In Search of the Perfect Investment

A few years ago, at precisely the wrong time, at the peak, I bought a two-bedroom apartment down the road for $1.5 million. It was an incentive to keep Michael in New York. (It didn’t work.)

Fast forward five years, Manhattan real estate is red hot. (I don’t know why. Maybe the Russians have given up on Cyprus?) The identical apartment one floor below is going for $2.4 million. I”m up 60% for doing nothing. I’m an investment genius.

But then what? Sell it and buy muni bonds? Nah. Interest rates are too low. Leave it in cash until interest rates rise?

Every investing conversation I have these days seems to start and end with “Interest rates are soon going to explode.” And that will destroy the value of all those real estate deals and all the stocks I own. (The presumption is that the recent stock market pop has been almost entirely due to the absence of decent bonds yields. It hasn’t been a function of exploding corporate earnings, which, if anything, have been narrowing.)

Most everyone has gotten the yield question wrong. Interest rates have not risen. They’ve stayed low and, in fact, have fallen even lower.

As the interest rate discussion rages, I bring you this piece from the latest New Yorker. I think he’s got it right. Interest rates are staying low.

The Financial Page
Shut Up, Savers!
by James Surowiecki April 8, 2013

Ben Bernanke may look like a mild-mannered academic, but, according to a chorus of critics, the chairman of the Federal Reserve is one of history’s great thieves. Over the past four years, the Fed has kept interest rates near zero and has pumped money into the economy by buying trillions of dollars in mortgage-backed securities and government debt. The idea is that a so-called “loose” monetary policy can help galvanize a weak economy-for instance, by encouraging businesses to invest and hire and by making it easier for people to buy homes. But, to his detractors, Bernanke is guilty of waging a “war on savers”-fleecing people, especially retirees, of hundreds of billions of dollars that they could have earned in interest. Among many conservatives, this notion has become mainstream. Last year, both Mitt Romney and Paul Ryan regularly attacked the Fed for keeping interest rates too low, and, when Bernanke testified before Congress in February, Senator Bob Corker, of Tennessee, upbraided him for “throwing seniors under the bus.”

Certainly, it’s not the easiest time to live off interest income. The average rate on a savings account is less than 0.25 per cent. Long-term certificates of deposit offer rates well below inflation, and even a ten-year government bond yields less than two per cent. No wonder people with lots of savings want the Fed to start tightening-to stop buying bonds, and to raise interest rates. But most Americans depend on wages and salaries for their livelihood, not on interest income, and higher interest rates would hurt the job market, which is still weak, with unemployment near eight per cent and wages barely rising. Also, most Americans have more debt than savings, which means that they benefit directly from lower interest rates. Only an estimated seven per cent of all financial assets nationally are directly held in interest-bearing assets (like CDs or savings bonds). Even seniors, one of the groups most obviously hurt by low interest rates, get only ten per cent of their income from interest payments. Bernanke has been accused of waging class warfare and forcing senior citizens to eat cat food, but the simple fact is that people who are net savers are, on average, wealthier than those who aren’t.

And what if the Fed did raise interest rates? It’s unlikely that savers would be better off in the long run, since the move would slow down the economy as a whole and perhaps even tip us back into recession. Most savers aren’t just savers, after all: they are also workers or homeowners or stock-market investors-groups that need a growing economy to prosper. Even people who live entirely off interest rely on economic growth. “There’s this myth that monetary policy is a zero-sum game,” Scott Sumner, an economist at Bentley University who has become an influential advocate for a more expansionary Fed policy, says. “But it’s perfectly possible that looser monetary policy could make both savers and borrowers better off. When the economy is weak, tight money makes the whole pie smaller. When the economy is robust, we get more output, which means more real income, and that usually means higher rates of return for investors.” Indeed, the biggest culprit when it comes to low interest rates isn’t the Fed: it’s the weak economy, which has held down the demand for credit and made us all risk-averse. That’s why interest rates are low across most of the developed world-even in countries where central bankers haven’t been buying up assets the way the Fed has.

The war-on-savers crowd makes Bernanke out to be a wild-eyed ideologue, willfully risking hyperinflation and sacrificing the well-being of retirees to his reckless schemes. But, if you look at the U.S. economy, you don’t see any of the signs you’d expect if the Fed were acting recklessly: the money supply is not growing rapidly, and inflation is trivially low. If anything, Fed policy has been too cautious; it could have done more to rev up the economy. Sumner has argued that the Fed could have set a public target for nominal G.D.P. and committed itself to printing as much money as needed to get there. And a new research paper from the New York Fed suggests that we should have aimed at a higher rate of inflation, which would have stimulated spending and investment by making it less attractive to just park money in the bank. Bernanke’s critics like to point to the still weak job market as evidence that the Fed’s policy hasn’t worked. It’s far more likely evidence that the Fed hasn’t gone far enough.

