Archive for the 'inflation' Category

Traditional IRA’s looking better and better.

When you look at whether you would like a traditional IRA or a Roth there are basically three considerations.

  1. Do you expect to be in a higher or lower bracket when you retire (making more or less money)
  2. Do you expect overall taxes to be higher or lower when you retire
  3. Do you have extra money to put in (putting in dollars after tax effectively lets you put in more)

Lets look as these issues one at a time, based on the current financial disaster

Will you be making more

In this instance, I am looking at what the feds are doing as far as monetary policy. By injecting huge amounts of dollars, they are going to cause massive inflation. It is economics 101. According to this story, we are already into it about $1.8 Trillion. Assuming a population of 300 Million, we end up with about $6,000 for every man, woman, and child. Um, Mr. President, could you exclude me from the plan and just send me the $30k for my family? Especially seeing the spectacular results so far, I wonder how much more money we will send in with questionable results. All of these dollars are going to inflate our currency. Result? Inflation and earnings (not real earnings) go up.

Will Overall taxes be Higher or Lower

I will give you a hint. We were already looking at a mess when we had social security and medicare with a healthy economy. With the coming economic crisis, taxes will have to go even higher just to keep the leviathon from tumbling. The other part is that next year they will try to lower taxes on middle and lower income people. This might be your chance to put in money at very favorable rates before the spike.

Do you have extra money to put in

This is all up to you. I would just recommend having a nice nest egg in case things get even worse. We thought things wouldn’t get worse a couple weeks ago. Good old Cramer called the bottom of the market at 11,500. Looks live we have slipped a bit since then. It can always get worse, but if you are prepared, it isn’t all that bad.

Good luck, and take another serious look at the traditional IRA. Due to shifts, it could be right for you.

You Were Right to be Worried

My son just came up to me and told me he hurt his bum.  He wanted me to kiss it better.  Does anyone else feel like this is what we have done for the banks?  Why would we do something that doesn’t seem to be making the banks feel any better and seems to be making us about 700 Billion poorer.

I don’t know if anyone else has taken a look at the situation, but the market is getting crushed again today.  I remember the happy days when 3% was a steep decline.  The S&P, the broadest measurement, is down over 9%.  That isn’t a steep decline.  That is falling off a damn cliff.  It is carrying the senior citizens down with it. The suicides are starting up.  It is tragic, and I can see it getting worse.  The news today was that retail sales took a massive dip.  This is not the time to be working at the Buckle.

Everyone is looking for the big event around the corner, be it rising unemployment, more welfare for the banks, more welfare for everybody.  Mccain and Obama are going to have a real treat when they are done with the campaigning.  The prize is to be at the helm of of a ship that is on the rocks.   I know that my retirement funds have dwindled down to pitiful levels.  I am 29, and it is not a huge problem.  But this could be the end of free enterprise as we know it.

The time has finally come for the US to pay the piper.  It is going to be tough for the baby boomers, and there are only so many Walmart greeter jobs out there.  The next 5 years are going to show massive changes to welfare.  I hope we can handle the increase in tax rates.

Prepare for the coming financial duress.

So, how bout that that economy?

I wish I wasn’t right, but all of the indicators seem to be pointing in some direction.  We need to prepare ourselves for what is clearly coming.

One thing we can look at is where we want to invest.  As the market develops, the law that people will only be able to consume as much as they produce will take hold.  The question is, where are these producers?  The developing world holds these producers.  They are going to drive a lot of future buying.  The question is, what do they want?  They are manufacturers, so what they really need is the natural resources required to make whatever they are making.  The feedstock for almost all processes is oil, for both plastics and energy.  Copper is also very important, for infrastructure and also for everyday electronics. 

As the world tries to get more energy efficient, we are going to move to more and more electrical devices, whether it is hybrid or plug in cars, or more power generation capabilities.  These will continue to consume raw resources like copper.  Also, as we try to wean ourselves form fossil fuels using biofuels, we will be pulling food off the market to use to convert to energy.  Commodities will continue to be strong over the near future.  Gold and silver are surging, supported by people fleeing the dollar.  

