Saturday, October 17, 2015

Investment Misdirection

Most all bubbles are a misallocation of resources. We build more houses than we need, we bid stocks up to unsupportable levels. What it really works out to, at the height of the bubble the end purchasers pay too much for an overvalued item and lose everything. At the time they have comfort in the fact, that everyone is doing the same thing.

Our government has manipulated interest rates to almost zero (ZIRP). Using the rule of 72 which states dividing the interest rate into 72 yields the years to wait for your bank savings to double. Right now that is about 144 years. So if you want to invest your savings, why put it in the bank? The government is forcing people away from saving money in the bank to other forms of investment, the biggest two are the stock market and real estate rentals. Plus if the bank gives you zip on your savings, why not spend it now and enjoy it, there is no reward for saving—not in my life time or even my sons.

At some point in the future, when both the workers and the government are spending with no tomorrow in sight, there will be a shortage of product to consume. With a shortage of product, prices have to rise for those who really want to have it.

There are people saving like me for retirement, I’m 68. I just learned that by deferring my Social Security to age 70 I get to pay more for Medicare by about 50%. I can’t possibly live off of the interest on my savings. When I started saving, I was counting on a 5% interest rate at retirement. Notice who gets hurt with the low government interest rates, people who have saved money. We are not talking rich people, we are talking people that have managed to save a million dollars over a life time. At 5% interest, that’s about $50,000 a year for two to retire on until you have to be put in a rest home. Right now, that will return about $6,000 a year, not much for a life time of savings.

The real issue that has to be looked at, is that we are no longer a nation of savers, we are a nation of spenders. With both government spending and consumer spending, we will run out of product to buy not dollars. The government can print dollars, but it cannot print product, and the surplus product that will disappear, is the product that was available for purchase only because someone previously decided to save instead of consume. All of the printed money in the world cannot buy a car that was never built.

If 40 million food stamp shoppers want steak and lobster, guess what, chicken becomes a real deal.
And of course, if you want corn in your gas tank instead of in you cattle, steak becomes more expensive.
Notice one thing, almost everything mentioned has to do with government intervention. They can screw up anything and ask for your blessing at the same time.

It is very interesting growing old. Young people have no idea what I am talking about and people that are my age, nobody listens to. A little old lady the other day bought 3 hallmark cards and some expensive prescription drugs, and the total was $175. She put it on a credit card, I wonder if the balance will ever get paid off in her life time?

An FYI nugget
In today’s newspaper two different Investment funds each bought rental complexes in San Diego. A 35 unit one for 5.4 million, rents bumped up from $1,050 to $1,225, many on Social Security are moving out. Then a 208 unit luxury living complex bought for 84 million by Monogram Residential Trust of Texas projects rents on this one being built will be about $2,500 a month. The second one they paid double of what they should have IMHO. Both companies are trying to get a decent return on their investment. The only thing being overlooked is that rental returns are based on vacancy rates. You can charge any rate you desire, but the actual rental rate is determined by the rent collected over 12 months divided by 12 months. If it rents for $2,500 a month and is empty 6 months of the year, the net rental rate is $1,250 per month. The newspapers conclusion was that rental rates were rising, while at the same time in the first building everyone is moving out.

This is what made the Great Depression of the 1930's. What you wanted and expected from your investments, was not what you got. There was a disconnect that no one could comprehend.


Anonymous said...

there is a new normal, regardless of which side you land on, the sooner you realize this, the sooner you will go with the flow.
after reading your blog for years, i believe you finally realize that the real world dose not follow academic theorems and calculus.
we live in a "fixed" world, either you adapt and survive or get left behind.


Unknown said...

The whole world has gone mad, rewarding the speculators at the expense of the savers. They forgot what Capitalism is about, deferring current gratification, saving it, deploying the savings (capital) into productive assets, and enjoy the returns in the future. ZIRP is bidding up everything to crazy levels, reducing the returns, and thereby justifying more loans for leverage.

I really wonder why so many people in the West and Japan still haven't woke up. In Japan, their bonds are like almost zero for decades and so many Japanese still dutifully save and buy their bonds. In the rest of Asia, people like gold cause they don't trust the government (currency) and since cash savings is returning zero, there is no harm in holding physical gold.

Jim in San Marcos said...

Hi Anon 1:41

Your close, to what I am trying to convey.

We can use economics to explain what has happened in the past, not to project what will happen in the future.

Most people follow others when it comes to everything. It never bothered me to be the first and only one on the dance floor with my date, others would follow in after that.

The biggest mistake is to believe that the world is in a fixed state. Fortunes are lost and made everyday. The people that do very well do not seem to be moving with the herd, rather against it. The rich are few and the poor, many. Risk has its just rewards, just as failure has its multitude of minions.

