Staying Even?
Insight NewsletterIssue #14
Ten years. 10 years ago long term interest rates were at 7.1%. Today they are 4.7%. How can I remember you ask? That is when I began to track the equity markets on a daily basis. Only 10 years you ask. Well yes, but 3652 days of watching markets (okay, maybe just 2612 days?there were some Saturdays and Sundays) have shown me a few things.
Back then the Dow was in the six thousands. Yahoo and Dell were driving the tech markets, Asia was about to melt-down and Apple Computer was headed off the cliffs. Today it’s an Apple-Exxon world; interest rates are 2½ points lower, Asia is driving a commodities boom, and housing is about 150%?200% more expensive. Overall people made a fair amount of money over these ten years, but easy it was not.
Over any longer time frame, capital protection, or staying even, never really is easy. Inflation, the steady march of the decline of the purchasing power of a single dollar, guarantees that it isn’t easy to stay even. You don’t believe me? Think of your house: If you needed $75,000 of income to buy a 3 bedroom California house in Contra Costa County in 1997, you need about $150,000 of income today to buy that $800,000 home. So even if your assets have doubled or tripled or more in the last 10 years, you may not have the income today to buy your current house that you live in, at today’s real estate prices. That is what we mean by staying even, it’s never easy.
As bonafide generalists we do a couple things besides fundamental securities analysis, to help keep a breast of the best way to protect and grow our clients’ accumulated assets. One thing we do is watch price action the other, is read what smart people are thinking.
Price Action
Technicians (a term for market watchers who use technical (price action) analyses, to explain and analyze securities markets, have it right: the market knows more than any one of us. Right now the market is speaking clearly, stocks remain attractive.
Smart People
One of my daily reads is Richard Russell. Richard has been writing Dow Theory Letters since 1958. He hasn’t missed an issue in 48 years. Richard is a joy to read, and his newsletter is a bargain, published daily to the web for just $250/year (www.dowtheoryletters.com). Richard is 83 years old and he believes that he escaped death as an 18 year-old when WW2 in Europe and then Japan, mercifully came to an end. You see, according to Richard, the average career of an American bombardier was about 20 missions, and Richard had completed about 25 missions up to that time. When he returned to the states he enrolled in New York University and was one year ahead of Alan Greenspan. When Richard talks of Alan, it reminds me of Francisco telling Dagny in Atlas Shrugged that one of them has betrayed their family heritage. You see, Greenspan wrote famous essay’s about the corrosive power of government intervention in monetary policy. Earlier this week, Richard wrote: “Alan Greenspan was once a fervent believer in gold as the basis for money… the following two paragraphs are from Greenspan’s famous essay on gold “Gold and Economic Freedom” written in 1966:
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
“This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”
Is this the same man who presided over an increase in aggregate debt from 10 Trillion to 40 Trillion in 18 years? You might ask, “What happened? Thinking the way he did, how could Greenspan have ever accepted the job of being head of the Federal Reserve?” Well, that is a story for another day, probably he rationalized it.
The point is, gold is going up, and stocks are going up. Are they both inflation hedges? I think they might be. Look at stocks! They have been up for four years in a row, and this year they could well be up again.
What is the market doing? I think that maybe it is treating common stocks, as tangible assets. Stocks represent partial ownership in businesses. Business prospects are tied to the economic cycle, not the value of a dollar. So a share of Microsoft should be worth about the same number of dollars in real terms (inflation adjusted), because if everything doubles in price, Microsoft’s earnings and its stock price, will also double in price. The broad market is treating stocks as an inflation hedge. And historically over very long periods of time, this has been true.
Question: So Barnes, what’s the bottom line?
Answer: Bottom line, stocks are a better inflation hedge than bonds or cash.
Question: So what should clients do?
Answer: They should diversify into both.
Question: So what do we do with this information?
Answer: Broad Diversification. Call us, we can help.
- Dividend-paying common stocks
- T-Bills
- Gold/Silver
- Other tangibles
- Some bonds
- Some Real Estate
In our next issue we will recap the 1st Quarter and discuss the 2nd Quarter Outlook. We will be launching www.barnescapital.com later in April which includes descriptions of our new service offerings: Wealth Counsel and Business Services.
Have a Happy Easter and Spring Break.
Blessings,
Daniel A. Barnes, CFA