Manarin On Money » Financial Safety

Depression Fears (And A Response To The Housing Bill)

Manarin Investment Counsel — Wed, 30 Jul 2008 19:25:28 +0000

The “We are in the worst economic climate since the Great Depression” wackadoos sure put up a good fight. But now more folks are finally seeing through their flawed logic.

From a recent Newsweek article:

The specter of depression stalks America. You hear the word repeatedly. Are we in a depression? If not, are we headed for one? The answer to the first question is no; the answer to the second is “almost certainly not.” The use of “depression” to describe the economy is a case of rhetorical overkill that speaks volumes about today’s widespread pessimism and anxiety. A short history lesson shows why.

The Great Depression of the 1930s – the last time the term rightly applied – was industrial capitalism’s worst calamity. U.S. unemployment peaked at 25 percent in 1933; it averaged 18 percent for the decade. From 1929 to 1933, 40 percent of U.S. banks failed. People lost deposits; businesses and consumers lost access to credit. Over the same period, wholesale prices dropped a third, driving farmers and firms into bankruptcy. Farm foreclosures, shantytowns (called “Hoovervilles,” after the president) and bread lines followed.

This was a social as well as economic breakdown. Our present situation bears no resemblance to this. In June, employment was 5.5 percent, slightly below the average since 1960 of 5.8 percent. It’s true that banks and investment banks – Citigroup, Merrill Lynch, Wachovia – have suffered large losses. But on the whole, the banking system seems fairly strong. Although profits in the first quarter of 2008 were down 46 percent from 2007, they totaled $19 billion even after $37 billion set aside for loan loss revenues. Overall corporate profits are still running at a near-record annual rate of $1.5 trillion.

Read the entire article here.

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Congressman Ron Paul explains in simple language the price Americans will pay for the recent housing industry bailout:

Here’s My Take: If you’ve read my book, you know that inflation and debasement of the dollar is going to be with us for a long time. Probably for the rest of our lives or until enough people get fed up with the current system.

That’s why the best advice I can give is to become a student of inflation, monetary policy, and their impact on your buying power. For as long as the government continues creating money out of thin air, any wise investor will keep the bulk of their long-term investments away from dollar-denominated paper assets.

But to quote the great U.S. economist Milton Friedman: There is no free lunch.

That’s why I put up with the short-term volatility that comes with trading my dollars in exchange for real assets. My goal is to accumulate more wealth, not money – it’s a big difference. Money can be created out of nothing but wealth (stocks, precious metals, businesses, raw materials, etc.) are tangible and carry greater value.

If we someday enter a stage of hyperinflation similar to what Germany experienced in the 1920s, which would you rather own: a pile of cash or a pile of companies located around the world? Money or wealth, you decide.

Only one can make inflation work for you instead of against you.

Gut Check Time and the Transfer of Wealth

Manarin Investment Counsel — Tue, 15 Jul 2008 16:58:03 +0000

When talking about the stock market these days, it’s easy to be wooed into becoming a long-term pessimist. Last Friday, the S&P 500 closed at 1239. Contrast that to where the index was trading at 10 years ago – 1164 – and you end up with a gain of about 6.4%.

So why am I still so enthusiastic about my “stocks for the long run” philosophy?

Take a look at history.

The last time we went through a similar market environment was from about 1969 to 1982. Not only were the returns middling but inflation wiped out the gains that investors had earned leaving many with a real return in negative territory.

But people who maintained their discipline and continued acquiring equity positions were rewarded for it.

From 1983 thru 2001, vast sums of wealth were created because certain people understood the gift the financial gods had given them and knew how to take advantage of it. Or there were others who prospered simply from dumb luck for being in the right place at the right time.

You see, tangible assets – real wealth – does not vanish in a market decline. Instead, uninformed investors panic and sell their wealth while savvy investors go bargain hunting.

And that’s the way it has been throughout history.

The yo-yo of the market goes up, but a few times each decade the yo-yo goes down for a period of time. Many times it has gone up rapidly and in each instance investors become overly greedily; then it goes down and investors become equally as fearful.

