Risk of inflation

Nobody with any sense denies that the greatest risk of fixed income investing in inflation. A lot of people are forgetting how insidious inflation is, and don't consider the current low levels (from 2 to 4%) dangerous.

Basically, general macroeconomic inflation is a general raising of the prices throughout the economy. Simply, there's a relative rise in the amount of cash going through the economy compared to the amount of goods and services available for sale in that economy.

My macroeconomics teacher in college used to like to tell us that if we wanted to reduce inflation we should burn money. It was such a shocking thing to say about money (and nobody, including him, volunteered their personal money for this stop-inflation project), that we didn't get that it was one of those jokes that was funny because true.

If you have two apples for sale and two dollars -- each apples costs a dollar. Print two more dollars so you have a total of four -- but the number of applies remains the same -- and the price of apples will go up to two dollars each.

A simplified example like that makes it clear. Our real-world economy is much larger and more complex but operates the same.

We can't eliminate inflation because there's a general call for the government to keep on creating money by spending it. Congress votes to spend some money et voila! checks are issued and then cashed and a welfare mother is paying her rent to her landlord or a defense contractor is paying its suppliers.

Some of this comes from the tax money taken from us taxpayers, of course, but when Congress authorizes more money than is already in the Treasury Department collected from taxpayers, then bonds are issued to raise the money, and the American budget deficit keeps on growing.

But people who receive the money directly (welfare recipients and defense contractors) or indirectly (landlords or raw materials suppliers) like having that cash flowing into the economy.

Retired people who are receiving only Social Security and pensions and interest on bonds are not so happy to see the price of bread go up the next time they visit the supermarket.



inflation
inflation

Is entertainment including gambling really of value?

One of the investment ezines I subscribe to is the The Rude Awakening from William Bonner of Agora, and the other day it published an interesting article contrasting an oil refinery with a casino, and drew implications that clearly condemned the modern American economy, for building casinos but not refineries.

It mentioned that casinos do not create wealth, only transfer it from the customers to the shareholders of Harrah's while providing a little entertainment value.

Yes, this is certainly true, and it's true that refineries do add value to the economy by turned crude oil into usable gasoline and other petroleum byproducts, and that our economy is weaker because we don't have enough refining capacity.

I also agree that most gambling is stupid (some forms which also require skill, especially poker, are winnable if you're good enough).

But if spending money on entertainment is bad, the whole world is going down to the tubes and also has. It's true that the developed world spends huge amounts of money on "entertainment" (all nonessential activities), but so does the developing world.

Spectator sports, cigarettes, alcohol, snack foods, movies, music, novels, games of all kinds . . . people in the developed world spend large amounts of money on these things also. Perhaps, in proportion to their total wealth, more than people in the developed world.

I think that there's a valid argument that all this economic activity simply transfers wealth from customers to producers. Yes, much of it creates something permanent (movies, for example), but still there's no utilitarian value to a good movie. It's valuable only for the experience of the people who enjoy watching it.

And this includes gambling. People all over the world play cards, bet on lotteries, go to casinos etc. Americans having many gambling options besides going to Las Vegas, that's new. Internet gambling is new. But gambling itself is not new at all.

As far the American economy . . . I don't know the figures, but I'd bet that our trade deficit would be a lot higher if we didn't export Hollywood movies, professional sports, pop music, and junk food (Coke is the best known brand in the world). It's probably not significant compared to the world economy as a whole, but lots of people from all over the world go to Las Vegas to see the sights and to lose money gambling, including our greatest economy rivals, the Chinese and Japanese.

Time to invest in oil?

As I write, some people are upset about Iran taking 15 British sailors hostage. One person who is outspoken is Tony Blair, Prime Minister of Great Britain, and he has been making veiled threats. Naturally, this entire situation is making the price of oil go up.

I believe that the only reason we don't just blow the shit out of Iran's military, and their oil infrastructure is of course our dependence on that oil. Iran has the capability of shutting down oil transportation from the entire Persian Gulf, and probably would do so if attacked.

So is this time to join the commodity bulls and buy up oil stocks? I'm sure not going to say such stocks aren't going up. There's little doubt that prices at the gas pumps are going to go up due to this crisis -- quite possiblly a lot.

A local radio show morning host likes to repeat that this increases Iran's income, so that's why they like to provoke us by creating these crises.

Yet the more oil prices increase, the greater the incentive for alternative fuels.

