Not Investment Advice

Dear Friends,

No Liability. This is not advice for any specific person. Everything here could be wrong; think for yourself. Only you are responsible for your behavior. If you accept these terms, you may continue reading.

I get asked for financial and investment advice a lot, and want to help. There has been tremendous public attention aimed at complicated financial and economic issues, and I’m happy to give my perspective on planning and investing.

First of all, as always, never maintain a balance on your credit cards from month to month. For those who maintain big savings accounts and a mortgage, make extra principal payments now. Savings accounts earn much less than mortgage interest, so use some of that savings to reduce the interest you pay. By law there is no penalty for making extra principal payments.

Economic risk is high right now. We could recover with strong employment and growing prosperity. We could have a run on US Dollar debt and fall into an inflationary and humanitarian collapse. The likely future is somewhere in between. Our future course is unknowable, and anyone who tells you otherwise is overconfident. Instead, try to be aware of the range of possibilities and strike a balance that leaves you well prepared.

The biggest reason for high risk right now is the fragile confidence in the long term solvency of debtor nations. The shaken confidence is rational because it remains unclear if global debt and trade imbalances can come back into balance smoothly – or only through national default.

Stocks look pretty reasonable right now. In the US, dividends and earnings look good from a historical perspective. In a lot of emerging markets, stocks have big discounts because of perceived risk — but how much riskier is it for an emerging business to imitate existing efficiency, compared to a developed business improving through R&D? Owning stocks now looks better than usual, and diversifying globally seems as important and attractive as ever.

Bonds look bad. They may be in a bubble. If the Federal Reserve and the banks can not work together to maintain a stable monetary base, we risk high inflation. Monetary policy has eased in an attempt to offset the shrinking bank leverage, but history suggests that reversing this situation will not go smoothly. The recent financial reform included some good ideas, but does not protect against re-leveraging the banks.

Assets are the opposite of bonds; the same thinking above applies in reverse to assets. If bank lending recovers while monetary policy is still generous, then inflation can raise the price of real estate, gold, and everything else.

Overall, pay down your mortgage and use credit as little as possible – interest rates are high for people and companies. Don’t loan the government money by buying bonds — money has flooded in and they pay a low interest. Focus on global equities and real assets, especially emerging markets and commodities that are supply-constrained.

In the modern adult lifetime, emerging markets look poised to fully emerge. Investing globally looks wise. As global production enables global consumers to behave more like US consumers, there will not be enough raw materials. The constraining factors are the commodities used in production, so owning those looks wise. There is plenty of low skill labor in the world, so education will become increasingly important. The most educated nations likely have better 10-40 year outlooks than the less educated nations.

Finally, innovation has been lowering prices and improving products at an ~increasing~ rate, so save your money and delay your gratification because products in the future are going to be much better than what you can buy today.

Hope that helps.

Happy to discuss,

Dan