The Closest You'll Get To A Sure Thing

The Closest You'll Ever Get To Betting On A Sure Thing

Since I first moved to New York in 1996 and got my first job as a stock broker, I’ve seen a lot of the ugly underbelly of the Wall Street money machine beast. I’ve also seen a lot of success and wealth created over the years. I’ve fought long and hard and have learned a lot of very important lessons both from keeping my eyes open and observing others and also from my own hard knocks and failures and losses.

Yes, I've had losses and I’ve made a ton of trading and investing mistakes just like everybody who has ever traded or invested has.

I bring all this up because this Easter, at a family function, I got a great question from a niece, a variation of the most common question I get from many new investors: I am going to graduate this year and I've saved a few thousand dollars. How and in what should I invest it in?

Money and life is complex, and so is my answer.

If she was going to buy stocks with that money, I suggested she check out some of  the major brokerage firms' top recommendations and buy a few shares of her favorite two or three from the model portfolio. Otherwise, she could also visit some of the larger financial institutions' websites for their picks. Regardless of what stocks you buy and when you do it the first time, when you first start out investing and trading, you should be prepared for painful times and lessons which will cost you money and profits in your portfolio. You should consider upfront what you would do if you started putting that money to work and immediately saw it blow up.

I remember reading articles in Institutional Investor back in 2007 that quoted “professional” institutional brokers and salespeople explaining how they were selling “risk-free” securities that guaranteed 5% or more income. Within twelve months, those people's employers, the Morgan Stanleys, JPMs, and Goldmans of the world, needed trillions in new taxpayer support and bailouts because those “risk-free” assets weren’t. In Canada, few people remember the ABCP fiasco (Do the words: "Asset-Backed Commercial Paper" ring any bells?)

I also remember the time I was watching television and a speaker gave a presentation about his options trading formula and before he could get to the microphone, he screamed to the audience, “Forget everything else you heard today, if you follow my options trading plan, you’re guaranteed to make money and never lose.”

Don’t think anybody’s immune to huge losses and wipeouts. Even the Warren Buffett’s and other financiers/insiders of the moneyed world, who had hundreds of billions of dollars invested in the same TBTF (Too Big To Fail) banks that would have been wiped out and other assets that too would have been wiped out without all the “emergency measures” and welfare and bailouts and accounting changes that were made back in 2008 too, obviously can’t avoid mistakes too. Buffett’s big money has enabled him to spend the last few decades buying warrants, convertible debt and discounted equity directly from giant corporations in ways that retail investors can’t even fathom, much less get access to.

So think about all that even before buying a single share of any stock in any publicly-traded company. And before you pull any trigger and open up any stock account, I’d suggest asking yourself if that money might be better used in starting a new app company or website business that you have come up with and think could be a big winner. The experience of running a business and more to the point, the upside of betting on your own actions creating value rather than betting on other people at other companies ability to create value for you as a shareholder, is probably the best bet for your money at this age and stage of your life.

"You’re 18. You’ve got a whole career and a whole life ahead of you. Bet on yourself first. Stocks and other people can come later. And either way, understand that it will take a lot of time, perseverance and luck to make that few hundred dollars you’re looking to put to work in the stock market turn into something meaningful to your overall future income and investments."

Defending The Greeks And Their Prime Minister

Prime Minister George Papandreou is correct to put the EU bailout package to a vote.

Without public consent to the tough austerity imposed by the EU aid package, those measures will not be sustained--a future government can balk at its conditions and start spending again.

For their part, the EU, the IMF and leaders in Germany and other wealthy countries are falsely convinced no good solution for the Greek mess exists other than the package now offered Athens. Introduced in 1999, the euro was the last of several sweeping initiatives to more closely bind European economies into a single, integrated unit, as a preface for greater political unity. Others included the elimination of tariffs, a continental antitrust policy, and greater harmonization of tax structures and environmental standards.

