So, what are we looking at in 2-3 years?

[haha]

The classic way to beat inflation is to own commodities (PCRIX type stuff, physical gold, etc.), hard assets (stuff like real estate, timber, factories that make stuff people want, etc.), and commodity producers.

In the 70s WEB wrote many classic letters that gave his somewhat different take on how to beat inflation with equities. His choice was companies that could run with very little incremental investment, either in plant or current assets. He wanted high profit margin, high ROA businesses. It almost turned the "hard assets" idea on its head, as what he wanted was a company that was as close to being a pure cash generator as possible. He sometimes used the analogy of a tollgate. By this time in his career, he was no longer attracted to the classic hard assets such as mines, feeling that whatever cash the miner got from selling his product was more than used up in buying new equipment, and prospecting for more places to dig big expensive holes.

I think he is right. Hard asset plays can be excellent speculations, but a company with a capital sparing business and good pricing power will grind out the money every time. As Brewer mentioned, timber as a pure tree farm operation fits this, except that demand for the product can be very volatile. Tree farmers are price takers, not price makers. Their main salvation is that if they are well capitalized they can cut way back on harverst and just let the trees grow. They generally have little in the way of fixed committment to labor, and almost no plant other than the tree farms. Planting, thinning, pest and weed control and harvesting are contracted out. They can even contract road maintenance, and the logger will build the roads too.

Some capital intensive businesses with very long lived assets can fit it too, as long as there is not a great need for maintenance capital.
Generally these businesses don't get real cheap, except when people are scared out of their wits. I wonder if shipping as in the bulkers that we have been following might fit well, as long as they can avoid bk in the troughs such as now. No real pricing power, but I guess the ones with financial breathing space can pretty cheaply mothball excess capacity. I guess because I don't really know.

Ha

 

[charlie]

The real yield on Vanguard's TIPS fund is quoted at 3.62%. The highest real yield on the TIPS fund occurred in early 2001 at 4.27%. The lowest
real yield was 0.63% in April of this year.

IMHO, and I am no economist, the TIPS fund is a bargain. I am seriously considering supplementing my IRA with a chunk. I think TIPS are a relatively safe haven for the next year or two and could even provide some nice capital gains when the economy re-inflates.

Cheers,

charlie

 

[FIREd]

As Brewer mentioned, timber as a pure tree farm operation fits this, except that demand for the product can be very volatile. Tree farmers are price takers, not price makers. Their main salvation is that if they are well capitalized they can cut way back on harverst and just let the trees grow. They generally have little in the way of fixed committment to labor, and almost no plant other than the tree farms. Planting, thinning, pest and weed control and harvesting are contracted out. They can even contract road maintenance, and the logger will build the roads too.

I am a tree farmer (technically speaking, because I have pretty much deferred the job to family members since I moved away) and so are my dad and uncle (full time for him). We have an integrated "operation": We all own some woodland, my uncle cuts down the trees and hauls them away to the saw mill that both my dad and uncle own. Then the wood gets sold as fire wood or lumber (some to my cousin who is a cabinet maker) depending on grade. As a youth, I spent my summer in the business. I can confirm that it can be a very profitable operation. In our case there is NO commitment to labor (we do most everything ourselves, but some times we have to rely on temp workers) and the overhead costs are minimal (taxes is probably the largest cost burden). We do our own planting, growing, maintenance, cutting, sawing, drying etc... so we can sell a semi-finished product with a higher value added. Still price swings can be pretty severe and cash flow very irregular. In years where prices are too low, we do minimal logging and we focus on maintenance (weeding, thinning, etc...) instead. In our case, we purchase woodland close to municipal roads/tracks, so road maintenance is mostly not our responsibility.

 

[freebird5825]

Some elementary questions:

1. This government of ours that's giving out $800 billion (or whatever the amount is), just where is this money actually coming from?
2. Anyhow, with all this money the government is giving out, how is this going to affect the economy in 2-3 years? (And, more importantly, how is going to affect me--and less importantly, how might it affect you)?

1. US bonds, i.e. more debt for our future.
Higher taxes...more industries moving overseas, less pocket money, less savings by public.
Agency budget cuts.
Special earmarked funds - slosh Congressional pork around and cut "fat" programs

2. Tea is brewing as I type.

 

[Gone4Good]

If I could accurately predict what is going to happen 2 or 3 years into the future on a consistent basis, I'd be too busy cruising the world in my 120 foot yacht with the latest supermodels to be posting here.

And the same is true for everyone else here.

