Stop Bernanke From Swiping Your Savings

No, he's not clad in black PJ's and sneaking into bank vaults. If only. Ben Bernanke is engaged in a process that's far more insidious and far more damaging to your financial well-being. He's helping to erode the buying power of your hard-earned, long-saved dollars with easy-money policies.

Hungry yet?
The evidence is everywhere, even in the "core" CPI, which pretends that food and energy prices don't matter. Yet those of us who do eat shelled out 5% more in May than we did last year. Get a load of what inflation has done to the following staples:

*Source: U.S. Bureau of Labor Statistics. Liquids by the gallon, other food commodities per pound.

Despite the Fed's too-little-too-late halt in interest rate cuts last week, this inflation looks likely to continue. The producer price index showed costs jumping 1.4% from April to May alone, and inflation to producers eventually makes its way to consumers. If manufacturers don't have the guts to raise the prices outright, for fear of losing customers, they engage in the sneakier practice of shrinking serving sizes. A recent USA Today story highlighted dwindling portions: fewer Fritos from PepsiCo (NYSE:PEP), meager-er Country Crock spreads from Unilever (NYSE:UL), and even fewer paper towels per package from Procter & Gamble (NYSE:PG).

You're bailing out the economy whether you like it or not
Why is this happening? Rising demand plays a part, as do distorted agricultural policies -- corn ethanol mandates, for instance. But a lot of the inflationary trouble is the direct result of the Fed's economic "medicine" for the bursting U.S. housing bubble. In other words, cheap money -- "liquidity" in Wall Street-speak -- is doing what it usually does: pushing up prices.

By taking this path, Bernanke and his comrades have made the conscious choice to sacrifice the savings of millions of Americans. Better to make your dollars worthless over time, quietly, 5% a year, than to shock everyone with a recession -- even though there's a good argument that the economy could use one, since they're natural parts of the business cycle, especially following incredible bubbles.

Unfortunately, for a wide swath of frugal, responsible Americans, the current result is little better than a recession. When your dollars buy a lot less stuff, you have a lower standard of living. And the more you saved over the past few years, the worse off you are.

What's the cure?
Short of plying Ben Bernanke with cut-rate ethanol the day before the Fed meeting, there's only one thing you can do to combat this inflation: Earn a better return on your savings. Luckily for us, the stock market provides a great vehicle for doing just that. According to Ibbotson Associates, stocks outpaced inflation in 78% of the five-year periods between 1926 and 2002. Of course, returns over shorter periods can be brutal, but that's exactly where our opportunity lies.

Say what?
The greatest investors of our time, guys like Warren Buffett and Shelby Davis, made their biggest scores during panics and stock market slumps. When the entire market gets paranoid, it puts every business on sale, and throws out plenty of great companies in the process, valuing them below their long-term value. Buying on the panic is where you make your money -- you reap the gains later, when everyone is euphoric again.

And you can do better than the wider market by buying value-priced small caps, which have been punished more than most stocks. There were plenty of people selling small caps during the market's gloom in mid-2002. But folks who had the courage to pick up strong small caps as varied as Research In Motion (NASDAQ:RIMM), Urban Outfitters (NASDAQ:URBN), MICROS Systems (NASDAQ:MCRS), or Strayer Education (NASDAQ:STRA) saw amazing returns:

Better yet, hundreds of small caps produced market-trouncing returns over the same period. You didn't need to find the needle in the haystack. Just buying a small-cap index would have let you roughly double the S&P 500 index return.

By buying the best and the brightest small companies at bargain prices, you can do better than both indexes, and the market is giving you that chance right now. As co-advisor on our premium small-cap service, Motley Fool Hidden Gems, I have the agony and excitement of watching many of the best and brightest get brutalized by the market. These stocks tend to move more than most because they're smaller, and they seem riskier than the safe-haven mega caps or commodity plays that have become extremely popular.

To us, these market fits provide a perfect recipe for amazing future returns from small caps. We conscientiously look for small market leaders with balance sheets strong enough to weather the upcoming storms. We look for owner-inspired corporate cultures and companies with strong moats. In short, we look for the strongest small companies we can find, and we rejoice when the market puts them on sale, because that spells opportunity for you and us.

We don't sweat the economy, but we do look for economic trends that we believe the market doesn't fully appreciate. In fact, in the just-released issue of Hidden Gems, my colleague Bill Mann and I tap a pair of companies that are leaders in their fields, are serving high-growth and high-demand industries, and whose stocks are still underappreciated by a market obsessed with timing the next commodities trend.

If you'd like to see the latest additions, a free trial to the service is available, on us. We think the Hidden Gems philosophy and active online community can help you learn to love economic and market turmoil (if not $5 gas). You risk nothing to find out.

Seth Jayson is co-advisor at Motley Fool Hidden Gems. At the time of publication, he had no positions in any company mentioned here. Unilever is an Income Investor recommendation. Fool rules are here.