Jim in San Marcos said...

Hi Anthony

Welcome back, I agree completely.

I really like gold, silver and platinum. Silver is underpriced and platinum is more of an unknown commodity to most of the world, but because of its scarcity, is 27 times more rare than gold. I believe down to earth investors who buy these metals and take possession of them will make out very well in retirement.

Right now we have a paper market in commodities that is a little misleading. I would hazard a guess that the paper market only has the backing of about 10 percent real product. What has happened in the past, there was no delivery of the metal, only delivery of the dollar value of the metal to the certificate holder on redemption.

When interest rates were 8% you were losing $80,000 a year holding one million in gold. The most you are losing now is $5,000 and we know that inflation is more than .05%.

The real neat thing about gold and silver, these items are not visible in any bank account if you are retired or not retired. So if you have a student scholarship for your kid to secure or an SSI claim to submit, . . . . .

Unknown said...

Hi Jim,

Logically the paper market for just about anything including commodities is nothing but fraud, except that it's backed by the banks and the government. So is fractional reserve banking, same as the old days where the goldsmith issued more notes then the gold they have in their vault. Fraud.

The American founding fathers were correct, only gold and silver is money and only the government (congress) may coin or create money. Even if we are to go with the times and accept that money is to be backed by nothing but the full faith of the government, it should be through a National Central Bank with the citizens benefitting from it's creation and not through a private bank (Federal Reserve.

Jim in San Marcos said...

Hi Anthony

No argument from me. But how can we convince everyone else? I can't even convince my wife.

That gives me a pretty good idea why the government has had its way for so long.

We can complain about the system, but until it fails, we are considered idiots. So I guess we give them a little more rope to hang themselves with.

Unknown said...

Hi Jim,

you are doing a good job with your blog. Every effort counts towards educating people of the real world around them by offering them alternative views. Mainstream news are just propaganda which are full of lies.

AIM said...

Either put your money into the stock market (and lose 40-60% of it sometime during the next few years); put your money into treasuries (making no return as you fund the welfare/warfare state) OR... forget about retirement and just keep working to support yourself.

The best investment with the best return is a successful business, or businesses, that you own. I believe that that is what boomers should be setting up and transitioning towards in order to be able to maintain a decent standard of living in their later years (being productive and adding value to the society is much healthier mentally and physically than retiring... work, is an anti-aging activity).

Forget gold and silver. They'll never be used as money again (and there is not enough of it to back a big currency... that would be a very deflationary thing to do). It's a new digital world. A fiat world: the government will always tell you what the legal tender or money will be. They won't let you be a winner in a financial crisis for putting your money into physical gold and silver. They'll either highly tax, restrict or confiscate it.

In the depression of the 30's all asset classes went down. The only thing that was valuable and went up was the USD. In the 2007-2008 crash the same exact thing happened. Take your savings (dollars) and put it into safe investments that give the best yield you can get (e.g., a four-plex rental property, etc.) and set up a business or two (something that you enjoy doing) so that you have an income source (investment income, business income and social security will give you a decent standard of living). Just face the fact that you will need to work for the rest of your life (change your attitude and realize that it is the healthier thing to do). Statistics have already shown that the whole concept of retirement: puttering around the house, fishing and golfing, etc. is a death sentence.

Don't buy the hogwash that the USD is going to be worthless. Or that it has lost 95% of its purchasing power (that is ridiculous... our standard of living has increased 8X during the period of time that the USD has supposedly devalued). There won't be hyper-inflation (that only happened with revolutionary governments that defaulted on their debts and didn't have bond markets... like Weimar Republic and Zimbabwe).

The USA has the biggest deepest bond market (safe haven), the strongest military, the world reserve currency, and a lot of assets and resources. The USD is the major component in most every country's foreign reserves. It doesn't matter if the petro-dollar goes (countries start buying oil with gold or other currencies) because that is a very small part of global trade. The biggest percentage of money flowing around the globe is investment capital and that is USD. The USD will be "Numero Uno" for a long time to come. (The SDR will just be for global trade. Things will change when this happens. The USD will still be the currency of the USA.)

Get onto a healthy lifestyle (food, water, sleep, exercise, stress management); pay off all your debt; put your savings into safe decent investments (you need to be an active investor); set up some businesses that you will enjoy; collect your social security (for as long as it is around); and you'll be fine.

Anonymous said...

I am not convinced that owning your own business is a sound model for all investors.

First, there is the time commitment. Then, you have to report everything to the government. The government will take more as the years go on and the national debt increases, and there is nowhere you can hide. Your business will become ground zero for local and national plundering.