I'm tempted to offer a wager to Mr. Moyer that gold will exceed it's current $457 high sometime in the next 12 months. However I would bet that he is not the wagering kind. While commodities may be on their down leg now, I don't think gold has run its course yet. Same with oil for that matter.
If you want some of the upsides and downsides to the derivatives question please checkout www.jsmineset.com (link below). GE is currently going through the restatement of some interest rate derivatives.
roadrunner >>
Sorry roadrunner, I hate picking on you, but charting things is my business. You can not extrapolate from a chart like that. Here is an example of a stock in a nice uptrend like the gold chart that you posted. You would think it goes up forever. Then look what happened over the next year. Yes, this is an extreme example, but I could post 1000's that look like it.
The bottom line is that "things" for lack of a better word, will continue upward in price as long as there is increasing demand. When the rate of demand changes, the price will change. Any slowing will result in stable or declining prices. A decline in demand usually results in disaster.
This can also be applied to the chart that Kaytsok posted. He uses a baseline from 1979. Why does he not use from 1950 or 1995 or any other year? I could draw a similiar chart that projects the S&P being anywhere from between 100 and 10000 over the next 3 years. Everything must be put in context.
Am I wrong, or am I sensing that even the most strident inflationist here are moving more to a deflationary scenario?
I have been on the stagflation side of the fence for several years now but the deflationists are making some very good points. In addition we have been having stagflation for several years so has it run its course?
As a baby boomer investor looking to protect my assets I need to follow a certain set of rules, and I think my personal rules would apply to millions in my age group and situation. See how many of these you might agree with if you are in this group.
1 I do not have decades to be patient and watch my investments grow.
2. I did all my gambling when I was younger and now I need to eliminate as much risk as possible.
3. I can’t set around on the sidelines for months or years waiting to see if the Mr. Hays of the World are going to be right.
4. I have no time to be a day trader and no desire to be a speculator.
5. I am very concerned about electronic assets that I cannot hold in my hand. I don’t trust the system that much and the news is full of horror stories about identity theft.
6. I am not looking to get rich quick, and would be very happy to just protect the assets built up over a lifetime of labor. So I need diversity without rock and roll and I need to be assured that inflation, or bank collapses will not leave me holding an empty bag.
Let me add one other thing here I have been looking the last several weeks for a good longer term investment that I might own, that pays a decent rate of return and is also a good deflation hedge to go with my other assets. How about U.S. savings bonds?
You can buy them at any Bank, you can sell them after a short time period with a small interest penalty, you can hold them in your hand, you can buy them in small or large denominations, and the interest is tax deferred?????
The chart I posted was certainly not misleading nor optimistic. It just shows that the long term trend (over months at a time) has been steadily upwards since 2001. Simple as that. Until that trend is broken and the moving averages are crushed, the major move is up. This is just the opposite trend in the US dollar index. I'll bet on gold and numismatic coins until the gold "crush" is in.
Goldsaint, the deflationary scenario certainly has merits so one cannot ignore the possibilities of it occurring. A sudden crunch to the stock or housing markets, the US dollar, GM, Fannie, or derivatives could send most markets tumbling 7-10% in a day. Gold offers protection on either side of the inflation/deflation scenario. Eventually gold will always seek its honest value for the currency in question. In today's manipulated markets that takes time. But it has been occurring for 4 years and will continue. There really is no easy way. Personally I would short the Dow heavily if I liked playing with stocks but I have always disliked them with a passion. Something about holding a numismatic coin in one's hand (or gold) seems more real than a tulip (i.e. FRN or stock certificate).
In my opinion, Derivatives represent nothing more than a wealth transfer mechanism, a shifting of risks associated with Credit expansion. If the scope and scale of underlying ‘Fair Value, Money or Capital’ at ‘Risk,’ one has to question who has the ability to structure such vehicles for transfer. .....this is the basic summary of John McKenzie's article linked by gold saint. Wealth transference, shift risks for more credit. What could be better? McKenzie also states that there are nearly $500 TRILLION in world derivatives at this point of which $25-35 TRILLION is of real value. I'm guessing the rest is leverage. That's still a boat load of money.
GOLDSAINT, the secondary Treasury market is the place to be for DEFLATION. That market has been SCREAMING "deflation" for all but last December and then only for a short while. The reason the yield curve is flattening is because waaay out long, the bond buyers see NO safe return on investment. Another factor is a very STRONG possibility that when (not if) the real estate market finally caves from just overwhelming debt combining with the layoffs from the fallout of the re-fi money that won't be happening anymore...... the BANKS will stop looking to RE loans for their operating income and turn to BONDS.
Again.
Just to be able to pay interest of SOME sort on accounts.
I don't have ALL my eggs in the 30 yr for the past 3 years, but a goodly amount of it.
Gold will also benefit from the deflation as corporations will find it hard to match Treasury paper and people will begin looking for something solider than stocks.
This ain't gonna be 1929. In 1929, people wanted to work and WOULD.....at anything. No more.
Nope. Not unless I knew more about what ELSE he has. AND if he has a GOVERNMENT pension. (most others will be toast before too long)
Personally, I would split between COMMERCIAL REITs, foreign bond funds, and gold.
At age 50, it is late to START, but if a guy had prior assets it would be OK. If no other assets, I would be tempted to shoot for all gold and hope for a score.
Can sure do WORSE than bonds. If they US bonds they exempt from state tax.
At age 50, ......INCOME ...... will be the hardest thing to generate. And that will get harder in a few years when EVERY boomer is looking for it.
Personally, I would split between COMMERCIAL REITs, foreign bond funds, and gold.
I hope you know how risky that it. I would never recommend someone over 50 looking for safety and yield to invest in either of these assets.
1. The commercial r.e. market is extremely cyclical and downturns can last for many years, Dont be lured by higher interest(dividends). They dont come without risk. 2. Foreign govt bonds carry the added risk of political instability. Also you have to contend with foreign exchange rates. They dollar will not be weak forever and since it has already lost 35% of its value in the last 3 years I would not make a bet for further declines in the near term. This 1-2 punch makes foreign bonds quite risky. 3. Gold is probably the most speculative investment one can make. It is a reactionary asset, meaning it moves because of eternal pressures, not necesarily demand.
A broker recommending what you did would surely find himself in arbitration at some time in the future.
If you want to invest at age 50, with moderate risk, it had better be in high grade corp bonds, govt bonds and A quality dividend paying stocks.
Now you can also have some assets in more risky investments, if you like, just be aware that they are more risky and should not exceed 25% of your total assets.
Thanks for your suggestions. I made my list according to what I am hearing from many of my friends who are NOT in the same situation as I am. Personally I have already prepared for many potential contingencies, but many others have not. Most of my group is closer to 60 than to 50 and they have already wasted years waiting on their stock investments just to come back to the levels they had half a decade ago.
Many are now looking for VERY safe places to put money during the last 5 years of their working careers, and many are leaning more toward a deflation scenario as the most realistic possibility.
On a personal basis I am also looking for an investment that can be purchased month by month for the next several years that has ultimate security for capital preservation and will make at least some small return. Like many here I already have my share of Gold and coins, so more of those do not fill the hole.
Here are some of my concerns.
All purchases of stocks are out, since many large dividend paying companies have undisclosed liabilities either in upside down pension and medical funding, or options to employees i.e. GM, Ford, Delta, etc. etc. As far as I can tell there is no way to project future dividends for many of Americas best companies, and there is great risk in the current high PE ratios that many of these companies are trading for.
I am also very concerned about many of the bonds issued in these companies due to much of the above. Who can tell whose bonds will be down graded to JUNK next? Also who can tell who has been playing in the derivatives markets?
As I said I am also concerned about electronic entries on ownership, and would prefer to hold any assets I own in my own hands.
As far as ownership of foreign money, or foreign bonds I still believe that America for all its problems is a better place to have secure money than any other place on the planet. The bain of our existence are the entitlement programs but they are much worst in most of Europe, and Asia for all of its growth is an accident waiting to happen. If we do in fact go into a consumer deflation here most of Asia will go strait down the tubes. Without us Asia is hard press to even feed their people.
Holding cash in C.D.’s might be an option, but how many Banks will the government cover in a sever deflation? What amount of money for each individual will actually be covered?
I understand that this is a very specific portfolio need, but on the other hand lets say we are in fact headed for a 1929 style deflation. Lets also say that most folks cannot react in a few months if we head downward, but need to buy and save at least over several years.
U.S. savings bonds seem like a terrible investment, but look at reality.
You can buy these at any commercial bank in the U.S.
The bonds can be issued and you can tuck them away with your Gold.
They pay a reasonable interest rate, currently about the average of most stock dividends, and higher than most bank C.D.’s.
They are generally owned by middle class America and are less likely to be defaulted on or have payments deferred than muti-million dollar treasuries.
Prepayment penalties are 3 months worth, after 12 months holding, so they can be upgraded if we do in fact head to more inflationary times.
cohodk..... I'll buy a short term dollar rise, but I have to see a scenario projection that would indicate just WHERE the US is going to find revenue sources in the near future. Jobs are going. So are profits in most mercantile companies. We are so far in debt and facing a bank asset crisis via the RE market that is staggering. And we can't bring home the "troops" without skewing the employment numbers.
I see a lower dollar once this technical bounce runs its course.
As to the COMMERCIAL reits, I would agree with ...some... of that. However, on a REIT with a good tenant mix, I can't see anything short of Armageddon that would keep rents from rising. I was in business through the 20% interest rates of the early 80's and never saw a rent DECREASE.
AND....when I say "commercial REIT" I am NOT talking about builders of commercial properties, but the ones who acquire and lease out the props and pass the rent along to their shareholders. A very small crowd.
And I am also talking about collecting dividends and not the "total return." That would take trading and could indeed cause some losses. But short of a discontinuance of dividends, a divvy paying stock can cover a multitude of sins.
If the Feds don't cover CD's, why would they cover I-bonds?
These bonds are issued by the U.S. Treasury they are its obligation, and of course they can print the money.
The Bank C.D.’s are the obligation of the bank. Yes they are supposed to be insured up to $100,000 but what if your money is at Chase and they go belly up on a bad derivative play?
What happens if you have more than $100,000? What happens if you have more than $100,000 in several banks, will your clever move protect you, or will the Feds say sorry only $100,000 per family?
How many Banks failed in 1929, and folks lost it all?
