Prudent Investing

This Blog Has Moved

noreply@blogger.com (Adam Zuercher) — Thu, 10 Dec 2009 19:25:00 +0000

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Is The Recession Over?

noreply@blogger.com (Adam Zuercher) — Thu, 19 Nov 2009 18:50:00 +0000

Several leading economic indicators are showing signs that the economy is on the road to recovery. Click the image below for a nice visualization from Mint…

Mint.com Personal Finance Software

How to Invest With Deflation – Part 2 of 2

noreply@blogger.com (Tony Hixon) — Sat, 07 Nov 2009 16:50:00 +0000

Today, we look at investment themes during periods of deflation.

In deflation, debt is the enemy
Risk is to be avoided
Cash should be raised
Seek high-quality bonds. By default these are US Treasuries, with the longest dated Treasury bond being 30-year maturities. While it is a little burdensome for an individual to buy single bonds which have a face value of $10,000, they can easily do so via the Barclays 20+ Year Treasury Bond Fund (NYSE: TLT). The Fund rose from $88.59 last June to a high of $123.15 in December and now trades in the $93 range. Dividend yield is around 3%. One could also look at high-quality corporate bonds, which can be accessed via the iBoxx $Investment Grade Corporate Bond Fund (NYSE: LQD). Dividend yield is around 5%.
Laddered CDs offer a good investment structure
Gold typically acts well
Renting instead of buying a home should be considered

Rising unemployment and/or falling income with no way to pay the bills is the chief concern. The investment themes above should help you navigate a deflationary period.

~Tony

How to Invest With Deflation – Part 1 of 2

noreply@blogger.com (Tony Hixon) — Fri, 06 Nov 2009 16:49:00 +0000

We saw last time that the ingredients to deflation are present, this time, we look at how one can invest during these times.

Deflation, by definition, is a general decline in prices. It can be caused by reduction in the supply of money (not the case currently), reduction in supply of credit (yep), or decrease in personal or investment spending (yep). Deflation has the side effect of increased unemployment since there is lower levels of demand in the economy.

Declining demands leads to declining prices and if they persist, generally creates a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes and increasing defaults on loans by companies and individuals. Enter the Federal Reserve. They have tools (called Monetary Policy) to counter deflation…but their tools aren’t always successful. Deflation can be shortened by successful Fed action, or long if they don’t get it right, i.e. Japan has been in a period of deflation for decades starting in the early 1990s.

So, how does a person invest during such times? Answer: to be continued…

~Tony

Source: www.investopedia.com

10 Keys To Investing For Retirement In Your 20s and 30s

noreply@blogger.com (Adam Zuercher) — Thu, 05 Nov 2009 20:01:00 +0000

The Courier recently interviewed me for an article on young adults in there 20s and 30s investing for retirement. Sara Arthurs did a nice job writing this article and accurately quoted what I had to say. Here are the key takeaways:

Start investing now!
Newlyweds should make saving for retirement a priority.
Saving for your retirement is your responsibility, not your employer’s.
Don’t depend on Social Security for your retirement.
Invest in the stock market.
Get help from an investment professional.
Take full advantage of matching contributions your employer might offer to your company’s retirement plan.
If you are eligible, invest in a Roth IRA
Be patient with your investments.
Aim to be debt-free in retirement.

You can read the full article for more detail on these points.

~Adam

3 Year-End Tax Planning Ideas

noreply@blogger.com (Adam Zuercher) — Wed, 28 Oct 2009 12:00:00 +0000

November and December are key months for individuals to focus on minimizing their income and capital gain tax liabilities. While we don't hold ourselves out as tax advisors, one of our goals is to maximize the after-tax investment returns for our clients, so we thought it would be helpful to share some tax planning techniques to consider. Since each person's tax situation is different, we recommend that you consult with your tax advisor before taking any action.