Charles Mackay nailed it in his 1841 book, Extraordinary Popular Delusions and the Madness of Crowds:

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

In every market decline, there have been those who maintained their senses and did not flee from the stock market for the perceived safety of money market accounts and other cash-equivalent investments. They were able to prosper and enjoy the good times when the market roared back up simply from picking up the surplus of wealth others abandoned.

And after each major decline, history shows that the market has gone on to reach new highs.

Just look at the Great Depression of the 1930s. The real wealth did not go away – it was transferred to new owners who bought while prices were nose-diving. The real estate, farms, businesses, and other forms of wealth changed hands.

And that’s what my team of advisors and I help people do. We do our best to make sure long-term investors are owners of real assets and when the opportunity presents itself, help them accumulate more wealth at bargain prices while their adrenal gland and everyone else is telling them to run in the opposite direction.

In time, we will be rewarded for our discipline. But for now the market is in an arm-wrestling match between perception and reality. I’ve seen this occur over many market cycles now and history shows that reality will win.

Lastly, the dollar is just a paper currency that could collapse overnight and wipe out the value of CDs, bonds, and most annuities. Therefore, real world safety demands that we stay invested in ownership positions; common stocks have historically given investors the highest rate of return of all asset categories and the price we pay for that long-term success is short-term volatility

Nobody knows when the yo-yo will swing back up, but eventually we will get there. Probably sooner than most people realize.

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Got Real World Financial Safety?

Got Financial Safety in the Real World?

Manarin Investment Counsel — Wed, 04 Jun 2008 20:18:23 +0000

Everyone wants to be financially independent.

Everyone wants a safe investment portfolio.

But not everyone has real world financial safety. Do you?

If I give you the choice between conventional financial safety and real world financial safety, which would you pick? Or didn’t you know there was a difference?

Let me explain.

As a rookie stockbroker in the 1970s, I was instructed by my superiors to follow the conventional model of financial safety. They said to me, “Roland, if you have a client that is 65 years old, you need to put 35 percent of their money in stocks and the remaining 65 percent in bonds and other dollar-based investments that are guaranteed and insured.”

For the mainstream this was (and today still is) considered the safest way to manage money, especially for retirees.

Here’s the conundrum – in the real world “safety” has a totally different meaning. In the real world, financial safety is NOT the preservation of my principal. It’s the preservation of my buying power.

If you are old enough, you will remember the price of a new Mustang convertible when it debuted in the 1960s. About $2,395. In that day gold was trading at around $35 an ounce so it took about 69 ounces of gold to buy the Mustang.

In the late 1960s, $5,000 would have bought you two new Mustangs. If you had instead put your $5,000 in government bonds for “safe keeping” and taken the out in today, you would no longer be able to buy two brand new cars since the interest on your bonds has not kept pace with inflation and taxes.

However, if you had invested your $5,000 in a tangible asset such as gold, your buying power would have been maintained since 69 ounces of gold will today still buy you a new car. (Note: Gold is a terrible investment and I only recommend it as a hedge against inflation.)

And now for a quick history lesson.

For the last 100 years or so, the financial industry has considered dollar-based investments such as bonds, bank CDs, and fixed annuities to be among the safest options available. There was a time when this actually was true.

Over a centruy ago when the federal government issued U.S. Savings Bonds, those bonds were backed by gold and investors were certain their buying power would be preserved.

As long as the dollar was on the gold standard, it was.

Then came 1971 and Richard Nixon removed the final link between gold and the dollar while the Fed continued creating dollars out of thin air to pay for the Vietnam War.

But what remained was the common belief that dollar-based investments were still sound, long-term assets.

Important Point For Investors: History teaches that when a currency is no longer backed by a tangible asset and its value is at the mercy of government decisions, all investments that are claims on that currency must be viewed as speculations.

Most people today have limited background in monetary and economic history. They fail to understand that those dollar-based investments they own carry a risk level that would have scared the bejeezus out of people living when the dollar was on the gold standard.

Perhaps a nice way to summarize this article is: Real world financial safety is so simple that most investors fail to apply this little rule of wealth preservation to their financial decisions. Then one day they wake to realize the buying power of their portfolio has been confiscated and they have no clue why.

Sad.

My hope is this will never be your personal fate. So long as you stay informed, I like your odds.

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