One big problem coming down the pike is that this is a self fulfilling prophecy.  As the dollar drops, it will lose its status as the world’s currency.  People will flee the dollar, causing even more pronounced drops. 

How can we reduce our exposure to the dollar?  I think some of the best choices are foreign stocks.  A friend at work mentioned investing in the Australian dollar.  If you are going to do that, why not improve it?  Why not invest in quality Australian companies, many of whom are heavily involved in commodities, and very close to the hungry Asian markets.   Canada also has a healthy economy that is based on producing real goods that people in the world are hungry for.   Although FCX is headquartered in the US, it is truly worldwide, and is involved in commodities.  I still love FCX.

I have been talking about the approaching grinder of recession and inflation over the past few months(here, here, here, here).  In order to lessen the impact, we needed to face it squarely and work through it.  The average citizen doesn’t have enough forethought not to live paycheck to paycheck.  How can we expect them to plan years (gasp) into the future?  Savings rates are poor on both the macroscopic and microscopic scales.  Government policy is based on short sighted placating of the masses.  People are getting more and more lazy.  I can sometimes feel myself getting infected with a sense of entitlement.  It is pushed into us from so many different directions.  The idea that we should be able consume resources based on are ability to produce is going by the wayside.  At work, they are astonished that I just don’t fly out and buy everything. 

People in Washington could really help by stopping all their help.  Just get out of the way.  Seeing politicians can’t stand to do this, lets just try to isolate ourselves from the problem so that amidst the ocean of hubris we can still have a few ships floating along.  I would rather be on one of those ships.

Good luck all.

Stimulating the economy or just financially masturbating?

The more I think about the tax rebates that will be sent out, the more crazy I get.  We are going to dole out money that we don’t have, go down to walmart, and end up sending it to Asia.  What a splendid idea!!  We surely don’t owe the Chinese enough already.   This idea created the worst sort of burying your head in the sand.

It is an election year and getting reelected is foremost in the minds of politicians.  What could be better than sending out cash to all of your constituents?  Only a brave few opposed the bill.  I really respect what Sen. Judd Gregg, R-N.H., who voted against the bill said”We have to remember that every dollar being spent on the stimulus package is being borrowed from our children. And our children’s children.”   We can’t create this money out of nowhere.  We are all taking out a loan that our children will have to pay back with interest in the future. 

Many people don’t know what really happened in the bible when Joseph foresaw the 7 years of plenty followed by the 7 years of famine.  Joseph stored up the food for the Pharaoh, and then he sold it back to the people during the famine.  The first year he took their money.  Then he took their animals.  Then he took their land.  Finally, he took them, as they sold themselves into slavery to ensure they would have enough to eat.

We are setting up a financial famine for ourselves, and we better make sure that we have something stored up, or our creditors will have their pound of flesh.  In some ways, this is even worse then burying our heads in the sand.  It’s like having trouble because you have spent too much and are too far in debt, so you head out with a credit card and go shopping.  It is not the cure.  It is more of the sickness (but it feels good to the general populace right now).

Bernanke is in a very tight spot.  He can’t win, because we have to have a reckoning.  We are going to have a recession, inflation, or most likely, some combination of both.  He can shift it a bit, but huge economic forces are coming home to his doorstep.  We can minimize those that come to ours by not squandering our resources during our years of plenty, which might be coming to an end very soon.   Get out of debt and get some savings put away, preferably invested in some economy that knows how to save and invest in the future.  We seem to just want to mortgage ours.

Good luck.

They Picked Inflation

The Fed is caught between a rock and a hard spot.  The fiscal irresponsibility of our elected officials puts the Fed between recession and inflation, as I said in my previous post.  I guessed right, as far as what they would choose.   I love getting lucky.

One big problem is that oil, gold, and other commodities are on the upswing.  Real Estate also has a huge upswing.  Groceries have edged up.   A lot of these prices will start trickling down to durable goods.  If you look at the overall prices, inflation has been very significant over the last three years.  When Wal-mart says the prices are dropping, it is because they are getting cheaper and cheaper crap from China.