Charitable Donor-Advised Funds

Consider maximizing the tax benefit of your charitable gifts through the use of a Charitable Donor-Advised Fund. Donor-advised funds allow you to donate cash, or more ideally appreciated securities that you have held for a year or more, to a charitable account that you control. You receive a tax deduction in the year of transfer for the fair market value of the cash or securities transferred to the fund (and no capital gain is then realized by you, the donor). Assets transferred to a donor-advised fund are liquidated by the sponsoring organization and placed into an account, for which most donor-advised funds offer 5-10 investment options. At the instruction of the donor, assets can be transferred from this fund to qualified charities within the current year, or over several years.

Section 529 Plan for College Savings

Many people are now considering shifting assets they have reserved for college education expenses to accounts for your children or grandchildren through a College Savings Plan (a.k.a. Section 529 Plan). The benefit of these plans is that the investment earnings and the assets placed in these plans accounts are generally exempt from federal and state income taxes, provided that the withdrawals are used for qualified college expenses. This tax-free withdrawal feature can make 529 Plan accounts more attractive than other types of college savings strategies.

Roth IRA Conversion

If you have an IRA, it may be worthwhile to determine if you would experience long-term tax benefits from a Roth-IRA conversion.

With a Roth-IRA, withdrawals of your contributions or earnings are typically never taxed. Therefore, the long-term tax benefit of a Roth-IRA conversion (for people who find themselves in a low tax bracket) is that a small upfront tax payment, on the amount converted, can be a small price to pay for income tax savings on thousands and possibly hundreds of thousands of dollars of future earnings.

For 2009, to be eligible for a conversion your current year's adjusted gross income (AGI) will need to be less than $100,000, but starting next tax year, 2010, that income limitation will be eliminated. You may not fall into this "under $100,000 of adjusted gross income" category this year, but a one-time event (e.g., business losses, rental losses or capital losses) may reduce income to unusually low levels and make it a prime year for a Roth-IRA conversion. And, starting next tax year, 2010, with the income limitation lifted, people at any level of AGI will be eligible to make a Roth IRA conversion.

Operationally, some or all of an individual's traditional IRA is transferred to a Roth-IRA in a conversion. Taxes are due at ordinary income tax rates on the amount that is transferred, or converted. Ideally, conversions are done where the tax payer’s federal tax rate remains low, between 0% and 15%, so the upfront income tax cost are minimal. A relatively small (percentage-wise) upfront tax payment can be a small price to pay for the benefit of future tax-free withdrawals of both contributions and earnings that could extend for decades.

~Adam

Ingredients of Deflation

noreply@blogger.com (Tony Hixon) — Tue, 27 Oct 2009 14:22:00 +0000

The ongoing debate still rages…inflation or deflation? We’ve blogged a lot on these topics and it’s our stance that in the near term, deflation is the bigger risk. Longer term then, inflation will be a concern. Here’s a list of ingredients of deflation that we see as being currently present, and hence, why we believe that deflation is the greater near term risk.

Rising Unemployment – There has never been a sustained inflationary period without wage inflation. Currently, wages are basically flat and falling. A few years ago 1 in 16 Americans were unemployed, today it is 1 in 5.
Wealth Destruction – Two bear markets and a housing market collapse have put the American consumer on the ropes.
Decreased Demand / Increased Savings – Savings rates have increased to 6% and is expected to rise over the next 3-5 years back up to the 9% level where it was 20 years ago.
Low Capacity Utilization – This occurs when factories aren’t utilizing their full capacity. While this metric is rebounding, it is still lower than at any time since the data has been collected.

Not an exhaustive list, but certainly enough to help formulate our opinion. So, the question becomes, how do you invest in periods of near term deflation? Stay tuned til next time…

~Tony

SOURCE: www.2000wave.com

Reminiscing Dow 10,000

noreply@blogger.com (Adam Zuercher) — Wed, 14 Oct 2009 17:59:00 +0000

REBLOG: This post was originally published by Barry Ritholtz on his blog, The Big Picture.

