Thursday, February 5, 2009

It's Time to Own Stocks and Stuff

There have been so many lies and distortions coming out of Washington and the news media that it's hard to know where to begin setting the record straight. But I'll try.

The biggest lie is that American taxpayers are going to be paying for the massive stimulus and bailout packages that will soon be approved.

Fact: no American is paying higher taxes. The last time I looked we were all paying taxes at the lowest rate in our lifetimes. Most of us are paying less tax because we are earning less. In addition, many of us have a reverse annuity--capital losses we can never outlive--so we won't be paying any capital gains taxes for a long time either. And all the talk in Washington is about lowering tax rates--not raising them.

So, at the end of the day, American taxpayers aren't paying for any of the stimulus and bailouts and it is unlikely that neither we nor or children ever will. Do you think any Republican or Democratic congress or administration will ever have the guts to raise taxes by the tens of thousands of dollars per American to pay off the debt we are incurring as a result of this crisis?

Democrats in Congress seem to be focused on showering billions on the special interest groups that helped elect them while the Republicans have missed yet another opportunity to be wise and nuanced. Instead they just keep harping on lowering taxes. People have not stopped spending because their taxes are too high. They've stopped because they have lost their jobs, lost their hope, lost their net worth, and are scared to death about the future. And there is no conversation at all about how we will ever pay for all this.

The path of least resistance will be to just keep printing more and more money and inflate our way out of it. That way it will be the Chinese and the other sovereign and institutional investors who have been making 10 and 20 year loans to the U.S. Government at a 2 percent interest rate that will get slammed.

Many U.S. investors who moved their money out of "risky" stock funds into "safe" government bond funds will get hammered as well and they won't even know what hit them. These funds are not safe and can lose a lot of their value. Most of them have already started to move down.

For 20 years, the value of baseball cards went up and up and people who "invested" in them made a fortune. People looked at the cards as collectible pieces of American art. Then, a couple years ago, people suddenly looked at the cards and all they saw was a piece of paper with a picture on it. The bottom fell out of the market overnight.

The same thing could happen to paper money.

But while the news media has been reporting about "good" banks, "bad" banks, bailouts, stimulus, Madoff, and the greedy fat cats on Wall Street--something far more important has been happening and received very little attention.

Since the first of the year the price of gold has gone up more than $100 an ounce, oil and other commodities prices have stopped falling, and the rates that lenders are demanding to loan money to the federal government has gone up by 40 percent. The yield on 10-year U.S. treasury bonds has gone from 2.00 percent to 2.80 percent in just a few weeks. Those "safe" bond funds are dropping in price.

The word is getting out--through the markets, not the news media--that dollars and other world currencies may just be viewed as pieces of paper with nothing behind them. Investors are moving more and more into "stuff" and the companies that make it.

If that trend continues then a couple of things will happen. First and foremost, interest rates will rise dramatically and the value of long term bonds (and the funds that invest in them) will drop hard. The investments that sounded the safest will turn out to have been very risky. Cash, money markets, bank CDs and such will yield more and more but their buying power will drop faster than the returns go up.

The only way to stay ahead of the game will be to own the investments that have been labeled as "risky." Hard assets, real estate, energy, and a broad range of companies that make essential products and which have pricing power should start to do well. There is a glut of real estate and oil on the market right now, but prices will bottom sooner than most people believe as our dollars start buying less and less stuff.

Technology, bio tech, small cap stocks, and emerging markets--deemed to be the riskiest of the risky--could actually do the best in this environment. These are companies that develop and manufacture very useful stuff.

This may not happen today or tomorrow. It may not happen at all. I've been wrong before. Often. But I believe we are headed into this new environment sooner rather than later.

People should keep money that they're going to need during the next couple or years in the bank. The rest should be going into stocks and stuff.


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