Footnotes and Dazzle Sell More RSW? December 31, 2008March 12, 2017 What a year. We face huge challenges; and yet the whole world is excited about America again and rooting for her – most of the world, anyway – and that’s huge. Those of us who consider Martin Luther King’s ‘I have a dream’ the most moving and meaningful speech of our lives know that in 2008, hope won. So, for all the belt-tightening as we are likely to encounter over the next several years* there is still lots of reason to be hopeful**. And in that spirit, I offer, yet again, the column I wrote a year ago trying to summarize key points of a three-hour Ray Kurzweil C-SPAN interview . . . (only, use this link rather than the one in that column, because it’s free) . . . those points being, first, that as dazzling as the technological progress of the last 50 years has been, the next 50 years should be 32 times as dazzling . . . and, second, that one manifestation of this will be that – while you can certainly still get hit by a bus – life expectancy on average will soon be rising by more than one year per year. So you’ll be getting a little further from the end each year. So floss. My overarching point here: What an amazing time to be alive and Internet-enabled. Happy New Year! Here’s wishing you and yours a healthy, fulfilling 2009. _______________________ *By the way, because I should have included this thought Monday: tax cuts are probably the least effective way to fix our problem. Those who have enough income to be subject to tax aren’t the ones hurting worst, and they’d most likely just use a tax cut to pay down debt or build up savings – as they should. And if they did use it to buy another imported flat screen TV or airline ticket, what would they – or we – really have to show for it in 10 years? No, the resources we throw at our problems should go mainly to putting people without income to work doing things that need doing, as argued Monday, like retro-greening our residential and commercial building stock, digitizing our medical records, modernizing our schools, rebuilding our roads and bridges, deploying windmills and a new electric grid, dredging our waterways. Not to say the President-elect should go back on his tax-cut pledge – or that it can be this easy and neat. Not every laid-off store clerk and starving real estate agent can be effectively or swiftly employed building a new electric grid. Clearly. But this is the overall theme. Finally, it should be said, tax cuts are not a good answer (even if the electorate has thus far demanded them), because in our current circumstance they are not really tax cuts at all, they are tax shifts – onto our future selves and our children. ** Indeed, there is reason to fear that hopefulness may even get a little overdone in the excitement of a new year and the promise of the new administration. So I wouldn’t be surprised to see the stock market rise further . . . and thus have sold some more of my RSW. (Roughly speaking, you may recall, we bought it around $85 and sold ‘a third to a half’ around $170 or $200.) Monday I sold more for $120 . . . which was equivalent to $140 because we are about to get a big capital gains distribution. But if the market does climb much further, I plan to buy some back (only, as noted, switching from RSW to the more liquid SDS), because I think it may not yet fully have sunk in how much worse things are likely to get before they get better. I want to be hedged against that possibility.
TBT December 30, 2008January 3, 2017 Thanks for your good comments on yesterday’s column. I hope to post some of them soon.But today . . . The yields on Treasury securities are remarkably low. As you can see here, the 3-month T-bills yield essentially zero, and even the 3-year notes yield less than 1%. So the first thing I would say is: don’t buy them. You’d do better in an FDIC-insured certificate of deposit at your bank. The second thing to say is that these low yields are not only unattractive, they testify to the fear in the global marketplace. Investors are fleeing to safety, willing to accept almost any pittance in exchange for the preservation of their capital. They are buying 30-year US Treasury bonds at a price that yields just 2.6%. The third thing to say is that this is a rotten way to try to preserve capital – especially as regards the long-term bonds. Right now, they have bid up the same bond that fetched just $1,000 in May . . . paying $45 a year interest and thus yielding 4.5% . . . to $1,380 and the aforenoted 2.6% yield to maturity. If inflation kicks in at some point, and/or interest rates rise to more normal levels, investors might once again decided $1,000 is a fair price. Oops. And if interest rates rose to 9%, the bonds would trade around $800. (In 1979, at their peak in the aftermath of the post-Vietnam inflation, the rate reached 15%.) The fourth the thing to say is . . . why would anyone accept a 1.43% yield from a regular Treasury note when they can get virtually the same rate from the 5-year TIPS, which is adjusted up for inflation, should we have it? A month ago I suggested 5-year TIPS selling around $930 each – and