Oh you say, we now have the FDIC, right, there is no money in the FDIC.
Since a CD is a bank obligation and lets assume that the Feds cover all losses just how long might that take.
Would you get your interest if the Bank failed?
Many Banks went bust in 29 because they were playing the equity markets, they were supposed to be banned, but are they out? Have they just found other ways to play?
I like that they own freestanding buildings which (like gold) benefit from inflation but also protect on the deflation side by generating income.
They can be purchased and considered a part of a diversified REAL ESTATE portion of your assets. And if you use a discount broker, the commission for selling out your property is seven bucks instead of 6-10% from a RE broker. And they are traded every day so if ya get nervous, ya can get out with no "early withdrawal penalty."
They can be owned with a "stop loss" order if you ABSOLUTELY do not want to go "down with the ship." I personally use "mental" stops but in my mental state, that may be nuts
They pay MONTHLY! This is a consideration that is more important than many realize.
And they have few employees. Because their business plan is dead simple.
Edited to add: Their "Yahoo" comments page on Yahoo Finance has been broken for months now (Yahoo's bad) and it's hard for new investors to drop by and eavesdrop on the imminently SENSIBLE folks who own and have owned this pup for years.
Oh yeah #2: Being land and lumber, it's not a "promise" like a bond. Not that that means anything.
Reits can and should be a part of a MIX of investments. My comments were meant as precautionary as one should not have a heavy concentration of any asset, or a concentration of risky assets.
Everyone is talking about deflation. In my experience the more people talk about it the less likely it is to happen. If you are worried then just buy US Bonds. If the US defaults on these then we will have MUCH, MUCH bigger problems to deal with. ..... Like Martians
I believe that goldsaint has made a very good point for the 50ish looking to put some away with a little return that is not subject to corporate foolishness or housing bubbles. US bonds as the core of your cash investment strategy is not a bad idea. So, if it absolutely, positively has to be there at 62 1/2 then saint is right on it. Of course a little gold stashed under the mattress or in the wall safe would be good for us coin types, just so we get a chance at a play. I mean what regular guy is gonna play REITS or play the euro vs the yen...just not gonna happen.
All in all, I believe your post was very good goldsaint.
I listen to your voice like it was music, [ y o u ' r e ] the song I want to know.
I'd give you the world, just because...
Speak to me of loved ones, favorite places and things, loves lost and gained, tears shed for joy and sorrow, of when I see the sparkle in your eye ... and the blackness when the dream dies, of lovers, fools, adventurers and kings while I sip my wine and contemplate the Chi.
Auto industry is so competitive, us companies have huge pension/health obligations, i would not invest in stock unless it was low double digit or single digit. Purchased Ford at $16/ after 9-11, still losing today! I'm no expert... but my cigarette stock is up. Americans may not be smoking..... but the rest of the world is. I think all the bad letigation is done too. This thread has convinced me to convert CD's to US bonds, and to open a swiss bank account. I have a few pieces of foreign gold coins to store there.
Many Banks went bust in 29 because they were playing the equity markets, they were supposed to be banned, but are they out? Have they just found other ways to play? >>
Do 100 and 105% mortgages count against all time high housing prices?
GREAT!...... If they ever learned how to take apart a Camry and COPY every damn part. THEN get their employees to sing the company anthem and put em together without leaving any bolts out.
History buffs will recognize the roots of this phrase. Marie Antoinette, wife of King Louis XVI, is supposed to have said "Let them eat cake" when informed in 1789 that the Parisian masses had run out of bread. There is no reliable evidence that the ill-fated queen ever said this, but it has made good propaganda since 1789. The sign of the insensitivity of the successful to the suffering masses is some version of "Let them eat cake."
In our day, the public no longer worries about bread, except as a source of unwanted carbohydrates. The free market had made us all so rich that our concern is with too much bread and too much cake. Twinkies celebrated its 75th birthday recently – cost-conscious Americans’ favorite substitute for cake. Our waistlines reveal that ours is a world very different from Marie Antoinette’s.
But every society has its worries. Our worries center around official statistics. This includes stock market indexes. Newspapers run reports on how the Dow Jones did yesterday. Websites monitor this statistic constantly. TV anchormen do not let a broadcast get by without a reference to the Dow, usually with a line chart behind them. Up 6 points, down 9 points; it doesn’t matter how minuscule the change is from the day before. It will make it onto prime-time news.
The Dow is regarded as monitoring the pulse of the American economy. It is seen as the mark of America’s success or failure. "As goes the Dow, so goes America." Individually, we would not admit in private that we believe this, but the evening news indicates that millions of us do. We say we don’t believe in astrology, either, but what newspaper would dare to drop its astrology column?
Yes, yes: that’s for all those other people. Well, I hope so, but the reality is this: all those other people are eligible to vote. Upset them, and the incumbent political party is in trouble. "It’s the economy, stupid," 1992’s formula for national electoral success, still resonates with the voters.
POLITICAL NUMBERS
Official indexes tend to calm down the electorate. They are designed to calm down voters. This is why governments have the statisticians jiggle and juggle the official statistics. For example, we feel better when the Bureau of Labor Statistics announces that job growth increased in the previous month. On May 6, the BLS announced that job growth was up 274,000 jobs in April.
Sometimes, this sort of statistical optimism leads to verbal speculation that the economy is stronger, so inflation will rise, so the Federal Reserve will raise interest rates, which will strengthen the dollar, which will make exports more difficult, which will slow the economy. The Dow drops. Or doesn’t.
How does the BLS know that there were 274,000 new jobs? Not by counting them. It has a statistical formula which includes the likely creation of new businesses and the likely demise of old businesses. This is called the birth-death ratio.
Let me assure you, the journalists who report the employment figures do not report the following. That’s because hardly anyone knows about it, and of those who do, hardly anyone understands it, and of those who do understand it, hardly anyone knows what the BLS formula is or how the samples are made. The Bureau of Labor Statistics does publish a page about the birth-death ratio.
I have never met anyone who can explain it. Here, we read:
To account for this net birth/death portion of total employment, BLS is implementing an estimation procedure with two components: the first component uses business deaths to impute employment for business births. This is incorporated into the sample-based link relative estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample.
Got that? Good. Now it gets complicated.
The second component is an ARIMA time series model designed to estimate the residual net birth/death employment not accounted for by the imputation. The historical time series used to create and test the ARIMA model was derived from the UI universe micro level database, and reflects the actual residual net of births and deaths over the past five years. The ARIMA model component is updated and reviewed on a quarterly basis.
We assume that the same formula is maintained from month to month, so that we can compare apples and apples, or whatever the statistical fruit is. We assume lots of things in trying to make sense of the economy. We should also assume that three months later, there will be a revision of this month’s statistics. There probably will be. These revisions tend to be downward. They also tend to be ignored by the press.
The good news regarding jobs may be better-than-expected (by whom?) good news or less-than-expected (by whom?) good news. It depends on how the reporters want to pitch the statistic.
When people feel secure in their jobs, they tend to save less. They spend more. They assume that whoever is managing their retirement funds knows what he is doing. They don’t worry about the future.
Recessions rarely last long. During recessions, Americans worry about their jobs. They worry a little about their pension funds. But, as we saw in 2001, they don’t worry much. They buy. They especially buy nicer homes. They borrow. They especially borrow mortgage money.
THE WEALTH EFFECT
Economists speak of the wealth effect. When people think they are doing well – jobs, investments – they tend to save less. They assume that good times will take care of retirement portfolio growth. A rising market will let them retire in comfort. The self-discipline of thrift today can be deferred. Besides, thrift is so uncomfortable.
This same attitude afflicts corporate America. In a story published in Business Week (August 5, 2002), the authors commented on what they called the pension pinch. Because of the downturn of the market after November, 2000, corporate America was facing a new reality. Its pension funds were not being automatically funded by stock market indexes.
Amid the wreckage of the worst bear market in at least three decades, hemorrhaging corporate pension plans are rapidly becoming Wall Street’s biggest new worry. They have lost hundreds of billions of dollars, and now companies face the end of their long-running holiday from writing checks to the plans. Over the next 18 months or so, companies ranging from General Motors to United Technologies face having to pump billions into their plans to comply with federal laws to protect pensioners.
The authors were correct. This is exactly what large corporations had to do. General Motors, as the authors mentioned, was most at risk. Little did they know!
General Motors Corp., which has the biggest pension plan of all, with $80 billion in obligations, disclosed July 16 that it expects to put $9 billion into its plans by 2007.
Ha! General Motors had to float a $17 billion bond sale in 2003 to meet its pension fund obligations. Then, in 2004, it had to add another $13 billion. Yet it is still $57 billion in the hole.
The company has recently been reduced to junk bond status by Standard & Poor’s. So was Ford. Legally, many investment funds cannot hold junk bonds. Legally, fund managers will have to sell GM and Ford bonds. This should have begun last week. It didn’t. We shall see if the fire sale, or any sale, takes place. We shall see if Federal regulators or fund investors force them to do so.
The 2002 article went on to describe how America’s largest corporations got themselves into this pickle. Basically, the primary cause was the wealth effect. The same mentality that governs American consumers also governed corporate managers.
How did companies paint themselves into such a corner? It was more than bad luck. They made a bold bet during the 1990s that stock prices and interest rates would move in opposite directions, as they have nearly every year since the Great Depression. The relationship is crucial to pension funds because when interest rates go down, government rules require the plans to have bigger pools of investments to meet future obligations. That can only happen if stocks rise or companies put more money into the funds.
For years, the tactic worked like a charm as fund assets went up while their liabilities increased. Companies became confident about putting more of their pension assets into stocks than before. The resulting investment gains during the bull market more than covered most of the payouts they made to current retirees, averaging about 7% of the funds’ total values. Better yet, accounting rules allowed companies, quite legally, to boost their reported earnings by billions with higher projected investment gains because they were holding more stocks. Some, again quite legally, were able to actually tap the surpluses to help pay retiree medical expenses and even merger consolidation costs.
So, the corporations used their statistically overfunded pension funds as a convenient ATM machine. The pension funds became a source of operating expenses, especially medical costs. In other words, the corporations did exactly what the trustees of the Social Security Trust Fund have done ever since 1938.
