Investments in Uncertain Times

The elephant in the room is the effect of inflation on investments. Having decided not to buy Jr. Mining stocks, what then should I buy? 

One traditional piece of advice is to buy an index fund of various stocks so that one participates in a market upswing, while not having the risk of just one, or a few, stocks. Maybe, but the way the market works right now it is difficult for me to suggest that. Things are just too uncertain. Here is what Simon Black says about that strategy:

Most investors only think in terms of ‘nominal’ numbers, i.e. Dow 14,000+ is 40% higher than Dow 10,000 (back in November 2009). But few think in terms of ‘real’ numbers… inflation-adjusted averages.

...

Take beef, for example. Based on USDA retail price data, today the Dow will buy you 3,332 pounds of beef in the supermarket. This sounds like a lot. But it’s actually about 20% less than the 4,046 pounds of beef the Dow would buy back in December 1999.

...

Gasoline is an even more interesting example. Today, the Dow will buy roughly 3,812 gallons of unleaded, non-premium gasoline in the United States. This is almost exactly the same as last January, just fifteen months ago, when the Dow was only 12,633.

 

But to match its high of 10,718 gallons set in March 1999, the Dow would need to almost triple from where it’s at today.

Simon Black may be right, but he does ignore dividends. While dividends are considerably smaller than they were a few years ago, they take away much of the comparison Simon is trying to make. It is misleading. 

But in any event, I agree with Simon that now is not a good time to be buying stocks. It is just too chaotic a time for "normal" investments—remember the video I shared yesterday about market manipulation. 

Here is what I recommend before you do any investments at all. 

A. Do away with all credit card debt. 

B. Have one month’s worth of household expenditures in cash in your house. (Yes I know it is a risk, it could get stolen.)

C. Have three months’ worth of family monthly expenditures in a savings account at the bank. (Yes I know it is a risk, the banks could close.) 

D. Have three months’ worth of household expenditures in junk silver divided between a safe deposit box and your house.  (Yes I know there is a risk that the money in the safe deposit box will not be accessible. During the Great Depression when banks were closed, customers could still get into their safe deposit boxes.)

But please no Pop Tarts! E. Gradually build up an inventory of food, in other words have a large pantry. Buy food that you normally eat. You do not need expensive survival food. 

After you have done these things you might consider some investments. I have not done all these things myself, but I plan to do so this year, especially building up a food inventory. 

What should some of your early "investments" be? I use " " since the two next things I am going to suggest are not exactly investments. 

A. Pay off your house. Or sell your house and rent. It makes no sense to me to buy bonds that yield you 1 or 2% while paying 4% or more on your house. If Peter Schiff is right and Real Estate is Grossly Overpriced, downsizing your exposure to real estate is a smart move. Do not think of your house as an investment, it is consumption that some day might be sold for a partial return of your capital. 

B. Install an alternative energy system if your house is situated properly. Note that there is a substantial tax break for doing so, and the reduction in electricity costs are a tax-free reduction in household expenditures.  I hope to do this in 2014.

Once you have done all these things, then it might make sense to make some investments. Most people will never be in a position to do all these things, so I guess I am saying not to invest until you do. 

Note that you can do each of these things gradually in a multi-track plan. I have not done all these things myself, but hope to over the next year. If you try to do everything at once, you will become discouraged and do nothing. As clichéd as it sounds, I suggest baby steps. 

We live in interesting times. We can use the time we have until the crisis hits to get our respective financial houses in order, or we can have whatever financial house we have taken away from us.  

Update on Wednesday, March 13, 2013 at 1:51PM by [Positive Dennis]

Let me add a couple of points. 

If you do pay off your house, save at least what your house payment was to replenish your savings. 

Solar only works as an "investment" if you pay a substantial amount of income taxes each year. The tax credit makes it work. 

I do not feel confident giving financial advice except in real estate, so remember that this is preinvestment advice! 

Investments

At the Cambridge House Investment conference there was an emphasis on Jr. Mining stocks. This was only natural, as their presence at the conference was paying the bills. I found the individual stories fascinating. But if I wanted to invest I would have to really study mining, engineering, and the geopolitics of the country where the mine was. Another option would be to follow an expert in these matters and buy his advice.

But then I heard one presentation that eliminated any thought of such "investment." He said that if you invested in ten penny stocks you could expect to lose money on 9 out of 10 stocks, but hopefully make enough on that tenth stock to make it worthwhile. That does not fit my definition of investment.

Nothing wrong with a little speculation. It serves a useful societal purpose by keeping prices from dropping too low or too high. But when government becomes the speculator to the point of becoming a market manipulator, we begin to have problems, big problems.

How then should a person invest? I will discuss this tomorrow. But in the meantime here is a video that discusses the various types of governmental interference and manipulation. 

Real Estate Is Grossly Overpriced

The Real Estate Coroner gives her Toxicology Report: Real Estate died from too much governmental interference. At least that is what Peter Schiff says on page 2 of his book The Real Crash I purchased at the Cambridge House conference I attended. I even got it autographed! Be still my beating heart. Schiff is writ rather large on the hard money scene, so hearing him in person was interesting. It seems only correct to talk about him and what he had to say near the beginning of my series on the conference. I also plan to talk about his theories at the end of the series as well. 

