All posts by Geoffrey Pike

Obama and Your Investments

Although Barack Obama lost the Pennsylvania primary yesterday, he only lost by a few delegates and it is looking likely that he will be the Democratic nominee. It is hard to see how he would lose to McCain, especially given the unpopularity of the Iraq War.

With the likelihood of an Obama presidency getting higher, what does this mean for our investments? He is tougher to predict than the other two establishment candidates. He definitely has plans to expand the welfare state at home, but it is hard to say what he will do with foreign policy. It is unlikely there would be a dramatic change in foreign policy, but it is possible that the Iraq War could end sooner.

I don’t recommend having much in the way of stocks these days, but if you are going to own stocks, I would recommend energy and defense stocks. With that said, a withdrawal from Iraq would hurt some defense stocks, particularly in the short-term.

Although an Obama presidency may not live up to its promise, particularly in troop withdrawals, it is a possibility. Therefore, you should not be too heavy in defense stocks now. Of course, with a recession likely, you shouldn’t be too heavy in any stocks right now anyway.

U.S. Dollar vs. Housing Prices

For the last couple of years, the U.S. dollar has gotten hammered along with housing prices. Of course there was a housing bubble that was created by the loose monetary policy of the Greenspan era at the Fed. The short-term could bring more downward pressure on both housing and the U.S. dollar, but the trend is unlikely to continue for long.

It doesn’t make sense long-term to have a weakening dollar along with falling prices in housing. Eventually the dollar will get low enough that buying property in the U.S. will be a complete bargain, especially for foreigners.

Let’s say that as of today the U.S. dollar and the Canadian dollar are at par. In other words, one U.S. dollar can be traded for one Canadian dollar (this is pretty close to reality right now). Let’s also say that the average U.S. house costs $200,000. Now let’s take an extreme example and say that over the next couple of years the average U.S. house drops to $100,000 and the Canadian dollar rises to $2.00 against the U.S. dollar. In other words, one Canadian dollar will then give you 2 U.S. dollars. It would then cost a Canadian just $50,000 to buy a house in the U.S., whereas before it cost $200,000. You would see Canadians trading in their dollars for U.S. currency and buying U.S. property like crazy. This would either drive up housing prices or drive up the U.S. dollar, or both.

We have seen a crash in the U.S. dollar and drop in housing prices at the same time due to some unique circumstances. The U.S. dollar is the main currency of the world and foreigners are starting to realize that they shouldn’t have so much holdings of U.S. currency. And although housing prices have dropped, they are still much higher than 5 years ago and the drop can be attributed to the housing bubble created by the Fed.

It is possible that the Federal Reserve could have a tight monetary policy (which it actually does right now) and see other central banks have an even tighter monetary policy. But this is highly unlikely in the long-term. Therefore, it is also highly unlikely that both the U.S. dollar and housing prices will continue to drop in the long-term. Nobody knows for sure what the Fed will do, but if history means anything, the Fed will most likely start inflating again and we will see housing prices pick back up in a couple of years.

Exchange Traded Funds

Exchange Traded Funds or ETF’s are a great tool in today’s world. Although the financial industry is highly regulated in many ways, there are also a lot of advantages to investors that weren’t available a short time ago.

First, transaction fees are often much lower with on-line brokerages. You can manage your own account without having to call a broker. The trades are cheap and market orders for heavily traded securities fill almost instantly.

Now you also have the luxury of ETF’s. As if mutual funds weren’t good enough, now we have ETF’s that track closely to a whole range of investments. ETF’s can be traded just like stocks. If you wanted to set up a diversified portfolio of stocks, bonds, and gold, it isn’t a problem now. You can buy an ETF that tracks the Dow, the S&P, the NASDAQ, or a number of other stock indexes. Then you can buy an ETF for long-term bonds like TLT. Then you can buy an ETF like GLD that traces the price of gold. You could buy $100,000 worth of these three things in minutes and you would pay less than $50 in commission with a decent on-line brokerage account.

There are many other ETF’s that are available now. You can buy foreign currencies or you can buy foreign stocks like EWH that invests in stocks from Hong Kong. Or you can short the market. Better yet, you can buy ultra-short funds like DXD that has approximately a double inverse relationship with the Dow. If the Dow goes down 2%, then DXD will go up approximately 4%. You can also buy silver with SLV. There are many choices that have come about in just the last few years.

These ETF’s are great tools. Study them and see what’s out there and then you can use them for your investing.

401ks and IRAs

This may sound like traditional investment advice, but it is still good advice. You should take advantage of tax shelters like a 401k or IRA. As a libertarian, I am opposed to taxation, particularly on income. Although ending the income tax is a goal of mine, that is not the world we live in right now. Therefore, you should take advantage of the tax laws that you can. If you work for an employer that has a 401k plan, you should participate, especially if your employer matches contributions. If you don’t, you are turning down extra money from your employer.

You should also take advantage of a Roth IRA, particularly if you are young. This allows you to invest your after-tax money and it will then grow (hopefully) without having to pay any more taxes (I am not counting corporate taxes). If you invest $10,000 at the age of 25 and it grows to $1 million by the age of 60, then you will not pay taxes on that one million dollars upon withdrawal. This is a great deal that you should take advantage of.

