Keep this goal in mind as you read on: solid income and growth with minimal risk and no catastrophic losses. Just tuck it in the back of your head.
Subscriber Brian A. wrote sharing a common concern:
“I subscribe to your newsletter for the purpose of diversifying my portfolio as well as taking more responsibility for my investment future. … I look at the soaring S&P and Dow and wonder if both are appreciating from strong fundamentals, or from the Fed’s easy money policy. … I listen to my broker who spouts out information of a resurgence of manufacturing coming back to US soil and (says) equities are the place to be for the near future. The other side spouts banks are insolvent, businesses are closing, (and) if it wasn’t for the Fed propping things up we would be in a recession. Some say we are in a recession. I would like to see you devote an article on the subject of the ‘don’t worry be happy’ crowd verses the ‘doom and gloom’ crowd.”
Well, Brian, ask and ye shall receive. My recommendation, as always, is to look at the data, decide for yourself which camp you fall in—if either—and invest accordingly.
Folks who think things are turning around generally point to statistics published by the Congressional Budget Office (CBO). These numbers—the unemployment and inflation rates and the Consumer Price Index in particular—are used by the Federal Reserve to make or change policy. Those decisions affect the economy and the stock market.
If you swallow these numbers, you can point to a trend line going up. You may not think “happy days are here again,” but you could make a case that we are headed in the right direction.
In contrast, the “gloom and doom” crowd point to data from statisticians like John Williams at Shadow Government Statistics, who make a good case against the accuracy of official government data. Williams’ alternatives to the CPI, official inflation rate, and unemployment rate paint a much different picture.
Unemployment offers an easy example. When a person stops looking for work, the CBO no longer considers him unemployed. I guess that means if everyone just stopped looking, the unemployment problem would be solved.
Many in the gloom-and-doom crowd distrust the government and believe its statistics are produced for the benefit of politicians.
The gap between these two camps is wide. We recently published a special report called Bond Basics, offering safe ways to find yield in the current economy. Shortly after releasing our report, I attended a workshop with one of the top bond experts at a major brokerage firm. As I listened to his excellent presentation, I realized we agreed on many points: interest rates seem to be going up, the value of laddering and diversification, etc. We also agreed that investors (not traders) should buy bonds for one purpose: safe retirement income.
This speaker, however, recommended that baby boomers and retirees buying individual bonds only buy investment-grade bonds and ladder them over an eight-year period. Each year some would mature, and retirees would then replace them with other eight-year bonds. In a rising-rate environment, retirees would eventually catch up he claimed. This expert mentioned inflation only once, remarking that it is “under control” and should remain low.
I went to the company’s website and discovered that five-year AAA bonds were paying 1.92%, and ten-year bonds were paying 3.41%.
Then I went to Shadow Government Statistics. The official inflation rate as indicated by the CPI is hovering around 1.8%. However, using the same method used for calculating the CPI in 1990 (the government has changed the formula many times), the current rate comes to approximately 5.5%.
Now, it only makes sense to invest in long-term, high-quality bonds if you truly believe the government’s CPI statistics. If, however, you that suspect inflation isn’t quite so under control—even if you don’t believe it’s 5.5%—why would you invest in an eight-year bond that’s virtually certain to lose to inflation?
The same logic applies to unemployment numbers. The official number is around 6.7% and coming down. Alternative calculations show a double-digit unemployment rate that is rising. Should you invest heavily in stocks now? It depends again on whom you believe.