Real Estate being overpriced is not something you will hear about in the "normal media." This would not fit the allowed talking points on Real Estate. Prosperity is just around the coroner corner. I actually disagree with him on this. My own theory is worse. I think that the market is so screwed that it is impossible to value anything. I am not saying that one cannot look at recent sales and get a rough idea of potential sale price. I am saying that the market is so destroyed with horrific market conditions that the government interference dominates the market and distorts all pricing signals. 

A. The strongest market destroying condition is the Federal Reserve in effect buying all residential mortgages in the US. It is charging less than the Market rate. Since most people do not buy a house, but a payment, this is propping up the real estate prices for homes. One estimate I read was that the amount of such purchases was 800 billion dollars for 2013. We know the already completed purchases for 2010, 1.25 trillion. What is the true price with such non-market pressures? I have no idea. 

Are things better now? B. Another way that prices are being held higher than they would be is that many lenders are not foreclosing. A supply of such houses is a large overhang on the market. Yet at the same time when they do sell it is at a distressed price of course. But the supply of such houses is not enough to clear the market so you end up with a market that is bifurcated. These two different groups of prices are in competition. An appraiser will look to the upper group for their appraisals because if they don't, no sales will take place at all at that price with a loan. Which is the correct price? I have no idea.

While these kind of loans are available at ridiculous rates, normal loans for normal people are hard to get. C. But there is also another factor that is driving down prices. It can be difficult now to get a loan at all. In the heady days of the housing bubble, if you breathed you could get a loan. If the fraud I have read about is any indication, you may not have even needed to breathe. Many home owners’ names and credit rating were used on loans they actually knew nothing about.  As a result of the too-easy credit the bubble was made worse. Now, with a look to that history, it is too difficult to get financing on a home. Many people who could have gotten credit under normal circumstances before the bubble are unable to get credit now. This is driving prices down. 

I am sure that Peter Schiff's opinion is that the forces of A and B are greater than C. He is probably right, but no one knows. 

The same kind of forces are taking place in all markets right now. In such a situation, debt reduction seems to be the best option. Then, with a debt-free balance sheet, one might think about investing. 

Where should one invest? That is one presentation I will discuss Monday. Until then here is a Peter Schiff interview by Doug Casey. 

Hard Money Conference

Onion Jam, At least this won't lose any money. I recently attended a hard money conference sponsored by Cambridge House in Palm Springs. Also in attendance were such hard money luminaries as Peter Schiff, John Mauldin, and Eric Rule. Attending was an easy decision as it was only a one hour drive, and it was free. Well, almost free, $15 for a cheeseburger was a little high, even with the onion jam. Have you ever had onion jam? Interesting. The reason it was free is that the conference was designed to encourage the purchase of junior mining stocks, you know stocks costing 25 cents and listed on obscure stock exchanges. I was not convinced to buy any. 

I will be blogging about the various speakers over the next week, maybe two.

The first speaker I wish to talk about is the one I disagreed with the most. The whole point of his presentation seemed to be how awful it was to cut any military spending. I will point out tomorrow how charts and statistics are used to mislead. This presentation had such a chart. My guess is that the person was not lying, just hopelessly deceived. I may be naïve about this.

A more realistic chartHis chart had military spending as a percentage of total spending and it showed that military spending was down slightly over the last few years. This is a function of the much larger increase in non-defense spending that is the cause of the “decline.” But the decline is not in absolute defense expenditures, in that area spending is up, way up. It is just that other spending went up even more. 

Here is some information extracted from the US Treasury by alternative Internet newspaper CNS:

In fiscal 2002, which started on Oct. 1, 2001--three weeks after the Sept. 11, 2001 terrorist attacks—Defense Department spending was $423,856,810,000 in constant 2012 dollars. Ten years later, in fiscal 2012, Defense Department spending was $650,869,000,000 in 2012 dollars.

Thus, from fiscal 2002 to fiscal 2012, Defense Department spending increased by $227,012,190,000 in constant 2012 dollars—or by 53.558 percent.

This same article points out that even Obama, in real terms adjusted for inflation, increased defense spending by over 2%. 

I do not think that defenders of the status quo always realize the dire situation we are in. We are spending a lot more than we are taking in. In fact we are borrowing, mostly from the Fed by money printing, 42% of every dollar spent. Defense is 20% of this. (Actually it is more as they hide defense spending in other departments.) If we exempt defense spending from cuts, then the rest of the budget has to be cut more. Instead of cutting by 42% to balance our national budget, everything else must be cut by over 50%. Oh no, we must also exempt Social Security as well as defense, one might say. In that case we must also cut everything else by about 70%. What, cut medicine for poor people! If we exempt medical, Social Security, and defense we must cut the rest of the budget by over 100%.

Every part of the budget must be cut, Defense, Medicine, and Social Security cannot be exempt. We have no choice. The other speakers understood this better and I will talk about them over the coming days.