But first . . .
Steve Gilbert: “The beauty of the flying car is that it isn’t illegal to talk on the phone or text while flying. Plus, it will have a small effect on overpopulation, what with the constant horrible crashes. TV news will love them.”
Theo Kent: “Thank you for the site with the slide show of the universe. I don’t know whether to cry or just sit in stunned silence. I’ve thought of the things this person reveals many, many times – and now have the ‘visual aids’ to display the thoughts.”
Its city council yesterday became the twenty-first to pass a resolution endorsing the Uniting American Families Act. UAFA would allow LGBT citizens to sponsor their foreign partners for “green cards” to live here with them. Twenty other leading Western democracies already have something like this on their books – including every English-speaking country except (of course) the United States.
Well, not Hawaii – I’m crazy about Hawaii – but her Republican governor, Linda Lingle, who yesterday announced she would veto the civil unions bill passed by the legislature. Will she next attempt a ban on gay vacationers?
And now . . .
RUN FOR THE HILLS!
Kathryn Lance: “Scary article in the Times. Can you please comment on this in a column soon?”
☞ Robert Prechter is often wrong (as am I), but the article is worth reading (executive summary: 1929 was a cakewalk compared with what we may be in for) and I have long advocated the notion that those of us fortunate enough to have assets to protect should adopt a “four-prong strategy” – some liquid assets, an inflation hedge, a deflation hedge, and a “prosperity” hedge (in case things should go right).
Cash in the bank is always a good liquid asset – and FDIC insured now up to $250,000 per account.
For most Americans, just paying off their credit cards and having this first prong covered with an ample cash cushion is a distant (but worthy) goal.
For those with more:
Real estate (like your own home, and/or someone else’s) – and shares in companies that can raise prices – have been the inflation hedges I’ve long suggested (with big caveats as the bubbles grew in both). Last year I reluctantly added gold (for example, here). Today, with GLD up 25% since then at $117 or so, I think it still makes sense as an inflation hedge.
My deflation hedge of choice (apart from cash, which becomes more valuable as prices decline) has been long-term Treasury bonds. Yet with the likelihood of inflation returning some day, lending Uncle Sam money for 30 years at 3.89% carries its own risks. (So see: TIPS, below.) Yes, you would do exceptionally well if the yield continued to drop to, say, 2%. But you would need to be nimble in exiting as the yield eventually (or perhaps tomorrow) began heading back up. I hope long-term Treasuries never again yield 15% as 30 years ago they did (let alone more, as in a true meltdown they theoretically could). But if the general level of interest rates zooms, the market value of long-term, bonds paying 3.89% will be a small fraction of their $1,000 face value.
Prosperity hedges remain, of course, shares in American and international businesses – though I will admit my own guess is: more tough sledding ahead for many of them. Will the stocks of most retailers, restaurant chains, and home builders come roaring back? Well, some of them already have – a lot of stocks are still double or triple or quintuple where they were at their depths. To me, many of them embody more risk here than reward. I like to think we may be able to tilt the odds a little in our favor (you know my feelings on dredging, and some little drug stocks, and one preposterously speculative long-shot whose name starts with a B and shall otherwise today go unmocked). But stock picking is notoriously difficult, so index funds continue to make sense – though there may be an edge in unweighted index funds (like RSP) and an even greater edge in the Joel Greenblatt approach that I find persuasive.
One way to combine the first three prongs is with recently-issued intermediate-term TIPS. (“Recently-issued” so that, if we have deflation, you are not paying for an accumulated inflation premium that will deflate back down to the guaranteed $1,000 “par” value of the bond.) They will not be a perfect hedge against everything (least of all, prosperity) . . . and if we have inflation, Uncle Sam will tax you on the inflation factor . . . but they’re still something to consider for the portion of your assets you want to keep as safe as possible – while swearing off all possibility of any meaningful gain.
(Also always worthwhile: a true disaster hedge, whether that disaster be financial upheaval or hurricane, tornado, earthquake, or terrorism – basically, ye trusty olde supply of nonperishables, like tuna fish and peanut butter, aspirin and V8 juice, matches and so on – don’t forget a can opener – that could come in handy if normal supply lines to your community became disrupted for a week or three. I have those little solar-and-crank powered radio/flashlights . . . and guess whose rooftop solar photovoltaic panels now generate 3.6KW of electricity on a sunny day? (They were installed last week and look great. They get hooked into the grid this week or next, and my meter should start running backwards much of the time. This is still an infant industry, but one to “invest” in that might add more value to your home than a swimming pool.)
The main thing to say about Prechter’s view is that the power of market tides is different from the power of lunar ones. The lunar ones are predictable and out of our control. The financial tides are vastly more complex to predict – and actions we take do affect them. So we’d be wise to take actions that prove Robert Prechter wrong.
Which is the subject I hope to touch on tomorrow.
Quote of the Day
In 1800, 75% of [an American's] working man's expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%.~The Wall Street Journal, September 20, 1996
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