However, European leaders never came to terms with the fact that the euro, even if left to float to find a market value against the dollar and other foreign currencies, would be overvalued for some jurisdictions--leaving businesses unable to compete and wages too high to generate adequate exports, as is the case in Spain, Portugal, southern Italy and Greece. Similarly, it would be undervalued for others--creating hypercompetitive enterprises able to offer their workers the very best benefits and short work weeks, as in Germany.

The United States faces similar issues--the dollar is likely undervalued for Manhattan with its robust financial services, advertising and creative arts--and overvalued for mostly rural Mississippi.

Simply, with a single federal tax structure, Washington subsidizes Mississippi with revenues collected in Manhattan, and somewhat equalizes things across the 50 states. Such burden sharing is largely absent in Europe, even though a single market and currency caused voters in Mediterranean jurisdictions to expect the same caliber of health care and other social services enjoyed in Germany and in other northern climes.

Similarly, teachers, doctors and the like, who deliver those services, could demand compensation more comparable to their counterparts in wealthier nations or migrate. Mediterranean governments coped by borrowing too much. Now that string has run out and austerity is not enough to pay off all they owe. The bailout packages simply won't work without draconian consequences.

Government is so intertwined with the private Greek economy, for example, that large cutbacks in government spending are slashing the size of the Greek economy and tax base faster than government obligations can be trimmed and resources freed to pay the interest on outstanding sovereign debt--even with privately held sovereign debt cut in half.

Greeks sense, after successive rounds of austerity, a vicious cycle has emerged, and the EU won't quit in its demands until their economy is reduced to rubble. All to sustain a common currency that is at the center of the problem and really is not necessary for European unity.

Ultimately, Greece must generate a large trade surplus--export considerably more than it imports--to repay its debts, because much so much is held by foreign banks and international agencies like the European Central Bank and IMF. With the euro overvalued for its economy, it can't accomplish that surplus without enduring decades of high unemployment to drive down wages and living standards--likely by 50% or more--to make Greek exports adequately competitive.

If Athens can't pay, private creditors and international agencies can't repossess the Parthenon. In the end, Greek private creditors will be compelled to take additional losses beyond the 50% haircut imposed on them now, and the ECB and IMF will take losses too.

This is simply too draconian compared to the other way out--readopting the drachma, remarking sovereign and private debt to the reinstituted national currency, and letting the value of the drachma fall to levels consistent with a trade surplus that permits Greece to service its debts.

As denominated in euro, foreign creditors would receive payments on Greek debt less than they are currently owed. However, with the Greek economy more fully employed and generating exports, the haircut a reinstituted drachma would impose would be far less than will ultimately occur though the mindless austerity now imposed. In the bargain, Greece would not be pulverized into decades of punishing depression.

2007 Revisited?

THERE was a whiff of August 2007 in the air on Thursday and again today as financial markets tumbled around the world. More than a whiff, in fact. The familiar stench of panic was back as shares fell heavily, bond yields in Spain and Italy rose and the search for a haven sent the price of gold to a record level. Banks took an especially severe pummelling amid fears that they were exposed to the two big concerns of investors: a break-up in the euro zone and a double-dip recession in the global economy.

In a week of anniversaries, Thursday was a day that conjured up all the wrong sort of memories. It was 97 years since Britain declared war on Germany, when the resulting financial turmoil meant the stockmarket, which had closed at the end of July, did not reopen for business until early 1915. Yet even in the month or so after the assassination at Sarajevo, when the great powers gave up on diplomacy and prepared for conflict, the movements in financial markets were less violent than they were on Thursday.

More recently, it is almost four years since an announcement by French bank BNP Paribas that it was temporarily suspending three hedge funds specialising in United States subprime mortgage debt led to financial paralysis. Banks, it was discovered, had lent unwisely, were loaded up with toxic derivatives that were vulnerable to falling American house prices, and had far too little capital set aside for a rainy day. On August 9, 2007, the heavens opened. On the face of it, the banks are in better shape than they were when British bank Northern Rock became the first major UK high-street lender to suffer a bank run since Overend & Gurney in the 1860s. They have been forced to build up capital reserves and to hold a higher proportion of their assets in liquid form - financial instruments such as government bonds that can be quickly turned into cash.

