Good news merely hides the bad news

I have spent most of my adult life trying to find out if there actually is such a thing as a free lunch. Despite my efforts, I have yet to find that there is.

And so it is with economic news: we hope for things to happen that will signify growth and health only to realize that the rebound comes at a cost of those industries and sectors that were managing quite well in challenging times.

It’s kind of like rooting for the advent of man at the cost of the dinosaurs. They didn’t wipe themselves out; conditions changed.

This is precisely where we find ourselves now.

The Federal Reserve and everyone else’s central banks continue to pump cheap money into the financial sector to bolster banks that completely overplayed their hands and almost took down the modern global economy.

So the financial-services sector is in rally mode. And housing took off again.

These two events come with caveats, however: the price of the lunch. First, since the housing market collapse was what started this whole mess, banks have been holding on to a lot of foreclosures.

And having direct and anecdotal evidence piling up for years, the banks were in no hurry to write them off their books or even sell them at fair market value, much less a discount. Part of their reasoning was that once they wrote them off or sold them, it would show up on their earnings and income statements and that would not look good. As long as they didn’t touch them, no one could really know how much potential liability the banks were holding.

With rates exceedingly low, buyers have more spending power, and the strong dollar means investors from around the world are swapping dollars for real estate. The Miami-area market got set on fire again, for example, and a lot of Latin-American and Chinese money has come into other markets as well.

Lending is still tight for the average American, but wealthy investors from around the globe are able to buy their piece of the American dream. And this is helping the banks unload properties, issue low-risk mortgages and even get into the home-rental business through large-scale investing.

The problem with success

This is what we’ve been hoping for, right? A reinvigorated financial sector and a strengthening real estate market.

I always remember the great Chinese curse, “May your wishes come true.”

The point is all this success has some serious implications. The first is the great bond heyday is coming to a close. As stocks continue to rise and the world becomes increasingly “risk off,” all that safe money in bonds will start to head to stocks. That’s on top of the Chinese and Japanese unloading billions of dollars in Treasuries.

This means the bond bubble that’s grown over the past several years may burst with a bang, not a whimper. And if inflation accelerates, it could get very ugly.

Remember, the reason we haven’t seen official inflation numbers increase after all this easing is that the money is still sitting on banks’ balance sheets. If the money ever starts making its way into the economy, say lending money to small businesses, individuals, etc., inflation won’t be far behind.

So it’s my view we’re in for a bumpy ride. Washington isn’t getting along — again. Wall Street is quickly forgetting the cautionary tale of the last handful of years — again. And money is running out of bonds and precious metals into stocks and real estate. All this while China, the recent global engine of growth, sits on its own potentially massive real-estate bubble and commodity prices are still bottom feeding.

Go with the pros

I’m not a big fan of mutual funds. But in times like these, if I can find a smart adviser who has a good system in place, I’d rather put my available assets with him.

Two mutual funds I think are still strong are the SGA Global Growth Fund (SGAGX) and the Auxier Focus Fund (AUXFX). These funds aren’t built for flash; they’re built for long-term growth and safety. If you look at their long-term charts, you’ll see a steady rise — not much volatility.

SGAGX co-founder and fund manager George Fraise believes that the best way to preserve and grow capital while minimizing risk is to invest only in the most predictable and most sustainable high-quality growth companies and allow the strong cash flows generated by those businesses to compound out for investors.  And it works well.

Jeff Auxier, president and CEO of AUXFX, believes compounding is the most influential element of an investment program. He looks for companies in slow growth industries, which often achieve the best performance over the long-term-investment horizon. His goal is to find value with a significant margin of safety relative to price and follows a price/value strategy that helps eliminate emotional reaction to market panics. This strategy has earned him a 4-Star All-Time Morningstar rating, as well as 5-Star 5 and 10 year ratings.

— GS Early

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GS Early