noted that the long-term TIPS, quoted to yield more than 3%, seemed worth considering. Last night, the 5-years were a tad higher. And the quote on the long-term TIPS had risen 25%, bringing the yield-to-maturity back down under 2%. So the 5-year TIPS remain an ultra-safe (if uninspiring) place for money. But the chance for a one-month 25% gain on the long-term TIPS has now passed. (If you bought some, you might even take that profit and reinvest in the 5-year TIPS.) (Note also the discussion of I-Bonds.) But what I’m leading around to is that the perceived safety of long-term Treasuries, especially those not adjusted for inflation . . . and the crazy prices they fetch . . . may be little more justified than the perceived safety, once upon a time, of California home prices, which everyone knew could never suffer more than the most fleeting of minor corrections. Yes, it’s possible that long-term rates will stay low for a very long-time, as they did in the Great Depression and as they did/have in Japan. That seems to be what the market is telling us. But if they don’t, and if inflation ever came roaring back as a consequence of our giant deficits and money-printing and the falling value of the dollar, you could get killed owning long-term Treasuries. Which is why I bought a little TBT at $36-and-change yesterday, an exchange-traded fund that aims to rise twice as fast as the price of the 20-year Treasury falls (if it falls) or and vice versa. It was probably dumb, because this is a bet that I know more about where the price of the 20-year Treasury is going than the market does. But as long-time readers of this column know, that has never stopped me before.
The Big Picture December 29, 2008March 12, 2017 It took a decade to get out of the Great Depression; and for all the good New Deal programs, it was really only the massive government stimulus of World War II that did the trick. Let’s skip the ten years and the mega-war – indeed, let’s skip the depression – by having an equally massive government stimulus now (no need to wait ten years) focused not on building tanks and planes but windmills . . . and on retro-greening our residential and commercial building stock, digitizing our medical records, modernizing our schools, rebuilding our roads and bridges, and – most important of all* – dredging our waterways. Instead of a Manhattan Project for the bomb, a Manhattan project for abundant, clean, cheap energy. (Have you noticed that, in our lifetime, communications and computing power have become all but free? You can call China on Skype for free. You can put the entire computing capacity of NASA circa 1969 on your lap for $600**. Imagine the economic impact of similarly cheap energy.) In mobilizing to win World War II, the National Debt soared from around 40% of GDP to 121%. It will soar again now – and we start in a bind because the debt is already high relative to GDP. Just 30% when Reagan took over, he and the Bushes leave us close to 80% now.*** But we also start with some advantages. First, we’ve learned a lot from the Depression.We know, among other things, not to go protectionist or to try to balance budgets. Second, we have excellent shock absorbers already in place – FDIC insurance to avert bank runs; food stamps, welfare, Medicare, Medicaid, unemployment insurance, Social Security and the minimum wage to lessen the suffering and preserve some minimum income floor to bolster consumption. Third, it is fundamentally more productive to be greening buildings than to be blowing them up. So it actually might require less expenditure (and surely less horror) than World War II. This is the big picture. We need to declare war on our inefficiencies – be they in energy, manufacturing, education, transportation, or health care – and mobilize to conquer them. Who cares what it costs, so long as we have the man-and-womanpower unemployed and available to get the job done? Did anyone stop to figure out what defeating the Nazis would cost? It just had to be done. (As sensibly as possible, to be sure, but done.) And it ended the Depression. *Long-time readers may get this joke. **I pulled that factoid out of the air , but I bet it’s true. *** Though it’s been a positively grand time to be rich and powerful.
With a Song in Your Heart December 26, 2008March 12, 2017 Steve Sapka: ‘Have you tried Pandora? Pick all your favorite artists and it plays a mix for you – free!’ ☞ I’m not sure Pandora is what I’d name a box I wanted people to open, but it’s most cool nonetheless. You set up ‘channels’ – I set up one for Tom Rush – and it offers music it thinks you will like by other artists as well. Like your own private commercial-free radio station with a DJ who knows just what you like. You can thumbs up or down its selections and it gets smarter. I liked Bob Dylan of course and Gordon Lightfoot – but who’s this David Bromberg? Ralph McTell? Well, turns out I liked them, too. And all this can be streamed on your iPhone. So I set up a channel for high energy stuff to use exercising. And then some more channels – hey, this is free and easy, perfect for the challenging economic times ahead.
