Measuring Inflation, Yield, and God May 14, 2004February 25, 2017 HI$TORY BUFFS . . . LITTA HELP, PLEASE Everyone knows the ‘permanent plateau’ pronouncement just before the 1929 market crash. But do you have your own favorite Worst Financial Prediction of All Time? I need some link or reference so I can quote it accurately – whether a general market prediction or a prediction for a specific stock . . . anything from the last 2000 years (or the year 2000) that looks, with the benefit of hindsight, unbelievably inept. Jail time, bankruptcy, or defenestration a plus, but not required. WILL UNCLE SAM UNDERSTATE INFLATION AND CLIP YOUR TIPS? Gray Chang: ‘The U.S. Treasury is supposed to disallow any changes to the CPI that would be unfair to TIPS investors. This is what the Treasury has to say about it: The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS). If, while an inflation-indexed security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index. You can read the whole thing here.’ Will Galway: ‘It’s strange Forbes would charge $2.95 for what they also give away for free, but a quick (free!) Google search turned up this link to the James Grant TIPS article you cited Wednesday.’ YTM Jeff: ‘Yield to maturity. Can you define this term?’ ☞ The annual rate of return you’d get from a bond if you held it to maturity. With a 5% bond that you buy ‘at par’ (100 cents on the dollar), the answer is easy: 5%. But what if you paid 110 for it ($1,100 for each $1,000 bond)? Then the 5% interest it pays ($50 a year on the $1,000 bond) is actually only 4.545% ($50 on the $1,100 you paid) . . . and it’s worse than that, because when the bond is redeemed for $1,000 at maturity, you will have suffered a $100 loss. So YTM is that compounded annual return which best describes the series of cash flows that will derive from your ownership of the bond – namely, the semi-annual interest payments plus any gain or loss that will be realized when the bond is redeemed. If a bond still has 10 years left until it matures and sells at 110 today, but pays $55 a year interest (5% on $1100), you might think the YTM is 4% . . . the 5% you get on your money each year, less the 1% a year you lose as it falls from 110 to 100. But while close, the precise math is trickier than that and why God invented calculators. (Because of compounding, a bond need depreciate at slightly less than 1% a year to fall in 10 years from $1,100 to $1,000.) SECOND THOUGHTS ON IRAQ Remember the general who last year said things would turn out fine because ‘our God is bigger than their God?’ Lt. Gen. William Boykin? What I hadn’t realized is that he heads up Military Intelligence. Now I’m sleeping better. Meanwhile – must reading – click here.
Work Harder – My Taxes Are STILL Too High May 13, 2004February 25, 2017 From Saturday’s New York Times: Americans are being taxed more than twice as heavily on earnings from work as they are on investment income, a new study has estimated. The study, which applied the most current tax laws to a database of 186,000 tax returns, found that federal income taxes on wages and other earnings average about 10.7 percent and that payroll taxes for Medicare and Social Security take another 12.7 percent. By contrast, federal taxes on investment income average about 9.6 percent. . . . [T]he average tax rate on ordinary earnings was 2.1 times that on investment income when Mr. Bush became president and became 2.5 times after last year’s tax cuts . . .‘ ☞ Most of this tax benefit goes to multi-millionaires . . . and, no we don’t have enough money to run the government, so we’re having to borrow $500 billion a year from your kids . . . but how could this be bad? Heck, even Ralph Nader is a multimillionaire these days. So to those relative few Americans who aren’t wealthy (does anyone these days not earn a couple of hundred thousand dollars a year from dividends and capital gains?) – and whose kids just lost their music and gym classes – I say: hey, pal: work harder. Not only will it enrich you, the taxes on your additional earnings will help to finance further tax cuts on my investment income. A win-win. ENVIRONMENTAL IMPACT STUDIES Nick Papadopoulos: ‘I am putting together a workshop on Information Cartography and systems thinking and would like permission to print and use your column on The Aswan High Dam and Unintended Consequences. Is this o.k.?’ ☞ It’s so funny when you get e-mail meant for someone else – Anna or Arthur or perhaps Abner Tobias. Clearly, I have never written a column on The Aswan High Dam. I know two things only about this dam – that it’s in Egypt (I seem to remember the Soviets helping to build it while I was building a damn in the brook behind our house) and that, presumably, it is high. But just before I disabused this person, I searched my past columns to be sure and found that – oops – I had done this after all, seven years ago. Reading it over, I realized that it complements the recent Chernobyl link. What we don’t see can harm us. A President who turns back environmental progress seems to be doing nothing harmful – you can’t see or smell it. But environmental shortsightedness sure harmed the Egyptians. What this has to do with Cartography, of course, is painfully obvious. What? Do I have to draw you a map? (OK, I have no idea what it has to do with Cartography. But I’m glad Nick has seen fit to include it in his workshop.) ANOTHER WAY TO ESCAPE AOL?* America Online has finally opened up its email format so that you can download your messages using standard email programs like Outlook. Click here for instructions – or here, if you are WAY smarter than I am. *Which I wouldn’t even consider doing if AOL would let me upgrade from Version 5 to Version 9. But ever since Version 6, it has told me I should upgrade – but also that I can’t upgrade because my address book is too big.
501c-6’s (Did You Say SIX-es???) May 12, 2004January 21, 2017 TIPS CAVEAT James Karn: ‘I have a problem with your TIPS recommendation. Correct me if I am wrong, but TIPS are tied to the CPI. There is significant debate in the financial community regarding the way the CPI is calculated and whether it accurately measures inflation. In addition, you have the inherent conflict of interest in that the borrower – the US government – is calculating it. Not that the US government would ever mislead the American public (ahem), but anytime two parties are involved in a financial agreement, it would seem prudent that one of them not have the ability to make up the rules as they go along. There is no way I would ever lend money to the US government with a payout based on inflation and let them calculate inflation.’ ☞ This was more or less the case James Grant made in that Forbes piece I linked to March 23. (Unfortunately – talk about inflation! – Forbes will now charge you $2.95 to read it.) But over the long run, can Uncle Sam grossly under-report inflation? Against the howls of more and more TIPS owners? And even if so, might TIPS not still outperform traditional bonds? I’m not saying it’s an unimportant issue; just that it’s probably something to take into account rather than an out-and-out deal-breaker. THE 501C-6 You probably know that 501c-3’s are non-profit groups to which contributions are tax-deductible. And you may know that non-profits engaged in significant lobbying or political advocacy – and that are, therefore, not deductible – fall under section 501c-4 of the IRS code. In Roman times, there were 501c-1’s and -2’s, but they pertained to gladiator exhibitions and private aqueduct associations, and so no longer apply. In modern America, there are just these two: c-3’s and c-4’s. Like vertebrae. But just as we seem to have discovered a weird new planet – Sedna – so now, out of nowhere, and leapfrogging whatever c-5’s would have been, come 501c-6 organizations. If the foregoing is not completely accurate (if they had viaducts and aqueducts, what about aeroducts?), click here for the real story. While everyone has been railing against “527s,” the press has given the Republicans a pass on their much more secretive 501c-6’s – at least until now.
