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Category Archives: Inflation

Bill Gross – Damages

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If you have not come across the latest monthly installment by Bill Gross, you certainly will want to give it a read (linked below).  Bill does a great job this month providing a stark dose of macro economic reality.  It’s better to know what you’re up against than pretend what you’re up against isn’t there.  Since the discussion is focused on a ‘big picture’ centric view of the U.S. economy, it is relevant to investor or non-investor.

Three key takeaways from Bill’s October column…

  • The U.S. has federal debt/GDP less than 100%, Aaa/AA+ credit ratings, and the benefit of being the world’s reserve currency.
  • Studies by the CBO, IMF and BIS (when averaged) suggest that we need to cut spending or raise taxes by 11% of GDP and rather quickly over the next five to 10 years.
  • Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow, and the dollar would inevitably decline.

Read October’s Installment

Boomers, Demand Curves and Inflation

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If you’ve ever looked at a population chart that lists age ranges from greatest and least within the U.S. (or other Western country), you’ll notice a noticeable bulge representing the group known as the Baby Boomers.  Today we hear numerous concerns over the future prospects of runaway inflation.  While inflation is a threat, given an emerging dependance on a loose monetary policy, it will have a hard time growing out of control in an environment where a significant amount of the population is reducing their consumption (Boomers).

The following link provides consumer demand curves across a myriad of economic activities.  As you will see, the vast majority of these graphs demonstrate a decline in demand once a person enters their 50′s-60′s.  The exception comes mainly in the area of health/wellness products and services.

Having a sizable portion of the population move into a period where consumption is reduced, is not an inflationary force.  This is not to say inflation is not to be feared.  It is simply to note that a strong current in the economy is pulling away from rapid inflation.

Retirement Income, Savings & Expenses Calculator

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Retirement Income, Savings & Expenses Calculator

I’m releasing a tool that will be of great value for anyone looking to engage in long-term retirement planning.  This calculator is designed to take in factors such as years to retirement, expenses and savings rate, average annual income increase, return on investment, inflation and a number of other variables.

The best part of the calculator is seeing how your potential savings at the end of your career will decrease, remain constant or increase after you’ve retired.  In seeing this information, you will have an idea of whether you’re likely to go broke in your retirement or be able to live comfortably.

A note…This tool is not all inclusive.  I’ve built it to take in a limited number of variables and the granularity it provides is limited.  Its purpose is to provide a ballpark figure.

The Smartest Man in Europe Is Very Cautious

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Every year I try to spend time with the person I have come to think of as The Smartest Man in Europe. I met him almost thirty years ago when he encouraged me to think about the investment implications of the end of communism in the Soviet Union. He later saw opportunities developing in the emerging markets of Asia. Over the years he has been early to see important changes in trends across the world…READ MORE.

My Take: I always am pleased when I come across information online that provides a good future oriented macro perspective on where the market is headed and what dangers and opportunities are on the horizon.  Gaining such bearings from informed and experienced investors is very helpful in structuring where my future investment research will be directed.

In the linked pieced, Byron Wien delivers a summary of thought from a man he considers to be the smartest man in Europe.  It’s a catchy claim, but the information presented by Wien’s associate is very astute and informative.  I would encourage readers to give Wien’s writeup a few minutes of your day.  It will give you a macro perspective on the economy and investment landscape.

In the commentary you will here an echo of Steve Forbes prediction about 3 months ago that we would be seeing a dramatic shift in world currencies with a reserve currency backed partially by gold.  The claim is met with the condition that this “only happen after the next crisis.” A devaluation of the dollar is also argued for.  Wien’s market commentary is one of the more interesting reads I’ve had online in a while.

Barron’s Mid-Year Roundtable

Posted on by Posted in Bonds, Dividends, Funds, Inflation, Interest Rates, Investing, News, Opinion, Risk, Saving, Speculation, Stock Ownership, Strategy 1 Comment

If you missed it this weekend, I’m linking to Barron’s mid-year roundtable article from this past weekend’s edition.  I feel that this year’s group discussion at mid-year is particularly helpful, since we’re currently down from where we started at in the beginning of the year.  Therefore, this could potentially be a window of opportunity for your portfolio to finish the year strong.  A little guidance from a few market experts might help, too.