Chestnuts . . . December 24, 2008March 12, 2017 Christmas Eve. It is all I can do to keep from bursting into song. Peace on earth; good will to all. Seriously.
Melissa Etheridge, Rick Warren, and Common Sense December 23, 2008March 12, 2017 INVOCATION III For those still interested, here are two somewhat contrasting views: ‘Rick Warren Is an Insulting Choice,’ a stinging op-ed in the LA Times by Katha Pollitt . . . and this account by Melissa Etheridge – who fought as hard as anyone against Prop 8 – but met Rick Warren recently and came away hopeful. LIFE WITHOUT LAWYERS I am so angry at Sirius Satellite Radio I am looking to find others who may wish to join in a class action suit. (Sirius makes it impossible to cancel your monthly charge if you have lost your account number.) So don’t count me entirely anti-lawyer. But neither is the system anywhere close to perfect – let alone welcoming of improvement – as I recounted at great length here. (Such is the enduring value of ‘my two cents’ on this and other topics that you can apparently acquire it for one cent.) Now comes Philip K. Howard’s Life Without Lawyers, reviewed here, the sequel to his 1995 The Death of Common Sense (‘What Mr. Howard is trying to do with this thoughtful little book is drive us all sane,’ opined the New York Times at the time). PRE-ARCHIVISATION That got me thinking about my own blurb for The Death of Common Sense, back when it was first published . . . and that got me to thinking I had actually written something about it here, in this space, inaccessible to you, but in my pre-archived stash of about 180 particularly musty columns – dated September 11, 1996. The Don’t Be Ridiculous Law It’s a matter of no small chagrin that my two most successful books were written by other people. The first was Indecent Exposure, by David McClintick, in 1982. It hit #1 on the New York Times best-seller list, and my name was prominently on the front. I had the lead blurb. I had a book of my own out then, but I quickly learned that when friends called all excited to tell me they’d seen ‘my book,’ they didn’t mean my book at all. They meant Indecent Exposure. My second big success is out now. It climbed to #3 on the list (the best I’ve ever done is #4), and, again, I had the lead blurb. I am very proud of this, because it is an important book: The Death Of Common Sense, by Philip Howard. And it’s having an impact. Florida Governor Lawton Chiles bought 200 copies with his own money and has vowed to cut Florida’s 28,000 regulations in half. President Clinton waved the book around at a press conference and reemphasized his commitment to reinventing government. It is a slim volume filled with anecdotes that suggest we’ve lost our minds. The quick example everyone uses: When Mother Teresa tried to renovate an abandoned building in the Bronx to be used as a homeless shelter, she met two years of opposition and finally had to give it up because she couldn’t afford to install an elevator for the handicapped homeless. Surely, society would have been better served had the nuns been granted a waiver, but rules is rules and, well, you get the idea. I once had to spend $600 to build a three-foot staircase to allow direct access to a fuse box. It could easily be reached by leaning a little to the left from the existing concrete stairs, or by grabbing a step-ladder; but the inspector insisted on stairs. We should build them, pass inspection, and then get rid of them if we liked, he said. Rules is rules. The problem with the book that some reviewers have noted: it’s long on frustration but short on solutions. In fact, the book does point clearly at a solution. Namely, that, where reasonable, we write objectives, not rules, and allow regulators and inspectors to use their judgment in meeting those objectives in the most sensible way. But if that’s a little vague, let me suggest something specific. What we need, simply, is Congress (and each Statehouse) to pass a ‘Don’t Be RIDICULOUS’ Law. Oh, it could be called something more formal, but here’s what it would say: When something is just patently stupid, you wouldn’t have to do it. Every government agency would have to enact Don’t Be Ridiculous guidelines – or give a convincing excuse why not. For example, the banking regulators would say that any bank can waive any government requirement that is patently, in the circumstances, ridiculous. If you owned the Sears Tower, free and clear, and wanted to borrow $5 million against it, the bank would have the right to make that loan without an appraisal. Right now, it can’t. Or if you owned a toxic waste site that could be made into a perfectly safe parking lot for $15 million, but that would cost $500 million to be made suitable for cows to graze and produce milk for children, you’d be allowed to pave it over – and without ten years of legal fees. Or if you were a federal judge faced with mandatory sentencing guidelines you were certain, in this particular case, were grotesquely unfair, you would be allowed to exercise some judgment. Or