DJIA 10,000, let’s reminisce: "

With the DJIA approaching 10,000 again, let’s reminisce about 1999, the year it first passed that magic level on March 29th. Millennium by the Backstreet Boys was the best selling album, American Beauty won the Academy Award, the Euro was established, SpongeBob SquarePants aired for the first time, Hugo Chavez was elected President of Venezuela, Karl Malone, Pudge, Chipper Jones, Jagr and Kurt Warner won MVP awards and the average price of a gallon of gasoline at the pump was about $1.20. US nominal GDP ended at $9.6b vs $14.1 as of Q2 ‘09. Also, on March 29th 1999, the DXY was at 100.36 (now 75.60), the CRB was at 192.40 (now 269.15), gold was at $280 (now $1,060), oil was $16.44 (now $74.80), corn was $2.32 (now $3.85), copper was $.62 (now $2.83), the 10 yr yield was 5.19% (now 3.38%), and the fed funds rate was at 4.75% (now 0-.25%). Oh, how time flies.

2010 Roth Conversion

noreply@blogger.com (Tony Hixon) — Tue, 06 Oct 2009 13:49:00 +0000

2010 may be a great time for boomers to create a tax-free income stream for retirement. This is thanks to the opportunity to complete a Roth conversion without income limits (current limit is $100,000). This elimination of income limits was part of the Tax Increase Prevention and Reconciliation Act of 2005.

However, in a recent survey, 73% of boomers who own a traditional IRA are not planning to convert to a Roth IRA next year. A lack of knowledge about Roth conversions could be to blame. 57% of high income boomers are not aware that income limitations on conversions will be eliminated in 2010.

To learn more, or see if a conversion is right for you, feel free to contact us or post a reply to this blog.

For further reading:

Check out the white paper published by our firm called Tax-Free Investment Earnings for Life!?
Adam blogged about this topic in July: Roth IRA Conversions.

~Tony

Source: Journal of Financial Planning

TARP Losses: $100-200B (And Counting…)

noreply@blogger.com (Adam Zuercher) — Mon, 05 Oct 2009 17:02:00 +0000

REBLOG: This post was originally published by Barry Ritholtz on his blog, The Big Picture.

TARP Losses: $100-200B (And Counting…):

Over the weekend, we celebrated (if that is the right word) the one year anniversary of TARP

Whoopee.

CNN/Money has a pair of nice graphics dissecting how taxpayer monies were spent, along with likely losses:

Source:

TARP: Taxpayers on the hook for $200 billion

David Goldman

CNN/Money, October 3, 2009

http://money.cnn.com/2009/10/02/news/economy/tarp_anniversary/index.htm?postversion=2009100211

Q3-2009: the Best Quarter For Stocks Since 1998

noreply@blogger.com (Adam Zuercher) — Thu, 01 Oct 2009 15:20:00 +0000

Stocks just finished another strong quarter. That makes two in a row! The Dow & the S&P both had their best quarter since 1998! Here are the details:

Dow Industrials

Up 1265 points this quarter, or 15%, to close at 9712.
Biggest quarterly percentage gain since Q4-1998.
Best 3rd quarter performance since 1939.
July was the best month for the Dow since 2002.
Up 28% over the last six months. This is the best two-quarter performance since the two-quarters ending March 1987.
Up 11% for the year-to-date.

Nasdaq Composite

Up 287 points this quarter, or 16% to close at 2122.
Up 39% over the last six months. This is the largest two-quarter gain since the two-quarters ending March 2000.
Up 35% for the year-to-date.

S&P 500

Up 138 points this quarter, or 15% to close at 1057.
Up 56% from its March low.
32% off its October 2007 high.
Biggest quarterly percentage gain since Q4-1998.
Up 32% over the last six months. This is the best two-quarter performance since the two-quarters ending June 1975.
Up 17% for the year-to-date.

