Investing risk of debt and inflation

Are we going to have a replay of 1970s-style stagflation? Advisor Stephen Leeb thinks so, according to a recent email I got from him.

For those of you who don't remember, during much of the 1970s the econony did something it's not supposed to -- it had high inflation and high unemployment at the same time. The stock market basically went nowhere. Commodities and real estate greatly rose in price. The whole "get rich quick in real estate" concept began during that period. All but the youngest real estate gurus got their start during that decade.

But personally I think the investing risk of stagflation is low. A lot of those problems are traceable back to the coming of age of the baby boomers. A whole lot of 20 somethings looking for work. That created the high unemployment rate.

I am not going to argue with Mr. Leeb, however, that inflation remains a threat. The decline of the dollar and the rise in the price of oil are both problems for American residents.

Also, I highly agree that there's way too much debt for the good of the American and world economy. Federal government debt could be lower, but business and personal debt is a lot higher.

In case you're wondering, Mr. Leeb believes that the market is going up in the short run. He says the smart money, including Warren Buffett, is buying.

Of course, it's always smart to buy good companies with a long record of paying dividends.


investing risk
investing risk

Currency diversification

I think one of the most difficult aspects of the current monetary system and economics -- and how it affects investing -- is the relativity of the value of currency in relation to other currencies.

You can make 5% on your US dollar investment but still losing spending power because the yen goes up against the US dollar.

In the past, this has not been particularly important for US residents getting a US dollar income. Everything we bought was priced in dollars. We might notice Toyota prices going up and down, but overall, it didn't make any difference unless and until you travelled overseas.

Yet as the world's economies adapt and change, we will all be affected by the relative strength of our own national (or multi-national, in the case of the euro) currencies.

Therefore, everybody should have some source of income from other currencies, and therefore should consider making good investments outside their own country.

Some people in the US advise simply investing in major US corporations that do a lot of business around the globe (Coke is the most recognized brand name in the world. They even have a flair for designing how the name looks in other alphabets -- the Coke logo in Thai looks more impressive than the English version.) And this makes a lot of sense.

However, I favor diversifying your investments in different currencies -- NOT trying to make money from trading the foreign exchange markets (that's madness for a normal person), but simply from hedging your sources of investment income. At a minimum, try to have some Japanese yen, US dollars and euros. Also, British pounds, Australian and Canadian dollars.



foreign exchange investing
foreign exchange investing

Investing in consumer (bad health) companies

Yesterday's post made me think about how the same principle holds true for many of the companies that are high, dependable dividend payers, which is the kind I'm interested in, since I don't want to put my money in fixed investments that are eroded by inflation.

Many of the good dividend payers are companies that sell low-cost consumables -- especially snack food. Hershey, Wrigley, McDonalds and so on. Or Philip Morris (now Altria) which sell cigarettes, which is the ultimate bad health type of consumer stock. When I buy those companies am I responsible for the poor health of the people who eat too many of their products? I don't think so -- even of tobacco companies, as politically incorrect as it is to say so. I've never been a smoker, don't want to be a smoker, hate tobacco smoke, don't like to be around it, and I'm glad for reasonable restrictions on it inside public buildings -- though I've come to hate the fascist reminders in airports about not smoking.

Yet nobody forces anybody to go to McDonalds, eat a chocolate bar or even to smoke a cigarette. When I was a teenager I chose not to smoke, and I've kept up that choice through my adult years. And the information about the health problems associated with smoking have only increased since I was a teenager. So anybody who's a smoking teenager or young adult now is smoking despite 100 times more knowledge of its negative health effects than I had.

So why not buy the stocks of these companies and collect the dividends?


consumer investing
consumer investing

Drugs and drug stocks

Invest in drug stocks but avoid their products -- you'll be wealthier and healthier.

I can understand how people get into social investing, though I haven't since my days as a radical. As someone who's long been interested in natural health, vitamins and so on, I feel a conflict when it comes to investing in drug stocks.

Oh, it's not like I believe companies such as Merck are frauds such as the infamous prime bank scam -- I just think that in a perfect world, we'd all be in better health if we first of all took good nutrition, herbs and other supplements. Plus exercised and did other things that enhance good health.

It's not just a matter of avoiding the need for drugs by staying healthy (although that's important), it's that I believe that most prescription drugs are downright unhealthy -- or, at the very least, an unpleasant trade off between benefit and risk, which is probably unnecessary if the patient would take the right nutrition or get the right exercise.

Yet there's no doubt that drug companies are good investments. As baby boomers grow olders, they're going to take a lot more prescription drugs (I'll stay away from jokes about non-prescription drugs).



investing in drug stocks
investing in drug stocks

International investing + global warming

How will global warming affect income investing?

I'd rather write -- how will the global warming controversy affect income investing?

I don't know whether the planet is getting any warmer or not. After all, local weather varies tremendously for a huge variety of reasons. We now have ways of collecting data from around the world, satellites, etc which we didn't have until recently. When we compare current temperatures to past records, we're not making a fair comparison.