Bruce McCain, head of the investment strategy team for Key Private Bank said, “A rather stingy Fed suggests that they see an economy that is in pretty good shape.”   I think he is crazy.  A really stingy Fed sees massive inflation on the horizon and is walking the tightrope for as long as they can.

The classic hedge against inflation, gold, has topped $800 for the first time since 1980.  This fact becomes even more significant given the price of gold just 5 years ago (a little over $300).

Only fiscal conservatism can stem this tide.  The government can’t keep printing money that is not backed by anything.  We have to try to stop this wreck and, given the fact that the chances of stopping it are slim, insulate ourselves from the effects.  The only fiscal conservative in office I know of is Ron Paul.  I like his message because he walks the walk.  He actually believes in a small government.  I just donated to his campaign because I think he could win.  If not, I want to shock the republicans into following his lead.  I just hope that someone in government becomes responsible.

Paulson, “Congress, Can I Please Get My Credit Limit Increased?”

The secretary of treasury wants to increase his spending again.  I think the debt professionals at Saturday Night Live have some advice for them.

 Now I know this is complicated, so maybe the Secretary of the Treasury should watch this once again. 

I thought these people were supposed to be smart.  There is a threat of a recession on the horizon, and we are spending more and more now.  If we can’t manage our budget during the better years what will we do when things actually get bad?  What are they thinking? 

The worst part is that we continue to have faith in them.  Social security is going to be a complete disaster, medicare and medicaid will be worse, and who knows who will finance the retirement of military vets.  It’s going to be great.  A bunch of cranky old sick people who know how to kill other people wandering around town in a bad mood.  If we already have massive liabilities that we don’t know how we are going to cover, why are we increasing spending right now?  We should be cutting expenses and getting ready for the perfect storm that is coming, both as a country and personally.  That means, “Don’t buy stuff you cannot afford”. 

Savings rates were once positive in this country.  The fact that they are already negative is very scary, especially seeing that baby boomers are still supposed to be socking away money.  If, as a country, we have a negative savings rate now, where will we be in 15 years when all of the baby boomers retire.  With those extremely negative savings rates, our credit rating around the world will be dropping like a rock.  We will be the country that is paying high interest rates because there is so much doubt in our ability to repay our debts. 

It looks like they may just use infaltion to debase the debts, slaughtering the accounts of those who were responsible and saved.  The catch is actions like this promote irresponsible behavior in the citizens.  Savers are what allows growth of industry through financing new equipment, factories, and research.  Why do we punish them?  I guess the government will end up getting the citizens it deserves in this case. 

It will be interesting to see how things shake out, but it would be a lot more pleasant waiting if both our government and our citizens tried to be a little responsible in the meantime.

If you vote or improve ratings or readership, nothing is your fault!

Today, in the CBS news column FDR Solves the Mortgage Crisis, Andrew Jakabovics pandered to the public with the classic line.  It’s not your fault, it is the fault of big business.

Basically, the theme is that the government should jump in and give mortgages to the people if they can’t get mortgages elsewhere.  The government is encouraging risky behavior by allowing people to reap the benefits of risky moves, while protecting them from the downside. 

I think the government should extent the relief that they have given to those in Vegas.  If we are protecting those who took risky mortgages, we might as well protect those who didn’t do so well in the stock market.  If the stocks drop, the government should give them a tax credit for fifty percent of their losses.  After all, isn’t the security of our retirees of just as much concern as having others live in a home instead of an apartment?  After all, it’s for the children. (Don’t ask me how.) 

It seems that others are very confident of our abilities to repay all of our mortgages based on the exchange rates.  Euro hit an all time high, and the pound went over $2.  Inflation is starting to rear it’s ugly head, as shown by the rapidly falling dollar.  It stinks, but we’ve been bringing this on for a long time.  The US has a bit of a hangover from the mortgage binge, and we have to pay the piper at some point. 