Meet 43 May 11, 2004January 21, 2017 Mike Dillon: ‘This week has finally pushed me to the point that I deeply regret voting for Nader. I’m not ready to talk about it, except to offer this apology. Good luck in November.’ ☞ America desperately needs a fresh start. Rehiring Bush/Ashcroft for another four years would send the world precisely the wrong message. Instead, I think John Kerry is going to win. After being pummeled with $50 million of cynically deceptive ads designed to destroy his character – as the Bush team so successfully destroyed John McCain and Al Gore – Senator Kerry remains neck and neck with the incumbent. Remarkable, really. (In June of 1992, Governor Clinton was running third behind Bush and Perot.) Nick Drury: ‘Possibly the most misleading ad that I have seen to date is the one in which Bush states that ‘Senator Kerry even voted against body armor for our troops.’ It was Bush who in his rush to war sent many American troops to Iraq without body armor. He later submitted a controversial request to Congress for $87 billion to fund military operations in Iraq and Afghanistan and to provide funds for Iraq re-construction. The cost of the body armor could not have been more than $50 million of that and funds certainly could have been found for the armor without waiting for the passage of the larger bill.’ ☞ After all, they found $700 million in the Afghanistan appropriation to secretly prepare a war in Iraq. Nick goes on to ask: ‘Did Bush delay getting the armor to the troops so that he could get this controversial bill passed? And possibly even to label those who voted against it as uncaring for American troops?’ One wants to scream, no! And ‘no,’ may in fact be the correct answer. But one also remembers the Administration’s nine-month opposition to forming a Department of Homeland Security . . . only then to embrace it with an anti-labor poison pill to get Democrats to oppose it . . . which led to accusations that (for example) Senator Max Cleland – the Vietnam triple-amputee – is unpatriotic. Well, former Senator Max Cleland. Sadly, it worked. But I digress. Here’s what I wanted to offer today: Jacob Weisberg’s May 7 piece in Slate, The Misunderestimated Man – How Bush Chose Stupidity, starts off like just another cheap shot at the President’s intelligence . . . much like that idiotic bogus press release that was going around the Internet a while back from some non-existent ‘Institute’ estimating the President’s IQ at 98. But it is actually much more than that (both the essay and the IQ). I urge those of you thinking of rehiring the President to ignore the parts you’ll find disrespectful and read it anyway. You probably wouldn’t fail to read a critical evaluation of your baby sitter, if one came your way. Well, I would argue that the President’s policies may have as much of an impact on your children’s future as their baby sitter. In small part: Dubya’s youthful screw-ups and smart-aleck attitude reflect some combination of protest, plea for attention, and flailing attempt to compete. Until a decade ago, his résumé read like a send-up of his dad’s. Bush senior was a star student at Andover and Phi Beta Kappa at Yale, where he was also captain of the baseball team; Junior struggled through with gentleman’s C’s and, though he loved baseball, couldn’t make the college lineup. Père was a bomber pilot in the Pacific; fils sat out ‘Nam in the Texas Air National Guard, where he lost flying privileges by not showing up. Dad drove to Texas in 1947 to get rich in the oil business and actually did; Son tried the same in 1975 and drilled dry holes for a decade. Bush the elder got elected to Congress in 1966; Shrub ran in 1978, didn’t know what he was talking about, and got clobbered. Through all this incompetent emulation runs an undercurrent of hostility. In an oft-told anecdote circa 1973, GWB—after getting wasted at a party and driving over a neighbor’s trash can in Houston—challenged his dad. “I hear you’re lookin’ for me,” W. told the chairman of the Republican National Committee. “You want to go mano a mano right here?” Some years later at a state dinner, he told the Queen of England he was being seated far away because he was the black sheep of the family. But read the whole thing.
