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 eroding 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 prices don't matter. Those of us who do eat shelled out 6% more in September than we did last year. And that blended statistic doesn't get to the whole story. 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.

The expected recession may dull some of the most out-of-hand price increases, with some sequential drops in the producer price index, but it still shows major year-over-year gains, 8.7%. Those price increases have already been making their way to consumers, and if manufacturers don't have the guts to raise the prices outright, they have already begun to engage in the sneakier practice of shrinking serving sizes. A recent USA Today story highlighted dwindling portions. That means fewer Fritos from PepsiCo, meagerer Hellman's mayo from Best Foods, and even fewer paper towels per package from Procter & Gamble.

You're bailing out the economy whether you like it or not
Why is this happening? Supply and demand play a part, but a lot of the inflationary trouble is the direct result of the Fed's frantic attempts to prescribe the right economic "medicine." As the credit crunch ramped up -- because of a lack of confidence between lenders and borrowers -- the Federal reserve and treasury kept pumping in money in various forms, hoping that the flood of dollars could flush out the blockages. But invariably, cheap money or "liquidity," in Wall Street speak, does what it always does: pushes up prices.

Remember, cheap money chasing returns is what caused the housing bubble. More cheap money now has led to some other panicked chases for returns, and with real interest rates negative in the U.S. and much of the world, the hot money sometimes heads to commodities, pushing up prices. It remains to be seen if the recessionary fears will dampen the last couple years' price inflation for any substantial period.

Unfortunately, for a wide swath of frugal, responsible Americans, the current result is worse than a simple recession. We've got elevated prices plus a shaky economy. 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 gin the day before the Fed meeting, there's only one thing you can do to combat this inflation, and that's to earn a better return on your savings. Luckily for us, the stock market provides a great vehicle for doing just that. Over the long run, stocks have produced 10%-11% compounded returns. Of course, returns over short periods can be brutal, but that's exactly where our opportunity lies.

Come again?

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. I can tell you (because I checked the charts) that 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 Range Resources (NYSE:RRC) and FLIR Systems (NYSE:GES) saw enormous gains.

*Data and Screening from Capital IQ.

In fact, this quick search found more than 10 dozen small caps that returned between 150% and 1200% over that time period. It doesn't happen right away, and it takes a solid temperament, but it does happen, and those are the kinds of returns I spend a lot of time hunting, especially now that the market is writing off resources, apparel, and retailers again.

As co-advisor on our premium small-cap service, Motley Fool Hidden Gems, I have the agony and excitement of watching many of our favorite companies get brutalized by the market. If you think wider market gyrations are dizzying, try buying a few shares of our favorites.

These stocks tend to move more than most because they're smaller, and they seem riskier than the safe haven stocks or commodities plays that have become extremely popular. To us, these market fits provide a perfect recipe for amazing future returns. We consciously 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 smallcaps we can find, and we rejoice when the market puts them on sale, because that means opportunities for you and us.

We don't try to predict the economy, but we do look for economic trends that we believe the market doesn't fully appreciate. In fact, my colleague Bill Mann and I recently tapped a pair of companies who 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, as well as our regular review of all recommendations, including a defense rating to help you assess balance-sheet risks, 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. He doesn't own shares of any other company mentioned here. Fool rules are here.