None of us know what the market will look like in 2 to 3 years, let alone 2 to 3 days. Which is why most of us stick with a balanced portfolio of fixed income (good for deflation) and stocks (less bad for inflation).

However, I'd agree with others here who have expressed a greater concern over potential inflation than deflation. Although we are currently experiencing a deflationary credit crisis, the Fed is throwing everything under the sun at that problem and the risk of over correcting is very real.

One potential way to protect against inflation is by investing in commodities. Another way (and a better way, in my view) is to allocate some of your fixed income investments in TIPS, which at current yields, are very attractive right now.

 

[samclem]

One potential way to protect against inflation is by investing in commodities. Another way (and a better way, in my view) is to allocate some of your fixed income investments in TIPS, which at current yields, are very attractive right now.

A question from a "TIPS Novice:" I assume buying the actual securities (at auction or through a broker) is the preferred way of locking in today's high rates and the only way to guarantee your principal (if held to maturity), right? I know that you have to pay tax on the interest as it accrues, even though you don't actually receive it, so these things should be held in tax advantaged accounts.

Would a TIPS fund offer the same inflation protection, though without the guarantee of return of principal?

Also: Any significant differences (in costs, in reaction to changes in inflation or interest rates) between a TIPS ETF and a TIPS MF?

Thanks!

 

[John23]

Some elementary questions:

1. This government of ours that's giving out $800 billion (or whatever the amount is), just where is this money actually coming from? And, did they have it all the time? And, if so, why wasn't it used for daily physical education in the elementary schools or looking for a cure for cancer? Or both? Or for other things worthwhile?

2. Anyhow, with all this money the government is giving out, how is this going to affect the economy in 2-3 years? (And, more importantly, how is going to affect me--and less importantly, how might it affect you)?

It'd be like playing Monopoly, and the banker adds more money to the board

Prices get bid up (inflation) and if you're holding money, you're money is diluted.

The govt doesn't care about education, infrastructure, roads, health care. Funny, they can never find the money for that....but they can find the money to bail out banks and brokers

I think there's a very real risk of Japan, L shaped recession/depression for 10 or 15 years. That's what happens when you keep propping up the system.

My theory for the next 5-10 years....

-Higher commodity prices. Jim Rogers commodity super cycle theory. Makes sense to me. Will last 18-25 years and started in 98/99. Higher oil, gold, crb, agriculture.

-Higher inflation, interest rates. Bonds are making a gigantic top now.

-Weaker US debt rating.

-Stocks, flat to down. I don't know how you make the case for a sustained bull market coming out of this. These companies....bac, ge, goldman sachs...they aren't going to come out of this unimpaired.

Negligible returns over cash. But a real risk of...DOW 5,000 in 10 years or something. What's going to happen to stocks if the 10 year or 30 year goes to 8 or 10%? In the 70's, stocks went to nothing and we flat for 10 years. And they were coming off a smaller top in the late 60's vs the late 90's.

So many bubbles have built up over the last 30-50 years, I find it hard to believe the market has discounted *all* the bad news going forward. Has it discounted 10 or 15% unemployment?

A bigger risk in 10 years...China, Japan, S Korea, Taiwan, Singapore, etc. They've got all the cash in the world and reserves...why are they going to continue to hold dollars?

Who's going to be holding the dollar in 20 years?

Funny, in sept and oct, everyone thought the world was going to end....weren't we suppose to be living in shanty towns by now?

These things take time...you don't turn around the Titanic just like that. Turning the American economy is like a super tanker. 2-3 years, probably similar to what's happening now. But 10-15 years....who knows.

 

[kyounge1956]

A question from a "TIPS Novice:" I assume buying the actual securities (at auction or through a broker) is the preferred way of locking in today's high rates and the only way to guarantee your principal (if held to maturity), right? I know that you have to pay tax on the interest as it accrues, even though you don't actually receive it, so these things should be held in tax advantaged accounts.

Would a TIPS fund offer the same inflation protection, though without the guarantee of return of principal?

Also: Any significant differences (in costs, in reaction to changes in inflation or interest rates) between a TIPS ETF and a TIPS MF?

Thanks!

There are also Series I savings bonds, and IIRC, you don't have to pay tax on I-Bond interest until you cash in the bonds. I buy these on payroll deduction but I think they can also be purchased at banks, and possibly also online from treasurydirect.gov (web address from memory). I don't know whether I-Bonds are similar enough to TIPS to be interchangeable in a portfolio.

