"If you live in a cave (a cave without a mortgage, that is), you've probably not been aware of the economic news of the great subprime mortgage debacle. Otherwise, you probably know that a relatively large number of recent home buyers were lured into home purchases by temporarily low adjustable interest rates. Now that real estate interest rates are adjusting, these "subprime" buyers are facing burdensome mortgage payments. With interest rates rising to realistic levels, payments on those mortgages have become so burdensome for many home owners that home foreclosures are increasing at an alarming rate.

Such a situation is not entirely new. Home foreclosures have happened over past years; think great depression. However, as is often said, it's different this time. The difference is the size of the problem. The problem has expanded not just nationally through the USA, but has become internationalized because a lot of the money financing these home loans has come from both domestic and foreign financing. There are many factors that relate to this problem. Consider the sequence of just one factor: (1.) home owners can't pay increased mortgage payments because of higher interest rates, (2.) foreclosures ensue, (3.) foreclosed houses are put up for sale so that the financiers will get some of their money back.

Again, consider the size of the problem. If a large number of homes are thrown on the market for whatever money can be salvaged, home values will drop. How much? Only time will tell. But a bigger problem will be that average home owners will see their net worth, mostly in the values of their homes, drop. Needless to say, this will affect the attitudes of a great number of people who will understandably feel less affluent. Less affluent people tend to eschew investments, so we could expect less money going into all kinds of investments, from savings and stock & bonds to small businesses. Of course, the great subprime mortgage debacle does not exist in a vacuum; the amount of outstanding corporate credit and related leverage is fully as large as or larger than the market for subprime mortgages. As such, the consequences of financial problems coming together can be very severe. But, not to worry; here in the USA the Federal Reserve will come to the rescue.

Federal Reserve will do a lot of maneuvering to minimize the problems. Their major tool is interest rate maneuvers, so expect to see interest rates cut significantly. That will buy time; hence, the good times, as such as they are, will continue rolling. As mentioned last month, we can expect stock (equity) markets to react positively to this continuance. The fact that during this recent week (week of December 2 - 8, 2007) the Dow (Dow Jones Industrial Average) increased 250 points indicates that a year-end rally is upon us. Also, there is a "January Effect", which is the seasonal tendency for stocks of small companies to perform particularly well as January progresses.

But there never is a "free lunch", so payments will be extracted. Those payments will include lower valuations of the US dollar. It follows that a weaker dollar begets inflation and that won't be good for anyone except for the entity that creates dollars. We will see costs rise for imported goods, with domestic costs following, because of continuing dollar weakness. There are some positive comments that made-in-USA items will become more attractively priced, and therefore we'll be exporting more. That's true, but most of us are consumers not exporters. Hence, we'll be financially squeezed as inflation progresses.

Investing in hard assets such as precious metals may provide a bit of relief. Although such investments cannot fully compensate for an inflationary squeeze, those investments may be appropriate at this point.

Although most precious metals have had slight decreases this past month, precious metals maintain their valuations. For example, gold is still about $150 higher ($790, up from $640 per ounce) than it was last year at this time; that's a very decent 25% annual return. Precious metal equities including Goldcorp (symbol GG), Silver Wheaton (SLW), and Central Fund of Canada (CEF) may be timely investments. Although it appears that precious metals and related equities will outperform oil and other energy equities over the next few months, prudent diversification is suggested.

Specifically, industrial commodities in general and more specifically, energy, are suggested for investment diversifications because they will benefit as inflation takes hold. Coal is expected to increase in value simply because it is one of the cheapest sources of energy. Admittedly, as a fossil fuel, coal is detrimental to the environment. But chances are that equities including Peabody Energy Corporation (NYSE: BTU), the world's largest coal producer, will be profitable for investors. Natural gas is another commodity which may be a timely investment. Rather than investing directly in natural gas producers, the gas pipelines can be somewhat better. El Paso Corp (EP), the largest pipeline operator in North America, provides long term stability with positive evaluations and enjoys several "outperform" ratings. Oil, which is down from October prices, will recover and should provide good returns. Rather than focusing on a single oil company, a fund like US Global Investors' Global Resources Fund (PSPFX), which has a third of its holdings in oil related equities, provides excellent natural resource diversification.

Looking further in the US Global Investors firmament, there's a fund that includes the dynamic economies of Eastern Europe. It is the Eastern European Fund (EUROX). It has performed well over the past five years, returning almost 550%. Markets in Eastern Europe have continued to rally, driven by liquidity flows. In Russia, the country is awash with money and foreign reserves, and the government is on record as planning to spend close to a trillion dollars (or the equivalent rubles) on infrastructure over the next five years. Natural resources, particularly in Russia and in former Soviet states, are providing a solid base for continuing economic growth.

These comments may appear to be a bit negative, but the near term looks O.K., especially if you have investments that will not be too badly battered by an almost certain inflationary storm. As noted above, there are some partially safe harbors from this pending storm; those investments generally include hard assets, industrial commodities, and non-US dollar based economies. Remember, though, that inflation is not good for equity markets in general. Try to minimize inflationary losses by tracking how fast the purchasing power of the US dollar declines. You may dodge some "bullets" by being aware of that and other trends. In the near term, the financial environment seems rather placid, but later as 2008 unfolds, things will appear more "interesting".

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The information contained here is, to the best of my knowledge, accurate and reliable but it's neither verified nor guaranteed. The information is based upon my observations and as such should be considered to be observations rather than recommendations. As this is free, all I can offer to those who don't feel it is of interest is a money back guarantee along with the caution that a person gets what he and/or she pays for. - - Bud Wood.