Contrarian guru David Dreman says the Federal Reserve has been playing a dangerous, unsuccessful game by keeping interest rates so low for so long. But he says there are ways for investors to cure the “easy money hangover.”
In a Forbes column, Dreman says the low rates raise an inflationary risk, and just plain aren’t helping. “The Fed sent mountains of cash to banks to rebuild reserves decimated by the subprime mortgage meltdown and domino effect on the economy, but this was no economic tonic,” he says. “Banks had no appetite for risk and drastically cut lending to smaller companies, curtailing their expansion and forcing them to lay off workers.”
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Dreman says the low rates also mean savers earn little or no real return. His recommendations: “You could own a diversified portfolio of value stocks that should perform well even in a slow-growth economy while also providing above-average yields,” he writes, adding that your own home is also a good investment. “If I’m right, Fed policies will inevitably produce much higher inflation. In this environment value stocks and real estate should both protect or even grow capital in real terms.”
Dreman adds that “venturesome types should consider conservative U.S. banks, which are only now emerging from the crisis. Subprime nightmares are only a memory, and beefed-up reserves provide good protection from the likes of another serious crisis in the future. Look for steady increases in earnings and dividends in the years ahead.”