 

[OAG]

I Bonds are limited in purchase I think - $5K limit per year. Here is the link to I Bonds: http://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

 

[Dennis]

Me too! Meaning? I'm just Holding steady with my current 40/60 mix of Balanced Funds ( 4 of them) and Intermediate and Short Bond funds..
having kept 25% out from 07's gains and Reinvesting Now and just adding to my Balanced Funds on the Dips ( S&P 800 or less )

and hope they repeat and know what they're doing again, this time around vs in the apst 10 yrs with them..

So far YTD is down about -15%..not the best of times, but could be alot worse..
having 3 yrs of COH? Just hope that is enough toget thru this Mess and things are fully recovered by this time in 3 yrs...1/11

Having ride out the last 3+ yr Bear was alot easier with the Bonds & My Bal. Funds doing very well, but not this time around..

BTHOMe!

 

[Dennis]

Bail out and cost?

Being On the Otherside with More than enough $ to be Financially Retired?

I have to admit, I really don't care how much it takes to get things back to Normal..adn if it cost another 1-2% in one's Taxes? Fine with me..

Meaning? If it's going to cost everyone another 1-2% in our taxes to get our Savings ( #401k/#403's/Retirement Ports) back to 1500 S&P levels?
Seems like a Small price to pay..

I mean, if it cost me $1,000/yr more in taxes for the next 3-5 yrs to get back over Double or more than that on a per $10,000 ?
It's a no brainer to me..

It seems that everyone on the lower Economic income scale wants The Gov't to Provide More from A Nat. health Plan to Everything else, but don't want to pay directly for it thru Higher Taxes ( that other countries have to pay for it) and they just have to come into A Reality Check ..

and with Group Health Plan Premiums now exceeding $10k yr? It's time to start taxing that as well to employees getting it paid by their employer..

If self employed and even Seniors can't Deduct their Health Ins. Costs, why should Employees get it tax free? It doesn't sound fair to me..

We need alot more $ going Into Medicare and SS to increase it's services and keep it In business...

maybe Obama's Idea of Converting #401k $ into SS and get 50% more SS in return is a Good Idea as well..? Seeing as Most #401k investors can't handle their own Investing anyway..and it's a Stacked Deck against them ....

Can have all the Regulations they want, but Businesses will just figure out new ways to circumvent the System... Considering your Dealing with a Devious Insurance & a used car salesman Attitude to begin with..

and our system is designed to Clean up AFTER the Fact and not prevent much of anything..until after it's been done..and not prevent it..

Their is justToo Much influence on our Congress and Senators to Do or expect otherwise from them...in the real world..If they want to stay in office and achieve other things for the people of their District/State.. and get everyone else to pay for it.. That's their real job..isn't it?

Bank America drops-25%? Just a Month Before , 60 min. did a Story on them and how their CEO was saying How Great of shape they were in...?
Yeah... More BS.. But did we expect him to Tell the truth and have it's Co. Crash back then?

 

[kyounge1956]

I Bonds are limited in purchase I think - $5K limit per year. Here is the link to I Bonds: Individual - I Savings Bonds

True, but that is a much lower limit than I remembered. I just did a quick check, and the limit was $30,000 until the beginning of this year. This article says the limit is $5K in paper I-bonds and $5K in electronically purchased I-bonds, per Social Security number, per year. So a single person could buy $10K I-Bonds/year and a couple, $20K.

 

[samclem]

Thanks. I bought some I-Bonds a few years ago when the fixed portion of the yield (the part added on to whatever the inflation adjustment is. This part represents the real yield.) was 3%+. That was a good deal. Now the fixed portion is less than 1% and it's hard to get very excited about it. With 10-20 year TIPS paying an effective real yield of approx 2-3%, I'm getting interested. . .

 

[barbarus]

This is the scenario that I think is a bigger risk than deflation. The Fed and other regulators know pretty well how to combat deflation. Not so easy to corral the other side, though.

The Feds don't want to combat inflation, they want to CREATE it. With your economic background brewer, you understand the concept of monetizing debt better than most of the rest of us here.

Pay off you debts with cheaper dollars. The only average citizens who count are mostly those up to their ears in debt. They are a prime reason the "printing presses" will be turned up to high.

 

[Kwirk]

A great deal of "money" (assets that people believed they owned at a certain value) disappeared in the past year. This may be the perfect time to "print" more money. I just hope we can bring ourselves to stop when the economy picks up, after deflation stops and before substantial inflation starts.

 

[clifp]

The Feds don't want to combat inflation, they want to CREATE it. With your economic background brewer, you understand the concept of monetizing debt better than most of the rest of us here.

Pay off you debts with cheaper dollars. The only average citizens who count are mostly those up to their ears in debt. They are a prime reason the "printing presses" will be turned up to high.

