Personal Finance Advice

A slumping dollar has helped spur U.S. exports as well as foreign investment and has contributed to a decline in the Current Account, a measure of international trade. However analysts cautions that this trend may not continue.

“Capital inflows into the U.S. surged in October, but cyclical downside and persistent credit concerns suggest the October print was a flash in the pan and not the start of a new trend,” said Gabriel de Kock, currency economist at Citigroup Global Markets in New York.

“The U.S. external deficit remains large and longer-term trends in capital flows suggest that foreign private investors are becoming less willing to fund the U.S. deficit,” he added.

Foreign investment won’t be helped by the Bush Administration’s mortgage bailout plan which freezes adjustable rates for five years. Anytime you have the government interfering in private contracts, investors will become wary, both foreign and domestic.

While the overall trade deficit has been narrowing in recent months, our trade gap with China continues to widen to record levels. The possibility of a trade war can’t be discounted.

There has been a large outcry of public sentiment for the imposition of trade sanctions. The recent scandal involving contaminated toys manufactured in that country hasn’t helped matters either.

As a large holder of our national debt, China has expressed in recent months, a reluctance to carry such large amounts a dollar denominated assets. A thinly veiled threat of their ability to wreak further havoc on our already beleaguered financial system.

It was another roller coaster ride for Wall Street as the stock market has become increasingly volatile the last few weeks.  Stocks fell sharply earlier this week after the Federal Reserve disappointed many investors by lowering interest rates by only 25 basis points.

The day after it rebounded slightly on news that the Fed would join forces with four other central banks in a coordinated effort to combat the global credit crunch.  However, stocks tumbled once again Friday as government inflation numbers rose higher than what many economists were predicting.

The Producer Price Index(PPI) rose 3.2 percent in November, it’s highest increase in 34 years, showing signs that high oil prices may finally be working its way through the economy.  The Consumer Price Index(CPI) rose 0.8 percent, a 0.5 percent jump form the previous month.

With inflation fears hitting the market, investors are concerned that future rate cuts may not be forthcoming.  These numbers underscore the Fed’s statements about inflation risks when it cut interest rates by only a quarter percent on Tuesday.

The housing slump and mortgage meltdown have yet to impact the broader economy adversely as growth as well as employment has stayed fairly steady the last few months.  In years past, times of high inflation were accompanied by rising unemployment so investors will be watching carefully for this in upcoming months.

2008 is shaping up to be a murky year for the economy and the stock market.  A turbulent end to 2007 has many analysts wondering if the long bull run might be over.  Investors will face many difficult choices on where to best put their money to good use.

While the bond market is often seen as a safe haven in troubled times, even it has it’s share of risk.  Fears of inflation coupled with a weak dollar, not to mention the impact of international involvement, could send long term rates soaring and bond prices tumbling next year.

Commodities markets seem highly favorable now with the prices of oil, food and gold skyrocketing this year. However, any analyst will tell you that these markets are highly volatile and that with the chance of high reward comes high risk.  So while this market makes a good hedge against inflation, you wouldn’t want to bet the farm on it because that’s what this market is, a gamble.

Most analysts tend to agree that tech stocks will perform comparatively better than other types of stocks even if the economy were to go into a recession.  But who can forget when the tech bubble burst earlier this decade and with many fleeing into tech stocks nowadays, investors might be bidding up prices to unreasonable levels.

While the housing market as well as finance stocks are down in the dumps at the moment, that may not always be the case.  Although I believe that these markets will continue to fall for at least the next six months, an investment in these depressed markets in the near future could be the springboard for substantial gains to your portfolio in future years.

What may seem like a smart decision now, might not be in a few years.  Now more than ever, it is important to maintain a long term view in your investment strategy.