People are also trying to paint the picture of a mortgage market in which people just can’t get a loan, even with great credit.  According to the Wall Steet Journal,banks are tripping over themselves to give conventional mortgages to credit worthy borrowers.  This is just what should be happening.  Bankers should cut risky loans.  They are obligated to do this by their depositors, who depend on them to remain liquid.  Credit Unions, who are very conscious of the fact that they are lending out depositor (basically owner) money have had a fraction of the default rate.

On the radio a couple of days ago I heard a demagogue spouting out bull about how the bankers and evil mortage industy were responsible for this mess.  I assume grocery store owners are responsible for obesity, baseball bat owners are responsible for thuggery, and dell is one the line for carpel tunnel syndrome. 

We have dug ourselves into this hole and it is time for us to get out through thrift, hardwork, and saving.  The plan proposed by Jakabovics is based on spending taxpayer money to subsidize foolishness.  Let’s move in the other direction.

Bush Pushing for Bank Bail Out

I can still remember a very true garfield comic, in which garfield said, “If I am telling a lie, may lightning strike. . . the dog next door.” (thunder and yipping). This is what the savings and loan industry wants now. They know that if they show themselves as irresponsible enough, they can get the government to bail them out once again, taking money from the taxpayer and funneling it into hands of bank owners and people who couldn’t afford a house.  This is very similar to the bailout that they did of those who lost substantial sums in Vegas.

The government is now doing its patriotic duty in making sure that profits remain high in the banking industry. Banks made fortunes in the last five years off of the rush to pull cash out of houses. Now, when there poor risk management is about to kick them in the teeth, Bush is prepared to guarantee the loans. Now we will end up on the hook for failed loans. We had a savings and loan crisis in the eightees and we bailed out the banks. We are about to do the same things again. In addition, injecting this new money will serve to inflate the currency and steal value from the savers in this country at an ever increasing rate.

We all know who pays. The taxpayer ends up putting up the cash. But we don’t have any money, so we will finance the banks with our deficit. The government continually acts like it has the ability and the kindness to provide money all around. They steal the money from our children, putting an increasing burden on those of the future.

Everyone knows those annoying people at the store or restaraunt who’s kids are obnoxious. The parents threaten and cajole, but the misbehavior continues as there are no real consequences. There kids later turn into juvenile delinquents, and from there they become more dysfunctional than your usual adult. We have been doing this with industry and communities (see New Orleans and Hurricane Katrina). There need to be some consequences for the irresponsible, and starting all over with renting, and slowly saving up another down payment (if there was one at all) is fair. They have paid the price for their lack of vision. (But at least they won’t be killed by the emperor)

I will put it bluntly. People should lose their houses if they can’t afford them. Banks should suffer massive losses if they made bad loans for a large scale. Don’t punish the honest taxpayer and their children because banks and homeowners are irresponsible.

Lack of liquidity in the markets, and inflation

When I was at work today, an employee who likes to follow the markets talked about the the liquidity issues that a lot of the banks are facing.  They have loaned out a ton of money that people are having trouble repaying.  Here is a quote.

“Extraordinary optimism sustained an orgy of speculation.  Books were written to prove that economic crisis was a phase which expanding business organization and science had at last mastered.  ‘We are apparently finished and done with economic cycles as we have known them,’ said the President of the New York Stock Exchange.”

When was this from?  September 1929.  The whole passage was pulled from Churchill’s The Gathering storm (1948).  I believe that the modern day comparison is “irrational exuberance”.   We have spent money that we do not have, and the whole country is mortgaged up to the hilt.  The US still wants to be big and bad, but economics are what provide worldwide power. 

Karl von Clausewitz said, “To secure peace is to prepare for war.”  Instead of preparing for future wars that we could win decisively, we have slowly whittled away our strength in piecemeal wars.  Foreign governments are emboldened as they see us stretched to the breaking point.  The number of people employed by the government leviathon are people that can’t be employed in contructive industry or in the military.  Those killed and maimed in war represent permanent losses to the country economically (not to mention their families met someone in a hospital or in a body bag.)  Those people permanently injured in action also require permanent benefits, including medical care with its escalating costs. 