Your Money – A Slew of New TIPS May 10, 2004January 21, 2017 Amit: ‘On May 4, you suggest TIPS, PCL and TRF as potential investments. Does this mean it is time to get out of ILA, CMM, SYM, TXCO? It was not clear to me what is your current recommendation for these securities.’ ☞ No, I am holding all of those. If I do think it’s time to sell something, I will always note that here . . . unless I forget that I suggested it, which is always possible. But two things are very important to stress: The first – painfully obvious – is that if I were really good at this, I wouldn’t have to write this column. In other words, my suggestions are just that, suggestions, and one of these days, if not sooner, there are bound to be some big disappointments. Which leads me to the second thing to say, which is that in a bad market, almost everything goes out with the tide, even if, eventually, some of it may come rushing back. I worry that we may be in for a bad market. So the third thing to say – and already we are into extra-innings – is that under no circumstances should you be investing in the market with borrowed money (either on margin, directly from your broker, or indirectly, because you have credit card debt outstanding or any other high-interest debt). Indeed, I think this is a good time to keep at least some of your money safely on the sidelines, in case true bargains should come along. One reason for my caution is the possibility of rising interest rates caused by inflation – or the fear of inflation. Market sage James Grant, in his April 23 market letter, draws parallels to 1964, when inflation was under 2% and the Treasury’s long-bond was yielding 4%-and-a-fraction (it would sink all the way through 1982, as the yield rose to 15%). He wonders whether Baghdad in 2003 may not have been, to the financial road ahead, what the Gulf of Tonkin was in August 1964. There are differences of course; for one, the Iraq war is thus far significantly less costly than was the war in Viet Nam, and will almost surely remain so. But both are examples of ‘guns and butter,’ a combination that often leads to inflation. And that leads to TIPS – Treasury Inflation Protected Securities. When last we left TIPS (of which more in a minute), I offered extra credit for anyone who could identify the movie ‘from whence’ the line ‘Get it? Got it? Good’ comes. Michael Gonsior: ‘The meaning of ‘whence’ is ‘from where.’ So when you write ‘from whence it came’ – as you did – you are really writing ‘from from where.’ Don’t feel bad – most folks make this mistake.’ ☞ Thank you! Rob Sartain (and many others): ‘The line comes from The Court Jester (Paramount 1956), right? Oh, I’m smilin’ thinkin’ about Danny Kaye trying to determine if the pellet with the poison is in the vessel with the pestle, or if the chalace from the palace holds the brew that is true.’ ☞ Avoid the flagon with the dragon. Tom Ciullo: ‘That line, spoken by James Cagney, is from the 1961 Billy Wilder comedy One, Two, Three.’ ☞ An homage, perhaps? Charles Wright: ‘What about purchasing TIPS through a mutual fund (in a tax sheltered account)? Assuming that all interest earned goes into purchasing more TIPS that are added to the account – does this make any sense versus purchasing the individual TIPS?’ ☞ The only downside I can see is the annual fee you pay. But if this is for your tax-sheltered retirement account, why not go for the long-maturity TIPS? Well, John offers one reason . . . John: ‘Do mutual funds like Fidelity’s Inflation Protected Bond Fund (FINPX) and Vanguard’s similar fund (VIPSX) have the same advantages as TIPS? Is this a good place to put 401K and IRA dollars given the expectations by many for the return of inflation and higher interest rates? I ask because most 401Ks don’t allow you to buy TIPS.’ ☞ Those funds are fine. Chris: ‘It’s probably not a question of if the fed raises interest rates, in my mind it’s when. Will they do it before the election? Every time Greenspan speaks, it has been wreaking havoc with my portfolio. My TIPS are down about to where I bought them a few months back. I was looking at buying more, but I don’t know the effect that the eventual interest rate hike will have on them. Will they remain neutral in relation to that? I know a regular long-term bond would get killed.’ ☞ Yes, as interest rates rise, the value of long-term bonds falls – always, absolutely. If the general level of long term interest rates rises to 6%, no one is going to pay you 100 cents on the dollar for your 5% bond. But TIPS are different. The return they pay sits on top of inflation. There is no reason they have to fall in price as inflation pushes interest rates up . . . because inflation will boost their value and pay-out as well. Only time will tell, but the demand for TIPS could actually increase if inflation expectations come roaring back, as people look for some reasonable way to stay ahead of it. A thing is worth only what people are willing to pay – $104 million, last week, in the case of a pretty painting of a boy with a pipe (just for the record, that was not me who bought it) – but my own sense is that the TIPS market has been a little illogical. The shorter-maturity TIPS have been priced to yield less than the longer-maturity TIPS. For example, the bonds maturing five years from now, on January 15, 2009, closed Friday at a price that worked out to a 1.4% ‘yield to maturity,’ while the bonds maturing 10 years from now were yielding 2.2% and the bonds maturing 28 years from now (the ones I own) were yielding 2.5%. Granted, there’s not a huge difference there. And granted, they ALL may be a