if you were nuns trying to turn an abandoned building into a homeless shelter, you could get a DBR waiver to do it without installing an elevator. There would be safeguards. In the case of banking, no one DBR waiver could exceed, say, 2% of the bank’s capital, and the sum of all could not exceed 60% – so that even if the bank had been wrong in every single instance, its solvency would still not be threatened. And the auditors, when they showed up every year or two, would scrutinize a random sampling of these DBRs to be sure they were not being abused. If they were, a full audit would ensue, and some sort of harsh penalty levied. Bureaucrats would know they could lose their jobs or even go to jail if they invoked the DBR waiver inappropriately. And a separate group would spot-check DBRs, so even if the official and his boss were taking bribes to issue DBRs, both would get caught. But the net effect would be to do what Philip Howard wants: Give people in positions of responsibility a little discretion. Allow them to exercise a little common sense. The good news is that, even without a law, progress is being made – as those who saw Al Gore smash an ashtray on David Letterman’s desk may have sensed. No longer, if you work for the government and need to buy a hammer (or an ashtray), must you put out a competitive bid. In Maine, OSHA has successfully redefined its mission from handing out citations, like a meter maid – the more citations, the better the job – to finding business-friendly ways to encourage safety. Now that program is being rolled out. And there are other examples. You still need to get an appraisal if you want to borrow $5 million on the Sears Tower. But that too may one day change. ☞ Thirteen years later, Mother Teresa has long since gone on to her reward, but Philip Howard is still banging the drum for common sense.
The Invocation – Part II December 22, 2008March 12, 2017 HULU – HU NU? As if you didn’t already have enough to watch (see Gran Torino – wow!), here is free TV, with free movies. Check it out, check it out. MADOFF-WHY NOT IN RIKERS ISLAND? Huh? He admits to a $50 billion Ponzi scheme that, among other things, is forcing charities to close their doors and leave poor children bereft . . . and he’s confined to his home at night and the greater New York area by day? I don’t mean to be a hard-ass, but he should be held in Rikers Island while the legal process unfolds. Bail: $50 billion. Seriously. THE INVOCATION David Frankel: ‘If Barack Obama wants to be inclusive and listen to the views of those who support discrimination against homosexuals, he can invite them to the Oval Office for meetings or he can hold conferences on the subject. He did not have to provide such an immensely public platform for those with these intolerant views. I am surprised frankly by your reaction.’ ☞ I don’t think the subject of his Invocation will be marriage. My guess is that it will be more along the lines of ‘the opportunity we all have to find common ground and move ahead in common purpose for a better world – there is more that unites us than divides us.’ I can live with that. And I can imagine the President’s calling the pastor from time to time for his support on issues where they can agree . . . even including, perhaps, the hate crimes, ENDA, and military service legislation I’d like to see signed into law at last (and soon). Warren: After reading your blog about Rick Warren, I was persuaded by your reasoning, and concluded that the selection was acceptable. But after then reading HRC President Joe Solmonese in the Washington Post, I have changed my mind. How can it be OK to select for the inaugural invocation – with all the symbolism which that appointment carries – a pastor whose church openly states that gays and lesbians can attend a service, but are not eligible to join as members, and who likens gays to pedophiles in his speeches? ‘We strongly agree with President-elect Obama that everyone should have a seat at the table, but only those who respect others should have a seat of honor,’ reads P-FAW’s petition. I can’t think of a better or more succinct way to put it.’ ☞ That is a good way to put it. And Joe’s op-ed is excellent, too. Even so, I think Obama strengthened his Presidency by making this choice, and thereby improved his ability to do all the things we hope he succeeds at doing. Just my opinion, worth what you pay for it. Rosalie Griffin: ‘Amen, brother. I’d much rather have a Warren saying the prayer and an Obama making the policy than the other way around. PS – My 38-year marriage has occasionally been threatened, but never by gay people who love each other.’ ☞ Yes. If we can’t have both, let’s give them the invocation and us the legislation. (I’d like both, but success may require compromise.) Peg: ‘It’s a lot easier to change people’s minds if they think that YOU don’t hate THEM – and are at least listening to them a bit. I’m on YOUR side for gay rights and gay marriage. Let’s hope that more of the super-left side comes to appreciate that including Rick Warren this way is ultimately in their best interest and not against it.’ Ralph: ‘Anyone concerned with GLBT rights, who doubts Obama will be an improvement, should read this week’s news that the U.S., alone among Western nations, refuses to sign a UN declaration calling for worldwide decriminalization of homosexuality.’ Stephen Gilbert (Straight, Lapsed Jewish American): ‘I disagree with your implicit view that some are making too much of a story about Rick Warren giving the invocation at the inauguration. If the new president chose a holocaust denier or a Klansman to have a place of honor at the inauguration, I think the reaction would be universal. If the gay rights movement is in fact a civil rights movement (which I think it is), then I think Mr. Warren’s opposition to it should make him watch on television. I don’t condemn Obama for making this choice, but think it is a mistake. At some point we have to have the courage to say that bigots are bad and stop celebrating the ‘courage’ it takes to invite them to pubic events.’ ☞ The thing is, 99% of the folks in California will tell you the Holocaust was real and unspeakably evil; 99% will tell you the Ku Klux Klan is evil incarnate; but about half will tell you they voted for Prop 8. And that’s California – in Florida (which is not exactly Mississippi), 62% voted for discrimination. I, of course, firmly support marriage equality and just as firmly believe pastor Warren gets it totally wrong – Jesus, I think, is rolling his eyes at the way his message of love is being misinterpreted. But I think we are some years from being able to equate an opponent of marriage equality with a Holocaust denier or a Klansman. And it may also be worth pointing out that Warren’s opposition to marriage equality is not the only thing that defines him. His followers know him for several things that even the most progressive among us would agree are good. So I guess I’m saying that likening him to a Holocaust denier or a Klansman, to make your case, is not unlike his likening gays to pedophiles to make his case. I don’t think you literally meant Warren is as evil as a Klansman; and I don’t think Warren literally meant being gay is like being a pedophile. # It is a sign of how far we’ve come that this controversy could be one of the major stories of the weekend, across all TV news networks, being treated with the seriousness and respect that an issue of equal rights deserves. I apologize, but I see the glass as half full.
Self-Promotion Run Wild And a Word about the Invocation December 19, 2008March 12, 2017 $4,000-A-NIGHT LUXURY AT A FRACTION OF THE COST! Increasingly, you hear about wealthy women buying at super-high-end shops but then asking for ‘plain white bags’ instead of the Hermes or Prada bag that would scream, ‘Yes, I know you are starving, but I just spent $2,200 on a throw.’ It’s become a little unseemly to splurge. ‘Economy’ (so long as its first class) is the new chic. So, yes, if you want quality and a designer name at a fraction of the cost, I get huge product placement fees to mention Charles Nolan – look at these $100 ruffles! (I didn’t know what a ruffle was, either. We learn together.) But forget clothes. Here’s a way to save $20,000 a week and still come back rested and tan. You COULD stay in this two-bedroom Four Seasons Costa Rican villa for $4,000 a night with the taxes and resort charge. (Just $24,000 for the week – they give you one night free.) And listen, we’d love to join you if we could afford it. OR, you could rough it in this FOUR-bedroom luxury villa, twice the size and an even nicer pool, for under $600 a night and perhaps even split it with friends. (Or for under $200 a night in this studio.) Yes, it’s a bit harder to get to Paradise Breezes. And, yes, ours is a different kind of luxury. (We have a private cook and masseur on call for you, daily maid service, and a brand new gym . . . but no restaurants or poolside bars, no gift shop or uniformed bellmen. Our sheets are high-end and there are bathrobes and flowers . . . but there’s no mint on your pillow – and we drew the line at slippers.) Then again, you do save about $20,000 a week. Check out our guest comments! Full disclosure: I am closely related to Charles Nolan; I am a part owner in Paradise Breezes. LAST-MINUTE GIFT IDEA: Print out this page, and maybe some screenshots of the views. Package and gift wrap nicely. Present on Christmas morning. Spend the rest of the day deciding which of the villas you want to stay in and which week you want to come. RICK WARREN’S INVOCATION Some my friends are outraged that Rick Warren will be giving the Invocation at the Inaugural. (Others are outraged that there even is an Invocation – what about the separation of church and state, they reasonably wonder.) Warren is the author of The Purpose Driven Life, which Newsweek says is the best-selling nonfiction hardcover book of all time. He is not rabidly anti-gay, by any means – you can hear his views in this clip and decide for yourself – but he definitely