~Adam

Sources

Dow, Up 15%, Has Best Quarter Since ‘98 [The Wall Street Journal]
Data Points: U.S. Markets, Currencies & Treasuries [MarketBeat]

Insourcing

noreply@blogger.com (Tony Hixon) — Wed, 23 Sep 2009 15:45:00 +0000

Jeff Immelt, CEO of General Electric coined this term as he called for a reinvestment in U.S. manufacturing jobs and announced plans to move parts of its aviation components group back to the U.S.

The trend seems to be catching on. Stanley Furniture, an 85-year-old maker of home furnishings will be bringing all of its remaining kid’s line that is produced overseas back the the U.S. It might be that the factors that made offshore production so attractive – cheap goods and labor – might no longer compensate for things like transportation costs, quality control, and intellectual property issues. Case in point, Stanley Furniture had to recall 300 cribs made in Slovenia in 2008. (although the company says that isn’t the reason it is changing course)

Recalls throughout the industry has made consumers wary nonetheless. And more control over the company’s inventory puts them in a better position. Perhaps “Made In The USA” has some appeal after all.

~Tony

Source: FORTUNE

Point to Ponder – US Annual Budget

noreply@blogger.com (Tony Hixon) — Tue, 15 Sep 2009 15:15:00 +0000

“In 1909, the US federal government had an annual budget of $US 0.8 Billion. With this it governed a population of just over 90 million people. The cost of government was about $9 per capita. In 2009, the US federal government has an annual budget of $US 3,550 Billion. With this it governs a population of just over 300 million people. That’s a cost of about $11,675 per capita.”

Are we 1,200 times better off?

~Tony

Source: The Privateer

9/11/01 = 9/11/09: No Change for the Dow 8 Years Later

noreply@blogger.com (Adam Zuercher) — Mon, 14 Sep 2009 20:33:00 +0000

Here is a crazy fact! On both 9/11/01 and 9/11/09, the Dow Industrial Average was at 9605.

Here is a re-post from Barry Ritholtz’s blog:

This has been circulating Wall Street trading desks: On both 9/11/01 and 9/11/09, the Dow industrials were at 9605 (it was the close of the 9/10 in 2001, since markets never opened on 9/11 2001).

Here’s the chart:

>

Thanks, Pete!

Point to Ponder – Gold

noreply@blogger.com (Tony Hixon) — Mon, 14 Sep 2009 15:18:00 +0000

“Though gold bugs make it sound as such, gold is not the only and not the best alternative if the worst fears come to pass. The best way to deal with the risks of dollar devaluation and high inflation – with a much lower cost to being wrong – is, instead, to own stocks of companies that have pricing power of their product. When inflation hits, they will be able to raise prices and thus maintain their profitability. Also, companies that generate a large portion of their sales from outside the US will benefit from the declining dollar.

Gold bugs look at gold as a currency, but it is not one and unlikely to be one in our lifetime. Here is why: there is not enough of it around, so even if world government were to adopt a fractional system (currency in circulation as a multiple of gold reserves), they will never go for it, because central banks and governments will never give up their monetary tools – inflation is a very addictive tool to fight growing monetary obligations.” - Vitaliy N. Katsenelson, CFA

The ETF Industry is Booming & 4 Reasons I Like ETFs

noreply@blogger.com (Adam Zuercher) — Thu, 10 Sep 2009 17:13:00 +0000

A few quick facts on the ETF industry:

The first ETF ever launched was the SPDR S&P 500 ETF (SPY) which is designed to track the S&P 500 index.
Today, the SPY is the largest ETF with nearly $70 Billion in assets.
Assets in ETFs are now at a new record of $678 Billion at the end of August.
This year, through August ETF assets have risen 25%.
There are a total of 846 ETFs from 36 providers.

I like ETFs for the following reasons:

ETFs enable intelligent investing for anyone. Investors can now gain access to many types of investments that previously only the very wealthy could access.
ETFs are cost efficient. You can buy and sell ETFs with very reasonable trading costs.
ETFs offer access to unique markets and asset classes. There is an ETF for nearly any stock or bond market index, sector, country, currency, or commodity.
ETFs are liquid. ETFs trade like a stock. You can buy or sell them very quickly.

