This experiment began several years ago when I received a brochure in the mail advertising silver bullion coins as an investment vehicle. The “hook” was, “We will sell you two silver eagles for the price of one, if you agree to read our special report on silver.” When I saw this, I thought, “I could give one of these coins to a friend who was having money problems as a touch point for her prayers.” I sent her a coin and a notebook with instructions. Every day we prayed that the Lord would grant her wisdom in the area of finance. Every day she made an entry in her notebook.
The initial experiment was extremely successful. At the end of six months, her attitude towards money was radically different. She began to systematically eliminate her consumer debt. She changed some behaviors that were sabotaging her financial situation. Then towards the end of the six month experiment, she was able to move into her own home for the first time in her life.
Finally, when the participants are ready, they will give their coin with a blank notebook to a friend or a family member who is ready to change their relationship with money. In this way, friendship and blessings will keep flowing forward forever, even into eternity.
I was a big fan of the police drama/soap opera, Hill Street Blues back in the early eighties. The characterizations were exceptionally well done. The intriguing story lines contained just about the right amount of moral ambivalence. The world, after all, is a complex place requiring, well, compromise from time to time; or does it? Every episode began with the role call. Sergeant Phil Esterhaus, a tough old cop respected by one and all, announced shift assignments to the assembled uniform, plain clothes, and detectives. He informed the troops of special problems or areas requiring an unusual concentration of police resources. He always ended his sometimes serious, sometimes funny or absurd announcements with a warning, “Let’s be careful out there.”
I frequently end blog posts on investing with the same caveat. I simply do not know what the future will hold. Neither do you.
This appears to be a bad time to invest large sums of money. If you are at a time in life when you are essentially engaging in dollar cost averaging by having a percentage of your pre-tax income deducted from your paycheck for your 401(k), you really don’t need to worry. As long as you maintain an age appropriate balance over a sufficiently long period of time, Modern Portfolio Theory conclusively demonstrates that you will be OK. During your working years, you are investing relatively small sums of money over relatively long periods of time.
However, if you are retired and (hopefully) managing larger sums of money the stakes are higher and the risks greater. Now you are making decisions involving large sums of money over relatively short periods of time with no possibility of earning your way out of a serious mistake. Yuk!
Over the next week or so, I will need to decide what to do with the proceeds from a good old CD that paid an acceptable interest rate. In today’s zero interest rate world the Federal Reserve Bank is relentlessly punishing savers and conservative investors with low interest rates in an attempt to stimulate the economy. Although individual debt load as well as the baby boomers headed for retirement (a demographic time bomb about to explode) would indicate deflation rather than inflation, our national debt is now so large the only way out looks like a controlled devaluation of our currency. Inflation is deadly to cash, savings accounts, certificates of deposit, and bonds.
If interest rates are near zero can they fall any further or will they go up?
How about equities? The Case Shiller Price Earnings Ratio is flashing danger at 26.1 even after a rather nasty couple of weeks on the Street. Historically this average runs about 16.6. Anything over 25 will lead to a “correction.” In 2008, that correction destroyed about 40% of the total value of American equities. This is not a good time to buy stocks, unless you are adding small amounts to a well diversified portfolio in a disciplined manner.
How about bond funds? Bonds tend to track with CDs. The interest they pay is a function of perceived risk. Conservative bond funds holding investment grade securities from major corporations are hardly paying enough of a premium to justify the risk. Junk bonds are overvalued if you believe, as I do, that the world economy is headed for a slow down. A slow down could cause the default rate to jump overnight. This would reduce the value of your junk bonds to—junk?
The current U.S. recovery has never trickled down to Main Street. The unemployment rate has thankfully improved since the dark days of 2009, but higher paying full time jobs lost in the last recession have been replaced with lower paying jobs and a higher percentage of part time jobs. When calculating U3 unemployment, a part time job counts the same as a full time job.
Europe appears to be in worse shape than the U.S. The problems with the PIGS have not been solved. Over the last couple of weeks the Greek stock market has just about collapsed. It appears that an extreme left wing nationalistic party will win big in the next election. They want to stick it to the Germans who lent them money for the big party they threw for themselves back in the 1990s. A number of large Spanish banks are on the verge of collapse. In Spain the unemployment rate is running around 25%. For youth that number is running around 50%! There is a danger of a lost generation. The situations in Ireland, Portugal, and Italy are not much better. The two big boys, France and Germany, are better off than most of Europe, but France is starting to hurt. Their current government is generating serious problems. In Germany, the economic engine is finally running out of steam. Europe (with a few possible exceptions like Sweden) doesn’t look like a good place for new money.
Japan is heading towards a major financial crisis. With a national debt to GDP ratio over 200% and a major demographic crisis (worse than the Baby Boom) their future looks bleak. They are devaluing their currency in a desperate attempt to increase exports and pay down the national debt. Perhaps the high rollers can borrow Yen on the carry trade, but even the hedge fund managers are going to have a hard time finding a home for this “hot money.”
China is coming to the realization that they can not continue to increase GDP at 10% forever. The Chinese stock market has been a gamblers paradise. That appears to be coming to an end. Their notorious empty cities built with Government mandated money by corrupt crony capitalists have not solved the long term need for wealth producing jobs in the private sector.
How about the rest of the BRIC countries? Brazil has major problems. Russia is getting killed by the drop in the price of oil. The Ruble has dropped 50% in value over the last year. The Russian Government has responded by raising interest rates to over 17%. That should choke out just about any domestic economic growth. India is not in the news, but the level of corruption and a lack of financial transparence in that country make it difficult for the outside investor to know what they are actually buying. It doesn’t look like the developing world is a good place for my money.
About the only thing left are niche investments. Real Estate Investment Trusts (REIT) are paying out at 3%; not enough to justify the downside risk to the value of the underlying properties in another recession. Oil and gas pipeline Master Limited Partnerships (MLP) look interesting (for a little bit of new money), but given the current collapse in oil price where will the new money come from to “fuel” growth? I think I could put a few more bucks in Intermediate Term Tax Free Municipal Bonds, but again we are not talking a large amount of money. A number of municipalities are facing bankruptcy at the hands of public unions. Politicians made pension promises that they could not keep. Now the birds are coming home to roost.
All I can say is, “Please! Let’s be careful out there.”