opposes marriage equality, and worked to pass Prop 8, and, as you know, I am firmly of the belief that this is not what Jesus would have done. I think Warren gets it dead wrong. But is it an outrage that he will be part of the Inaugural program? Here is how the President-elect addressed the question yesterday: PETER SLEVIN, WASHINGTON POST: I have a question about pastor Rick Warren. He holds a number of social views at odds with your own views and your strong supporters. I’m wondering what went into your decision to choose him for this prominent role as you embark on your own presidency at a time when you are dotting every I and crossing every t to send some important signals? OBAMA: Let me start by talking about my own views. I think it is no secret I’m a fierce advocate for equality for gay and lesbian Americans. It is something that I have been consistent on and something that I intend to continue to be consistent on during my presidency. What I’ve also said is that it is important for America to come together, even though we may have disagreements on certain social issues. And I would note that couple of years ago, I was invited to Rick Warren’s church to speak despite his awareness that I held views that were entirely contrary to his when it came to gay and lesbian rights, when it came to issues like abortion. Nevertheless, I had an opportunity to speak and that dialogue, I think, is part of what my campaign has been all about: that we’re not going to agree on every single issue, but what we have to do is be able to create an atmosphere where we can disagree without being disagreeable and then focus on those things that we hold in common as Americans. So Rick Warren has been invited to speak. Dr. Joseph Lowery, who has deeply contrasting views to Rick Warren on a whole host of issues is also speaking. During the course of the entire inaugural festivities there are going to be a wide range of viewpoints that are presented. And that’s how it should be. Because that’s what America is about. That’s part of the magic of this country is that we are diverse and noisy and opinionated. And so that’s the spirit in which we have put together what I think will be a terrific inauguration, and that’s hopefully going to be a spirit that carries over into my administration. To have a President-elect who would say stuff like that, comfortably and non-combatively – and to have it shown on all the national evening news broadcasts for all the world to hear? To have a President-elect publicly pledged to advocate on behalf of equal rights? (And in considerable detail on his website?) I think this is wildly more significant than who gives the Invocation, especially as I feel quite sure the Invocation will in no way be identifiably anti-gay (but equally sure the Lesbian and Gay Band Association – included as a marching contingent in the Inaugural Parade – will be identifiably gay). If it helps Barack Obama govern successfully to have Rick Warren bless his efforts and signal Evangelicals that they, too, are a part of his America – well, I’m not sure that’s bad. My goal is to open hearts and minds, win our rights, and get progressive judges appointed to protect them.
Well, You Asked December 18, 2008March 12, 2017 So where to put your money now? YOU COULD WRITE A BOOK The first thing to say is that everyone is different, and anyone who invests based on a TV interview here, a magazine article there – and then takes a different tack based on a blog entry from some guy who also offers eggplant recipes – is clearly not going about this the right way. The right way is to have an overall plan, good money habits, and a life perspective that serves you well. To cover all this adequately (or even inadequately, depending on your review) could take an entire book. Having said that, let’s say some more . . . with a wide lens before we pan in. BROAD THEMES We’ve known for some time that residential real estate was a bubble, and have been wary of it even back when it was only modestly inflated – e.g., this column from October, 2002. It seems obvious now, yet many got burned. If you watched (or read) Whitney Tilson’s segment on this past Sunday’s ’60 Minutes,’ you know there’s a lot more pain ahead, as the Alt-A and Option ARM mortgage default wave sweeps in even as the subprime foreclosures gradually get absorbed. We’ve known for some time that interest rates, or certainly short-term rates, would likely stay low. E.g., here, in March of 2007. This week the Fed took its short-term rate down to zero (how’s that for low?) and explicitly stated its intent not just to keep short-term rates low for a long time, but long-term rates as well. Normally, the Fed tools have limited effect on long-term rates, which are determined by supply and demand. Ah, but if the Fed itself becomes a massive buyer, that can drive the price of bonds up – and, thus, interest rates down.