Financial regulators have spent the past four years crawling all over the banks, making up for the not-so-benign neglect in the days leading up to the crisis, when supervision was far too lax. Britain's Financial Services Authority, the European Banking Authority and America's Federal Reserve know where all the bodies are buried in their respective banks. In theory, at least. One of the parallels between August 2007 and August 2011 is the shiftiness of those running the show, a sense that they are not letting on all they know for fear of creating more panic.

The dwindling band of optimists point to differences with four years ago. Many companies, especially the bigger ones, are in rude financial health after cutting costs aggressively. Parts of the emerging world, such as China and Russia, are growing strongly and may act as the locomotive for the rest of the world. In the West, interest rates are low and budget deficits high: policymakers have pressed the pedal to the floor in an attempt to get their economies moving.

But the ultra-loose state of macro-economic policy cuts both ways. Policymakers were the heroes of Meltdown 1, thumbing through their copies of Keynes's General Theory to come up with the measures deemed necessary to prevent the global banking system from imploding. But if the next few weeks see Meltdown 2, the policy options will be limited. Interest rates are already at rock-bottom levels while the flirtation with Keynesian fiscal policies was brief. As one analyst put it yesterday, the monetary and fiscal guns are not obviously full of bullets. Thursday's mayhem will fan speculation that the Federal Reserve will respond with a third dose of electronic money creation through the process known as quantitative easing.

Not that the $US2 trillion the US central bank has already pumped into the global economy appears to have had much effect, apart from to provide more casino chips for speculators and to push up food and energy bills around the world. There was a colossal stimulus provided in the northern winter of 2008-09 but the results have been profoundly disappointing. Cheap money and big budget deficits certainly averted a second Great Depression, a very real prospect three years ago when no bank looked safe and factories were lying idle, and that is success of a sort. But it has not produced the normal snap back from recession seen during the post-Second World War era. Indeed, the deepest recession since the 1930s has been followed by the feeblest recovery.

The global downturn of 2008 was a different sort of recession - one caused by banks and individuals borrowing far more than was good for them, rather than one caused by central banks raising interest rates in response to higher inflation. It's a different sort of recovery as well - weak, stuttering and at risk of being aborted at any moment.

In one sense, the mood is different from August 2007. Back then, financiers and politicians spent the first six months after the crisis broke in a state of denial, expecting the return of business as usual. They didn't really get it until the collapse of Lehman Brothers in September 2008. Financial markets were taken unawares by Lehmans, but this is a week that has seen the US taken to the brink of debt default, a deal to safeguard the single currency start to unravel within a fortnight of it being agreed, and a steady drip-feed of downbeat economic news. Only a mug would call Thursday's events a ''Lehmans moment''.

Stockmarkets tend to anticipate change. They rise at the bottom of the cycle in anticipation that economic conditions will improve, and they fall when they assume that things are about to take a turn for the worse, which is what they expect now. It is not just that growth appears to be flagging everywhere, even in China. It is the concern, cruelly exposed in Greece, Portugal, Ireland, Italy, Spain and even the US, about the solvency of nation states.

Back in 2007, the one comfort for markets was that a banking crisis never became a sovereign debt crisis. Now it has, and markets are scared witless as a result.

Why UK Banks Are Not Immune To Eurozone Woes

Will lenders have to accept that they won't get their money back from Greece?

The Bank of England points out that there is an 80% probability that the Greek government won't be able to repay all its debt, based on the current market price for insuring Greek sovereign debt.

For Portugal, investors put the probability of default at some point over the next five years at just under 50% and for Ireland the default probability is a little bit less.

As for the market odds on what eurozone ministers regard as the Armageddon scenario, default by Spain, they're around 40% at any time before 2016 if preceded by Ireland or Portugal going bust, but less than 30% if Greece goes down.

That implies potential contagion from Greece's woes may be less devastating than from Portugal's and Ireland's - which may or may not be a comfort.