little high – typically, one might hope for a yield more like 3% above inflation. These bonds would have to fall in price before their yield reached that level. But here’s my point. Yes, with normal bonds, the longer the maturity, the higher the yield you normally expect – the higher yield is how the market induces you to take the extra risk. But with TIPS, what extra risk is there? The Treasury is unlikely to default; and the inflation risk is avoided. So might it not make sense for the longer maturity bonds to command a premium? That is, might sensible investors not being will to accept a slightly lower yield on the longer-term bonds than on the shorter-term bonds? I ask, because to me, the extraordinarily attractive thing about TIPS is their guarantee to outstrip inflation. That being the case, which is more extraordinary: A bond that guarantees to outstrip inflation for the next five years? Or one that guarantees to outstrip it for the next 30? I suppose there could be some reasons to buy the shorter term TIPS, even though you get less of a guarantee and less of a return. But in most scenarios, I think I’d go for the combination of greater guarantee and higher return. This is just my opinion, and I did not go to MIT. (I have passed it many times – in the sort of awe one reserves for the kids who could actually do the quadratic equations.) Some of you know more about this than I, and we will all welcome your thoughts. But however overpriced TIPS may still be, yielding less than my rule-of-thumb 3% above inflation, it seems to me that the long-term TIPS, yielding 2.5% above inflation are relatively more interesting than the 5-year TIPS yielding 1.4% above inflation. The last thing to say about this, if any of you are still reading (I myself quit reading several minutes ago to watch ‘The Larry Sanders Show,’ pressing F9, the auto-pilot key that activates a macro – devised at M.I.T., no doubt – that captures the gist of where I was headed and then finishes the column for me), is that the Treasury is about to issue a whole slew of new TIPS, both 20-year and 5-year. Indeed, the prospect of that added supply may be one reason TIPS have fallen off yet a bit more (the 3.375%s of 2032 closed Friday at 116-and-change), and may have further to go. But as I’ve said from the outset, I don’t see TIPS as a way to get rich, but rather as a way to sleep well. Twenty-eight years from now, when mine mature, I expect they’ll be worth about double what they are today – in real, 2004 dollars – which is to say 28 years of 2.5% growth (which is roughly a double) on top of inflation (which is what allows me to imagine all this in ‘today’s dollars’). Not a spectacular return, by any means. But as a core holding within a retirement account? Why not. Tomorrow: Meet Mr. President
Counting the Votes May 7, 2004February 25, 2017 COUNTING THE VOTES John Seiffer sends along two interesting pieces on electronic voting. The first is short and begins: Voters can run, but they can’t hide from these guys. Meet the Urosevich brothers, Bob and Todd. Their respective companies, Diebold and ES&S, will count (using BOTH computerized ballot scanners and touchscreen machines) about 80% of all votes cast in the upcoming U.S. presidential election . . . The, second, from Salon, is free if you watch a short ad – but so interesting, like much of Salon, you may decide you want to subscribe. In very small part: . . . The system stores its votes in a format recognizable by Microsoft Access, a common office database program. If you’ve got a copy of Access and can get physical access to the county machine — or, some activists say, if you discover the county’s number and call into the machine over a phone line — the vote is yours to steal. While I sat at his computer, March helped me open a file containing actual results from a March 2002 primary election held in San Luis Obispo County, Calif. — a file that March says would be accessible to anyone who worked in the county elections office on Election Day. Following March’s direction, I changed the vote count with a few clicks. Then, he explained how to alter the “audit log,” erasing all evidence that we’d tampered with the results. I saved the file. If it had been a real election, I would have been carrying out an electronic coup. It was a chilling realization. . . . In July, a team of four computer scientists at Johns Hopkins University and Rice University announced that they’d uncovered major security flaws in the machines used in Georgia’s elections. “Our analysis shows that this voting system is far below even the most minimal security standards applicable in other contexts,” the team wrote. Diebold has long boasted that votes in its system are stored in an encrypted manner, hidden to anyone who didn’t have a valid password; the computer scientists found that Diebold’s programmers left the “key” to decrypt the votes written into the code, which is a bit like locking your door and placing the key on the welcome mat. . . . Diebold fiercely disputes that its technology is vulnerable to attacks. . . . As for the Hopkins study, Radke says the scientists who looked at the system erred in their assessment by examining only a small bit of the code and by neglecting the “checks and balances” that occur in an actual election. He pointed to a study of the company’s system that was performed by Science Applications International Corp., a consulting firm, at the behest of the state of Maryland. The SAIC report gives Diebold a clean bill of health, and Georgia officials say it proves their system is safe. (The study is available here in PDF format.)