For these reasons (and more) I expect ETFs to become even more popular. The industry will continue to see extraordinary growth. If you aren’t aware of the different types of ETFs and the benefits they offer you should take the time to learn more. They are simply great investment vehicles.

~Adam

Source: Investors Are Sweet On ETF Products [The Wall Street Journal]

Recession 101

noreply@blogger.com (Tony Hixon) — Wed, 26 Aug 2009 18:46:00 +0000

Well, this week I just got back from vacation. We stayed in a cabin at Brown County State Park in Indiana. Twas a great time and really enjoyed the beauty of God’s creation, and of course, spending some quality time with my wife and two daughters. My sister, her husband, and my parents joined us then toward the end of the week. Great times!

Well, it took 4 hours to drive there, and with a 3 year and 1 year old in the back seat of the van, you can imagine the fun. So as I stared out the window peering thru the tons of “Putting America Back to Work” road signs and other billboards, one sign stood out:

Recession 101: CHILL!

Hysteria only makes it worse.

That was it, and it made sense to me. Now that I’m back and catching up on reading, there are quite a few well respected economists that are declaring the recession is close to being over. Let’s hope!

What do you think? Are you seeing signs of recovery in your neck of the woods? Is the recession over? Feel free to post a comment.

~Tony

Warren Buffett Says Inflation is a Real Threat

noreply@blogger.com (Adam Zuercher) — Thu, 20 Aug 2009 20:37:00 +0000

The New York Times published an article by Warren Buffett yesterday. He touches on a couple of subjects that we’ve written about recently:

our country’s debt, and
the threat of higher inflation

Warren commends both the Bush and Obama administrations for their courageous actions last fall which helped us avoid a depression. With the US economy now a slow path to recovery, we now face the side effects of “a gusher of federal money” that played “an essential role in the rescue.” Although it may be a long time before these effects are visible, “their threat may be as ominous as that posed by the financial crisis itself.” So what are the side effects Warren’s talking about? Gigantic deficits and inflation.

“To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.”

Our government is spending our nation into a mountain of debt. So how do we finance this increase in debt? Warren points out three ways:

Borrow from foreigners. Foreigners already hold over 50% of our debt. it’s not a sure thing they’ll continue to buy our treasuries. They might decide to invest in stocks, commodities, or real estate.
Borrow from US citizens. Americans will have to increase their savings rate and buy more US Treasuries.
Print money. “With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap. Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes.”

I agree with Warren’s conclusion:

“Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.”

For further reading:

The Greenback Effect [Warren Buffet]
The US Budget is on an Unsustainable Path [Adam Zuercher]
The Truth About the Dollar [Adam Zuercher]
Is inflation accelerating? [Tony Hixon]
Why is higher inflation expected? [Tony Hixon]
Why hasn’t inflation occurred yet? [Tony Hixon]
When will inflation return? [Tony Hixon]
How high will inflation go? [Tony Hixon]

~Adam

BOOK REVIEW: Technical Analysis Using Multiple Timeframes

noreply@blogger.com (Adam Zuercher) — Wed, 19 Aug 2009 20:26:00 +0000

Are you looking for a book that will help you improve your trading or investing? Look no further than Brian Shannon’s excellent book, Technical Analysis Using Multiple Timeframes. Brian is not only an experienced and successful trader, but a great teacher.

Brian is a trend follower and a very short term trader. This book is for you if you are a trader or want to learn more about trading. In this book, Brian clearly explains how to identify and profit from market trends over multiple timeframes.

You will want to read this book if:

You have ever wondered how to read and profit from a stock chart.
You want to learn how to analyze price action, volume, and moving averages.
You believe in investing with trends by entering them at low risk, high profit levels.
You want to truly understand the psychology behind charts – WHY markets move the way they do, and HOW trends form as a result.
You want to understand how to manage risk.

Brian gives you specific strategies for entering, managing and exiting long and short trades. He lays out his approach in logical steps with each chapter building on the previous chapters. He does a nice job wrapping it all up at the end by explaining how he puts it all together.