Now investors, just like bookies, can be wrong. But a banker or investor who ignores the market odds is probably more foolish than a gambler who bets whatever the price offered in the betting shop.

So if you are a banker or an investor and you have an exposure to these financially overstretched countries, and you don't have a death wish then you would probably be advised to make sure you have sufficient spare capital to absorb 80% of whatever losses would be generated by a Greek default, 50% of Portuguese losses given default, and (perhaps) 45% times 50% of Spain's write-offs from default (keep up!).

Falling dominoes

Here's the thing. It is not at all clear that Europe's banks are making adequate preparation to cope with such potential pain.

In the tests of the stresses they can absorb, being overseen by the newly created European Banking Authority, they have been told - for the first time - to make some provisions for potential losses on the 80% of their sovereign exposure which is held in their so-called banking books.

But it is not at all clear that banks are being asked to protect themselves against either the worst that could happen, in respect of Greece, Ireland, Portugal and Spain - or indeed what may in fact happen.

Which is why Sir Mervyn King, the Governor of the Bank of England, made clear that he doesn't take enormous comfort from big UK banks' relatively limited direct exposure to Greece, Portugal, Ireland and Spain.

According to the Bank of England's analysis, if every single one of those countries went bust and wrote off 50% of their sovereign debt, banking debt and non-bank private-sector debt, that would wipe out around half the capital in the UK banking system - which is another way of saying that, in theory, the majority of our banks would limp on.

What is the probability of all those dominoes falling in that way?

It might be higher than we care to know. But British banks must have done something right that such a catastrophe wouldn't eliminate 100% of their capital.

But it is not only the direct loans to these countries that could do severe damage to our banks.

Sir Mervyn puts it like this: "experience has shown that contagion can spread through financial markets especially when there is uncertainty about the precise location of exposures. A UK bank could have lent to a bank that itself had lent to a bank that in turn was exposed to sovereign risk."

Forgive and forget

So if a British bank has a big exposure to a French bank which is undermined by its exposure to Greece, that could be a problem for said British bank.

And, in the crisis of 2007-8, we learned something else about how modern banks can bring down themselves and the rest of us with them: in an interconnected banking world, it is uncertainty that can be the worst poison.

The point is that those who lend to banks can't be sure where the fatal direct exposures to Greece, or Portugal, or Ireland lie. Which is why in a time of panic they may well stop lending to any bank which may have a direct or indirect exposure.
It is in that way that Greece's solvency crisis can become a liquidity crisis for the banking system - and can even wreak havoc for British banks that have lent relatively little to Greece.

By the way, Sir Mervyn made clear he hasn't got a huge amount of confidence that eurozone ministers have yet come up with a plan to cure the disease that underlies all of this, the excessive amounts that the Greek government has borrowed.

Sir Mervyn said that lending more money to Greece, the eurozone's current strategy, is only useful if it buys time to somehow make those debts affordable.

And there are only two ways that can happen.

Either Greece's relatively weak and small private sector has to be supercharged such that it starts generating current account surpluses that would allow the country to service the enormous debts - which seems unlikely to happen any time soon.

Or lenders to Greece have to accept that they're not going to get all their money back - and Greece's debts would be "forgiven" or reduced to a level it can afford.

Either way, Sir Mervyn noted that Greece has a solvency problem that has not yet been solved.

A Stronger Yuan May Not Help US Workers or the Economy.

Let me get right to the point: A stronger Yuan won't help the US economy and its workers. In fact, it may actually have a disproportionately negative effect on those who are unemployed, underemployed or on the lower scale of incomes.

The US is sqandering precious political capital by pressuring China to strengthen the value of the yuan in order to reduce US imports and help restore output and jobs to the US.

While a weaker currency does make goods produced in China more competitive on the world market, US leaders are mistaken about the effects of this on the US economy and workers.