Lately, however, the bet has turned sour. Stocks – in which a record 60% of fund assets were invested in early 2000 – have gone down in the bear market, as have interest rates. The result: Funds’ assets have plunged at the same time that their liabilities have soared. The pincer movement has wiped out surpluses racked up during the long-running bull market, and then some.
The authors then pointed to a major problem facing investors, including fund managers. The companies generally do not report the status of their pension fund obligations. What they report is governed by them, not by any independent agency.
The fear is that nobody but the companies knows exactly how big the cash calls will be. Companies hardly ever disclose anything in their Securities & Exchange Commission filings about the impact of the government pension rules on them. "The specific calculations are impossible to get right with publicly available data," says Trevor S. Harris, accounting analyst at Morgan Stanley. That is important because it means investors can’t accurately predict corporate cash flows.
Which companies are facing the biggest problems? Old-line companies that are unionized.
Old-line companies or those with large unionized workforces will be particularly hard hit because they have large defined-benefit plans – ones offering guaranteed payouts to pensioners. The biggest obligations are among auto, telephone, airline, steel, chemical, and pharmaceutical companies.
I dredged up this old article for two reasons. First, it was right on target. Second, it was published in mid-2002, close to the bottom of the stock market. The S&P 500 was around 900. It rose, then fell back to 800 the following March. Today, it is around 1200. You can see the swings.
So, despite the bad news regarding the pension funds’ condition, investors in mid-2003 decided to ignore the information. They rushed back into the stock market.
They assumed that GM could solve its pension problem. We now know that this assessment was premature. GM and Ford investors have taken major hits, both in stocks and bonds. But the stock market’s current rebound indicates that these wake-up calls have made no impression on investors and fund managers.
Investors did not wake up in 2002. They have not awakened in 2005. They assume that they can continue to rely on the wealth effect for their retirement portfolios.
JIGGERING WITH THE STOCK INDEXES
Everyone plays the manipulation game. Everyone wants things to look better.
Consider Standard & Poor’s, the rating company that just downgraded General Motors and Ford. Some market watchers prefer the S&P 500 to the Dow Jones Industrial Average. Far more companies are in the S&P index.
Both the Dow and the S&P 500 are subject to statistical jiggering. Companies that do poorly are removed from both indexes. Both add companies that seem to be doing well.
Again, let us return to 2002, when bad news was visible in the stock indexes, and readers were a little more alert to reality. An article appeared on the Slate site, "The Poor Standard of Standard & Poor’s" (Aug. 1, 2002). The author discussed in detail the way that the S&P 500 is subject to revisions.
The index is one of the more unlikely villains of the bubble. Despite perceptions, the index is not a passive investment vehicle. Instead, S&P is constantly choosing new stocks and booting old ones. And in the past few years, S&P’s modus operandi – which receives surprisingly little scrutiny – led it, essentially, to recommend that investors buy highly speculative companies at or near their tops.
How did this happen? Because any stock index is structured to reflect current realities. The past is sacked when it become too embarrassing.
When a company merges with another index company, or is acquired by a foreign concern, or files for Chapter 11, the S&P committee automatically deletes it. And some companies simply wither away to the point where the committee – which remains anonymous to forestall lobbying – determines them to be too insignificant to merit inclusion.
Between 1990 and 1994, the committee made an average of about 13 changes each year. But with the surge of merger and acquisition activity in the late 1990s, the need for deletions rose. Between 1996 and 2000, the committee changed an average of 40 companies each year. In 2000, a record 58 changes occurred.
The index managers added high-tech companies in 1999, which was close to the top.
AOL was arguably the first New Economy stock granted entree into the S&P 500. It entered at the close of 1998, replacing Venator, the parent company of Foot Locker. Network Appliances entered on June 24, 1999, followed soon after by Qualcomm on July 21, Global Crossing on Sept. 28, and Yahoo! on Dec. 7. The tech-tilted makeover accelerated throughout 2000.
The problem was not that these companies were added – it was clear that they represented an important part of the economy – but when they were added. S&P essentially took many of these speculative companies at or near their tops. When Yahoo! came in, it traded at an astronomical 228 (it’s now at 13); Qualcomm traded at 159.75 when it was initiated into the club, and now it trades at 27.
Index funds that follow the S&P 500, and which are the darlings of the buy-and-hold investment strategy school, bought these stocks at the top. Global Crossing is long gone – bankrupt.
On the day Yahoo! joined the S&P 500, it rose 67 points. And in the week between the announcement and the actual inclusion, Yahoo! rose 136 points, or 64 percent. According to a 2000 study by Salomon Smith Barney, stocks selected for inclusion outperformed the S&P 500 by 7.7 percent in the period between the announcement and the inclusion. The net effect: S&P 500 mutual funds – that is, you – effectively bought these new stocks at artificially inflated prices.
The indexes drop poorly performing stocks after they have shrunk. This is called "sell low." They add stocks after a long period of rising prices. This is called "buy high." This "buy high, sell low" strategy guides the stock index funds. But it does more than guide index funds. It guides the investment community generally.
Because of its breadth and diversification, the S&P 500 is the crucial benchmark for professional investors. Investments by insurance companies, pension funds, college savings funds run by states, and public employee pension funds are either invested in the S&P 500 companies or mimic its makeup closely. "The S&P 500 is used by 97 percent of U.S. money managers and pension plan sponsors," S&P’s Web site proudly notes. "More than $1 trillion is indexed to the S&P 500." (That sum is almost certainly lower now.) About 8 percent of the shares of every S&P 500 stock are held by index funds. As a result, S&P’s eight-person Index Committee, which selects the companies that enter and leave the S&P 500, is a far more influential stock picker than Warren Buffett or Fidelity manager Peter Lynch.
CONCLUSION
Most Americans ignore retirement. They assume that "something will turn up." They trust Social Security and Medicare – the red-ink monsters that are rated as if they were tools of budget-balancing. But even those Americans who dutifully add funds systematically to their retirement fund portfolios according to the recommended buy-and-hold strategy are rarely informed regarding the assumptions of those who take their money: corporate managers, index designers, and index fund managers. If they did understand, they might plan differently.
Or would they? Stories like those that I have cited appear from time to time, but investors take little notice. It seems easier to trust the experts . . . until the bills come due.
When the bills do come due, the experts will say, "We knew it all along." And when index fund investors complain, the experts will say, "Let them eat indexes."
Which companies are facing the biggest problems? Old-line companies that are unionized.
Exactly. Unions are the reason for the US manufacturing decline and exportation of jobs overseas. They were good and necessary when founded but they have denigrated into vicious parasites that have sucked the blood from corporations and the economy.
The country.....OUR country..... could DO with some strong unions now.
Gutted by the insatiable demand for more STOCK profits, the American WORKER is now on the endangered species list.
From crime committed by those who lack the intellect (there will ALWAYS be less smart folks...but they DESERVE living wages) to those who are being OUTSOURCED by some jungle slave-worker, we are now on a continuing downward spiral in wages for anyone who just works on an assembly line.
We lack the leadership of someone like Henry Ford who understood that EVERY company depends on ITS OWN employees for sales.
He paid his workers enough to buy his cars.
Simple? It must not be. Somehow, people have got the wrong idea and are jumping on the PRICE CUTTING bandwagon. No longer able or content to figure ways to create more DEMAND, industry is hell-bent on cutting COSTS to get some profit from an ever more .....s t r e t c h e d.... consumer base.
EXCEPT in China. And even there too now.
As we gaily march bravely toward no more Social Security and no prospect of "normal" workin stiffs being able to afford to EVER retire, maybe we should give some more attention to the Inuits. They put their old folks on an ice floe and kick em out to sea.
I love to buy hammered stocks from panicked investors. It's how I pay for my fishing trips! Nothing is better than free fishing!
However, with GM I personally decided to pass at these price levels. The main reason is that their products are weak. I mean, their styles are behind the curve and the brands are not marketed smartly. My last chevy truck needed it's A/C, transmission, water pump, and windshield wiper motor - all repaired before 4 years/60,000 miles. My Mom's Pontiac minivan needed front end tie-rods at 51,000 miles. These types of repairs are indicative of quality problems from the core of the design, not the union guy installing them. One can complain about union pensions raising costs - and they do - but GM's problems are only solved if they walk away from the path of Cost Cutting. I don't think they have management smart enough to figure that out.
While I disagree that everyone deserves high wages in any job, I submit that outsourcing will end precisely when it begins to tap Executive Management!
Will a Chinese guy be CEO for only $1 million/year? You bet. And he'd earn his keep, unlike the Americans.
Mr. EG Thanks for a great post. I think Mr. North did a great job explaining many of the things we have discussed here, in particular the manipulated indexes.
As to the pension crisis, I think this is just one more thing to add to the deflation scenario. How many millions of working folks are going to get cheated out of a good portion of their pensions and medical benefits via chapter 11.
If I were a Union member I would be getting my hanging rope out, and it would not be for the companies officers, but for the Union management that I paid to protect me.
Companies fall on hard times, but there is no excuse for the heads of the Unions not to have demanded that pension and medical funds be set aside in segregated accounts, and invested only in super safe investments.
Risk is becoming a nasty four letter word. Stocks are down for the year, junk bond holders are lightening up as credit spreads widen, and it's likely that GM and Ford won't be the only big issuers to see credit downgrades now that the credit cycle has turned. Hedge Funds are also struggling to see positive returns, commodities are well off their highs, and even gold and silver stock investors have recently been taken to the cleaners. Virtually every investor in almost every asset class, who has placed bets, has suddenly discovered that they are actually a losing speculator.
So, is anything offering a positive return these days? Have we all forgotten about plain old cash? Short-term interest rates are raised every six weeks - the Federal Reserve has raised the yield on cash eight times in a row! Moreover, with inflation in the CPI well entrenched at over 3 percent a year, there is more tightening to do. Indeed, unless there is a real market crash or the economy looks like it is dead in the water, the Gods and the odds favor the yield on cash rising. Each time interest rates are raised, the yield curve flattens more like a pancake taking all of the easy profit out of the carry trade. The markets are getting nervous, stock prices are up and down like a yoyo, and volatility is back.
With over 40 percent of profits at S&P 500 companies tied to financing activities, rising interest rates can deflate this profit balloon. With the yield on cash increasing, price volatility in the stock and bond markets favor the down side of the market.