Brian does a great job of taking a complex topic and communicating it very clearly. This book is a useful resource for serious investors.

~Adam

Inflation: To Be or Not To Be – Part 5 of 5

noreply@blogger.com (Tony Hixon) — Thu, 13 Aug 2009 12:34:00 +0000

Lastly, when inflation does return:

5. How high will inflation go?

Given the high level of slack likely to remain in the economy during the next two years, there could actually be some deflationary pressures that linger in the system. For example, unemployment isn’t expected to peak until 2010 at over 10%. Industrial capacity utilization rates are at their lowest levels ever, which means a lot of unused capacity in the manufacturing sector. This slack must be cinched up before upward pressure is put on wages and other prices. Double-digit inflation outbursts remain unlikely in the short to medium term.

However, in economies where there is less slack, i.e. China and India, prices could rise more quickly. Commodity prices have been driven more from emerging economies than wage growth in the U.S. In mid 2008, CPI hit 5.4% driven mainly by commodity price spikes despite the fact the U.S. economy had been in a recession for 6 months at that point.

BOTTOMLINE ANSWER: If the Fed is not quick enough to withdraw liquidity as money velocity picks up, prices are likely to rise. Rampant inflation may not occur if the U.S. remains below its potential growth rate.

~Tony

Source: MARE group

Inflation: To Be or Not To Be – Part 4 of 5

noreply@blogger.com (Tony Hixon) — Wed, 12 Aug 2009 12:12:00 +0000

We’ve looked into the reasons why inflation hasn’t occurred yet. This time, I’d like to answer the obvious next question:

4. When will inflation return?

Inflation is likely to pick up when the velocity of money stabilizes and banks start to lend again. Presumably, this will occur as the economy gains traction.

Whether or not the pick-up in money velocity leads to higher inflation depends on how quickly the Fed pulls the reins back on the extraordinary credit it is currently providing. In theory, the Fed can take actions to reduce the size of its balance sheet, in practice, this will be a challenge.

The Fed has the power to end the extraordinary lending programs in put in place during the crisis, mop up the excess reserves of money in the banking system (by raising the Fed funds rate), and sell off the long-term securities (mortgages and Treasuries) it has purchased. Timing will be extremely tricky however. Time it wrong, and we could go back into a double-dip recession. Given the sheer size of the balance sheet reductions that need to be made, perfect timing may be nearly impossible.

BOTTOMLINE ANSWER: Inflation will return when velocity of money stabilizes and banks start lending freely again.

~Tony

Source: MARE group

Inflation: To Be or Not To Be – Part 3 of 5

noreply@blogger.com (Tony Hixon) — Tue, 11 Aug 2009 12:39:00 +0000

In Part 2 of this series, we looked at the reasons why higher inflation is expected. Today, we take a look at the reasons why, in spite of all the necessary ingredients to inflation being in place:

3. Why hasn’t inflation occurred yet?

Although a lot of money has technically been created, much of it isn’t being used. “Velocity”, a common term in an economist’s vocabulary, refers to describe how quickly money changes hands as it is lent time and again throughout the financial system food chain (lent, spent, deposited, lent out again). Inflation is not only a function of the amount of money, but also its use, and a lack of velocity can offset an increase in money supply.

For now, much of the increase in bank reserves is sitting idle on deposit with the Fed, meaning banks are remaining cautious about making new loans. Restoring their balance sheets to health remains a higher priority than new lending.

Meanwhile, additional downward pressure on prices are being caused by growing slack in the economy and continued deleveraging by consumers. Unemployment rates are at 26 year highs and consumers are saving more and spending less. With these factors in place for at least the foreseeable future, there is little upward pressure on prices for consumer goods.

BOTTOMLINE ANSWER: Inflation hasn’t occurred yet due to lack of velocity of money and consumer spending slacking off due to unemployment.

