"Stocks are Cheap", (yeah) Right?

So we now have short term interest rates at 40 year lows, and the 30-year bond is history. Both of these moves were designed by our friendly financial engineers at the FED and their partners. The 30-year bond is the best inflation barometer out there...the engineers killed two birds with one stone so to speak by killing the inflation barometer (which would be likely to perk up after billions in new spending) and lowering long-term interest rates (through a lack of supply) in one fell swoop....brilliant....or was it? I read an interesting newspaper article the other day about the new plight of the retirees in Florida, my home state.

This is a serious side effect of the financial engineers plans...many millions of people count on fixed income yields on their savings to finance their retirement, and yet fixed income is now providing at best a marginal real rate of return and at worst a negative real rate of return. What are these people going to do? Well, put yourself in their position..... We have the people on Wall Street shouting as loud as they can that "stocks are cheap", despite the fact that the S&P500 P/E ratio is making all time highs. At current levels the stock market is arguably more expensive than it has ever been in the history of the world. I'm sure a lot of financial planners actually believe the party line that stocks are cheap (because they don't know any better), and I'm equally as sure that retiree savings are being diverted from fixed income to equity shares in the hopes of seeking a reasonable return.

So, we are now developing a situation whereby much of our retired population are exposed to going bankrupt. I believe that the financial engineers "remedy" is in the process of creating the biggest equity bubble ever seen on this planet, given the fact that investors are being told across the board by wall street and on national TV that "stocks are cheap" and there is a clear lack of alternatives for the average investor....think about it...if you were a naive investor, what would you do? You'd do the same thing....you would put your money into the equity market as you were told to do...it is truly frightening to think about the level of risk these people are taking on without even knowing it. And the consequences of an inevitable collapse in share prices is even more frightening.

Back to the subject of alternatives....what are the alternatives? Well, you can invest in government debt, and the main risk there is that your real return will be negative, but your principal is relatively risk free. You can invest in shares, with the obvious risk being that if the market P/E were to return to a more normal level you would lose the majority of your investment. You could also turn to the one other major asset class that people on Wall Street don't talk about much....commodities. Looking at the stock market P/E, you can see how unfashionable it is to talk about value, but is there any actual real value out there? Look at a chart of the CRB index. As the stock market makes all time highs in price and valuation, commodity prices have been in a 20 year bear market. What about a commodity that is selling for one half of what it costs to produce it? There are several such commodities trading on exchanges around the world.

What about gold? Lower yields make a non-interest bearing investment like gold much more competitive. Gold is an asset close to it's production cost, having been through a 20 year bear market along with most all other commodities. It also acts as a hedge against the risks I outlined in my essays "Interesting Times, part 1 and 2", and the even more horrific risks associated with an act of nuclear terrorism or a bio-weapon like smallpox. Even if the price of gold is being manipulated as some including myself believe, market manipulation doesn't work forever....and when a manipulated market breaks free, it usually makes a swift move to it's non-manipulated real value.

Successful investors are trained to recognize value. The whole idea of investing versus speculating is to seek value....to buy something for less than it's intrinsic worth and then to sell it when that worth is realized in the market place. In these times of financially engineered markets and spin doctoring rather than objective quantitative analysis, it's easy to forget that but it's the one thing that never changes....Jim Rogers said it best....you want to "Buy Value and sell Hysteria". It's important to think independently in these interesting times.

So, we are now developing a situation whereby much of our retired population are exposed to going bankrupt.

This is so funny.

The gold bugs are terrified that, even with a war in progress, gold is still stuck at historically low levels.

Why the hell should I care that a bunch of geezers are being adversely affected by low interest rates? Everyone else in America loves low interest rates: refinanced mortgages, more young people in homes for the first time, automobiles selling at record rates.

A "fixed income" portfolio is, frankly, foolish, even for retired people.

Is America supposed to continue to cater to the "early bird special" crowd?

Treating the market like Vegas is a recipe for disaster

It is. But prices of stock are looking better. IBM is still far too high, but some others are reasonable. This might not be the time to jump in with everything, prices could be better later, and it could be a while before the market takes a good upward direction. I would look for companies that are likely to be doing well in a couple of years, and watching out for ones that could fold. But I wouldn't be interested right now.

Gold has only been important in nations that have failed, or are in the process of failing.

What we have to be alert to is if the Lewis Farrakahn's of this Country can cause some kind of revolution which aint going to happen.

By the same token don't count the 'minister' and his ilk out.

Gold is an asset close to it's production cost...

I'll consider taking investment advice from this
guy when he masters grammar. In the meantime,
anyone lamenting the fact that the federal govt
is no longer borrowing money that it won't
be paying back for thirty years, rates as a short-
sighted doofus.

I find it interesting, with the debate in the Congress about getting people to spend, that nobody recognizes that many of us who are on "fixed incomes" are just not going to be spending.

A major money market mutual fund was paying about 5.25% a year ago and many "senior citizens" had a lot of money invested there. Their current interest rate is halfed - 2.6%. When the money doesn't come in, it ain't going out.

A guy who specializes in selling gold putting out more scare material to sell more gold.

