The Bubble of All Bubbles

Coming to a financial portfolio near you!Economically we have been cascading from one Bubble to another. The first two bubbles were gold and silver, where gold reached over $800 an ounce in 1980. They crashed. The next bubble is still with us. Interest rates have been dropping for almost 35 years. This bubble has not crashed yet but it will. While this bubble has been going on two other bubbles grew and popped. The Dot Com bubble popped in 2001; the Real Estate Bubble popped in 2008. The continual drop in interest rates fed these bubbles. In fact the low interest rates have been fueling a resurgent Real Estate bubble. The rates are not just low; they are not just at generational lows; they are as low as they have ever been in history.

This one's gonna blow.

Really there are no investment choices, so you gamble. But only do this after you have done the pre-investments I mentioned in a previous blog post.

This is where the following video comes in. Rather than talk about the intrinsic value of gold—nonsense…it has no such value—it admits that gold is once again a bubble.  But we may be early in the bubble process. If so, now is the time to buy.

So join the other punters at the Casino. Yes, there will be a jackpot for somebody.  Just hope, or dare I say it, pray, that the dice are not loaded. Remember that if you are at a gaming table, or in a business deal, and you do not know who the sucker is, it is probably you. 

What is Money?

Money makes the world go around. You would think this question has an easy answer. It doesn't. The Federal Reserve has many different definitions. Here is one definition from the Federal Reserve:

The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments. For example, U.S. currency and balances held in checking accounts and savings accounts are included in many measures of the money supply. 

Here is an example of recent money supply calculations based on two different definitions of Money from the Fed. If you can figure it out, you are a smarter person than I. Or maybe you have more time than I do! Or you could read the Wiki entry on the money supply. I did until I had a bad case of EGO—eyes glazed over. 

So after much reading and thought I decided to present my own amateur musings. Hopefully you will conclude that I am a talented amateur. 

Some people actually think that money grows on trees-more on this next week. The primary category of "money" is wealth that can be accessed immediately—currency, savings accounts, checking accounts, and here is where I probably disagree with many…short-term treasury bills. 

Secondary "money" would be financial assets that are highly liquid and have a small transaction cost: stocks, CD's at a bank, gold, silver, and other semi-monetary metals, or medium-term debt from the government.   

Tertiary "money" would be real estate, corporate bonds, and long-term government debt. These have either high transaction costs or interest rate risk, or both. In my view anything in an IRA or a 401K would be in this category. 

Quaternary "money" would be things like collectables and derivatives.   

So what is money? How about real estate with a line of credit on it? You just pick up a phone and voilà, the money is in your checking account and you can spend it. Is this "money"? Or what about Apple stock? One call to your broker and it is in your account and it can be spent. Apple has been volatile lately, but the transaction costs on stock sales keeps dropping. Is an investment in Apple stock money? 

Before I answer these questions, you probably have another question. "Why does this matter?" It matters because we all like to plan for the future; I hope you do anyway. So among the hard money types the question of the moment is “Are we headed for deflation?” Mish Shedlock would be in this school. Or, are we headed toward hyperinflation? Peter Schiff is in that school. John Mauldin speaking at the Cambridge House seminars I attended offered a third way. 

This would be just as true with a picture of Bush.Who is right? If you define money as in my first definition, we are in an inflationary period. Hooray for Peter Schiff. If you use the second definition we seem to be in a neutral period. Hooray for John Mauldin. If you use definition three then we are in a deflationary period. Hooray for Mish Shedlock. (Even Peter Schiff thinks real estate is grossly over-valued, and sorry Peter, but this is deflationary.) If you include the fourth definition of money, then it changes nothing but does manage to intensify the alternatives. 

We cannot trust the definition of money. We cannot trust the price increases announced by the government CPI, Consumer Price Index. If we use the same method that kept Jimmy Carter from being reelected, our inflation rate is 5 to 7%. Remember that Nixon was horrified and instituted wage and price controls when inflation was at 4%. Even if inflation was the 2% the government insists that it is, a 22-year-old college graduate just now entering the work force, good luck by-the-way, would have 90% of whatever he saves today stolen from him over his 45 year working life. Yes, inflation is "only" 2%! We cannot trust the government announced unemployment rate. 

We are screwed. This is not the word I wanted to use but this is a family-oriented blog. 

What is money? I have no idea. Yogi Berra was right. “It is difficult to make predictions, especially about the future.” Liza Minnelli and Joel Grey were right too. 