For those unfamiliar, the Barron’s roundtable is an annual event, which brings a number of notable investors together to discuss what they see in the year ahead and what stocks, funds, commodities and other investments they are bullish or bearish on.  The mid-year meeting provides greater insights into what has changed or remained the same from their forecasts from January.

I find this annual roundtable group very helpful for the individual investor.  For one, it helps investors get a sense of what the ‘pros’ are thinking about and what they are attracted to.  Secondly, it’s a point at which you can start branching off in your research.  By this I mean that you may come across ideas that lead you to consider other related investments.

Ten market pros offer their investment advice for the back half of 2011.

2011 Mid-Year Roundtable Report Card.

Rising Interest Rates, the Dollar and Gold

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For nearly a year and half now many foreign countries (mainly developing countries, but Australia is in the mix) have been increasing interest rates and increasing reserve requirements.  This summer the Federal Reserve’s Quantitative Easing II will be ending.  A national election is upcoming in 2012.  As usual, a number of events are happening and are upcoming that can impact the performance of your portfolio.

I’m not much for big predictions, but I think it’s a good idea to at least think about shifts in trends and how such shift could impact your investing game plan.  Bear with me as I shoot off a few random thoughts…

What happens when the Fed finally starts to increase interest rates?  It’s bound to happen some day soon, right?  Free money (or nearly) can’t exist in perpetuity.  At least I don’t think so.  When rates begin to increase, what will that do for the dollar?  I suppose if every other country in the world is doing the same (increasing rates), then it’s a wash, but that sounds like some type of text book situation.

If we hold that the recovery continues, will we come out stronger that Europe?  If so, does this mean that the dollar begins to regain some of its strength?

What if Washington gets the deficit under control and drives the current account deficit down?  That would be a positive catalyst for the dollar.  I think we could agree that the public sentiment wants deficit spending reduced, but will current and/or future politicians have the will to do so?

In the case that the dollar gets stronger, what does that mean for commodities?  What does it mean for precious metals?  Gold is driven up right now based on anxiety and fear.  Increased faith in ‘the system’ would presumably cause investors to migrate away from gold.  Other commodities might be hit as well.  Oil is priced in dollars and therefore a stronger dollar would lead to lower oil prices, all else being equal.

Questions like those above are good for any investor to consider.  Right now it’s hard to think about a strong dollar bull run, but if it does occur is your portfolio ready?  If not, what type of plan can you devise to act accordingly?  No one wants get caught unprepared.

I’ve Come to Expect it…Inflation

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Their financial repressionary thesis points out that bond prices don’t necessarily have to go down for savers to get skunked during a process of “debt liquidation.” The argument over whether the end of QEII on June 30 will result in higher yields and lower Treasury bond prices is, in a sense, a secondary one. Even if 10-year Treasuries stay where they are at 3.30%, and fed funds close to 0%, savers and financial intermediaries are being shortchanged by both of these yields and everything in between…READ MORE.

My Take:  I love Bill Gross and his regular op-ed pieces are something I do not pass up, but it doesn’t take an investor of Bill Gross’s caliber to foresee what he is discussing in this weeks piece.  The government has a huge amount of debt and one way to get out front under that debt is to inflate…as in inflation of the currency.  Inflation is the grim reaper that comes hidden in more ways than I would possibly want to write within this blog.

Gross is primarily concerned with investments in such things as Treasuries, which have very low yeilds.  Thus, the yeild isn’t even covering the devaluation of your money through inflation.

Since the fall of 2008 I’ve stated that the government would bring about inflation as one of its principle ways to ease its debt problem.  I wasn’t the only one because it is something that has happened in the past and will happen some place some where in the future.  Yet, since this great evil is upon on us, what the heck are we to do?

One area I think you should consider is Canada.  Stability and a plethora of investments that are very good inflation hedges.  Canada is home to a large amount of companies that deal in natural resources.  Whether it’s a bond or stock, Canada is an area where you can turn to, if you are worried about your domestic investments and their inability to hedge against inflationary pressures.