~Tony

Source: MARE group

Inflation: To Be or Not To Be – Part 2 of 5

noreply@blogger.com (Tony Hixon) — Mon, 10 Aug 2009 17:44:00 +0000

Last time, we looked at the first of 5 key questions in regards to the threat of inflation: Is inflation accelerating?

The second question that needs answered is, with all the fuss in the media:

2. Why is higher inflation expected?

The godfather of modern monetarist economic thought, Milton Friedman, defined inflation as “too much money chasing too few goods and services.” As a result, the textbook prescription for inflation is an excessive increase in the amount or use of money relative to economic output.

Today, the governments response to the financial and economic crisis in late 2008 has put the printing presses into overdrive. Chief among the astronomical growth in the monetary base is the fact that the Federal Reserve has tried their hardest to prevent the collapse of the U.S. financial system. To do this, they flooded the economy with newly minted cash…and the monetary base is now tuning in at $1.7 trillion.

Compounding the problem is the massive borrowing by the U.S. government to finance its large and growing budget deficit. Historically, huge borrowing needs have lead to the temptation to inflate away the deficit, by excessively growing the money supply to make servicing the debt easier through the creation of cheaper money. While inflating the debt away is probably not the Fed’s ultimate objective, history has shown that massive government debt places tremendous political pressure on central banks to attempt to inflate their governments back to fiscal health.

BOTTOMLINE ANSWER: There are 2 main reasons of why higher inflation is expected. First, the Fed is growing the money supply and that can at some future point create 'too much money chasing too few goods and services’, the exact prescription for inflation. Also, the governments massive borrowing to finance huge budget deficits is compounding the problem.

~Tony

Source: MARE group

Inflation: To Be or Not To Be – Part 1 of 5

noreply@blogger.com (Tony Hixon) — Fri, 07 Aug 2009 15:28:00 +0000

Turn on any financial newscast or open any newspaper and you’ll surely find a debate on the threat of inflation. Inflation is of particular importance to investors because it erodes purchasing power and historically has affected the returns of stocks and bonds.

In this blog series, I will provide answers to 5 key questions that are pervading everyone’s mind.

1. Is Inflation Accelerating?

Despite the headlines, actual inflation has remained muted. The U.S. Consumer Price Index (CPI) actually declined 1.2% YOY, representing the biggest drop in prices since 1950.

However, there is usually a lag before inflationary pressures tend to show up after the deluge of government bailouts and trillion dollar deficits. CPI generally offers little information about where inflation may be heading. Looking at a group of more forward-looking, market based inflation indicators can sometimes clarify. Here are a few:

Commodities – such as gold and crude oil, have staged a broad-based rally from their lows in 2008.
Long-term Treasury Bond Yields – nearly doubled in 2009.
Implied inflation rate in TIPS – climbing, showing a big increase from the 5 year deflation predicted in 2008.

However, at these levels, the indicators do not appear to provide any support for spiking inflation rates (i.e. hyper-inflation). Crude oil is still 50% lower than it was last year, Treasury yields are near their lowest ever, and TIPS prices project only 1.4% inflation over the next 5 years.

BOTTOMLINE ANSWER: Yes, there are signs that inflation is accelerating, but not at an unusually high rate.

~Tony

Source: MARE group

Fascinating (and somewhat scary) Boomer Factoids

noreply@blogger.com (Tony Hixon) — Wed, 29 Jul 2009 18:09:00 +0000

The rising savings rates in the boomer population will drain $400 billion out of consumer spending for the foreseeable future.
The boomer’s were such an integral part of the spending culture that the group (79 million) accounted for 47% of national spending before the credit and real estate bubble burst, yet was responsible for just 7% of national savings.
The boomers were responsible for 78% of the spending growth in the economy from 1995 to 2005.
The peak year for spending in the boomer community was 54; whereas for the generation ahead of them (a thriftier bunch), the peak was 47.
The share of boomers aged 54 to 63 who say they are “financially unprepared for retirement” comes to 69%.

~Tony

Source: BusinessWeek