It’s easy to understand why savers feel like collateral damage in the Fed’s fight against recession, but too much sympathy for their plight is dangerous. Sumner points out that, in the past century, there have been only five occasions when a central bank tried to end a zero-bound-interest-rate policy. On four of those occasions, the central bank acted too soon, the economy slipped back into recession, and rates had to be cut all over again. “Raise rates now,” Sumner says, “and you can quickly turn what looks like a recovery into a double-dip recession.” Currently, the big risk isn’t that the Fed will wait too long to raise interest rates; it’s that pressure from savers will cause it to raise them prematurely. The economy may be looking a bit perkier, but it’s still growing slowly, and it has an enormous amount of ground to make up; median household income, for instance, is still seven per cent lower than it was before the recession. It may be hard for people to live off their savings these days, but the far more urgent problem is that it’s even harder for people who don’t have jobs, or whose wages are stagnant, to save anything at all. 

Apple Yuch. Once again Tim Cook is spending his time apologizing, not introducing new products. This time he’s apologizing not over crazy maps, but over an insane warranty policy in China that gives customers only a one-year warranty on iPhones — while the law in China apparently says it should be two years. I can’t find any word of Mr. Cook extending the iPhone warranty in China to two years — which is what I would have done in  a heartbeat. Meanwhile Goldman Sachs has downgraded Apple. I’m guessing they figured there was no investment banking business with a company with $150 billion plus in cash. Or am I just cynical? Meantime, Apple’s stock continues to look like dog doo-doo.

Apple’s P/E is now under 10, which makes it “cheap” in many people’s view. But what has always driven the stock has been the infatuation with its new products. It’s always been a momentum stock.

Since Steve died, the company is in disarray, with no hot new products and too many senior management departures — a result of senior bickering.

Goldman said ” “The stock’s upside potential should be more limited than we previously anticipated.”

My family says I’m nuts. This won’t work for me. But the  piece below on living with less rings a bell in my brain. Read it.

Living With Less. A Lot Less.
By GRAHAM HILL

I LIVE in a 420-square-foot studio. I sleep in a bed that folds down from the wall. I have six dress shirts. I have 10 shallow bowls that I use for salads and main dishes. When people come over for dinner, I pull out my extendable dining room table. I don’t have a single CD or DVD and I have 10 percent of the books I once did.

I have come a long way from the life I had in the late ’90s, when, flush with cash from an Internet start-up sale, I had a giant house crammed with stuff – electronics and cars and appliances and gadgets.

Somehow this stuff ended up running my life, or a lot of it; the things I consumed ended up consuming me. My circumstances are unusual (not everyone gets an Internet windfall before turning 30), but my relationship with material things isn’t.

We live in a world of surfeit stuff, of big-box stores and 24-hour online shopping opportunities. Members of every socioeconomic bracket can and do deluge themselves with products.

There isn’t any indication that any of these things makes anyone any happier; in fact it seems the reverse may be true.

For me, it took 15 years, a great love and a lot of travel to get rid of all the inessential things I had collected and live a bigger, better, richer life with less.

It started in 1998 in Seattle, when my partner and I sold our Internet consultancy company, Sitewerks, for more money than I thought I’d earn in a lifetime.

To celebrate, I bought a four-story, 3,600-square-foot, turn-of-the-century house in Seattle’s happening Capitol Hill neighborhood and, in a frenzy of consumption, bought a brand-new sectional couch (my first ever), a pair of $300 sunglasses, a ton of gadgets, like an Audible.com MobilePlayer (one of the first portable digital music players) and an audiophile-worthy five-disc CD player. And, of course, a black turbocharged Volvo. With a remote starter!

I was working hard for Sitewerks’ new parent company, Bowne, and didn’t have the time to finish getting everything I needed for my house. So I hired a guy named Seven, who said he had been Courtney Love’s assistant, to be my personal shopper. He went to furniture, appliance and electronics stores and took Polaroids of things he thought I might like to fill the house; I’d shuffle through the pictures and proceed on a virtual shopping spree.

My success and the things it bought quickly changed from novel to normal. Soon I was numb to it all. The new Nokia phone didn’t excite me or satisfy me. It didn’t take long before I started to wonder why my theoretically upgraded life didn’t feel any better and why I felt more anxious than before.

My life was unnecessarily complicated. There were lawns to mow, gutters to clear, floors to vacuum, roommates to manage (it seemed nuts to have such a big, empty house), a car to insure, wash, refuel, repair and register and tech to set up and keep working. To top it all off, I had to keep Seven busy. And really, a personal shopper? Who had I become? My house and my things were my new employers for a job I had never applied for.

It got worse. Soon after we sold our company, I moved east to work in Bowne’s office in New York, where I rented a 1,900-square-foot SoHo loft that befit my station as a tech entrepreneur. The new pad needed furniture, housewares, electronics, etc. – which took more time and energy to manage.

AND because the place was so big, I felt obliged to get roommates – who required more time, more energy, to manage. I still had the Seattle house, so I found myself worrying about two homes. When I decided to stay in New York, it cost a fortune and took months of cross-country trips – and big headaches – to close on the Seattle house and get rid of the all of the things inside.

I’m lucky, obviously; not everyone gets a windfall from a tech start-up sale. But I’m not the only one whose life is cluttered with excess belongings.

