Around the office this week, we’ve been talking about the economy. One of the persistent questions that’s come up lately is this: Where can you put your money?
Right now, nowhere looks like a safe bet. In stocks, you’ve got a kind of triple whammy coming: the specter of European debt default, an imminent downturn in the domestic economy brought on by super-cuts to domestic governmental spending, and rising domestic inflation at a time when the Federal Reserve has just promised to keep interest rates low for the next eighteen months. And, oh by the way, unemployment is stuck at around 10% and starting to look like a permanent national fixture. Any one of those things would be bad. All three of them together are, well… you’ve seen the stock market lately, right? I mean, it’d probably be a decent time to invest in high-quality value stocks if you’ve got some money lying around, and you can confidently call the bottom of the market. But calling the bottom of the market is a lot easier said than done. For example, if Greece really does default and thereby drags down some of the big European commercial banks with it, well, I mean, there are market bottoms and then there are market bottoms. NPR’s Marketplaceclaimed that something like that wouldn’t just pull down Italy, Ireland, and Spain. A default that big would likely destroy France, too. And probably the rest of the Euro-Zone as well.
I dare say there are some big American banks with exposure to at least some of that soon-to-be-toxic European debt, too. It really is quite a nightmare scenario.
Regardless, even if the worst doesn’t come about, I think that personal investors can be forgiven for looking at some other potential investments besides stocks. At a minimum, it seems likely that American and European demand for consumer goods is likely to tail off even further over the course of the next year or two, and I know that at least for me personally, I’d just as soon not ride that wave down into the abyss. Maybe there will be some few profitable companies (Apple, Proctor & Gamble, various utilities, etc.), but even those seem likely to be over-bought. And even a good company is a bad investment if you overpay for its stock.
So what else is there?
Well, unfortunately, the bond markets are affected by the same forces that are affecting stocks, albeit in different ways. Bonds are ostensibly safer than stocks, of course—at least, you’re more likely to get your initial investment back in any case—but they’re hardly risk free. In fact, lately the risk of default has been a real risk. Moreover, with interest rates as low as they are now, bonds really don’t pay. At all. The Federal government right now is selling Treasures with roughly 2% yields. That’s unbelievable! If you believe that inflation is higher than 2%—and you’d be a fool not to believe that—then bottom line, you know that the government is actually making money by borrowing right now. Or, to put it another way, right now folks are so scared of what’s coming that they’re actually lending to the U.S. government at a loss! And this less than a month after we almost defaulted!
So bonds are out. In fact, they might even be worse than stocks right now.
That leaves commodities, of course. You can buy gold or oil or pig futures or whatever the Hell else catches you fancy, I suppose. Around here, we’ve been talking about gold and oil, but my colleagues and I agree that gold might be in a bit of bubble right now given its current valuations and that while oil is probably not a terrible investment, it’s still not exactly safe, either. I mean, we are talking about a significant potential drop in consumer demand in the U.S. and Europe, after all. That seems likely to send oil lower, at least in the short term and on a rather unpredictable timeline, and if there really is a serious contraction in the U.S. and in Europe, all those Asian countries that depend on exports to the West to drive their economies are gonna suffer, too—probably even worse than we are. And that’ll drive down demand for oil even more.
So. What do you do? You can’t just sit on your money because inflation will erode its buying power, even if you put it in something like a CD or a money market fund. Those things pay less than Treasuries. But none of the major investments look particularly safe, either. No matter what you do, you’re looking at the risk of some serious losses in the next 18-months, even if you don’t do anything!
It’s a tough issue. If I had the answer, trust me, I’d have opened with it.
Hell, part of me thinks that the government ought to raise taxes now just because all the other uses for the world’s ambient capital are all so awful. Nationally speaking, I think that might actually be the least-worst solution. All the other alternatives seem to lead to even more unjustified asset price bubbles and ultra-low risk premiums in return for capital investment. Frankly, that’s a game I’m getting a little tired of playing.
Eh. Come to think of it, I think Warren Buffet said that this week, too.
No comments:
Post a Comment