* *Interest rates are the converse of bond prices, as light is the converse of dark: if it’s getting lighter, it is also, and to precisely the same degree, getting less dark. If a bond that is slated to pay $50 a year for 30 years trades hands for $1,000, it yields its owner 5% a year. But if it later can fetch its owner no more than $800 when he goes to sell it, the new owner gets a current yield of 6.25% on his investment ($50 on $800 = 6.25%). In this example, interest rates have gone up. If the Fed were then to come in with massive purchases, competing with private investors to buy bonds and driving their prices up to the point that this same bond fetched $1,250, then whoever bought it – the Fed or your neighbor – would be getting $50 a year on $1,250, which is to say 4%. That is how the Fed would drive down long-term rates. It may or may not work as hoped. ‘The market’ might be so alarmed to see the Fed printing trillions of dollars to buy bonds and mortgages that it might begin to fear for the strength of the dollar . . . and to fear the inflation they might expect eventually to result from so much money-printing . . . and thus sell their long-term bonds almost as fast as – or (oops!) even faster than – the Fed is buying them. We’ve known for a long time we face challenges. There’s the challenge of better preparing our kids to compete in the global marketplace. There’s the challenge of maintaining our aging infrastructure – and our aging population. There’s the challenge of terrorism. The challenge of global climate change. And have I ever mentioned that the National Debt – under $1 trillion when President Reagan was Inaugurated – will be ‘around $10 trillion’ when President Bush finally leaves? In fact, it will be even higher, as it turns out. Which means nothing in absolute dollars (trillions? shmillions? who can keep track?) but quite a lot when expressed relative to the size of our economy: around 30% of GDP when Reagan took over, closing in on 80% by the time Bush leaves, and inevitably rocketing rapidly higher (as it must and should for a while, so long as we’re borrowing to make smart investments in our future). We’ve known for a long time of the risk of a vicious cycle. Here, for example, ‘with falling housing prices leading to less consumption leading to recession leading to job loss leading to more foreclosures and yet lower home prices leading to . . . ‘ (It has a hopeful ending.) We’ve known for a long time ‘it’s the end of the world.’ Here is that thought reflected upon in April of 2000, as the dot-com bubble was bursting. And here, last May, as I was touring a $7 million apartment that a friend had just purchased as a third residence. I can’t help thinking that if we had skewed tax breaks exclusively to the middle class these past eight years – leaving the best-off to suffer as luxuriously as they did during the Clinton/Gore years (and closing the truly obscene hedge-fund-manager tax loophole) – our economy might not have gotten quite so far out of whack. Perhaps most of all we’ve known for a long time that I sure don’t know what’s going to happen (long-time readers may remember Google Puts, FMD and Wa-moops, among others) – although, in my defense, I’d like to point out that neither does anyone else. And so it makes sense – as always – not to take more risk than you can afford, and to diversify your assets, should you be so fortunate as to have some, over ‘four prongs.’ Kindly click here to be reminded what they are. SPECIFICS So yesterday Lynn asked . . . Lynn H.: ‘How About Some Financial Advice? Every day I read your blog hoping you have the magic answers for us, but you don’t say a word about investing. My husband and I are retirement age though he still works and we did all the so-called ‘right things’ over the years. So we have the house paid off and we have no debt and we have savings, but we lost a lot when the market crashed as we were a bit heavy in stock. Where do we put money now? My broker sure doesn’t know and wherever I turn, I see no good advice. My bonds, both corporate and muni, are down in value along with my stocks. Treasury stuff earns zilch and we need income. The only advice I see is for young people or for those in debt. I know we who have money are the lucky ones, but we’re scared too. Reading about Madoff is enough to give anyone the willies, isn’t it?’ ☞ It is – and one more reason to feel vaguely, or not so vaguely, nervous about taking risk. Which leads to the old saw – ‘a bull market climbs a wall of worry’ (and peaks when people finally decide it’s safe to get in). Note that at the end of his truly dire ’60 Minutes’ analysis of the residential mortgage situation referenced above (and let’s not forget the looming problems in commercial mortgages), Whitney Tilson pronounced opportunities in the stock market more interesting than he had seen in ten years. ‘Actually we’re the most bullish we’ve been in 10 years of managing money,’ he said. ‘And the reason is because the stock market, for the first time I can say this, in years, has finally figured out how bad things are going to be. And the stock market is forward looking. And with U.S. stocks down nearly 50 percent from their highs, we’re actually finding bargains galore. We think corporate America’s on sale.’ So maybe now’s the time to buy. Certainly you would have done better to buy Citicorp at $3.05 a month ago – or even at $7.83 last night – than at $57 two years ago. But where will it be next year? The bank will be there; but will the current shareholders own it? I don’t know. Sometimes, a market seems so wildly overpriced (or cheap – ‘if the world doesn’t end, and if it does, who cares?’) that a guy thinks he really does know. Like I knew not to buy real estate and avoided the dot coms. (But did buy some real estate in Miami in the Eighties when they were giving it away.) But even if a market does seem wildly cheap or overvalued, and even if a guy turns out to be right, it could be years before he is vindicated – if he doesn’t go broke being right in the meantime. In any event, I don’t see the stock market as wildly cheap or dear at these levels. It’s certainly cheap if we things get back to normal in the next year or three (another Wall Street truism: ‘Don’t fight the Fed’); dear, if we are headed over a cliff (as argued by James Boyce here). So I have some money in stocks . . . I still think we will have to dredge our waterways (GLDD) and I still think trees will grow (PCL) – although it’s less clear to me that the price of lumber will continue to outstrip inflation over the long-term. I still hope airplanes may back out from their gates under their own power. (If you don’t know the symbol for that one by now, I’m not going to compound the felony by repeating it.) I actually bought some more CPNO at $10.24 yesterday (down from $30 this summer). And have taken a flyer on any number of items beaten down to pennies by this market and by (I’m guessing) year-end tax selling. . . . But most people shouldn’t buy individual stocks (nor this particular sampling) – index funds are the place for most of the money you want to have in the stock market. . . . And I still own RSW as a ‘hedge’ against the possibility of further declines. RSW – my ‘safe-ish way to short the market‘ – is designed to go up 10% when the S&P goes down 5% and vice versa. We first looked at these in April at $85 or so; sold ‘a third to a half’ around $180. They closed last night at $112.* Yesterday, I replaced some of the shares I sold; only instead of buying RSW, I used SDS, much the same thing, because it is far more heavily traded and thus more liquid. * Net of a 13.79% distribution being paid at the end of this month to holders of record as of December 12, so in a sense RSW is around $130, if you want to compare apples and apples. . . . And I have those 5-year TIPS I suggested last month, as both a deflation and an inflation hedge. (Happily or unhappily depending on whether or not you bought some, they have risen in the meantime, making them marginally less appealing). And have I-Bonds, as discussed last week. Neither of these is the magic answer that will give Lynn the yield she is after, but both are at least safe. I have a few more suggestions but I don’t want to make you late for work, so I’ll shorthand them: First, Lynn, if ‘your broker sure doesn’t know,’ as you say, then why do you have a broker? Maybe you’d do just as well, and save money, using a deep discounter and/or a family of low-expense funds like Vanguard’s. Not spending money is as good as earning money – tax free. Which is why the very best investment many people can make is simply to pay off their credit card debt, to avoid paying interest. Then there’s this caveat: Don’t reach for yield. If something is paying an extraordinary dividend or interest rate, it almost certainly entails a commensurate risk. It could work out, but especially these days, it could well not. On a related note: At least some municipal bonds are not as safe as they once were (which is why, though tax-free, they now yield more than taxable Treasury bonds). I like to think that states and cities won’t go bankrupt. There are a lot of reasons to think most won’t. But some restructuring will almost surely have to be done . . . (I have a friend who was a New York City cop from age 20 to 40 and now will receive something like $75,000 a year, with guaranteed cost of living increases, for what could be the next 50 or 60 years. How can the City not go broke with contracts like those?) . . . and I can’t imagine breaking labor contracts without bondholders’ also taking some kind of hit. Tell your retirement-age husband: Keep working. He’ll live longer, and you’ll able to use his income to dollar-cost average at least a portion of your stock portfolio as he does. Save more, or at least live on less. After all, you say the mortgage is paid off; and you can both now get senior citizen discounts at the movies; fuel has come back down in price; property taxes may fall with lower appraisals – so try to bank some of those savings, or at least let them help you make do on less income from your investments. And, hey! Social Security is about to kick in. You will be rolling in it!