Harry Newton's In Search of The Perfect Investment
AM EST, Wednesday, December 10, 2008: "Gas was $1.49 a gallon
yesterday morning at the Race Track gas station in Waco, Texas, reports reader
David Rhoden. He says it's "the best stimulus package going and it's
There is more
good news. It's now clear that our present and our upcoming government will
do everything, and anything to keep this economy from slip sliding
While I clearly
can't time this market, it does increasingly look like the time to start nibbling
at solid equities -- not financials. Keep reading.
lost decade: This week's Economist's leader
is called "Where have all your savings gone?" And the Economist's
conclusion? "Implausible as it may sound, right now equities and corporate
bonds are a better long-term bet than cash."
may draw the wrong lesson from history
and European savers it has been a lost decade. After two booms and two busts,
stockmarkets have earned them nothing, or less, in the past ten years. Low
interest rates have made bonds and bank deposits unrewarding too. Were it
not for the tax relief they receive, contributors to personal pension plans
would have been better off keeping their money under their mattresses. It
will be little consolation to Westerners that savers in Japan have known
this empty feeling for far longer.
figures are enough to put anybody off saving. American mutual-fund assets
have declined by $2.4 trilliona fifth of their valuesince the
start of 2008; in Britain, the drop is more than a quarter, or almost £130
billion ($195 billion). The value of global stockmarkets has shrunk by maybe
$30 trillion, or roughly half. These figures put the losses on credit-related
securitieswhere the financial crisis beganinto the shade.
Nor has the
bad news been confined to equities. This year the value of all manner of
risky investments, from corporate bonds to commodities to hedge funds, has
been clobbered. The belief that diversification into alternative assets
could prevent investors losing money in bear markets has proved false. And
of course housing, which many people counted on for their retirement nest-eggs,
has lost value too (see article).
As a result,
saving seems like pouring money into a black hole. Any American who has
diligently put $100 a month into a domestic equity mutual fund for the past
ten years will find his pot worth less than he put into it; a European who
did the same has lost a quarter of his money.
It may seem
an odd time to worry about savings. This week the National Bureau of Economic
Research declared that the worlds largest economy, America, had been
in recession since December last year. The economies of Japan and much of
western Europe have been shrinking. A rapid, global, private-sector shift
to thrift is exactly what the world economy does not need. Thats why
governments around the world have been passing hurried measures to try to
encourage people to spend more of their incomes.
In some countries,
they should. Asians (and Germans too), have been squirreling their money
away with excessive enthusiasm. But other countries citizens have
been putting too little aside for their old age. In America, the household
savings ratio (the proportion of disposable income not used for consumption)
has been below 2.5% since 1999; in Britain, it has been below 3% in each
of the past two years. The Asians parsimony made the Anglo-Saxons
profligacy possible. Through their increasingly sophisticated financial
systems, the Americans and British were able to borrow from the thrifty
Asians to finance their spending spree. And, because their house prices
were rising so fast, they had the collateral and the confidence to do so.
In other words,
Anglo-Saxons were able to save their cake and eat it. They did not have
to sacrifice consumption in order to build up assets for the future, because
lax monetary policies encouraged borrowing that pushed up the prices of
housing and other assets, which gave them the illusion of having saved enough.
But now this debt burden is being unwound, asset prices are collapsing and
savings rates are rising because consumers are unwilling, or unable, to
is bad news for the American and British economies in the short term, it
ought to be good news in the long term. How good, though, depends as much
on where people put their savings as on how much they put aside.
treated financial assets as they do other goods, they would sell them when
they are expensive and buy them when they are cheap. Actually, they do
the opposite. They piled into the market in 1999-2000, at the peak,
and are piling out of it now. They should, of course, have got out in 2000,
when the global price-earnings ratio was 35; shares look relatively
much more attractive now, since the ratio is down to ten. A recent
analysis shows that, when American price-earnings ratios are low, returns
on equities over the next decade average 8%; when they are high,
returns average 3%.
recent losses have made them cautious. They are putting their money into
cash or money-market funds, rather than equities or corporate bonds. The
returns they are getting on their savings look increasingly pitiful. Interest
rates are falling sharply, with more central banks announcing cuts this
week. Savers may initially be shielded from the full impact of those reductions,
because commercial banks are competing for retail deposits. But rates in
many big economies are heading for, or have already reached, 1-2%.
understandable, after the trauma of this year. Equity and corporate bond
markets could yet fall further, especially as the news on the economy seems
to get worse every week. But it is still perverse that investors were happy
to buy shares nine years ago, when the ratio of share prices to profits
was three times what it is today, and are now determined to keep
their money in cash and bonds.
will be hopelessly inadequate for those who want to build a decent pension,
especially in defined-contribution, or money-purchase, schemes, where the
employee bears all the investment risk. The average American scheme member
contributes just 7.8% of salary to his pension scheme. His employer,
on average, contributes only 4.4%. He has a pot worth only $68,000.
A rule of thumb is that total contributions need to be around 20%
of wages to match a traditional final-salary scheme.
savings, badly invested, are a problem for individuals and the economy.
Cautious savers are putting their money in banks; banks are reluctant to
lend; companies therefore find it hard both to borrow money and to raise
equity capital. This timidity hurts companies and, in the long term, savers.
Implausible as it may sound, right now equities and corporate bonds are
a better long-term bet than cash.
Miller's rise and fall. It's chronicled in a long article in today's
Wall Street Journal. The piece is called "The
Stock Picker's Defeat." I wrote about Bill Miller and his 2008
appalling performance last week under the headline Yesterday's
"experts" are today's experts.
bonds yield big. I am eyeing a New York City
GO (general obligation) muni bond that is yielding 6.10% triple tax-free
until its maturity in 18 years. That's over 10% pre-tax. Is the bond a good
deal? It is an incredibly good deal if you assume New York City won't go broke
and default on its bonds. Is that a gamble I'm willing to make? Or am I, as
usual, chasing yield -- being a yield hog?
hogs get slaughtered.
bleak in New York City, with financial jobs evaporating daily. But will Washington
really let New York go? Like it let Lehman Brothers go? We live in weird times
when I have these thoughts. And then a reader sends me these horrid words:
credit default swaps that insure against the US government and several European
Governments defaulting on their debt. These swaps hit record highs last
Tuesday. Yes, there are people buying insurance against the US defaulting
on its debt. Which is one reason for owning gold! The COMEX gold price and
the leveraged futures market is becoming less relevant by the day to the
actual price of physical bullion with rationing, shortages and premiums
on all coins and bars rising very significantly rising even on a
daily basis. Bullion coins that once retailed at some 5% over the spot price
are now being traded at 10% to 15% over the spot price. Most wholesalers
and retailers nationally are out of Krugerrands and other popular bullion
coins and much of the public are now seeking to buy bullion on Ebay where
prices are also surging.
weeks there have been little or no bullion sellers and nearly all buyers
and bullion owners will have to be incensed by and are waiting for far higher
prices prior to even a minority of them selling. Many are buy and
hold investors and savers and will not be taking profits
even at higher prices as their motivation is not profit rather wealth preservation.
It seems increasingly likely that gold and silver will have to rally to
over $1,200/oz and $25/oz before there is some selling and liquidity returns
to the bullion market.
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The governor of Illinois was arrested yesterday.
The governor, a Democrat, tried to sell Barack Obama's Senate seat. He got
offered $500,000 by one candidate. When he got arrested and handcuffed, he
offered the seat to the arresting policeman. I don't make this stuff up. I
can't. No one can.
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
is . You can't
click on my email address. You have to re-type it . This protects me from
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