The weak yuan is diverting jobs and output from Mexico, Thailand and even Japan, not from the U.S. The top 20 products imported into the US from China are in industries that account for less than 5 percent of US gross domestic product. The emerging countries of the world, such as Mexico and Thailand, are China's true competitors on these largely commodity-type products.

The US has high wages associated with the world's highest productivity rates, and so does not have a competitive advantage in the majority of the products imported from China.

The US does produce other goods -- and, notably, services -- that are both competitive and in demand in China. If the US is serious about stimulating sustainable growth in US production and employment, it should implement policies that encourage investment in these high-value-added products and services, rather than attempting to stimulate production of goods that represent America's past. If the US wants China's assistance in reducing the trade deficit, it should pressure Chinese leaders to allow their workers to become consumers, which would lead to increased exports of these US-produced goods and services.

The table above lists the top 20 categories of products that the US imports from China. These account for 75 percent of US imports from China, but less than 5 percent of US GDP. The top three Chinese import categories combined -- computers and peripherals, communications devices, and apparel -- constitute nearly 31 percent of total US imports from China but less than 1 percent of US GDP. Put in plain English: One third of the US imports from China amount to 1 percent of our total production -- little wonder that the Chinese feel unfairly targeted. And don't take my word for it -- the numbers come from the US Department of Commerce and the US Bureau of Economic Analysis. We are literally fighting over pennies on the dollar. The Chinese and the rest of the world know this. That's why we aren't getting any international support on this issue. It's also why other developed nations are focusing on increasing their exports to China, concentrating particularly on the higher-value-added components of the equation.

The 2004 Economic Report of the President made the point that rising Chinese imports were taking markets from Mexico and other developing nations rather than US producers. The reverse is equally true -- foregone imports from China will be replaced by imports from Mexico, Thailand and even Japan, where they are produced more cheaply than in the US, but at a higher cost to the American consumer. This will have the same effect as a regressive tax.

A stronger yuan will not have a meaningful effect on US production because of the disparity between the products imported from China and the capacity to produce those same products in the US. In fact, the trade deficit might worsen if the yuan's appreciation increases the prices of these imports, and would be exacerbated if they came from even higher cost producers, because in the end, they would still be imported!

Additionally, the low level of US production of these goods is not a result of the rising level of imports from China. The majority of the categories in the table have been in structural decline since before the US trade deficit with China surged. The US industry that has experienced the most significant reduction in size relative to the overall economy over the last decade is motor vehicles, an industry in which the Chinese do not yet compete globally.

Trade benefits all parties involved so long as trade patterns are determined by comparative advantage, meaning each country exports products in which it is competitive due to a greater availability of resources or productivity compared to cost.

The US has an advantage in producing capital equipment, robotics, audio and video content, sophisticated services such as insurance, banking, and real estate, and large-scale agricultural products. Accordingly, these industries command large shares of the US economy, led by professional and business services at 12 percent, real estate services at 13 percent, financial and insurance services at 8 percent and health care at 7 percent.

The US $132 billion annual trade surplus on services and $121 billion surplus on income earned abroad are often overlooked in trade discussions, taking a back seat to the $500 billion deficit on goods.

Instead of pressuring China to help move the US economy back to producing products for which it long ago lost its comparative advantage, the US should be working to expand the buying power of Chinese workers who now save close to 40 percent of their income. This, combined with an opening of their financial and other service markets to US providers, would be the best way to reduce the US-China trade imbalance.

Europe And Austerity Don't Mix

Europe has bought itself time with its E 750 billion bail-out for the euro. But the long-term problem remains.

Most of the European Union is living beyond its means. Government deficits are out of control and public-sector debt is rising. If European governments do not use their new breathing space to control spending, financial markets will get dangerously restless again. Unfortunately, European voters and politicians are simply unprepared for the age of austerity that lies ahead.

I used to think Europe had got it right. Let the US be a military superpower; let China be an economic superpower -- Europe would be the lifestyle superpower. The days when European empires dominated the globe had gone. But that was just fine. Europe could still be the place with the most beautiful cities, the best food and wine, the richest cultural history, the longest holidays, the best football and cricket teams. Life for most ordinary Europeans has never been more comfortable.

