Alpha Power Investing Newsletter

December 6, 2012

Financial Repression

We are living in an era of "financial repression*". What I mean is that investors are being manipulated and pressured into risky investments. The great puppet master is the Federal Reserve.

The Fed has concocted a grand scheme to revive the moribund economy of the U.S. This scheme, called quantitative easing, is designed to elevate the value of certain investment categories which the Fed believes are connected to a thriving economy. By buying bonds, particularly long-term bonds, the Fed keeps interest low. Low interest rates turn certain investments into non-starters. Money market funds, CDs, and other short-term fixed income vehicles, which are preferred by risk-averse investors, are effectively taken out of the game. A money market fund, for example, yielding less than 1% is a guaranteed loser when you factor in an inflation rate of 2% to 2.5% plus taxes

The stock market looks attractive under these circumstances. The S&P 500 currently has a dividend yield of 2%, with many stocks yielding 3% to 5%. Add in a tax rate of 15% on dividends and you've got yourself a very competitive investment vehicle. The end result is that the stock market is elevated by buyers seeking yield.

The Fed believes that a strong stock market is a major component in the risk-taking psychology of investors. A thriving market encourages entrepreneurs and growing businesses to start and/or expand their operations. This, they think, will lower unemployment and raise the confidence of consumers again.

Unfortunately, it won't work. These are not normal times. We are smack-dab in the opening phase of a major sea change. This new development will alter the investment scene for at least a decade.

I'm talking about "deleveraging".

For the past three decades, consumers and businesses have taken on mountains of debt. Government has led the way. We are now seeing the chickens coming home to roost. Several major cities have declared bankruptcy and larger ones are in the cards (see Detroit). Consumers are paying off debt also. This is a long-term trend. Every past era of debt expansion has come to an end as they inevitably must. Add to the pot the fact that the U.S. population is aging and investors as a class are becoming more risk-averse, and you can see that the Fed is pushing on a string.

So we are in stalemate. The manipulative Fed versus the historical force of deleveraging.

This can go on for awhile ... longer than anyone expects. Look at Japan, which has been going through this for almost two decades. While you're at it, take a look at Japan's economy (slow and slower) and its stock market (a twenty-year disaster).

Investors can thrive in this kind of long-term environment if they know how to sit on the sidelines from time to time. Alpha's risk management strategies have been working for the past twelve years - years containing two major bear markets. Our strategies are 100% transparent and easily understood. They are based on the assumption that human behavior is fairly predictable over the long-term and that this predictability can be exploited for profit.

For examples of this predictability, read any of our program brochures. You can find them in PDF format at the Programs and Performance section of our website at

Sincerely yours and happy holidays,
Jerry Minton, Ph.D.
1-877-229-9400, Ext. 11

*I borrowed this expression from James Montier of GMO. Go to to read his latest article, The 13th Labour of Hercules: Capital Preservation in the Age of Financial Repression.

Past performance is not a guarantee of future performance.

© 2012 Alpha Investment Management, Inc.
Alpha Power Investing Newsletter Archives