almost every other asset class except for bonds. In this type of environment, diversification may not be protecting you in a meaningful way. Investors who have exposure to U.S. equities of all market capitalizations and sectors, foreign equities, real estate, industrial and agricultural commodities, and precious metals may feel a false sense of security. The reality is that everything is trading together right now, which means if current trends persist, a decline in risk assets will hit everything under the sun. Diversification will not be the savior that your financial advisor may have told you it was. The worse case scenario would be if there was a sovereign default in Europe which caused sovereign risk to be re-priced across the world, sending bond prices tumbling along with risk assets. Despite the September rally in stocks, my personal opinion is that retail investors need to be extraordinary risk averse as we move forward. The outlook that I have presented is bleak, but it is in line with the risks that are pretty much unavoidable at this point. If things play out the way that I foresee them, it is going to be extremely difficult for investors who are behind on their retirement plan to catch up in the near to medium term. Rather, the focus right now should be on wealth preservation, not wealth accumulation. There will be plenty of opportunity for that down the road. Many intelligent investors and economists are predicting a double dip recession, although it is not the consensus viewpoint right now. The consensus is hardly ever correct. The reality is that we are in the middle of a multi-year de-leveraging process which is the consequence of years of credit excess. The monetary authorities are fighting this process at every step of the way, and as a result, exposing the country to deeper and unforeseen problems. They are now in control. There are two diametrically opposed scenarios which seem likely. Before addressing this, however, it is also important to note that I could be wrong and we get a relative "goldilocks" scenario which is defined by modest to healthy economic growth combined with low rates of inflation. I don't think this is likely, but a possibility nonetheless. The first of the two more likely scenarios is that the monetary cabal fails and we are hit with deflation - a period of persistent falling prices - including asset prices (i.e. stocks, real estate, commodities). Prepare for this scenario now. Slash equity exposure, keep exposure to high grade bonds, buy some gold, raise cash and diversify into currencies which benefit from risk aversion. The three most attractive currencies under such a outcome would likely be the Swiss Franc, the Japanese Yen and the U.S. Dollar. In a deflationary environment, you want to be as liquid as possible. That means paying down debts and holding assets in cash or short-term securities. If you deem deflation as being likely, consider ETFs such as the PowerShares DB US Dollar Index Bullish ETF

, the CurrencyShares Japanese Yen Trust

, and the CurrencyShares Swiss Franc Trust

. Also focus on high grade corporate bonds of blue chip companies with international exposure. The other scenario which seems likely, is that the Fed will begin on a dangerous path of printing money in order to combat deflationary forces which are the natural consequences of an unprecedented credit bubble. If this comes to transpire, it may not even work, but investors should be prepared. Because of the diametrically opposed nature of these two possibilities, flexibility will be key. If inflation takes hold as a result of reckless, desperate monetary policy, the name of the game will be hard assets - commodities. Gold, silver, oil, real estate, these will be your only protection from monetary debasement. If the economy weakens and the Fed begins a more aggressive easing stance, look to securities such as the SPDR Gold Trust ETF

and the United States Oil Fund

. Holding cash will be the last place that you want to be if the printing press goes into overdrive. Stocks, commodities, real estate, and precious metals should all do well on an absolute basis, although they may only offer meager inflation-adjusted returns. The thesis outlined here is not an optimistic one. I wish that it was. Unfortunately, we can only prepare for the outcomes that appear likely, not the ones that we wish would transpire. Investors who are interested in not getting burned by the gyrations of the financial markets for a second time in as many years need to watch two things. First, pay attention to the economic numbers and the outlook for the economy. Second, watch the Fed's reaction. Have a plan for both deflation and inflation, and then when one of these likely eventualities takes place, execute your plan unemotionally - until then, stay risk-averse, liquid and flexible.