In a study published last year titled “Life at Home in the Twenty-First Century,” researchers at U.C.L.A. observed 32 middle-class Los Angeles families and found that all of the mothers’ stress hormones spiked during the time they spent dealing with their belongings. Seventy-five percent of the families involved in the study couldn’t park their cars in their garages because they were too jammed with things.

Our fondness for stuff affects almost every aspect of our lives. Housing size, for example, has ballooned in the last 60 years. The average size of a new American home in 1950 was 983 square feet; by 2011, the average new home was 2,480 square feet. And those figures don’t provide a full picture. In 1950, an average of 3.37 people lived in each American home; in 2011, that number had shrunk to 2.6 people. This means that we take up more than three times the amount of space per capita than we did 60 years ago.

Apparently our supersize homes don’t provide space enough for all our possessions, as is evidenced by our country’s $22 billion personal storage industry.

What exactly are we storing away in the boxes we cart from place to place? Much of what Americans consume doesn’t even find its way into boxes or storage spaces, but winds up in the garbage.

The Natural Resources Defense Council reports, for example, that 40 percent of the food Americans buy finds its way into the trash.

Enormous consumption has global, environmental and social consequences. For at least 335 consecutive months, the average temperature of the globe has exceeded the average for the 20th century. As a recent report for Congress explained, this temperature increase, as well as acidifying oceans, melting glaciers and Arctic Sea ice are “primarily driven by human activity.” Many experts believe consumerism and all that it entails – from the extraction of resources to manufacturing to waste disposal – plays a big part in pushing our planet to the brink. And as we saw with Foxconn and the recent Beijing smog scare, many of the affordable products we buy depend on cheap, often exploitive overseas labor and lax environmental regulations.

Does all this endless consumption result in measurably increased happiness?

In a recent study, the Northwestern University psychologist Galen V. Bodenhausen linked consumption with aberrant, antisocial behavior. Professor Bodenhausen found that “Irrespective of personality, in situations that activate a consumer mind-set, people show the same sorts of problematic patterns in well-being, including negative affect and social disengagement.” Though American consumer activity has increased substantially since the 1950s, happiness levels have flat-lined.

I DON’T know that the gadgets I was collecting in my loft were part of an aberrant or antisocial behavior plan during the first months I lived in SoHo. But I was just going along, starting some start-ups that never quite started up when I met Olga, an Andorran beauty, and fell hard. My relationship with stuff quickly came apart.

I followed her to Barcelona when her visa expired and we lived in a tiny flat, totally content and in love before we realized that nothing was holding us in Spain. We packed a few clothes, some toiletries and a couple of laptops and hit the road. We lived in Bangkok, Buenos Aires and Toronto with many stops in between.

A compulsive entrepreneur, I worked all the time and started new companies from an office that fit in my solar backpack. I created some do-gooder companies like We Are Happy to Serve You, which makes a reusable, ceramic version of the iconic New York City Anthora coffee cup and TreeHugger.com, an environmental design blog that I later sold to Discovery Communications. My life was full of love and adventure and work I cared about. I felt free and I didn’t miss the car and gadgets and house; instead I felt as if I had quit a dead-end job.

The relationship with Olga eventually ended, but my life never looked the same. I live smaller and travel lighter. I have more time and money. Aside from my travel habit — which I try to keep in check by minimizing trips, combining trips and purchasing carbon offsets – I feel better that my carbon footprint is significantly smaller than in my previous supersized life.

Intuitively, we know that the best stuff in life isn’t stuff at all, and that relationships, experiences and meaningful work are the staples of a happy life.

I like material things as much as anyone. I studied product design in school. I’m into gadgets, clothing and all kinds of things. But my experiences show that after a certain point, material objects have a tendency to crowd out the emotional needs they are meant to support.

I wouldn’t trade a second spent wandering the streets of Bangkok with Olga for anything I’ve owned. Often, material objects take up mental as well as physical space.

I’m still a serial entrepreneur, and my latest venture is to design thoughtfully constructed small homes that support our lives, not the other way around. Like the 420-square-foot space I live in, the houses I design contain less stuff and make it easier for owners to live within their means and to limit their environmental footprint. My apartment sleeps four people comfortably; I frequently have dinner parties for 12. My space is well-built, affordable and as functional as living spaces twice the size. As the guy who started TreeHugger.com, I sleep better knowing I’m not using more resources than I need. I have less — and enjoy more.

My space is small. My life is big.

This is the funniest New Yorker cartoon ever. And it doesn’t have a caption:

He’s just slain the dragon and she’s getting on his case because he’s dripping dragon blood onto the carpet. Susan thought it was funny, too. We have the same color carpet and increasingly stringent rules about removing our shoes at least 500 yards from our front door.

Harry Newton who visited his ear doctor yesterday. The doc admonished Harry for “waiting too long” to have his ear wax removed. There was a gigantic buildup. Symptoms: Harry couldn’t hear any more and his ears were itchy. Of all the visits to a doctor you can have, this is the best. A two minute procedure. Bingo, you can hear. The world is wonderful, again. A $70 cleaning is much cheaper than a $6,000 set of hearing aids. …

Too much information, Harry.

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