How To Avoid The 2010 Bubble

“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income tax during years of 5 percent inflation. Either way, she is "taxed" in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 100 percent income tax but doesn't seem to notice that 5 percent inflation is the economic equivalent.”
-- Warren Buffett, “How Inflation Swindles the Investor,” Fortune, May, 1977

There have been a few articles already talking about the financial bubble to come in 2010 and here is mine. I don't see this coming bubble lasting just one year, but rather reach from 2010 into 2011, a full 20 months with repercussion lasting years after its bursting.

It has been a little more than two years since the last bubble burst. It brought Fannie Mae, Freddi Mac and AIG to their knees, not to mention Bernie Madof's Ponsi scheme which hurt many investors.

Ahead I will tell you how to avoid the coming bubble with sounder investment strategies you can use in place of following the herd and into financial decline.

First, let's look at this bubble and the two things that will contribute to this bubble.

More Defaults To Come

Ever heard of Alt-A loans? Most people haven't. These loans are very similar to the bad mortgages which created the current financial mess we are in. Alt-A loans are similar in every way to Sub-Prime mortgages except for one big difference, they are billions of dollars more.

Alt-A loans were used for multi-million properties, both private and commercial. These loans are due to rest beginning in 2010, peaking around December and January 2011 and tapering off later in 2011. Think bell curve. Next Holiday season may not be so jolly for million of people.

Expect more mortgage defaults over the next two years.

Not All That Glitters Is...

The Federal Government has and is spending billions of our tax dollars in an effort to stimulate the economy. It is entirely funded by debt pushing national debt toward 12 trillion. As national debt goes up, the dollar continues to become weaker as currency investors move away from high-debt countries to less in-debted countries. The result, higher inflation, which is coming, and will force incomes even further down and the price of everything up.

You may have seen the commercials on TV of companies who will buy your gold. Ad also claim its the best time to own gold. Also, consensus says the best way to counteract inflation is to invest in gold.

They Are Wrong

The problem with gold, it's a luxury. The average person either does not own gold or invest in it. It is very difficult to value it, afterall, who decides what's it's value is and it is not something we go out and buy on any regular basis. Some say the price of gold should match the Dow Industrial Average while others think it should follow the global supply and demand. Many top investors believe gold will continue to do well for now and for a while to come, but based on what, large investors or institutions who are the main buyers of gold or gold bonds.

A Fool's Gold: People Are Easily Fooled

So many investors blindly follow respectable advisors as if they knew everything there was. More than $12 billion of new money has been invested in gold this year, all due to marketing, not because it's a good investment.

What Are Investors and Advisors Overlooking?

As demand for goes up, supply goes up, driving price back down.

Fortune magazine reported how miners of gold invested more than $40 billion in new mining projects since 2001. They are now bearing fruit and as more gold comes to market the demand for gold has drops, as it already has dropped 20%. Hundreds of tons, 350 to 500 tons - estimated, of gold are expected to be added in the next couple of years, which will drive the price of gold down even further. As this happens, early investors will sell off their investments in gold dropping the price even further and faster, which means people who invested last, lose money.

Gold a Poor Investment, Historically

From Forbes magazine, a glaringly obvious and damning fact, from 1833 through 2005, gold and inflation had a nearly perfect correlation. After tax, you would have lost money.

Fact: The only way to make money in or from gold, is if the price rose and you sold yours off at a profit or you get other people to invest in it after you did. It has no value except the value given it. It's price holds steady forever until someone wants to make money off the gold they're holding and then they create a stir.

Buy gold at your own financial peril, it is a horrible decision. Investors are better off looking elsewhere.

Instead, Look to Dividend Stocks As The Best Place to Invest

Look no further than high-yielding stocks. People who have traditionally invested, and held, dividend paying stocks have faired much better, historically.

High-yielding dividend stocks are the best way to invest for inflation. They also have growth potential. Investing in companies that pay dividends, which does go up over time, on their stocks have a more stable growth potential and stronger assets. As inflation going up assets turn out to be more valuable because they cost more to replace which makes them a stabilization factor.

Investing in companies that pay dividends is a much better option to gold, hands down. Investing in DRiPs (Dividend Reinvestment Programs), mutual funds or buying these stocks from brokers, are all good ways to invest your money in high-yielding dividends. Holding onto these stocks, even into retirement, will give you a definite hedge against inflation and a long-term income.

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