It seems to me that we are in an inflatable zodiac that has sprung a leak.
Luckily we have a large stack of scuba tanks in the boat. The folks in charge (world wide Fed and Treasury) have a pretty good idea where the leak is, but no clue how to patch it. So right now they are taking the scuba tanks and inflating the zodiac as fast as they can.

It seems to we face two problems, when the hole eventually gets plugged the zodiac is going to inflate so fast that we are risking the whole zodiac bursting like a ballon (hyper inflation) The longer term problem is every time we use a scuba tank we toss it over board, that's one less scuba tank to use in the future. (Debt).

As far as investments go ISM/OSM anybody

 

[Notmuchlonger]

Best hedge against this whole thing. Is to keep working.. Providing there's work.

ER/R kinda nixes that though

My concern is with all this bailout action. When does the piper get paid eventually. I hope its when Im dead or nearing it. It will not be pretty.

 

[lazygood4nothinbum]

i think even if i was under the stress & depression i had when i quit, if the world looked then like it does today, i'd have found a way to suffer through it. and now that early retirement has served its purpose and relieved my initial stress, now that those conditions no longer exist, now that these new conditions do exist, i find early retirement creating all new stresses all on its own. could be e.r. has outlived its possibly short-lived usefulness. i've no clear idea what direction i'm yet headed but a new career is starting to look inviting.

 

[clifp]

i think even if i was under the stress & depression i had when i quit, if the world looked then like it does today, i'd have found a way to suffer through it. and now that early retirement has served its purpose and relieved my initial stress, now that those conditions no longer exist, now that these new conditions do exist, i find early retirement creating all new stresses all on its own. could be e.r. has outlived its possibly short-lived usefulness. i've no clear idea what direction i'm yet headed but a new career is starting to look inviting.

My back up plan was if my liquid net worth dropped below a figure, I'd go back to work. I am slightly below that number now. What I forget about was the economic conditions that caused me to net worth to suffer also means it is really crappy time to look for a job.

 

[NW-Bound]

Best hedge against this whole thing. Is to keep working.. Providing there's work.

Or eat less. I mean to consume, or to spend less. That is if the original ER plan has some "fun" or discretionary items to cut.

Just yesterday, my wife found cheap airfare to Athens, but we would have to buy right there and then. I regretfully had to pass.

 

[Notmuchlonger]

Or eat less. I mean to consume, or to spend less. That is if the original ER plan has some "fun" or discretionary items to cut.

Just yesterday, my wife found cheap airfare to Athens, but we would have to buy right there and then. I regretfully had to pass.

Ya I know. Life is rough when we need to pass on flying to Athens or not.

 

[unclemick]

SEC yield = 5.78%.

Pssst Wellesley. Lest we forget. I know. Iknow. But someone had to say it.

heh heh heh - could be a rough decade. .

 

[NW-Bound]

Ya I know. Life is rough when we need to pass on flying to Athens or not.

Man, that's all we live for now.

Can't eat as much as I like, for fear of gaining weight. Can't drink as much as when I was young. We have not been inside a shopping mall in years. Last month, for my wife's birthday I found a Belgian restaurant in town, whose proprietor is a Belgian chef. She didn't want to go, so we went to Fresh n Easy to buy stuff so I could cook dinner for her.

We do not eat out when not traveling, period. Nor do we go to the movies. Travel is all the pleasure we have left.

 

[NW-Bound]

... now that these new conditions do exist, i find early retirement creating all new stresses all on its own. could be e.r. has outlived its possibly short-lived usefulness. i've no clear idea what direction i'm yet headed but a new career is starting to look inviting.

Are these new stresses financially related?

If so, in a few years, when the economy recovers, and your houses are worth something again, you may yet change your mind once more. It's OK.

I never intended to retire early. I used to love my work, and still do. But I cannot fit inside a megacorp environment, and have failed at being part-owner of a couple of business ventures. If I need to work, I will. But so far, belt-tightening still works for me.

 

[Notmuchlonger]

Man, that's all we live for now.

Can't eat as much as I like, for fear of gaining weight. Can't drink as much as when I was young. We have not been inside a shopping mall in years. Last month, for my wife's birthday I found a Belgian restaurant in town, whose proprietor is a Belgian chef. She didn't want to go, so we went to Fresh n Easy to buy stuff so I could cook dinner for her.

We do not eat out when not traveling, period. Nor do we go to the movies. Travel is all the pleasure we have left.

Well its looking good for you. Dollar is getting strong on the foreign currencies. Im pondering visiting Europe real soon.