So who's making money these days? My wife is! I gave up trying to persuade her to buy racy investments like physical gold and silver; they're too volatile for her. She simply wanted an investment that was safe and would give her a return on her money, even if it barely kept up with inflation. So, over the last few years she has purchased I-Bonds which are sold directly by the United States Treasury www.savingsbonds.gov.
(I-Bonds pay a fixed interest rate plus the CPI and taxes on the interest are only due when the bonds are cashed in. There is no fee involved and you can only buy $30,000 a year.) Last week, my wife showed me her investment returns since 2001 when she first began buying I-Bonds. I was quite impressed.
(An I-Bond's composite earnings rate changes every six months after its issue date. For example, the earnings rate for an I-Bond issued in March 1999, changes every March and September).
For those who just want to save, keep up with inflation and assume no risk, cash or I-Bonds are the best anyone can do. The reason is, since the NASDAQ had its major decline in 2000, the Federal Reserve has been determined to make sure there is no return on capital. They did this by dropping short-term interest rates to an emergency 1 percent, encouraging speculators to make risky trades, and by creating an inflated housing market. This was their way to keep the economy moving forward. Now, they are ever so slowly shifting the balance towards savers and against the risk takers.
My tendency is to speculate - being short stocks looks better than being long - and physical gold and silver look good for long-term investment. However, my wife keeps reminding me that risk-taking could mean lost principal. As simplistic as this may sound, she instinctively understands the power of compound interest. Slow, steady, and consistent gains without losses, will almost always beat a portfolio with volatility "because if you have a loss, you need a massive gain just to break even."
More people are starting to think and act like my wife! With the yield on cash going up, the thought of being a saver with a guaranteed return is starting to look attractive to more savvy investors. With stock prices down for the year, retail stock investors, one by one, are realizing they have been conned by Wall Street into believing they are investing in stocks when, in reality, the middle class investor is suckered into buying stocks at the top and they ultimately end up holding the bag if the stock market tumbles. The markets are looking mighty risky and even hedge funds don't know if there is any real trend. You should start thinking about putting your stash in cash because cash is no longer trash; it's King again.
******
Richard Benson President Specialty Finance Group LLC Member NASD/SIPC www.sfgroup.org 800-860-2907
Current Rate: 4.80% through October 2005 Minimum purchase: $50 for a $50 I Bond when purchasing paper bond certificates
$25 for a $25 I bond when purchased electronically via TreasuryDirect Maximum purchase: $30,000 in TreasuryDirect and $30,000 in paper bonds Denominations: Paper bonds: $50, $75, $100, $200, $500, $1,000, $5,000, $10,000
Electronic bonds via TreasuryDirect: purchase to the penny for $25 or more Issue Method: Paper bond certificates or electronic transfer to TreasuryDirect accounts
Rates & Terms I Bonds earn a guaranteed real rate of return. They are an accrual-type security. Interest is added to the bond monthly and is paid when you cash the bond. I Bonds are sold at face value; i.e., you pay $50 for a $50 bond.
Redemption Information Minimum term of ownership: 1 year Interest-earning period: 30 years Early redemption penalties: Before 5 years, forfeit 3 most recent months'interest After 5 years, no penalty
The Treasury is not nutty enough to pay 4.80 % when it gets short term money for far less.
IF we have .....deflation..... the 1.20% will be your rate for 30 years.
The "inflation adjuster" varies. They use their own calculators to come up with it. Let's all make bets whether (knowing that it would cost them MORE) they admit to future inflation or come up with a new index based on something like ostrich egg futures.
I have the very delima you people are speaking of right now...My father just passed away and my mother is the heir to his assests...she is now 76...upon his death some of the assets became liquid and are now in cash (but it is IRA money)...I am looking into ways in which I can place this IRA money to where it will not spend down her principle...I was thinking of going with a Fixed Annunity giving a 10% bonus at signing and a guaranteed 3.25 percent for a ten year period...I could use some help from anyone who would have an Idea of where to place this money.
Topstuff you are correct in the way I bonds pay but you don’t have to be stuck with this,
“The GUARANTEED 30 yr rate is 1.20%.
The Treasury is not nutty enough to pay 4.80 % when it gets short-term money for far less.
IF we have .....deflation..... the 1.20% will be your rate for 30 years.”
The EE bonds have fixed rates they are currently 3.5%
If we head out of inflation and into true deflation and your I bonds start to head down you can simple redeem them at the top and buy EE bonds. These EE bonds also move up as interest rates move up.
Unlike the Bond market where you can get hammered in a few days, or a great corporate bond that gets down graded to junk. These U.S. Bonds are not volatile and you would have months to watch the movements.
In addition a saver can continually buy these bonds on a regular basis.
In coming years our Government will use more and more debt, they have been keeping the rates on these U.S. savings bonds in step with the other markets, this should continue and even accelerate.
Regardless of the hopes of Wall Street that the Fed will STOP raising rates, I don’t think they are going to do that right away. The government needs to borrow money, they want to slow down inflation, and credit bubbles, and foreigners are reluctant to buy debt at current low rates. U.S. debt investors are getting hammered buy the drops in the dollar and inflation so I think the rates are going to continue upward for some time.
Here are the I bond rates the last few years:
May 2005 - Oct. 2005 4.80% Nov. 2004 - April 2005 4.60% May 2004 - Oct. 2004 4.60% Nov. 2003 to April 2004 4.70% May 2003 - Oct. 2003 4.70% Nov. 2002 - April 2003 5.21% May 2002 - Oct. 2002 5.62% Nov. 2001 - April 2002 5.62%
Here's another snip of info from the RealMoney.com site:
Richard Suttmeier Commodities and FX 5/12/05 8:38 AM ET COMEX Gold: Not much movement so far this week, but beware that if gold closes below its 200- day moving average at $425.6 the downside is to at least $414.4 with semiannual support at $393.3. The last test of the 200- day MA was on Feb 9th at $412.6. This test proved to be a buying opportunity.
I must say that I am a bit concerned with how long this thread is and the fact that no one is getting flamed. I check in intermittently and always learn something here. Keep up the good work.
Rather than having a thread where we make our Gold, Silver, and economic predictions perhaps we can start a thread where we post related world announcements, price moves, and make comments on these moves as well as the predictions of others. Gold is at $455 today and Silver is back to $8."
Yes, an interesting and informative thread that is nearing 600 posts in 5 months. A very wide range of opinions posted from very serious financial analysts types to regular guys trying to figure out what to do with their spare change. And no one has been flamed. There have been some polite disagreements but nothing antisocial. Good thread!
oreville, I kinda like the idea of bonds too....Thank you for telling me to wait because the interest rate is rising...but with her monies being IRA money I do not think she can buy CD's but she can buy bonds! I just do not want her principle to be spent down and then she has nothing....there has to be some kinda of vehicle to place her monies in that will secure her principle.
I'm not sure how to buy I-bonds within an IRA, but you can buy TIPS (Treasury Inflation-Protected Securities) in an IRA account (ie through a brokerage, including low cost brokerages). TIPS pamphlet and Treasury Direct website re: TIPS.
From the website:
"Treasury Inflation-Protected Securities, or TIPS, guard your savings from inflation. TIPS pay a fixed rate of interest. The value of the principal of a TIPS is adjusted semiannually, based on changes in the Consumer Price Index. The interest rate is applied to the inflation-adjusted principal, not the original face value. So, if inflation occurs throughout the life of your security, every interest payment will be greater than the one before it. The converse is true however, in the event of deflation. Upon maturity, Treasury will pay the greater of either the inflation-adjusted principal or the original face value."
You have to pay taxes on the fluctuating principle, which is why they are so nice in an IRA--you don't have to worry about figuring out how to pay taxes on an increase of your bond's underlying value.
Of course you have to have trust that the way the CPI is calculated reflects reality . But, in the case of deflation you will theoretically be getting your money back at a bare minimum. Barring default on treasury obligations of course, and if that occured I'm thinking that gold and bullets are your best bet. You can buy gold for an IRA, but not bullets (unless there are some gold bullets out there???)
<< <i>You can buy gold for an IRA, but not bullets (unless there are some gold bullets out there???)
Cathy >>
I have a silver bullet. Got it at a Warren Zevon(R.I.P.) concert many years ago.
"Lenin is certainly right. There is no subtler or more severe means of overturning the existing basis of society(destroy capitalism) than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose." John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
1. A 76 year old person will have to take Required Minimum Distributions from their IRA. They are substantial. Keep that in mind when selecting a parking spot for the money.
2. I don't believe one can directly own I-bonds in an IRA.
Fish, that is why a fixed annuity is so great...I have found one that pays 10% at signing and 3.25 % guranteed for ten years...and upon the end of that 10 year period you are guaranteed no less than what you started with...so withen that 10 years you have only spent the interest and still have your principle...I think that a fixed annuity is one of the greatest investment vehicles created....more people need to know about them....they are only issued through Insurance companies.
Annuities do have their place, however the fees can be quite substantial. Make sure you do your homework.
CD's can be purchased within an IRA. That would be the safest way to go. Fishcooker is correct that your mother will have to take annual distributions from the IRA. Make sure you know how much she will be required to withdrawal.
A strategy that I used with my clients was to create a "laddered" portfolio. You can do this by putting equal dollar amounts in to cd's or bonds that come due in staggered years. IE. You put 1/3 into a 1 yr cd, 1/3 in 2 yr and 1/3 in 3 yr. When the 1 year comes due you then put the money into 3yr and repeat every year. This way you have money available every year for distibution, and you can take advantage of higher yields from longer maturities.
You can adjust the maturities and investment as desired. I just gave you an example to illustrate and keep it simple.
There is a REAL misconception here. A "30 year" bond does not have to be kept for 30 years. I tried to explain this to my 87 year old mother-in-law who needs INCOME and she never DID get it. If she had done it when I told her, she would be getting over 5% ...... and..... have about another 10% in PRICE appreciation.
The bond market DWARFS the stock market. It is ...... H U G E !!!!!!
30 year, 10 year, 5 year.....bonds are traded on a SECONDARY market. This means that you can buy them from a regular stockbroker. And...... you don't pay a commission or state taxes on the income. The broker BUYS the bonds at a slightly less price than he charges YOU .....so there IS a cost, but very small.
The PRICE ...... QUOTE...... VALUE..... of a bond depends on its "coupon." That's the price on the face of the bond to the first guy who bought it from the gubblemint.