Scary Stuff May 6, 2004February 25, 2017 QUOTES ‘The new administration seems to be paying no attention to the problem of terrorism. What they will do is stagger along until there’s a major incident and then suddenly say, ‘Oh, my God, shouldn’t we be organized to deal with this?’ That’s too bad. They’ve been given a window of opportunity with very little terrorism now, and they’re not taking advantage of it.’ – Paul Bremmer, February 26, 2001 Mebbe, mebbe not. But the Bush Administration makes no apologies. ‘I’m glad I did it. I’m glad I took the time. I enjoyed it.’ – GW Bush, on testifying before the 9/11 commission Dan Flikkema: ‘Think about that comment for a bit. I enjoyed it?! I’m glad I took the time?! What? It’s like he has no idea what he is talking about. Did he play a round of golf with the commission – or did he give testimony about a day 3,000 people were murdered? How would one ‘enjoy’ such a thing? What part exactly was enjoyable?’ SCARY STUFF If Iraq and Saddam’s Republican Guard were not in cahoots with al-Qaeda before 9/11 (as most seem to agree), this report suggests we’ve managed to make that happen. Going after Iraq instead of al-Qaeda is having nightmarish consequences. Fortunately in the minds of some, including at least one American general, our God is bigger than their God, so it may turn out fine. ‘THE JESUS FACTOR’ If you missed this Frontline documentary, you can watch it on-line. Those of you who doubted the sincerity of President Bush’s evangelical faith, or his belief that God wanted him to be President, may doubt less after seeing this. Tomorrow: Counting the Votes
Spelling Radiation CensoRship and More TIPS Clarified May 5, 2004February 25, 2017 SPELLING Chris Fischer: ‘Yes, if all the fsirt and lsat lertets are ucnhnaged, tehn any wrod wtih 3 lertets is esay and wrods with 4 lertets are olny stighly off. But cidsoner scantlifingy lightener lacixel citaniboms wtih recuded particletibidy and tulorbe cloud pilfertorae! (But consider significantly lengthier lexical combinations with reduced predictability and trouble could proliferate.) This has been floating around the Internet for a while.’ RADIATION Doug Simpkinson: ‘In case you are curious about how much radiation our motorcycle driving heroine is receiving [Monday’s column], she’s being very smart and safe. The level of radiation at Chernobyl varies wildly, and that is why she carries a radiation sensor. When her little meter reads ‘500,’ it is approximately as much radiation as one gets while sitting on an airliner cruising across the country. By sitting in that same place for 12 minutes, she’s getting as much radiation as one gets by eating 10 bananas. So just think about that on your next flight from New York to LA – you could have taken the train and eaten 250 bananas instead, but it’s all the same in the end.’ CENSORSHIP Prasanth: ‘I just wanted to bring to your attention this troubling article about how the Sinclair Broadcasting Group, which owns a bunch of ABC stations, censored ‘Nightline’ from reading the list of US soldiers killed in Iraq. They gave some lame excuse that doing so would be too ‘political.’ Interesting how these righteous non-political folks have given money only to George Bush. I don’t want to live in a country where the all content I see is dictated by companies like the Sinclair Broadcasting Group. Now I know why everyone raised a fuss about media consolidation.’ ☞ A fuss, yes; but with the Republican lock on the White House and Congress, the fuss failed. OR YOU COULD BUY THIS BACKPACK According to yahoo, a small backpack maker north of Seattle doubled its sales by adding a sentence, in French, to the little bilingual tag with laundering instructions. The extra sentence reads . . . well, I’ll get in too much trouble with some of you if I say what it reads, so only click the link if you have reservations about our President’s leadership. [Oh, OK. It reads: ‘Nous sommes desoles que notre president soit un idiot. Nous n’avons pas vote pour lui.’ (‘We are sorry that our president is an idiot. We did not vote for him.’)] # [Note on TIPS: When I said yesterday that the 3.375s of 2032, currently 119, would wend their way back down to 100 at maturity, I forgot to explain how TIPS work. Yes, they rise with inflation, but that is not reflected in the price at which they trade. Rather, that is reflected in an inflation ‘factor’ – currently around 5% on that particular bond – that is adjusted periodically. So if they were quoted at 100 instead of 119, each one would actually cost you $1,050 (plus any accrued interest). And 28 years from now, when they mature at 100, the inflation factor may by then be 89% or 193% or who knows what. The point of their trading at 119 today is that they are trading at a 19% premium above their ‘actual’ face value of $1,000 plus the 5% accrued inflation factor. The higher the premium at which they trade, the less attractive they are. Get it? Got it? Good! (Extra credit for anyone who can identify the movie from whence that comes.)] Tomorrow: Scary Stuff
Let’s Talk About Money May 4, 2004January 21, 2017 Enough with the politics! Let’s talk about money. The first thing to say about money (‘enough about me, let’s talk about you, what do you think of me?’) is that Warren Buffett, who has $43 billion, has endorsed John Kerry. Those of you who think Buffett is good at judging management talent and discerning value, please take note. In the same ‘Today Show’ clip yesterday, he said he was delighted with his friend Arnold Schwarzenegger’s performance as Governor of California (so Buffett, whose father was a conservative Republican congressman from Nebraska, is not above endorsing Republicans). And he agreed that the economy is showing signs of real life. And why wouldn’t it be, he implied, considering all the fiscal and monetary stimulus that’s been heaped on. But it is that stimulus that has him, and others, a bit worried about inflation. If it comes, you have two problems: As a consumer, stuff will cost more. As an investor, interest rates will rise and your bonds will automatically fall (in the same way that a glass automatically gets more full as it becomes less empty) and your stocks will have to swim upstream. The current will be against them, because the yield from safer alternatives, like bonds, will be more attractive. Just which way stocks would go depends on the strength of the swimmer (things like corporate earnings, dividend hikes, and investor psychology) and the strength of the current (namely, just how high long-term interest rates, which tend to sit atop inflation expectations, go). Stocks can definitely rise with mild inflation expectations and moderately higher interest rates, when people feel that prospects are good. And they may feel that way. But there are also clouds on the horizon, such as: our massive budget and trade deficits – incurred not to invest in our kids or our infrastructure, but to give tax cuts to the wealthy and finance the world’s war on terror (having failed to inspire the world to share much of the cost); the loss of jobs to eager, capable workers in India, China and elsewhere – which will ultimately make us all more prosperous, but in the short run may become even more of a drag on the job market and consumer confidence than it already has; the uncertainty caused by the election – and the knowledge that ‘tough medicine’ is often taken, when it is taken, in the first two years of a President’s term, not the last two. (This would be true of Bush or Kerry, although it’s also historically true that the economy and stock market do better with a Democrat in the White House than with a Republican.) So there’s reason for optimism, but at least as much reason, in my view, for caution. (This is what happens when you get old. You get cautious. That picture of me, top left? Taken in 1953.) Real estate would eventually bob above inflation in most places, even if higher interest rates temporarily led to rough times. But in places with the crazy prices we’ve discussed in recent weeks . . . well, who’s to say that the condo that was $200,000 three years ago and $550,000 last week could not be $200,000 again? Or $350,000, anyway? I’m not predicting this, but I wouldn’t rush to buy at today’s prices. So what to do with your money? The smartest short-term investment I can think of (after paying off all-your high interest debt) is to keep your money