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Subject:  Printing a Weaker Dollar Date:  11/21/2012  6:27 PM
Author:  trader2012 Number:  34516 of 35357

It should occur to you, as you watch Rickard’s interview, that Bernanke has multiple intentions with continuously printing money. One is a cheaper dollar (and the subject of Rickard’s book on currency wars). The other is persistently low interest-rates, maybe even far beyond Bernanke’s promised 2015 target. That’s makes it tough to break into the bond-game at this late date with other than investorly, credit-worthiness bets, or outright trading bets on the direction of interest-rates (though Schiller thinks that trade still has legs). In either case, the bond bull lives!

Back in 2000, getting entirely out of stocks (in favor of bonds) seemed like a risky move from the viewpoint of genuine capital appreciation. But the asset-class has proven to be the safer and more profitable place to be for over a decade now. Yes, eventually, interest-rates will rise again, because nothing lasts forever. But just as the the market can remain irrational longer than you can stay solvent, interest-rates could stay low longer than those who want to buy principal-protected instruments can wait for them to reappear at attractive prices.

In other words, the advice that Lokicious used to offer in this forum to "conservative investors" (in which a low-level, cash-management tactic was mistakenly substituted for the whole of a proper, high-level investment strategy) has proven to be very destructive of wealth maintenance and/or its generation, as can be seen by answering for yourself this question:

"After you pay ordinary-income taxes on your gains, just how much of your purchasing-power is retained from buying those 5% CDs once offered at PenFed as opposed to something that was a genuine investment and not merely a place to temporarily park a few bucks while looking for better opportunities?"

Yes, cash and cash-equivalents have a role to play in a properly-constructed, investment portfolio. But an over-weighting of cash and cash-equivalents, as Lokicious did advocate, in an effort to manage investment-risk by attempting to avoid it, has proven to be the risky, destructive foolishness it was. (And you are welcomed, Loki, to respond.) In other words, the question anyone needs to answer for her or himself is this: "Are you so rich that you can afford to accept the certainty of 3%-5% returns, and will they be enough to fund your retirement to three Standard Deviations of your life-expectancy?"

If the answer to either is "No", then investment-risk would have to have been accepted, and the likely result of doing so back then --when markets were far more benign than presently-- is that one might now find him or herself in the position to afford those low returns going forward. In yet further words, playing it "safe" back then created huge, present risks. But taking on the judicious, prudent risks I advocated has created a buffer of present and future-day safety.

You had two clear models to chose from. One is causing you present grief, i.e., the lament of "savers" that "they can't find yield". The other model taught you how to obtain yield even when markets got tough, namely, "buy across the yield-curve and across the credit-spectrum, because what seems safe isn't when all of one's risks are considered, not just default-risk."

As 2012 draws to a close, I can project that year's investment-gains will probably fall into the same, modest 10%-11% range of last year's gains, which were only half the the prior year's 20% gains and only a third of those the year before's 34% gains. Even after 2008's (-20%) losses are factored in, that still leaves a five-year, average gain of around 10.8%, or nearly 700 basis points more than the best CDs now offer. Admittedly, those surplus basis points aren't risk-free. But they carry with them no more than tolerable risks (provided those risks are managed responsibly by such tactics as position-sizing), and they certainly spend a lot better at the grocery store than what CDs provide.

"I love it when a plan comes together."

http://finance.yahoo.com/blogs/daily-ticker/fed-keep-printin...
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