The interest (whutcha git every 6 months) is fixed...FIXED ....for 30 years. But that ain't yer YIELD. The old bonds issued when rates were higher are not for SALE at the face value. Ya gotta pay a PREMIUM to get them. So THAT is the price you pay at your broker. The YIELD changes based on whatcha PAID.
But what you GET every 6 months will always be the same.
Ask your broker to explain bonds.
I own some 30 year bonds. But they ain't good fer 30 years cuz the gummint don't make em no more. They are THINKING of doing em again but NOW if ya want some, ya gotta buy em from someone who wants ta SELL some.
AND......You can SELL those bonds (even the 30 year ones) ...... TOMORROW. Even if ya buy em today.
It's a BOND MARKET.
The reason to buy a fixed income is for like me. I figgered out what I wanted to retire on and then bought some bonds that yielded the income I needed from BONDS. I also got other stuff, but the bonds are PART of what I live on and I can count on exactly that much money for longer than I got to live. Maybe.
But in a DEFLATION......the longer dated bonds will keep paying as long as the US keeps taking income taxes and stays in business. (which....though likely....is NOT guaranteed)
The "ladder" works fine. It is to be considered. But if rates go DOWN..... like in a deflation..... your ladder will get shorter and shorter an you won't get what you cudda got when you started.
Comments
<< <i>Here's a very negative gold chart for Mr. Moyer.
5 year gold chart (very very depressing)
I'm tempted to offer a wager to Mr. Moyer that gold will exceed it's current $457 high sometime in the next 12 months. However I would bet that he is not the wagering kind. While commodities may be on their down leg now, I don't think gold has run its course yet.
Same with oil for that matter.
If you want some of the upsides and downsides to the derivatives question please checkout www.jsmineset.com (link below). GE is currently going through the restatement of some interest rate derivatives.
roadrunner >>
Sorry roadrunner, I hate picking on you, but charting things is my business. You can not extrapolate from a chart like that. Here is an example of a stock in a nice uptrend like the gold chart that you posted. You would think it goes up forever. Then look what happened over the next year. Yes, this is an extreme example, but I could post 1000's that look like it.
The bottom line is that "things" for lack of a better word, will continue upward in price as long as there is increasing demand. When the rate of demand changes, the price will change. Any slowing will result in stable or declining prices. A decline in demand usually results in disaster.
Knowledge is the enemy of fear
Knowledge is the enemy of fear
I have been on the stagflation side of the fence for several years now but the deflationists are making some very good points. In addition we have been having stagflation for several years so has it run its course?
As a baby boomer investor looking to protect my assets I need to follow a certain set of rules, and I think my personal rules would apply to millions in my age group and situation. See how many of these you might agree with if you are in this group.
1 I do not have decades to be patient and watch my investments grow.
2. I did all my gambling when I was younger and now I need to eliminate as much risk as possible.
3. I can’t set around on the sidelines for months or years waiting to see if the Mr. Hays of the World are going to be right.
4. I have no time to be a day trader and no desire to be a speculator.
5. I am very concerned about electronic assets that I cannot hold in my hand. I don’t trust the system that much and the news is full of horror stories about identity theft.
6. I am not looking to get rich quick, and would be very happy to just protect the assets built up over a lifetime of labor. So I need diversity without rock and roll and I need to be assured that inflation, or bank collapses will not leave me holding an empty bag.
Let me add one other thing here I have been looking the last several weeks for a good longer term investment that I might own, that pays a decent rate of return and is also a good deflation hedge to go with my other assets. How about U.S. savings bonds?
You can buy them at any Bank, you can sell them after a short time period with a small interest penalty, you can hold them in your hand, you can buy them in small or large denominations, and the interest is tax deferred?????
Current (I) Bond quotes today were paying 4.8%.
Goldsaint, the deflationary scenario certainly has merits so one cannot ignore the possibilities of it occurring. A sudden crunch to the stock or housing markets, the US dollar, GM, Fannie, or derivatives could send most markets tumbling 7-10% in a day.
Gold offers protection on either side of the inflation/deflation scenario. Eventually gold will always seek its honest value for the currency in question. In today's manipulated markets that takes time. But it has been occurring for 4 years and will continue.
There really is no easy way. Personally I would short the Dow heavily if I liked playing with stocks but I have always disliked them with a passion. Something about holding a numismatic coin in one's hand (or gold) seems more real than a tulip (i.e. FRN or stock certificate).
In my opinion, Derivatives represent nothing more than a wealth transfer mechanism, a shifting of risks associated with Credit expansion. If the scope and scale of underlying ‘Fair Value, Money or Capital’ at ‘Risk,’ one has to question who has the ability to structure such vehicles for transfer. .....this is the basic summary of John McKenzie's article linked by gold saint. Wealth transference, shift risks for more credit. What could be better? McKenzie also states that there are nearly $500 TRILLION in world derivatives at this point of which $25-35 TRILLION is of real value. I'm guessing the rest is leverage. That's still a boat load of money.
I'm not the only one that sees the +274,000 "new" jobs as a lot of hot air: Ackerman article - and Paris Hilton??
roadrunner
The reason the yield curve is flattening is because waaay out long, the bond buyers see NO safe return on investment.
Another factor is a very STRONG possibility that when (not if) the real estate market finally caves from just overwhelming debt combining with the layoffs from the fallout of the re-fi money that won't be happening anymore...... the BANKS will stop looking to RE loans for their operating income and turn to BONDS.
Again.
Just to be able to pay interest of SOME sort on accounts.
I don't have ALL my eggs in the 30 yr for the past 3 years, but a goodly amount of it.
Gold will also benefit from the deflation as corporations will find it hard to match Treasury paper and people will begin looking for something solider than stocks.
This ain't gonna be 1929. In 1929, people wanted to work and WOULD.....at anything. No more.
Personally, I would split between COMMERCIAL REITs, foreign bond funds, and gold.
At age 50, it is late to START, but if a guy had prior assets it would be OK. If no other assets, I would be tempted to shoot for all gold and hope for a score.
Can sure do WORSE than bonds. If they US bonds they exempt from state tax.
At age 50, ......INCOME ...... will be the hardest thing to generate. And that will get harder in a few years when EVERY boomer is looking for it.
I hope you know how risky that it. I would never recommend someone over 50 looking for safety and yield to invest in either of these assets.
1. The commercial r.e. market is extremely cyclical and downturns can last for many years, Dont be lured by higher interest(dividends). They dont come without risk.
2. Foreign govt bonds carry the added risk of political instability. Also you have to contend with foreign exchange rates. They dollar will not be weak forever and since it has already lost 35% of its value in the last 3 years I would not make a bet for further declines in the near term. This 1-2 punch makes foreign bonds quite risky.
3. Gold is probably the most speculative investment one can make. It is a reactionary asset, meaning it moves because of eternal pressures, not necesarily demand.
A broker recommending what you did would surely find himself in arbitration at some time in the future.
If you want to invest at age 50, with moderate risk, it had better be in high grade corp bonds, govt bonds and A quality dividend paying stocks.
Now you can also have some assets in more risky investments, if you like, just be aware that they are more risky and should not exceed 25% of your total assets.
Knowledge is the enemy of fear
Thanks for your suggestions. I made my list according to what I am hearing from many of my friends who are NOT in the same situation as I am. Personally I have already prepared for many potential contingencies, but many others have not. Most of my group is closer to 60 than to 50 and they have already wasted years waiting on their stock investments just to come back to the levels they had half a decade ago.
Many are now looking for VERY safe places to put money during the last 5 years of their working careers, and many are leaning more toward a deflation scenario as the most realistic possibility.
On a personal basis I am also looking for an investment that can be purchased month by month for the next several years that has ultimate security for capital preservation and will make at least some small return. Like many here I already have my share of Gold and coins, so more of those do not fill the hole.
Here are some of my concerns.
All purchases of stocks are out, since many large dividend paying companies have undisclosed liabilities either in upside down pension and medical funding, or options to employees i.e. GM, Ford, Delta, etc. etc.
As far as I can tell there is no way to project future dividends for many of Americas best companies, and there is great risk in the current high PE ratios that many of these companies are trading for.
I am also very concerned about many of the bonds issued in these companies due to much of the above. Who can tell whose bonds will be down graded to JUNK next? Also who can tell who has been playing in the derivatives markets?
As I said I am also concerned about electronic entries on ownership, and would prefer to hold any assets I own in my own hands.
As far as ownership of foreign money, or foreign bonds I still believe that America for all its problems is a better place to have secure money than any other place on the planet. The bain of our existence are the entitlement programs but they are much worst in most of Europe, and Asia for all of its growth is an accident waiting to happen. If we do in fact go into a consumer deflation here most of Asia will go strait down the tubes. Without us Asia is hard press to even feed their people.
Holding cash in C.D.’s might be an option, but how many Banks will the government cover in a sever deflation? What amount of money for each individual will actually be covered?
I understand that this is a very specific portfolio need, but on the other hand lets say we are in fact headed for a 1929 style deflation. Lets also say that most folks cannot react in a few months if we head downward, but need to buy and save at least over several years.
U.S. savings bonds seem like a terrible investment, but look at reality.
You can buy these at any commercial bank in the U.S.
The bonds can be issued and you can tuck them away with your Gold.
They pay a reasonable interest rate, currently about the average of most stock dividends, and higher than most bank C.D.’s.
They are generally owned by middle class America and are less likely to be defaulted on or have payments deferred than muti-million dollar treasuries.
Prepayment penalties are 3 months worth, after 12 months holding, so they can be upgraded if we do in fact head to more inflationary times.
If the Feds don't cover CD's, why would they cover I-bonds?
I see a lower dollar once this technical bounce runs its course.
As to the COMMERCIAL reits, I would agree with ...some... of that. However, on a REIT with a good tenant mix, I can't see anything short of Armageddon that would keep rents from rising. I was in business through the 20% interest rates of the early 80's and never saw a rent DECREASE.
AND....when I say "commercial REIT" I am NOT talking about builders of commercial properties, but the ones who acquire and lease out the props and pass the rent along to their shareholders. A very small crowd.
And I am also talking about collecting dividends and not the "total return." That would take trading and could indeed cause some losses. But short of a discontinuance of dividends, a divvy paying stock can cover a multitude of sins.
These bonds are issued by the U.S. Treasury they are its obligation, and of course they can print the money.
The Bank C.D.’s are the obligation of the bank.