on the sidelines someplace safe, like a bank. The safest long-term investment I can think of (which is not necessarily the same as the smartest) are Treasury Inflation Protected Securities (TIPS), like the 3.375% TIPS maturing April 15, 2032, first suggested here a couple of years ago at 100 that I suggested selling in part at 132 a few weeks ago. They may certainly have further to fall, but are now more attractive again at around 119. At that price (which will eventually wend its way down to 100 on April 15, 2032), you are assured about a 2.4% return on top of inflation. I won’t reprise all the pluses and minuses, ins and outs of TIPS here, but you can use the Search feature of this web site (lower left) to find past columns and click here to see current TIPS prices (scroll down just below the chart to ‘Inflation Indexed Treasury’). If you decide to buy, you would want to do this only within your retirement plan, and would do it by calling your broker. A less safe but I think still quite conservative long-term investment remains timber, via shares in Plum Creek Lumber (PCL) – not as attractive at its closing price of $30.20 last night as it was last August at $26.50; but 20 years from now, what difference will that make? And better at $30.20 than the $33 it touched just five weeks ago. A wildly risky investment I still like for the long-term is Borealis (BOREF), which will make veterans of this column roll their eyes (‘poor boy – and he had such a promising career’), but which continues to report progress. The stock is around $7, up nicely from where most of us bought it, but that’s not the point. This isn’t a stock you buy for a double. This is a lottery ticket you buy hoping for much more. As always, I caution you to invest only dollars you can truly afford to lose without regret. Most lottery tickets do not pay off. And as always, I disclose that I am awash with these shares, because what is life without a dream? As most of you know, I think the bulk of whatever money you want to risk in the stock market should just go the simple, low-expense index-fund route (Vanguard being the most convenient low-cost vehicle). And that some of what you have in the market, if you are fortunate enough to be able to think in these terms, should be diversified into international mutual funds. One closed-end country fund, the Templeton Russia Fund (TRF), suggested here in November of 2002 at 19, touched 46 a month ago. I suggested selling half, which was either smart (it closed last night at $35.70) or stupid (it closed last night at $35.70), depending on which half of your holding you choose to focus on. It’s a better value now than it was at 46 – and that pretty much exhausts my expertise on the topic. OR YOU COULD BUY THIS DRESS Click here. (It gets funnier the further you read.)
Cycling Through the Dead Zone May 3, 2004February 25, 2017 WHY ALL THIS ATTENTION TO SPELLING, ANYWAY? Aoccdrnig to resecrah at Cmabridge Uinervtisy, it deosn’t mttaer in waht oredr the ltteers in a wrod are, the olny iprmoatnt tihng is that the frist and lsat ltteer be in the rghit pclae. The rset can be a taotl mses and you can sitll raed it wouthit porbelm. Tihs is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe. PAUL CRAIG ROBERTS James Blakey: ‘I wouldn’t out too much stock in what Paul Craig Roberts writes. Here is a column he wrote where he compared be a slave in the American South and being a US taxpayer today.’ ☞ Thanks! My point in offering the Roberts column was not, by any means, to endorse all his views; rather, to show that it’s not just liberals who feel President Bush has done a disastrous job. THINGS WE CAN’T SEE OR SMELL CAN KILL US Thomas Whitaker: ‘When you have 15 solid minutes for an interesting read, this is a photo-essay of someone living near Chernobyl, who drove her motorcycle in through the ‘dead zone’ and recorded what lifeless conditions are there now.’ ☞ I meant to run this a week ago, on the April 26 anniversary of Chernobyl. It is well worth the time. And think as you go through it not just of the dramatic – a melt down. Think, too, of the perhaps more insidious . . . such as an accretion of toxic substances in things we eat. Tomorrow, I hope: Money!