For more information about inflation, I’d recommend you watch a video I produced over a year ago: Protecting Your Portfolio Against Inflation

Take Note: PIMCO bets against U.S. government debt

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The world’s largest bond fund began betting against the United States last month by taking short positions on its debt on expectations the nation’s shaky finances will drive interest rates higher and imperil its triple-A rating…READ MORE.

My Take: PIMCO is the ‘largest bond fund’ referenced above.  As you may know, Bill Gross the Chief Investment Officer of PIMCO has expressed his concerns over excessive government debt in the U.S. for a while now.  If the article is correct, Gross is now putting his money where his mouth is (in figurative terms).

I think Gross is of the opinion that big cuts to defense, medicare, medicaid and social security are very unpopular with the majority of Americans.  Big cuts throughout these programs are not likely to be something that a politician can help get re-elected.  If this is true, then the drive to make sufficient cuts in the budget are likely to be to weak willed to control the tide of government debt.

As government debts increase more Treasuries will need to be purchased.  More debt will make the U.S. look more risky to investors, which will require a larger interest rates to be offered to attract buyers.

We live in very interesting and challenging times.

The Trouble With Low Rates

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Low rates have created quite a dilemma for those with cash stakes who are suddenly at a loss for how to make a reasonable return on their money. This is becoming an even bigger problem as inflation begins to heat up. With cash earning 0%, it won’t take long until investors lose lots of purchasing power…READ MORE.

My Take: While I understand the rational for low rates in these difficult economic times, I worry about the unattended consequences. Saying we’ll do X in order to cause Y to happen is pretty straight forward, but what is changing because we’re doing X and causing Y to occur? As Milton Friedman once stated, “There’s no free lunch.”

Low interest rates are great for many people/businesses, but they are also a burden for others. If you’re a retired person attempting to structure your portfolio to meet a certain fixed income level, the job now is more difficult than ever. With rock-bottom rates being given to savings, money-market and CD accounts, you almost have no choice but to increase your portfolio’s risk to obtain the return you need to get by.

Younger people might not think about the difficulties of these rates on those retired because they’re not dealing with an equivalent situation. The problem of receiving little reward for putting your money away in FDIC secured accounts is a real one. It’s going to become even more real, if we see a growing amount of inflation throughout the economy. Not only will savers not be rewarded through higher savings rate, but they will be penalized by an increasing rate of inflation.

If savers turn to the market to get their interest rate/dividend yield fix, what happens if the market stumbles? Maybe it won’t happen, but if it does, it’s not going to be pretty for a lot of people that are indirectly being forced into investments that carry varying degrees of risk.

As more of the baby-boomers become retirees, a greater need will be placed on investments that can provide for a monthly or quarterly income payment. If interest rates are kept down by the Fed, retirees will continue to be forced to take more risk than what they had planned to take in order to earn a level of return necessary to maintain their standard of living. Artificially low rates do not provide a free lunch.

Bill Gross On Skunks in the Government

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Bill Gross of Pimco on political/economic realities that lie before the U.S.: 

My Take:  First, the op-ed pieces that Bill Gross puts forth are some of the best on the Internet.  While you may not agree with him all the time, he presents well reasoned and well researched arguments.

Secondly, the topic that he’s writing about in this entry is focused on the potential default by the government on its debt.  If you’ve talked to me in the last 2 years, I’ve said over and over that the government would promote inflation to turn the debt we have now into pennies on the dollar.  Devalue the currency and you devalue your debt.

We do not live in a vacuum and the devaluation of our debt means many things to many people outside of the U.S.  Debt holders will not be fond of such actions.  If you’re inside the U.S. the concerns raised by Bill Gross should send off a yellow flag in your head.  If his notion about these back-door default scheme by the government come true, then how will this impact your current investment/savings strategy?

In the coming weeks I will be looking at a few ways to internationally diversify your portfolio in such a way that you hedge your bets against deterioration of the dollar, while still investing in solid companies that do not cause your portfolio’s risk profile to shoot off the charts.