Yes they are supposed to be insured up to $100,000 but what if your money is at Chase and they go belly up on a bad derivative play?
What happens if you have more than $100,000?
What happens if you have more than $100,000 in several banks, will your clever move protect you, or will the Feds say sorry only $100,000 per family?
How many Banks failed in 1929, and folks lost it all?
Oh you say, we now have the FDIC, right, there is no money in the FDIC.
Since a CD is a bank obligation and lets assume that the Feds cover all losses just how long might that take.
Would you get your interest if the Bank failed?
Many Banks went bust in 29 because they were playing the equity markets, they were supposed to be banned, but are they out? Have they just found other ways to play?
Realty Income website page
I like that they own freestanding buildings which (like gold) benefit from inflation but also protect on the deflation side by generating income.
They can be purchased and considered a part of a diversified REAL ESTATE portion of your assets. And if you use a discount broker, the commission for selling out your property is seven bucks instead of 6-10% from a RE broker. And they are traded every day so if ya get nervous, ya can get out with no "early withdrawal penalty."
They can be owned with a "stop loss" order if you ABSOLUTELY do not want to go "down with the ship." I personally use "mental" stops but in my mental state, that may be nuts
They pay MONTHLY! This is a consideration that is more important than many realize.
And they have few employees. Because their business plan is dead simple.
Edited to add: Their "Yahoo" comments page on Yahoo Finance has been broken for months now (Yahoo's bad) and it's hard for new investors to drop by and eavesdrop on the imminently SENSIBLE folks who own and have owned this pup for years.
Oh yeah #2: Being land and lumber, it's not a "promise" like a bond. Not that that means anything.
Reits can and should be a part of a MIX of investments. My comments were meant as precautionary as one should not have a heavy concentration of any asset, or a concentration of risky assets.
Everyone is talking about deflation. In my experience the more people talk about it the less likely it is to happen. If you are worried then just buy US Bonds. If the US defaults on these then we will have MUCH, MUCH bigger problems to deal with. ..... Like Martians
Knowledge is the enemy of fear
All in all, I believe your post was very good goldsaint.
I...MEAN...you could deMEAN yourself and say ya MEANt to declare it.....if you were confronted by a MEANy.
-g
I'd give you the world, just because...
Speak to me of loved ones, favorite places and things, loves lost and gained, tears shed for joy and sorrow, of when I see the sparkle in your eye ...
and the blackness when the dream dies, of lovers, fools, adventurers and kings while I sip my wine and contemplate the Chi.
Do 100 and 105% mortgages count against all time high housing prices?
Tom
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
<< <i>How do you all feel about GM? >>
GREAT!...... If they ever learned how to take apart a Camry and COPY every damn part. THEN get their employees to sing the company anthem and put em together without leaving any bolts out.
<< <i>Do 100 and 105% mortgages count against all time high housing prices? >>
Not as much as the 125% mortgages.
by Gary North
History buffs will recognize the roots of this phrase. Marie Antoinette, wife of King Louis XVI, is supposed to have said "Let them eat cake" when informed in 1789 that the Parisian masses had run out of bread. There is no reliable evidence that the ill-fated queen ever said this, but it has made good propaganda since 1789. The sign of the insensitivity of the successful to the suffering masses is some version of "Let them eat cake."
In our day, the public no longer worries about bread, except as a source of unwanted carbohydrates. The free market had made us all so rich that our concern is with too much bread and too much cake. Twinkies celebrated its 75th birthday recently – cost-conscious Americans’ favorite substitute for cake. Our waistlines reveal that ours is a world very different from Marie Antoinette’s.
But every society has its worries. Our worries center around official statistics. This includes stock market indexes. Newspapers run reports on how the Dow Jones did yesterday. Websites monitor this statistic constantly. TV anchormen do not let a broadcast get by without a reference to the Dow, usually with a line chart behind them. Up 6 points, down 9 points; it doesn’t matter how minuscule the change is from the day before. It will make it onto prime-time news.
The Dow is regarded as monitoring the pulse of the American economy. It is seen as the mark of America’s success or failure. "As goes the Dow, so goes America." Individually, we would not admit in private that we believe this, but the evening news indicates that millions of us do. We say we don’t believe in astrology, either, but what newspaper would dare to drop its astrology column?
Yes, yes: that’s for all those other people. Well, I hope so, but the reality is this: all those other people are eligible to vote. Upset them, and the incumbent political party is in trouble. "It’s the economy, stupid," 1992’s formula for national electoral success, still resonates with the voters.
POLITICAL NUMBERS
Official indexes tend to calm down the electorate. They are designed to calm down voters. This is why governments have the statisticians jiggle and juggle the official statistics. For example, we feel better when the Bureau of Labor Statistics announces that job growth increased in the previous month. On May 6, the BLS announced that job growth was up 274,000 jobs in April.
Sometimes, this sort of statistical optimism leads to verbal speculation that the economy is stronger, so inflation will rise, so the Federal Reserve will raise interest rates, which will strengthen the dollar, which will make exports more difficult, which will slow the economy. The Dow drops. Or doesn’t.
How does the BLS know that there were 274,000 new jobs? Not by counting them. It has a statistical formula which includes the likely creation of new businesses and the likely demise of old businesses. This is called the birth-death ratio.
Let me assure you, the journalists who report the employment figures do not report the following. That’s because hardly anyone knows about it, and of those who do, hardly anyone understands it, and of those who do understand it, hardly anyone knows what the BLS formula is or how the samples are made. The Bureau of Labor Statistics does publish a page about the birth-death ratio.
I have never met anyone who can explain it. Here, we read:
To account for this net birth/death portion of total employment, BLS is implementing an estimation procedure with two components: the first component uses business deaths to impute employment for business births. This is incorporated into the sample-based link relative estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample.
Got that? Good. Now it gets complicated.
The second component is an ARIMA time series model designed to estimate the residual net birth/death employment not accounted for by the imputation. The historical time series used to create and test the ARIMA model was derived from the UI universe micro level database, and reflects the actual residual net of births and deaths over the past five years. The ARIMA model component is updated and reviewed on a quarterly basis.
We assume that the same formula is maintained from month to month, so that we can compare apples and apples, or whatever the statistical fruit is. We assume lots of things in trying to make sense of the economy. We should also assume that three months later, there will be a revision of this month’s statistics. There probably will be. These revisions tend to be downward. They also tend to be ignored by the press.
The good news regarding jobs may be better-than-expected (by whom?) good news or less-than-expected (by whom?) good news. It depends on how the reporters want to pitch the statistic.
When people feel secure in their jobs, they tend to save less. They spend more. They assume that whoever is managing their retirement funds knows what he is doing. They don’t worry about the future.
Recessions rarely last long. During recessions, Americans worry about their jobs. They worry a little about their pension funds. But, as we saw in 2001, they don’t worry much. They buy. They especially buy nicer homes. They borrow. They especially borrow mortgage money.
THE WEALTH EFFECT
Economists speak of the wealth effect. When people think they are doing well – jobs, investments – they tend to save less. They assume that good times will take care of retirement portfolio growth. A rising market will let them retire in comfort. The self-discipline of thrift today can be deferred. Besides, thrift is so uncomfortable.
This same attitude afflicts corporate America. In a story published in Business Week (August 5, 2002), the authors commented on what they called the pension pinch. Because of the downturn of the market after November, 2000, corporate America was facing a new reality. Its pension funds were not being automatically funded by stock market indexes.
Amid the wreckage of the worst bear market in at least three decades, hemorrhaging corporate pension plans are rapidly becoming Wall Street’s biggest new worry. They have lost hundreds of billions of dollars, and now companies face the end of their long-running holiday from writing checks to the plans. Over the next 18 months or so, companies ranging from General Motors to United Technologies face having to pump billions into their plans to comply with federal laws to protect pensioners.
The authors were correct. This is exactly what large corporations had to do. General Motors, as the authors mentioned, was most at risk. Little did they know!
General Motors Corp., which has the biggest pension plan of all, with $80 billion in obligations, disclosed July 16 that it expects to put $9 billion into its plans by 2007.
Ha! General Motors had to float a $17 billion bond sale in 2003 to meet its pension fund obligations. Then, in 2004, it had to add another $13 billion. Yet it is still $57 billion in the hole.
The company has recently been reduced to junk bond status by Standard & Poor’s. So was Ford. Legally, many investment funds cannot hold junk bonds. Legally, fund managers will have to sell GM and Ford bonds. This should have begun last week. It didn’t. We shall see if the fire sale, or any sale, takes place. We shall see if Federal regulators or fund investors force them to do so.
The 2002 article went on to describe how America’s largest corporations got themselves into this pickle. Basically, the primary cause was the wealth effect. The same mentality that governs American consumers also governed corporate managers.
How did companies paint themselves into such a corner? It was more than bad luck. They made a bold bet during the 1990s that stock prices and interest rates would move in opposite directions, as they have nearly every year since the Great Depression. The relationship is crucial to pension funds because when interest rates go down, government rules require the plans to have bigger pools of investments to meet future obligations. That can only happen if stocks rise or companies put more money into the funds.
For years, the tactic worked like a charm as fund assets went up while their liabilities increased. Companies became confident about putting more of their pension assets into stocks than before. The resulting investment gains during the bull market more than covered most of the payouts they made to current retirees, averaging about 7% of the funds’ total values. Better yet, accounting rules allowed companies, quite legally, to boost their reported earnings by billions with higher projected investment gains because they were holding more stocks. Some, again quite legally, were able to actually tap the surpluses to help pay retiree medical expenses and even merger consolidation costs.
So, the corporations used their statistically overfunded pension funds as a convenient ATM machine. The pension funds became a source of operating expenses, especially medical costs. In other words, the corporations did exactly what the trustees of the Social Security Trust Fund have done ever since 1938.
Lately, however, the bet has turned sour. Stocks – in which a record 60% of fund assets were invested in early 2000 – have gone down in the bear market, as have interest rates. The result: Funds’ assets have plunged at the same time that their liabilities have soared. The pincer movement has wiped out surpluses racked up during the long-running bull market, and then some.
The authors then pointed to a major problem facing investors, including fund managers. The companies generally do not report the status of their pension fund obligations. What they report is governed by them, not by any independent agency.
