By: Arnold Bock with Lorimer Wilson
It is genuinely amazing that so many economists and investment professionals continue to promote "business as usual" investment advice. Their clients will surely pay a steep price for this "head in the sand" approach to investing. Here's why.
Current Investment Realities
a) Stocks - Risky
In spite of the fact that equities are more or less fully priced, there are those who continue to recommend stocks without caution to their inherent risk. We know the FED's propensity to create money out of thin air continues unabated and that money has to find a home somewhere. Is a traditional portfolio of stocks the place to be in this new environment?
b) Bonds - A Fool's Game
Safe haven investing in government and investment grade corporate bonds is a fool's game. Why? Aren't bonds designed to reduce risk and preserve one's equity? With interest rates at multigenerational lows, any change in interest rates can only go in one direction...higher. Rising interest rates will take a terrible toll on bond prices. More insulting yet is that bonds and fixed interest rate investments of all kinds earn infinitesimal returns these days.
c) Residential Real Estate - Still Overpriced
Now that residential real estate in the U.S. has experienced more than a 30 percent reduction from its highs, maybe the time is ripe to buy again? Not on your life! Real estate everywhere remains at heights well above intrinsic values. Even the International Monetary Fund suggested recently that housing is overpriced almost everywhere in the world and will therefore remain anaemic as an investment for years ahead.
Currency Calamities Coming
If the realities above aren't sufficiently stress inducing, consider what happens to the purchasing power of our currency as it competes with others to see which can devalue quicker? Why would governments and their central banks want to diminish the purchasing power of their own currency?
a) Competition for exports requires lower prices. Trashing the value of one's currency also helps with a positive balance of trade in that a cheaper currency makes imports more expensive.
b) Lower currency values allow governments to pay off debts and meet future obligations to their citizens for pensions and health care with cheaper currency.
c) Price inflation which follows, unfortunately, also lowers the standard of living for most citizens. Apologists might suggest this collateral damage is a necessary price to be paid to achieve the greater good.
d) Skilfully executed, a devalued currency also allows the government to avoid having to default on its mountains of accumulated debt.
If explained and communicated with cynical precision, the voting public might even be induced to accept reduced living standards without reverting to Greek or French style rioting to express its antagonism for having been raped by its own government.
Why the Aversion to Reality?
How accurate are these economic and financial bad news facts? Massive accumulated debt and unfunded future liabilities and obligations accrued by financial institutions such as insurance companies, pension funds and large banks, can't be paid. Of course many governments and their agencies are approaching insolvency too.
While most countries have not yet defaulted, an honest analysis of the value of their assets, income streams, obligations and realistic assessment of the broader global economy, leaves little doubt as to what will transpire ahead. When governments fail, who is available to bail out the financial sector? More importantly, who bails out governments?
Kicking the can down the road by talking up "recovery" in the economy doesn't change reality. At best, it merely buys more time for the tooth fairy to work her magic or that default occurs on someone else's watch. Politicians and governments are masters at this game.
So why are so many smart and informed persons in academia, the financial sector and government not acknowledging these realities?
Self interest might be a good place to start. If one is employed in the financial industry or government, employment tenure is paramount. Aside from a generous salary, a handsome defined benefit, inflation adjusted pension is guaranteed at the end of one's loyal service.
For academics, their credentials frequently infer credibility thus yielding lucrative consulting contracts. Clients frequently aren't interested in objective assessments, but rather a saleable, positive and safe report for the benefit of the Directors or the investment community. As with employees, it is simply more comfortable to 'go along and get along.' Parroting the party line and prevailing wisdom is safer...and more profitable.
People possess a distinct propensity to avoid unpleasant ideas, realities and prospects. Denial is a coping mechanism common to us all regardless of our intelligence, education, knowledge or income. Therefore deliberately remaining ignorant or accepting conventional wisdom from persons pursuing their separate agendas is foolish, but easy.
Does this suggest persons in positions of authority, responsibility and power deliberately lie? Of course they do! As an absolute minimum they speak in half truths, omit highly relevant information or say nothing. Is this so difficult to believe given that so much of their personal and organization's self interest is at stake?
Confidence is crucial. Causing investors and voters to remain confident is essential in order to avoid failure. Many financial institutions, governments and pension funds are effectively insolvent, but they have not declared bankruptcy in spite of this reality, simply because enough confidence continues to prevail with the assistance of a little creative accounting.
Self interest, as perceived and interpreted by each of us, is a dominant motivation. Listening to or reading the comments of the Federal Reserve Chairman and Treasury Secretary is at best to receive half truths. Quite simply, their jobs are to create and maintain the confidence of the public.
Where is the Public Concern?
We the 'sheepeople' like to travel in packs. We associate with persons of similar social class, age, and values, if for no other reason than it makes life more comfortable. Our associates, colleagues and friends validate our beliefs, because they believe what we believe. Yes, the tendency is to want to be part of a majority... a herd which follows opinion leaders like docile sheep. There is satisfaction and comfort in knowing we are correct, even safe, among folks of similar beliefs. That is largely why information and opinion expressed in the mainstream media is accepted without thought or reflection, much less challenge.
Where Should We Invest Our Money These Days?
Commodities, including energy, agriculture, precious and base metals and other tangibles should be our safe haven investment refuge. They are real, relatively underpriced, and are undeniably necessary. Moreover, most are scarce in a fast growing world of 6.5 Billion consumers, many of whom are also moving into the middle class in emerging markets and developing nations. Middle class incomes dramatically increase demand as well.
Economic policy direction is increasingly clear. U.S. Fed Chairman Bernanke continues to issue strong signals that massive money creation, conjured out of thin air, better known by the sophisticated term 'Quantitative Easing', will continue with a vengeance. It is the favourite wrench in his toolkit. A devalued dollar and price inflation follows.
The central thesis of this piece is that there is demonstrated reluctance by so many financial professionals, investment advisors and individual investors to understand and accept the current direction of our financial and economic system. Consequently, investors all too frequently insist on making investment decisions contrary to their own self interest.
As governments compete to devalue their currencies and financial institutions and governments both try to evade the inevitable consequences, it seems only reasonable we would want to adopt measures designed to mitigate the negative financial impacts on ourselves. On a more positive note, these realties also provide many opportunities to prosper.
The fact that so many investment professionals can't bring themselves to get with the program, doesn't mean we individual investors have to wait. Waiting could be financially fatal!
Get your "head out of the sand" and face up to the realities that are impacting our economy and the need to put some gold, silver and/or other investment tangibles in your portfolio. It's a "no brainer" decision if ever there was one!