So I still advise people to invest in chewing gum, electricity and real estate.


oil crisis
oil crisis

Mergent to bring out bond indexes

Here's good news for fixed income investors. Mergent, formerly known as Moody's, and Ryan ALM have teamed up to produce benchmark indexes of bonds.

Mergent already provides a great service to dividend investors through keeping its index of Mergent Dividend Achievers -- those are companies that have increased their dividends every year. The Dividend Achievers index forms the basis for a number of exchange traded funds, making it easy for income investors to buy a large number of companies that have consecutively raised their dividends (for U.S. companies, at least 10 years in a row). It also has version of Canadian and companies from other parts of the world which have raised their dividends at least 5 years in a row.

The press release did not give any details about what the bond indexes will focus on. Obviously, bonds don't raise their interest payments every year (don't we wish!), so they must be considering some other measure of quality.

You can learn more at:

Mergent and Ryah ALM bond index partnership



Mergent bond indexes
Mergent bond indexes

Define investing success

One common -- make that, "near universal" -- mistake people make with investments is to clearly define what they mean by "making money."

See, there're hundreds of investment techniques and methods of various kinds, and things to invest your money in. And they all "make money." Even HYIP scams make money for somebody -- everything can and sometimes does make money in the short term.

After all, any given investment can only go up or down. Sometimes they're essentially sideways, but sooner or later they choose one direction or the other.

So the odds are you can make money whether you choose investments for value, technical analysis, tea leaves, Gann squares, the Elliott Wave, astrology, Nostradamus, Edgar Cayce, growth, momentum, a gypsy medium, a crystal ball, dream analysis or any other nonsense. It also explains why so many investment newsletters stay in business. Some of their picks are winners and some readers put their money on those picks and are happy. So you should be careful about evaluating the records of anybody trying to sell you their stock picks or stock picking system or software.

But the real question is how much money, for how long, and for people actively buying and selling, how much of your gains is lost through transaction costs and paying capital gains taxes to the government.

That's why most people would be far better off to just put all their money into an S&P 500 index fund.

And in my opinion most people would be far better just putting all their money into investments that pay dividends or interest and holding on to them.

define investing success
define investing success

What goes up, comes down, and goes up and down again

The market had a terrific week last week. Now, of course, the question on everybody's mind is, will it keep going up this week.

Is that on your mind? I hope now. You have better things to do. Your job. Your business. Have fun with friends and family. Continue your education. Exercise. Watch a good movie.

Is this heresy? To some people, yes. I advocate that you just not care much what the market does unless it plunges so far that the overall economy is affected a la 1929. If it causes another Great Depression, then of course you should be concerned.

But these daily/weekly/monthly ups and downs just aren't worth the effort people put into tracking them. Even day traders. Last week the market went up big time, but I'm sure that most day traders lost money. And when it goes down, some day traders make money. What matters to all short term traders is how well they guess (or, to be nice, predict) the trends of the stocks or market they trade.

For you and me, we should just be buying up income-producing assets and focus the rest of our minds on living our lives. This of course should include doing well on our jobs, in our careers and in our businesses to increase our incomes so we have more money to invest.

But it doesn't include caring about the short term noise of the market. It goes up, it goes down. Care about your dividend and interest checks.






stock market noise
stock market noise

John Bogle interview

John Bogle started up the Vanguard family of mutual funds, known for their industry-shaking low expenses. I use that adjective "industry-shaking" for good reason -- most mutual fund companies want grab as much of your money as they can get away with. Bogle pioneered funds that take as little as possible, making their profits from volume.

Bogle understands that your longterm investment results are directly related to the price you pay, and keep paying in the form of expenses -- both front-end and back-end loads and annual management expenses. So he kept those down as much as possible. All investors owe him a debt of gratitude, because probably expenses at all mutual fund families are lower than they'd be if he hadn't founded Vanguard.

Bogle also made it easy for investors to simply buy the overall U.S. stock market through Vanguard's pioneering S&P 500 index fund.

This article focuses on Bogle's predictions for the stock market, and doesn't even mention the risks of investing in bonds, but he expects poor overall returns.

In my estimation, all the more reason to invest for income, because there's not going to be large returns from capital gains. The article mentions international diversification at the end, since Bogle apparently shares the general pessimism regarding the U.S. dollar's prospects. However, he doesn't even mention the greatest risk facing the U.S. (and many European) stock markets -- the retirement of baby boomers. What will happen when baby boomers want to sell their stocks for a big profit? Who's going to keep on buying?







John Bogle
John Bogle