The fear is that nobody but the companies knows exactly how big the cash calls will be. Companies hardly ever disclose anything in their Securities & Exchange Commission filings about the impact of the government pension rules on them. "The specific calculations are impossible to get right with publicly available data," says Trevor S. Harris, accounting analyst at Morgan Stanley. That is important because it means investors can’t accurately predict corporate cash flows.
Which companies are facing the biggest problems? Old-line companies that are unionized.
Old-line companies or those with large unionized workforces will be particularly hard hit because they have large defined-benefit plans – ones offering guaranteed payouts to pensioners. The biggest obligations are among auto, telephone, airline, steel, chemical, and pharmaceutical companies.
I dredged up this old article for two reasons. First, it was right on target. Second, it was published in mid-2002, close to the bottom of the stock market. The S&P 500 was around 900. It rose, then fell back to 800 the following March. Today, it is around 1200. You can see the swings.
So, despite the bad news regarding the pension funds’ condition, investors in mid-2003 decided to ignore the information. They rushed back into the stock market.
They assumed that GM could solve its pension problem. We now know that this assessment was premature. GM and Ford investors have taken major hits, both in stocks and bonds. But the stock market’s current rebound indicates that these wake-up calls have made no impression on investors and fund managers.
Investors did not wake up in 2002. They have not awakened in 2005. They assume that they can continue to rely on the wealth effect for their retirement portfolios.
JIGGERING WITH THE STOCK INDEXES
Everyone plays the manipulation game. Everyone wants things to look better.
Consider Standard & Poor’s, the rating company that just downgraded General Motors and Ford. Some market watchers prefer the S&P 500 to the Dow Jones Industrial Average. Far more companies are in the S&P index.
Both the Dow and the S&P 500 are subject to statistical jiggering. Companies that do poorly are removed from both indexes. Both add companies that seem to be doing well.
Again, let us return to 2002, when bad news was visible in the stock indexes, and readers were a little more alert to reality. An article appeared on the Slate site, "The Poor Standard of Standard & Poor’s" (Aug. 1, 2002). The author discussed in detail the way that the S&P 500 is subject to revisions.
The index is one of the more unlikely villains of the bubble. Despite perceptions, the index is not a passive investment vehicle. Instead, S&P is constantly choosing new stocks and booting old ones. And in the past few years, S&P’s modus operandi – which receives surprisingly little scrutiny – led it, essentially, to recommend that investors buy highly speculative companies at or near their tops.
How did this happen? Because any stock index is structured to reflect current realities. The past is sacked when it become too embarrassing.
When a company merges with another index company, or is acquired by a foreign concern, or files for Chapter 11, the S&P committee automatically deletes it. And some companies simply wither away to the point where the committee – which remains anonymous to forestall lobbying – determines them to be too insignificant to merit inclusion.
Between 1990 and 1994, the committee made an average of about 13 changes each year. But with the surge of merger and acquisition activity in the late 1990s, the need for deletions rose. Between 1996 and 2000, the committee changed an average of 40 companies each year. In 2000, a record 58 changes occurred.
The index managers added high-tech companies in 1999, which was close to the top.
AOL was arguably the first New Economy stock granted entree into the S&P 500. It entered at the close of 1998, replacing Venator, the parent company of Foot Locker. Network Appliances entered on June 24, 1999, followed soon after by Qualcomm on July 21, Global Crossing on Sept. 28, and Yahoo! on Dec. 7. The tech-tilted makeover accelerated throughout 2000.
The problem was not that these companies were added – it was clear that they represented an important part of the economy – but when they were added. S&P essentially took many of these speculative companies at or near their tops. When Yahoo! came in, it traded at an astronomical 228 (it’s now at 13); Qualcomm traded at 159.75 when it was initiated into the club, and now it trades at 27.
Index funds that follow the S&P 500, and which are the darlings of the buy-and-hold investment strategy school, bought these stocks at the top. Global Crossing is long gone – bankrupt.
On the day Yahoo! joined the S&P 500, it rose 67 points. And in the week between the announcement and the actual inclusion, Yahoo! rose 136 points, or 64 percent. According to a 2000 study by Salomon Smith Barney, stocks selected for inclusion outperformed the S&P 500 by 7.7 percent in the period between the announcement and the inclusion. The net effect: S&P 500 mutual funds – that is, you – effectively bought these new stocks at artificially inflated prices.
The indexes drop poorly performing stocks after they have shrunk. This is called "sell low." They add stocks after a long period of rising prices. This is called "buy high." This "buy high, sell low" strategy guides the stock index funds. But it does more than guide index funds. It guides the investment community generally.
Because of its breadth and diversification, the S&P 500 is the crucial benchmark for professional investors. Investments by insurance companies, pension funds, college savings funds run by states, and public employee pension funds are either invested in the S&P 500 companies or mimic its makeup closely. "The S&P 500 is used by 97 percent of U.S. money managers and pension plan sponsors," S&P’s Web site proudly notes. "More than $1 trillion is indexed to the S&P 500." (That sum is almost certainly lower now.) About 8 percent of the shares of every S&P 500 stock are held by index funds. As a result, S&P’s eight-person Index Committee, which selects the companies that enter and leave the S&P 500, is a far more influential stock picker than Warren Buffett or Fidelity manager Peter Lynch.
CONCLUSION
Most Americans ignore retirement. They assume that "something will turn up." They trust Social Security and Medicare – the red-ink monsters that are rated as if they were tools of budget-balancing. But even those Americans who dutifully add funds systematically to their retirement fund portfolios according to the recommended buy-and-hold strategy are rarely informed regarding the assumptions of those who take their money: corporate managers, index designers, and index fund managers. If they did understand, they might plan differently.
Or would they? Stories like those that I have cited appear from time to time, but investors take little notice. It seems easier to trust the experts . . . until the bills come due.
When the bills do come due, the experts will say, "We knew it all along." And when index fund investors complain, the experts will say, "Let them eat indexes."
May 11, 2005
Gary North
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
Exactly. Unions are the reason for the US manufacturing decline and exportation of jobs overseas. They were good and necessary when founded but they have denigrated into vicious parasites that have sucked the blood from corporations and the economy.
Knowledge is the enemy of fear
Gutted by the insatiable demand for more STOCK profits, the American WORKER is now on the endangered species list.
From crime committed by those who lack the intellect (there will ALWAYS be less smart folks...but they DESERVE living wages) to those who are being OUTSOURCED by some jungle slave-worker, we are now on a continuing downward spiral in wages for anyone who just works on an assembly line.
We lack the leadership of someone like Henry Ford who understood that EVERY company depends on ITS OWN employees for sales.
He paid his workers enough to buy his cars.
Simple? It must not be. Somehow, people have got the wrong idea and are jumping on the PRICE CUTTING bandwagon. No longer able or content to figure ways to create more DEMAND, industry is hell-bent on cutting COSTS to get some profit from an ever more .....s t r e t c h e d.... consumer base.
EXCEPT in China. And even there too now.
As we gaily march bravely toward no more Social Security and no prospect of "normal" workin stiffs being able to afford to EVER retire, maybe we should give some more attention to the Inuits. They put their old folks on an ice floe and kick em out to sea.
BRAVO for the supply siders.
I love to buy hammered stocks from panicked investors. It's how I pay for my fishing trips! Nothing is better than free fishing!
However, with GM I personally decided to pass at these price levels. The main reason is that their products are weak. I mean, their styles are behind the curve and the brands are not marketed smartly. My last chevy truck needed it's A/C, transmission, water pump, and windshield wiper motor - all repaired before 4 years/60,000 miles. My Mom's Pontiac minivan needed front end tie-rods at 51,000 miles. These types of repairs are indicative of quality problems from the core of the design, not the union guy installing them. One can complain about union pensions raising costs - and they do - but GM's problems are only solved if they walk away from the path of Cost Cutting. I don't think they have management smart enough to figure that out.
While I disagree that everyone deserves high wages in any job, I submit that outsourcing will end precisely when it begins to tap Executive Management!
Will a Chinese guy be CEO for only $1 million/year? You bet. And he'd earn his keep, unlike the Americans.
<< <i>And he'd earn his keep, unlike the Americans. >>
What? They don't post to the forum during working hours in China?
Thanks for a great post. I think Mr. North did a great job explaining many of the things we have discussed here, in particular the manipulated indexes.
As to the pension crisis, I think this is just one more thing to add to the deflation scenario. How many millions of working folks are going to get cheated out of a good portion of their pensions and medical benefits via chapter 11.
If I were a Union member I would be getting my hanging rope out, and it would not be for the companies officers, but for the Union management that I paid to protect me.
Companies fall on hard times, but there is no excuse for the heads of the Unions not to have demanded that pension and medical funds be set aside in segregated accounts, and invested only in super safe investments.
BENSON'S ECONOMIC & MARKET TRENDS
By Richard Benson
May 11, 2005
http://www.sfgroup.org
KEEP YOUR STASH IN CASH
Risk is becoming a nasty four letter word. Stocks are down for the year, junk bond holders are lightening up as credit spreads widen, and it's likely that GM and Ford won't be the only big issuers to see credit downgrades now that the credit cycle has turned. Hedge Funds are also struggling to see positive returns, commodities are well off their highs, and even gold and silver stock investors have recently been taken to the cleaners. Virtually every investor in almost every asset class, who has placed bets, has suddenly discovered that they are actually a losing speculator.
So, is anything offering a positive return these days? Have we all forgotten about plain old cash? Short-term interest rates are raised every six weeks - the Federal Reserve has raised the yield on cash eight times in a row! Moreover, with inflation in the CPI well entrenched at over 3 percent a year, there is more tightening to do. Indeed, unless there is a real market crash or the economy looks like it is dead in the water, the Gods and the odds favor the yield on cash rising. Each time interest rates are raised, the yield curve flattens more like a pancake taking all of the easy profit out of the carry trade. The markets are getting nervous, stock prices are up and down like a yoyo, and volatility is back.
With over 40 percent of profits at S&P 500 companies tied to financing activities, rising interest rates can deflate this profit balloon. With the yield on cash increasing, price volatility in the stock and bond markets favor the down side of the market.
So who's making money these days? My wife is! I gave up trying to persuade her to buy racy investments like physical gold and silver; they're too volatile for her. She simply wanted an investment that was safe and would give her a return on her money, even if it barely kept up with inflation. So, over the last few years she has purchased I-Bonds which are sold directly by the United States Treasury www.savingsbonds.gov.
