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investment blather 
19th-Jan-2003 04:01 pm
Discussion continued from here (I keep thinking there needs to be a better way to do this):

PIMCO bonds which are largely mortgage-backed. They've been very stable even over the past 18 months of fiscal chaos, returning 5 - 9% quarterly and not going negative. But I cringe at the idea of putting our nest egg into something that is not a fully-protected investment-- risking principal is not something I want to do right now . . . [we] have steadfastly left our account in cash while we figure out what to do, rather than moving it into any of the "short-term" bonds.
if you want to get beyond the 1% or so that savings/money-market accounts are paying right now, you have to take risks; there's such a thing as being too conservative (more on this below). Strictly speaking, even money-market isn't totally safe, though I suppose by the time that stuff is going belly up we're already screwed in so many other ways it's not worth thinking about.

Bonds have turned out to be the right place to be for the past couple years, but I'm not so sure going forward. When a Fed governor says things like
"The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."
you know something is fucked up. Remember this is a central bank guy; central bank guys are really not supposed to say things like this; they're supposed to spend their time worrying about maintaining the integrity of the currency. Go back 10 years or 20 years and the tune was always something like "Sorry, we're keeping interest rates up right now because it's the right thing to do; we don't care who gets thrown out of work because of it. Life is rough." So this is just a complete sea-change. Or it's a measure of how scared they are of deflation that they feel it necessary to threaten to do this.

It's annoying because if we do get another round of 70s-style inflation, then bonds, or at least the long-term bonds, are going to get utterly killed. But if we get deflation, then bonds are the place to be (provided you get bonds that are being issued by the folks who are going to survive, as if you can predict this stuff in advance). I'm still thinking inflation is more likely, but what do I know?

Last week I was finally spurred to sell most of my munis --- W's proposal to end taxation of corporate dividends (which I'm pretty sure will pass) would do a job on them even if inflation didn't. I still think short term bonds/munis are a fine place to park money while waiting to see what happens, you just have to make sure they're highly rated and don't have anything to do with industries you know are in trouble.

And just stay the hell away from REITs.

It's very hard dealing with folks who got their training in economics during the boom cycle. They *really* don't get it that things weren't always that way. ... Paradigms change, and yesterday's "conventional wisdom" becomes tomorrow's "how could anyone have thought that". ... and you try ditching your sister-in-law without starting a family micronuke incident
Well, if you want to see a real conniption, try telling her you want to buy gold.

See, given how the stock market remains horribly overvalued even now --- figure if they don't fire up the printing presses, we're gonna be seeing Dow 6000 / NASDAQ 800 at least once more --- and how bonds + real estate have a fairly good chance that they'll be sucking, too, the case for gold is perhaps even more compelling than it was a year ago. Never mind that gold has broken out above $350/oz for the first time in 5 years, some of the saner voices are calling for $500+/oz by the end of the year. The insane ones are, of course, dividing M3 by total known gold supply and getting a figure somewhere around $30,000/oz --- I'll believe that when I see it, but even doing the mindless thing of adjusting 70s-era prices forward for inflation gets you numbers well into four digits.

Some argue that there's an even better case for silver since that's a metal that actually gets used for something, the supply situation is equally horrible if not worse, and the central banks don't have huge stocks of it they can use to mess up the market (as the GATA folks have been claiming's been happening with gold since at least 1995).

Never mind that the paradigm for gold for at least the past 10 years has been "Stay away! Trade in it if you're bored, but holding it is the last thing you want to do." Which admittedly has been good advice so far. But they were saying the same thing about stocks back in 1982.

Never mind that I've been kicking myself that I didn't put way more into the mining stocks a year ago. Just to give you an idea, I bought Glamis (GLG), at around $2.30; last December I noticed it had risen to $3.50, said, "Cool, time to take some profits," and sold half of it. GLG closed last Friday at $12.02.

I mean it's been sort of fun watching some of this stuff do what MSFT used to do, and my gut feeling is that I need to greatly increase my exposure to it, but I'm still skittish.

And then I'm reminded of my uncle. Here's a guy who'd worked his way up the accounting ranks to become assistant treasurer of a decent sized corporation. Figure if there was anybody who knew anything about managing money, he was it. Every so often, he'd get a call on a Friday afternoon, "Hi. Turns out we have this extra $1e7 that we need to park someplace over the weekend," and he'd take care of it; that was his job.

When he passed away in 1995, we were all amazed to discover that he'd kept nearly all of his own money in . . . get ready for it . . . CDs. All through the 80s and early 90s when the stock market was going utterly and completely nuts, all of his stuff was sitting in the bank earning a measly 6% or whatever it was. The estate was astonishingly small.

But then you think about when he got his training in economics (born in 1918, got to watch almost firsthand as my great-grandfather, a banker, lost pretty much everything he had in the crash of '29) and it all makes sense. Stocks, mutual funds, bonds, options, you name it, ... all that shit was for other people's money; you don't trust it for anything you truly care about because it's all treacherous as hell. That was the dominant paradigm for the Great Depression folks.
19th-Jan-2003 04:55 pm (UTC)
My call (and I have $0 to invest based on it, so take with a grain of salt) is that you won't see deflation. Most (all? -- or at least, all who count) economists know that runaway inflation and stagnant deflation are comparably bad. Look at the past decade in Japan -- the one thing that could have pulled them out of their stagnant economy is actually printing enough money to run 2% inflation, rather than having deflation and not being able to cut interest rates.
19th-Jan-2003 06:37 pm (UTC)
hmm. I thought Japan's biggest problem was that they have a lot of big banks holding onto a lot of bad debts; writing these off means bank failure and the politics are such that this hasn't been and evidently still will not be allowed. And if the debts are dollar-denominated (?), I'm not sure how devaluing the yen is going to help them (except to bulk up their imaginary assets and distort things even more).
19th-Jan-2003 09:06 pm (UTC)
It's true, but the stronger Yen has also depressed exports relative to Korea, Indonesia, Vietnam, and other weak-currency nations, which means that they're not capable of being as export-driven as they have been. And with domestic consuption stagnant (for several reasons, including cultural), well... it's a mess.

Yes, a bunch of banks have to fall over and die. A couple have been allowed to. They seem to be pushing one to two over a year. It's not fast enough, though. I'm not sure what they're going to do next.
19th-Jan-2003 06:06 pm (UTC) - OK, that's weird.
So the "Discussion continued from here" link returns a GET error if you do it from my Friends page, but works fine if you do it after clicking through the <lj-cut> to get to the entire message body.

I don't GET that. (GET IT? AR AR AR AR AR <blam>)
19th-Jan-2003 06:36 pm (UTC) - Re: OK, that's weird.
hm, try it now. I left off the hostname before, figuring an absolute path was enough, but now I realize you can do things like access your friends page as http://solarbird.livejournal.com/friends in which case even an absolute path won't do the right thing.

19th-Jan-2003 09:03 pm (UTC) - Re: OK, that's weird.
It works great now. ^_^
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