We could afford these type of expenses if we weren’t hemoraging money in every other sector.  If in San Francisco the cost of illegal immigrants is not high enough, some people can fix that.   They wish to raise taxes to pay for the green cards of the illegal aliens.  It’s natural that we want to be the benefactor of poor nations, but we do not have the resources to take care of the problems of the world.  After we get our own house in order, from the federal government level down to the individual household, we can and should individually use our resources to help others.  Until then, we are like people buying gifts for everyone with our credit card, while planning to go bankrupt.  The polititians are afraid to tell Americans that the way out might require a bit of hard work and sacrifice.  They’d rather cheat their way out, through the magic of inflation.

The central banks of the world pumped over $300 billion into the world markets during 48 hours on Thursday and Friday (cough cough inflation).  What happens to the global econonmy when fiat money is pumped into the system?  It steadies temporarily, but we are delusional if we think that this is a permament fix.  This is a bandaid over a wound that is festering.  It has been festering for years, and it will take a major surgery to clean it up.  I’m not looking forward to it. 

The big rise in prices is half way in the door

I don’t know what you see when you go to the supermarket, but I have seen a trail of prices going up.  Food, oil, metals, and most other commodities have moved up.   A lot.  Less than one year ago I paid $.79 for orange juice concentrate.  It is now $1.39.  The price of ice cream is up about 25-30% (which hurts even more).  Everything in the produce department also seems to have taken an oil induced bounce upwards.

Houses have stabilized, but the payment for a basic house still eats up a very large portion of the paycheck of your average American.  Even with the house of prices stagnating or staying steady, most house payments move up as the cost to borrow is moving up.  The price of various building materials have gone up because of the cost of the underlying commodities.  The prices of metals is extremely pronounced, especially copper.  Because my wife and I plan on building a house in a few years, I invested in FCX to protect me against the high price of copper.   The price of some building materials has gone down since the housing bubble has been popped, but demand from the developing world, especially China, has supported higher prices for most metals.  It is just a matter of time until the prices of these materials trickle through the system and result in higher manufactured product prices.  Wages seem to lag other indicators.  That will kill the people who have adjustable rate loans, (inflation brings higher interest rates).   House builders (there will be a ton of excess on the market because of forclosures, and buidling costs will be high), and low income people (they spend a greater proportion of their income on food and lodging) will also help trickle down an economic downturn.

The big question is who wins?  People who have large amounts of fixed interest debt with a steady income will have the real value of their debts quickly decline, but you better make sure you are not one of those who has their income interrupted.   Commodities will also help carry people through, because they have intrinsic value.  Stock markets will be hit, but will try to rise a little more than inflation, although the economic situation will make it difficult.  The biggest winner is the biggest debtor, the good old government.  Then can reduce debts to a fraction of their initial value through inflating the currency, and at the same time, have more of the printed money they can distribute, using the greatest tax ever devised, inflation.

Who loses?  Those who put their faith in the fiat money of a government on a ride to bankruptcy.  Stock markets will be hit, but will try to rise a little more than inflation, although the economic situation will make it difficult.  Those who have bonds will see rates rise, and will be in a race to see whether their interest out paces inflation.  It will be interesting to see what the government does with TIPS (inflation protected bonds).   Grandma and Grandpa will wonder what they should do as the value of their annuity payments keep dropping.

What can we do to get ready?  In my humble opinion, get assets that have some true worth.  A house will keep you warm.  Stocks are partial ownership in a company.  Make sure that company produces things that people need and is well run.    If you have any variable rate debt, get rid of it.  That includes pretty much anything besides a fixed rate mortgage.  If anyone has any good ideas on picking up wreckage from the storm, let me know.  Everyone should invest in commodities.   I am long a case of beans, 15 cans of tuna, a bunch of spaghetti sauce, and some sausage.  When something is on sale at a significant discount, buy more than one weeks supply.  Right now I am making sure I will be prepared to weather it while not reducing my chances of eventual retirement.