(I-Bonds pay a fixed interest rate plus the CPI and taxes on the interest are only due when the bonds are cashed in. There is no fee involved and you can only buy $30,000 a year.) Last week, my wife showed me her investment returns since 2001 when she first began buying I-Bonds. I was quite impressed.
(An I-Bond's composite earnings rate changes every six months after its issue date. For example, the earnings rate for an I-Bond issued in March 1999, changes every March and September).
For those who just want to save, keep up with inflation and assume no risk, cash or I-Bonds are the best anyone can do. The reason is, since the NASDAQ had its major decline in 2000, the Federal Reserve has been determined to make sure there is no return on capital. They did this by dropping short-term interest rates to an emergency 1 percent, encouraging speculators to make risky trades, and by creating an inflated housing market. This was their way to keep the economy moving forward. Now, they are ever so slowly shifting the balance towards savers and against the risk takers.
My tendency is to speculate - being short stocks looks better than being long - and physical gold and silver look good for long-term investment. However, my wife keeps reminding me that risk-taking could mean lost principal. As simplistic as this may sound, she instinctively understands the power of compound interest. Slow, steady, and consistent gains without losses, will almost always beat a portfolio with volatility "because if you have a loss, you need a massive gain just to break even."
More people are starting to think and act like my wife! With the yield on cash going up, the thought of being a saver with a guaranteed return is starting to look attractive to more savvy investors. With stock prices down for the year, retail stock investors, one by one, are realizing they have been conned by Wall Street into believing they are investing in stocks when, in reality, the middle class investor is suckered into buying stocks at the top and they ultimately end up holding the bag if the stock market tumbles. The markets are looking mighty risky and even hedge funds don't know if there is any real trend. You should start thinking about putting your stash in cash because cash is no longer trash; it's King again.
******
Richard Benson
President
Specialty Finance Group LLC
Member NASD/SIPC
www.sfgroup.org
800-860-2907
Current Rate: 4.80% through October 2005
Minimum purchase: $50 for a $50 I Bond when purchasing paper bond certificates
$25 for a $25 I bond when purchased electronically via TreasuryDirect
Maximum purchase: $30,000 in TreasuryDirect and $30,000 in paper bonds
Denominations: Paper bonds: $50, $75, $100, $200, $500, $1,000, $5,000, $10,000
Electronic bonds via TreasuryDirect: purchase to the penny for $25 or more
Issue Method: Paper bond certificates or electronic transfer to TreasuryDirect accounts
Rates & Terms
I Bonds earn a guaranteed real rate of return. They are an accrual-type security. Interest is added to the bond monthly and is paid when you cash the bond.
I Bonds are sold at face value; i.e., you pay $50 for a $50 bond.
Redemption Information
Minimum term of ownership: 1 year
Interest-earning period: 30 years
Early redemption penalties:
Before 5 years, forfeit 3 most recent months'interest
After 5 years, no penalty
From the Treas website:
"HOW WE SET COMPOSITE RATES
Here's how we set the composite rate for I bonds issued May 2005 - Oct. 2005:
Fixed rate = 1.20%
Semiannual inflation rate = 1.79%
Composite rate = [Fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)]
Composite rate = [0.0120 + 2 x 0.0179 + (0.0179 X 0.0120)]
Composite rate = [0.0120 + 0.0358 + 0.0002148
Composite rate = [0.04801]
Composite rate = 0.048
Composite rate = 4.80%
...............................................
The GUARANTEED 30 yr rate is 1.20%.
The Treasury is not nutty enough to pay 4.80 % when it gets short term money for far less.
IF we have .....deflation..... the 1.20% will be your rate for 30 years.
The "inflation adjuster" varies. They use their own calculators to come up with it. Let's all make bets whether (knowing that it would cost them MORE) they admit to future inflation or come up with a new index based on something like ostrich egg futures.
The midday meal always has a price.
Pension "problems" are in the process of being solved.
A company for our times
Hold off another month or two to evaluate the interest rate scenario.
“The GUARANTEED 30 yr rate is 1.20%.
The Treasury is not nutty enough to pay 4.80 % when it gets short-term money for far less.
IF we have .....deflation..... the 1.20% will be your rate for 30 years.”
The EE bonds have fixed rates they are currently 3.5%
If we head out of inflation and into true deflation and your I bonds start to head down you can simple redeem them at the top and buy EE bonds. These EE bonds also move up as interest rates move up.
Unlike the Bond market where you can get hammered in a few days, or a great corporate bond that gets down graded to junk. These U.S. Bonds are not volatile and you would have months to watch the movements.
In addition a saver can continually buy these bonds on a regular basis.
In coming years our Government will use more and more debt, they have been keeping the rates on these U.S. savings bonds in step with the other markets, this should continue and even accelerate.
Regardless of the hopes of Wall Street that the Fed will STOP raising rates, I don’t think they are going to do that right away. The government needs to borrow money, they want to slow down inflation, and credit bubbles, and foreigners are reluctant to buy debt at current low rates. U.S. debt investors are getting hammered buy the drops in the dollar and inflation so I think the rates are going to continue upward for some time.
Here are the I bond rates the last few years:
May 2005 - Oct. 2005 4.80%
Nov. 2004 - April 2005 4.60%
May 2004 - Oct. 2004 4.60%
Nov. 2003 to April 2004 4.70%
May 2003 - Oct. 2003 4.70%
Nov. 2002 - April 2003 5.21%
May 2002 - Oct. 2002 5.62%
Nov. 2001 - April 2002 5.62%
Richard Suttmeier
Commodities and FX
5/12/05 8:38 AM ET
COMEX Gold: Not much movement so far this week, but beware that if gold closes below its 200- day moving average at $425.6 the downside is to at least $414.4 with semiannual support at $393.3. The last test of the 200- day MA was on Feb 9th at $412.6. This test proved to be a buying opportunity.
I must say that I am a bit concerned with how long this thread is and the fact that no one is getting flamed.
Rather than having a thread where we make our Gold, Silver, and economic predictions perhaps we can start a thread where we post related world announcements, price moves, and make comments on these moves as well as the predictions of others.
Gold is at $455 today and Silver is back to $8."
Yes, an interesting and informative thread that is nearing 600 posts in 5 months. A very wide range of opinions posted from very serious financial analysts types to regular guys trying to figure out what to do with their spare change. And no one has been flamed. There have been some polite disagreements but nothing antisocial. Good thread!
I just do not want her principle to be spent down and then she has nothing....there has to be some kinda of vehicle to place her monies in that will secure her principle.
From the website:
"Treasury Inflation-Protected Securities, or TIPS, guard your savings from inflation. TIPS pay a fixed rate of interest. The value of the principal of a TIPS is adjusted semiannually, based on changes in the Consumer Price Index. The interest rate is applied to the inflation-adjusted principal, not the original face value. So, if inflation occurs throughout the life of your security, every interest payment will be greater than the one before it. The converse is true however, in the event of deflation. Upon maturity, Treasury will pay the greater of either the inflation-adjusted principal or the original face value."
You have to pay taxes on the fluctuating principle, which is why they are so nice in an IRA--you don't have to worry about figuring out how to pay taxes on an increase of your bond's underlying value.
Of course you have to have trust that the way the CPI is calculated reflects reality
Cathy
<< <i>You can buy gold for an IRA, but not bullets (unless there are some gold bullets out there???)
Cathy >>
I have a silver bullet. Got it at a Warren Zevon(R.I.P.) concert many years ago.
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
1. A 76 year old person will have to take Required Minimum Distributions from their IRA. They are substantial. Keep that in mind when selecting a parking spot for the money.
2. I don't believe one can directly own I-bonds in an IRA.
Annuities do have their place, however the fees can be quite substantial. Make sure you do your homework.
CD's can be purchased within an IRA. That would be the safest way to go. Fishcooker is correct that your mother will have to take annual distributions from the IRA. Make sure you know how much she will be required to withdrawal.
A strategy that I used with my clients was to create a "laddered" portfolio. You can do this by putting equal dollar amounts in to cd's or bonds that come due in staggered years. IE. You put 1/3 into a 1 yr cd, 1/3 in 2 yr and 1/3 in 3 yr. When the 1 year comes due you then put the money into 3yr and repeat every year. This way you have money available every year for distibution, and you can take advantage of higher yields from longer maturities.
You can adjust the maturities and investment as desired. I just gave you an example to illustrate and keep it simple.
Knowledge is the enemy of fear
OK, but I can get 3.25% today in an overnight savings account. Why would I hedge against *falling* rates for 10 years?
The bond market DWARFS the stock market. It is ...... H U G E !!!!!!
30 year, 10 year, 5 year.....bonds are traded on a SECONDARY market. This means that you can buy them from a regular stockbroker. And...... you don't pay a commission or state taxes on the income. The broker BUYS the bonds at a slightly less price than he charges YOU .....so there IS a cost, but very small.
The PRICE ...... QUOTE...... VALUE..... of a bond depends on its "coupon." That's the price on the face of the bond to the first guy who bought it from the gubblemint.
The interest (whutcha git every 6 months) is fixed...FIXED ....for 30 years. But that ain't yer YIELD. The old bonds issued when rates were higher are not for SALE at the face value. Ya gotta pay a PREMIUM to get them. So THAT is the price you pay at your broker. The YIELD changes based on whatcha PAID.
But what you GET every 6 months will always be the same.
Ask your broker to explain bonds.
I own some 30 year bonds. But they ain't good fer 30 years cuz the gummint don't make em no more. They are THINKING of doing em again but NOW if ya want some, ya gotta buy em from someone who wants ta SELL some.
AND......You can SELL those bonds (even the 30 year ones) ...... TOMORROW. Even if ya buy em today.
It's a BOND MARKET.
The reason to buy a fixed income is for like me. I figgered out what I wanted to retire on and then bought some bonds that yielded the income I needed from BONDS. I also got other stuff, but the bonds are PART of what I live on and I can count on exactly that much money for longer than I got to live. Maybe.
But in a DEFLATION......the longer dated bonds will keep paying as long as the US keeps taking income taxes and stays in business. (which....though likely....is NOT guaranteed)
The "ladder" works fine. It is to be considered. But if rates go DOWN..... like in a deflation..... your ladder will get shorter and shorter an you won't get what you cudda got when you started.
Again.....The midday meal always has a price.
Edited AGAIN.....fishcooker, PM me please.