It was a great strategy. But there was one big flaw in it. Europe cannot afford its comfortable retirement.

Greece's financial crisis is, unfortunately, an extreme example of a broader European problem. Investors have been looking nervously at debt-levels and budget deficits in Spain, Portugal and Ireland for months. But even Europe's big four -- Britain, France, Italy and Germany -- are hardly immune from concern. Italy's public debt is about 115 per cent of gross domestic product. some 20 per cent of this needs to be rolled over during the course of 2010. Britain is currently running a budget-deficit of nearly 12 per cent of GDP, one of the largest in Europe. George Osborne, who is likely to end up as chancellor of the exchequer in the new government, has described Britain's official economic forecasts as a "work of fiction". The French government has not produced a balanced budget for more than 30 years. And one of the reasons for the deep bitterness in Germany at bailing out Greece, is the knowledge that Germany is already struggling to balance its own books.

It is true that the citizens of Latvia and Ireland have already swallowed actual cuts in wages and pensions. But these are both countries that have experienced real poverty in living memory, followed by massive and unsustainable booms. They know that the last few years have been a bit unreal.

As the riots on the streets of Athens illustrate, however, not all Europeans will react so stoically to deep cuts in spending. Many have come to regard early retirement, free public healthcare and generous unemployment benefits, as fundamental rights. They stopped asking, a long time ago, how these things were paid for. it is this sense of entitlement that makes reform so very difficult. As the British election has just amply illustrated, politicians are extremely reluctant to confront voters with the harsh choices that need to be made.

Yet if Europeans do not accept austerity now, they will eventually be faced with something far more shocking -- soverign debt-defaults and collapsing banks. For many Europeans that is the kind of thing that only happens in Latin America. The discovery that Latin Europe -- and maybe northern Europe, too -- can also hit the financial wall will come as a horrible shock.

The growth in the size and power of the EU has fed a dangerous sense of complacency. for the countries of southern and central Europe -- who joinced later than the inner core -- "Brussels" was sold as the ultimate insurance policy. Once they were inside the EU, it was felt that war, dictatorship and poverty were safely consigned to the past. Everybody could aspire to the relatively comfortable, stable lives of the French and the Germans. For many years, it worked beautifully -- as living standards shot up in countries such as Spain, Greece and Poland.

In recent years, European unity has also been marketed as an insurance policy for the founder members of the Union. Both President Sarkozy of France and Angela Merkel, the German chancellor, speak of a Europe that "protects". The idea was that a Union that spanned 27 nations was large enough to protect a unique European social model from the uncertainties of globalisation.

At the most fundamental level, the EU does indeed protect. But while Europeans no longer fear foreign armies, they are starting to fear foreign bondholders. Europe's existence as a "lifestyle superpower" has depended on an ample supply of credit.

This weekend's bail-out essentially extends one last, massive credit-line to those European governments that might need it. But, for all the talk of pan-European solidarity, once cost of this credit-line will be a sharp increase in political tensions with the EU. There is already much bitter talk in Greece about the loss of national sovereignty; matched only by bitter talk in Germany about the costs of bailing out feckless southern Europeans. This crisis has set two peoples against each other as close as it comes to war in modern Europe.

Let us hope so.

But Europeans are discovering that the "European project" provides no protection against the harshness of the outside world. Things can still go badly wrong -- even within the walled garden of the European Union.

Gold -- It's Not Safe, It's Not An Investment, And It's Not The Best Protection Against Inflation

Economic chaos? The dollar crumbling? Central banks printing money like crazy? Probably the only real surprise about the surge in gold prices over the last few months is that it took so long to arrive.

Last week, gold touched an all-time high of $1,277.50. Back in September it was still less than $1000. Chalk that up as a victory for the gold bugs.

This week, the price is heading down, dropping below $1,200. Chalk that up as a victory for the gold skeptics, who regularly point out that the metal's value is just a sentimental memory from a long-buried era.