I have decided to conclude with an analogy. Imagine you are in a plane in a blinding hailstorm. The plane's navigation systems fail, just as our financial system is mostly failing today. After the financial plane crash you might be eaten by dinosaurs! Co-pilot Schiff says we will crash and die and we will all go to inflationary hell. Co-pilot Shedlock thinks we will crash, and the plane will be a total loss and we will go to deflationary purgatory. Co-pilot Mauldin thinks we will crash, but we will repair the plane and fly again to heaven. I might wish that Mauldin is right, but I would not rely on it. I plan to talk about Mauldin and his theories on Tuesday. 

I remain guardedly pessimistic. 

In the meantime, here is an interview with another opinion, this time by co-pilot Gary Schilling. He thinks that everything is A-OK and that there is no reason to worry, the plane will have a safe, but bumpy landing. I think in the short run he is right, the government will spend money and sell bonds until it doesn't, then the plane will hit the ground. 

Are you wearing your financial seat belt? 

Thanks to Eric Anderson at Universe of Lies for pointing out this video. 

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! 

Class Warfare

I wonder if Obama's Class Warfare meme will be as successful as he hopes. Based on a conversation I overheard today at the nonStarbucks fair trade coffee shop I frequent, he might gain more votes with it than I might think. This was the topic of conversation:

A major fire burned the home of Idyllwild businessman Shane Stewart tonight. The large home was engulfed in flames for hours. No one was inside and officials were not aware of any injuries.

Naturally a portion of the conversation was along the lines of "Oh, how bad." But there was another thread to the conversation: "At least he can just move into another house he owns." You see Shane Stewart, an acquaintance and customer of mine at my hardware store, is successful. He is a real estate investor who buys and sells houses. He owns a local real estate sales company. He "owns" the city of Idyllwild as someone put it to me last week. 

Shane had developed an incentive program where if you shopped at one of his business, you could receive a discount at another. I was wanting a free movie ticket. (Shane owns the local theatre—if he was not subsidizing it, my guess is that it would close. He wants the theatre to remain so he invests.) I do not know the full story but a local eccentric complained about the program. The program ended because of the volatile nature of the complaint.

This seems to me to directly violate the tenth commandment. Here is the relevant command from Exodus 20 in the Message. 

¹⁷ No lusting after your neighbor's house—or wife or servant or maid or ox or donkey. Don't set your heart on anything that is your neighbor's.

What will the consequences of breaking the 10th commandment be? 

Make no mistake, commandment breaking is what it is, as class warfare is based on envy. It will have an inevitable consequence of less investment in the community. I too am a real estate investor. I would like to sell my property in Missouri, take my losses, and reinvest my assets here. But if I do, will I receive this same attitude? It makes me want to invest elsewhere. Palm Desert is just one hour away. 

Obama should want people like Shane and me to invest. Is investment worth it socially for the investor? Not so much. Personally I have decided to not make any investments unless I can do it without debt. This reduces investment and employment. If Obama wants me to invest he needs to give me incentives to invest and take risk. All Obama cares about is reelection. This is not a partisan issue. It was all Bush cared about too. 

Yes there are bankers who should go to jail and have not because of their connection to Obama. This is not a partisan issue. Yes there are bankers who should go to jail and have not because of their connection to Bush. 

I have seen some interesting opportunities out in my field—real estate. I will deleverage instead.

Best Investment for 2011

In this business environment any good investment idea is a highly desirable thing. So this item in the news naturally leads to an investment idea. From CBS News: 

(AP)  The Postal Service was $3.5 billion in the red for the third quarter and may not be able to make a required payment for future retiree health benefits, the agency said Thursday.  Losses for the April through June quarter were $1.1 billion more than the post office lost in the same period a year ago.  The post office has been rocked by declining mail volume as people and businesses continue switching to the Internet in place of letters and paper bills. ”Given current trends, we will not be able to pay all 2011 obligations,” Joseph R. Corbett, the Postal Service’s chief financial officer, said in a statement. 

How can the troubles of the Post Office, flowing from a combination of high costs, the great recession, and competition from the Internet, lead to an investment idea? Well, sometimes the government listens to consumers. Every time the price of stamps has gone up in the past, we had the annoying prospect of buying 2 cent stamps to add to the previous stamp. Now the post office offers stamps that never need to be replaced—the  “forever” stamp. Although my local postmaster does not foresee an increase soon, it is obvious that stamp prices will have to go up,. The investment idea is to estimate the number of stamps that you will use over the next two years and buy that amount. This is even a deductible expense for a business. With the interest rate on savings being at an all-time low, this is an investment whose time has come.