And if it the planet is warming, is human activity the cause? Long before the industrial revolution began, the world was hotter . . . and colder. The amount of light and heat the sun radiates can vary by up to 30%, yet I rarely hear this mentioned, and I've heard that the recent UN study on global warming did not even include that in its model.

If the planet is warming, no matter what the cause, what can we do about it? I'm against proposed solutions that would give government control over people, yet authitarian socialism seems to be the goal of many environmental activists. I believe that if there is a real problem, we need to use our ingenuity and technology to solve it, without condemning the masses of people of the Earth to poverty.

I do think that the issue makes international investing even more important. You can't afford to keep all of your money tied up with the political and economic fortunes of any one country, even the United States.

It appears that there will be a lot of economic activity related to global warming. And I can't really be against the reduction of fossil fuel emissions. Burning fossil fuels is wasteful of fossil fuels. Plus it creates some pollution, which I'm happy to reduce.

So hopefully the controversy will encourage the development of alternative energy sources and ways of cleaning up pollution . . . without discouraging the continued wealth creation of global capitalism.




global warming pollution
global warming pollution

How low can stocks go?

Is there a floor on the stock market and, if so, where is it?

A lot of times when you read about individual stocks and the stock market, the writer or commentator talks about price rises as though they're permanent.

"If you didn't buy XYZ at $20, you've lost out on its rise to $50." Maybe. Or maybe it will go to $10 by next year. Or $1.

People commenting on Alan Abelson of BARRON'S often sound like that, because he's a chronic bear. "He would have had us miss all market gains since the Dow was 3200," one woman wrote in. In their book RULE BREAKERS, RULE MAKERS, The Motley Fool also go after Abelson.

Now in 2007 we can see perhaps some truth on both sides. The late 1990s were an unsustainable boom which did bust. Starting in March 2000, The price of many dot.com stocks plummetted from hundreds of dollars to pennies. High tech companies that made a profit, such as Microsoft, saw their share prices dramatically reduced. The overall market went down, although not by as much.

However, bad as the early 2000s bear market was, it wasn't as bad as some of Abelson's predictions. People who bought stocks at a price below their bear market lows, remained "in profit" -- at least without adjusting for inflation.

Is that a guarantee that the market or individual stocks will never go below the early 2000s bear market lows?

No. The Dow is now about 12,500. Maybe it will go back 777 where it was in 1982. Maybe below that, wiping out all price gains made in this long term bull market.

Maybe it will never go below 12,500 again.

Nobody knows.

And that's my point. It's easy to point to stock charts from the past, compare them with today's prices and then draw conclusions. But nobody knows where those prices are going tomorrow or in the next 5 or 10 or 30 years.

It's not likely the Dow will ever go back to 777 -- but I wouldn't risk my life on it, especially not with terrorism, looming conflict with China, and such threats. The U.S. has survived past threats -- that's no guarantee of the future.

Advocates of "value investing" often speak of how stocks can be undervalued now but the market will reward good companies in the "long run." I've got news for you -- there is no "long run." Stock prices are ALWAYS fluctuating.

Many companies traded on the New York Stock Exchange are more than 30 years old. Their prices continue to fluctuate based on the market's current appraisal of their value. 30 years from now, the stock prices of all then-existing companies will also fluctuate based on the market's then-current appraisal of their value.

And those 30 years from now prices could be considered "over" or "under" valued at the time, depending on how you choose to value a stock.

And those 30 years from now prices could be higher but also lower than today's closing price -- without or without adjusting for inflation (which is important, but it's easy to forget about this when oohing and ahhing about how much a stock has gone up over the years.)


stock price lows
stock price lows

Is inflation under control? Does anybody know?

The #3 Deadly Lies About Money from the ad in Rude Awakening (I mentioned it about a week ago) is "Inflation is under control."

According to that, the "official" inflation rate is 3.8%. If that is true, the value of a U.S. dollar will be cut in half in just 19 years. If you're retiring now at age 65, the value of your savings will be diminished by half, before you're 85. And although that may sound very old and distant, large numbers of people are living to, and beyond, that age.

If you're just starting your work career, 19 years is less than half of the time you'll work before retiring.

It's a favorite theme of investment newsletter salesletters that the official inflation rate is understated by the government. I don't know, not having access to all their information.

And I doubt the real accuracy of the government's information. I remember once when I was still in college. The U.S. dollar was worth more than twice what it is now (though I didn't have nearly as many of them), but inflation was much higher than it is now.

I was working part time at Pizza John's (NOT "Papa" John's!), a local pizza restaurant. After a lunch hour rush, a young woman working for the government came in to ask about price increases to keep track of inflation.

She was young and nice looking so my boss enjoyed talking to her for a few minutes, flirting with her, but when she kept asking him about when it was that they'd last increased prices and whether a potato slice always went with a certain sandwich, I could see him getting bored and impatient, and he just put her off with whatever he felt like saying.

So I'm not convinced the government actually knows what the "true" rate of inflation is.

However, it is the greatest single financial enemy of anyone who's not actively increasing their income.



inflation
inflation