In reality, while investors are right to be nervous about inflation, maybe they are catching on that it's wrong to see gold as the best hedge against a general rise in prices. There are plenty of alternatives: equities, property, oil, luxuries or private-equity funds should prove just as effective a way of shielding yourself.

It isn't hard to figure out why investors had been getting interested in gold again. Central banks are pumping freshly minted money into the system. A few hundred years of economic history syas that eventualy this will lead to inflation. It might be next year, or the year after. It doesn't make much difference--it will arrive sooner or later, and you'll need to get your portfolio in shape before it does.

Alloyed Record

But gold? Whether it's a hedge against inflation depends on where you want to start drawing the graph. Back in 2002, gold was less than $300. If you bought it then, you'd certainly have protected yourself against rising prices-- and mad a fat profit as well. The 1990's were a different story. Gold started that decade at around $400, and ended it below $300. Not so great. As for the 1980s, forget it: gold lost almost half it's value during that decade.

In reality, gold has a mixed record. Nor should you be surprised about that. A few industrial uses, and jewelry, aside, gold is valuable only insofar as other investors think it is valuable. By itself it isn't necessarily worth anything. Nor does it generate interest or dividends. If the price doesn't rise, you don't get anything.

There isn't much chance, either, of the world's central banks making their currencies convertible into gold once again. They would bankrupt their governments in the process. It may secure itself a greater role as a reserve asset. But the gold standard isn't about to be re-imposed.

In truth, while gold may have a role in protecting against inflation, there are plenty of alternatives. Here are five you should be thinking about--particularly when you bear in mind that gold is already close to an all-time high.

Real-Estate Rebound

One, property. The price of real estate won't always move exactly in line with inflation. And you might want to steer clear of the markets where there has yet to be much of a retreat from the exuberant prices of 2006 and 2007. Even so, if there is more money chasing a static amount of land and buildings, prices are going to rise.

Oil

Two, oil. They used to call it black gold and maybe they should again. It has already stopped being just stuff we put in our cars, and use to heat houses, and has become an investment asset in itself. How else can we explain the fact that oil has ticked up past $70 a barrel even while we're living through the worst global recession since World War II? Oil is already, in effect, an alternative to gold. The one difference is that you can put it in your car and drive somewhere--making it far more useful than stuff good for little more than dental fillings and trinkets to wear around your neck. (Did I just say that?...Oh, that's right....diamonds are a girl's best friend.)

Stock Picking

Three, equities. Moderate, persistent inflation in the 3 percent range is good for the kind of big, blue-chip companies that dominate the major global stock markets. They can edge up rices along with everyone else. And they can usually get away with increasing wages just a bit less than inflation, so cutting labor costs as well--particularly as unions are far less powerful than they used to be. In those circumstances, the shareholders should do fine--and their equities will more than keep up with rising prices.

Luxury Goods

Four, luxury goods and collectibles. Once inflation takes off, it is only real assets that will hold their value--everything else is just paper, and that will be of dwindling use. Assets don't get much more real than historic art, valuable antiques, vintage automobiles or fine wines. They should start to soar in price as the mega-rich realize they are among the few ways to protect wealth. And, if you get it wrong, you can always hang them on the wall, or drink them.

Private Equity Funds

Five, private-equity funds. This one might not be obvious. But a leveraged buyout firm buys well-established companies, in basic industries, and then loads them up with lots of debt, while hanging on to a little bit of equity. Inflation will effectively wipe out all that debt. The result? The equity that is left over will be worth far more. What do you think the Chinese have been doing these last few years?

Rate Squeeze

Of course, none of these will necessarily work in the long-term. The only real way to control inflation once it gets started is to raise interest rates high enough to create a deep recession, and so choke off rising prices. That's what central bankers did in the late 1970s and early 1980s, and may do again sometime around 2015 or 2020. Once that happens, you'll need to think again--you might not want to be in property or equities.

That, however, is some way off. As we move into the early stages of an inflationary era, those five assets should do at least as well as gold, if not better.