While your sentiment is good, the guy does not sell gold, he is apparently a futures broker. In that case he can make commissions whether you go long or short. He is just giving advice to clients to go long.

I would not advise anyone to get into futures since virtually everyone who tries it ends up losing a lot of money before they get the hang of it, if they ever do.

Anyone contemplating gold investments must first be aware that the market is rigged.

The Working Group on Financial Markets apparently rigs the markets with money from the Exchange Stabilization Fund at the Treasury. Evidence shows that they use this money and leased gold from central banks to spike down the price of gold and to spike up the stock markets through secret accounts at Goldman Sachs and possibly others.

This has been going on for 6 or more years. One day they will run out of gold and we will see an astounding price spike. That may take several years, or it could happen soon. The amount of gold left is a closely guarded secret. The IMF requires Central Banks to list even their leased out gold as gold reserves, so nobody really knows how much gold is left. Most likely it is far less than what is generally reported.

www.GoldenSextant.com
www.GATA.org
www.LeMetropoleCafe.com

As a partial retiree, I've wondered about this. A lot of my friends depend totally on their pensions, supplemented with interest income. When those certificates of deposit (up until January paying over 6%!), the renewel rates are much lower. So, won't some financially responsible people have to sell stocks to increase the amount of money in safe CDs and thus compensate for lower interest rates?

I saw this happen to my mother and her peers in Florida during the last interest rate drought and it was really depressing to see these people who worked and saved their whole lives being destroyed by low interest rates. The promise of stock for long term gains doesn't mean anything to people who depend on that interest income NOW.

I'm outside the box again, but is it wise to have interest rates so low that retirees and others depending on investment income might have to get out of the stock market for safety and to increase interest income now?

"A "fixed income" portfolio is, frankly, foolish, even for retired people.

Over a very long time horizon, you are correct. Over 5 to 15 years maybe not (in the extreme case of the the 1929 top -- it took 25 years without considering inflation just to break even in stocks - 38 after factoring in inflation). This comparison disregards dividends which in many years during this period were actually higher than bond yields. Even so, there is clear history within living memory that stocks are not the "no brainer" that many believe. If the 29 top seems like ancient history, try the 70s on for size. There is a big difference between a good company and a good stock, and a good part of the difference is price.

BTW, before anyone comes back with a "new era" theory -- I believe that it is always a new era and that "even though history does not repeat itself, it often rhymes."

voluntary disclosure -- no short positions and being a glutton for punishment actually long a small percentage in stocks at the present.

Your post is wise, but few will appreciate or understand it here. Stocks for the long run ala Jeremy Siegel makes sense sometimes, but not others. Two years ago, it was nutso. Now it is marginal. Folks got spoiled by high returns in an extremely unusual period. Now it is back to hard heavy lifting of saving.

The hand wringing about collapsing real interest rate returns after inflation is overdone. Inflation is probably zero at present, and real interest rates go up in good times, and down in recessions. And of course very short rates are somewhat artifically reduced at present. Just move out a bit on the maturity curve to say 3 years, and it is not quite so bleak.

No one knows how to predict the markets short term, and no one in a retirement or near retirement position should bet large amounts on commodities or stocks at this time.

That said, the markets are nearing an inflection point, we have been in a "bear" for about as long as they usually last. The economy would likely already be heading out of recession if the attack and subsequent uncertainty had not occurred this fall. Most likely the low interest condition will be temporary, lasting at most another year. Retirees should plan accordingly and not do anything to try and "force" the outcome they want. Just know that economies go up and down and ours has been up for a while. That means its time to let things recover a bit.

Me? I'm nearing retirement and have pulled things out of equities 90%. I await the return to normal conditions, but I bet things have a littly while left to settle.

There are some very good REITS (that's Real Estate Investment Trusts, if you're not familiar) yielding anywhere from 6% to about 10% these days, and they're likely to return an additional 5% or so in capital gains. Two I own are JDN and HPT. REITS get favored tax status, so are required to pay out something like 90% of funds from operations (something like cash flow) in dividends. There are also registered investment companies that are treated similiarly under the tax code and also must pay high dividends-- Allied Capital (ALD) is one I own, currently yielding a little over 8%. Also, although I don't own any, I'm sure there are a variety of high quality preferred stocks yielding over 7%. Since the dividend rates of all of these securities are set independently of interest rates, their prices tend to go up as market interest rates go down-- in other words, they become more valuable. All, however, are riskier than money markets, although over the long term, if one chooses wisely, I don't think they're much riskier.

In short, there are much better places for fixed income investors than money market funds. You might want to talk to a broker.

I don't think the 5% capital gain figure is realistic. It should be closer to the inflation rate. And REITS have considerable volatility (among other things they are highly leveraged). They are not bond substitutes. And they seemed a considerably better buy a year ago than now. I'm not saying REITS are bad, they are just not a panacea, and few recommend that they constitute more than say 10% of a portfolio. Just my two cents.

If you can expect to make it to room temperature with inflation indexed bonds (once a great deal, now considerably less so), that is a good solution. But for those that can't, it becomes considerably more complex. Then you are parsing odds of making the finish line, versus crashing and burning. And the odds of making to port will be less than 100%.

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