Even if you are bearish on the stock market, you can invest in virtually anything. In a 401k, your choices are limited to whatever plan your company chooses. But you can open a Roth IRA with almost any major broker now.

There is a chance that the government could change the law and later decide to tax Roth IRAs. But there are enough people that have them now that it would be politically difficult for the government to do this. Again, nothing is a guarantee, but you should take advantage of what you can. You don’t want to pay more in taxes than you have to.

Oil

The price of oil is now around $115 per barrel. It just keeps going up and it seems like nothing can stop it. Oil is a tough investment to call right now. There obviously continues to be a mess in the Middle East (Iraq in particular) and this contributes to a fear of decreased supply. There is also higher demand worldwide as countries like China and India grow.

If you are invested in oil or oil related stocks/ETF’s, then you should beware. If the U.S. goes into recession (which may already be the case), then many parts of the world will probably suffer economically as well. A recession that spans a large part of the globe will weaken demand for oil and could send the price plummeting. The Federal Reserve, despite all of its gimmicks, has actually been tight the last couple of years under Bernanke. The money supply has gone up only slightly and this could trigger the bust following the boom. Of course, much of the boom was artificial that happened because of Greenspan and his inflationary policies.

There is one thing that would make oil continue to go up in price: Iran. If Bush decides to attack Iran, then oil will probably double in price within a short time span. This scenario seemed unlikely a couple of months ago, but now the conversations about Iran have picked up again. Hopefully the Bush administration will not do anything crazy like bomb Iran, but we can’t really be sure given everything that has happened so far.

Therefore, my recommendation is: if you think the U.S. government will attack Iran in the near future, buy oil options, oil stocks, oil ETF’s or anything that would go up with the price of oil. If you think war with Iran is unlikely, stay away from oil investments in the near term. Unfortunately, it is hard to predict what the crazy people in Washington D.C. will do.

Taking Profits

It is always a good idea to take profits when you have a successful investment. If you have a well-balanced, diversified portfolio, then this means re-balancing. If bonds make up 30% of your portfolio and they perform strongly in a short time and now make up 40% of your portfolio, then you should sell off that gain and re-balance. You can take the profits and buy the portion(s) of your portfolio that has sunk in its percentage. In other words, if stocks were previously 30% of your portfolio and have now gone down to 20%, you can take the profits from the bonds and buy more stocks to re-balance back to 30% stocks and 30% bonds.

If you are speculating in a particular stock or investment, then taking profits is even harder. If a stock doubles, why not sell half and protect your initial investment? It is hard to sell after an investment has done well because it seems like the sky is the limit. But remember that it can go down just as fast as it went up. Don’t get too greedy. When you have a good investment, take some profits. If you have an online brokerage account, it is even better to set a price target when you buy a stock, fund, or ETF. If you buy 100 shares of a stock at $20, you can put in a limit order to sell 50 shares at $30 and make it “good until cancelled”. Then you don’t have to think and you won’t let your emotions get the best of you. It is always good to be taking profits from successful investments.

Gold at $1,000 an Ounce

Gold continues to hit new all-time highs. This past week, gold went past the $1,000 mark for the first time ever. Much of this increase is due to the weakness of the American dollar. The dollar is in free fall against other currencies. Although it is hard to fight the trend right now as the dollar continues to plummet, gold could very well be in for some hard times in the short-term. Gold is an excellent hedge against fiat currency (paper currency backed by nothing). In times of high inflation and uncertainty, gold is a great thing to have. You should always have some gold and/or gold-related investments in your portfolio.

You should be warned that gold may not do well in a recession. If the dollar continues to fall, then gold will probably continue its run. But it appears that we could be in for a deep recession, where cash will be king. If you hold gold for the long-run, then don’t worry about it. But we could see a sharp drop in the gold price with a severe recession. Don’t get caught speculating with gold or gold related investments if you are not prepared to lose money. Gold is a must for diversification and should be a part of your portfolio. But standing alone, speculating on gold right now is a very risky business.

Oil Prices

Oil prices have had quite a run, with the price sitting just above $100 per barrel as of today. There are many factors for this huge price run-up in the last five years. Obviously war in Iraq has affected the supply. There is also an increase in demand for oil worldwide. Another major factor is the perception of the future. If you think that war with Iran is possible or even just continued war in Iraq, this alone can add a big premium. Of course, we never know exactly how much each factor plays into the price.

One other major factor is the devalued dollar. The dollar continues to weaken in terms of other currencies and in general. As Ron Paul recently pointed out, the price of oil in the last couple of years has not increased when measured in terms of gold. The Federal Reserve continues to create money out of thin air (although it looks like at a slower pace more recently), and this eventually leads to price inflation.

It is hard to say where the price of oil will go from here. There are so many factors. War with Iran would almost certainly drive up prices dramatically. A continuing crash of the U.S. dollar would also favor higher oil prices. But there is also a great possibility of recession, which could significantly weaken demand and suppress prices. Although oil looks like a great investment long-term, be cautious about the price short-term with a likely recession.

Economic “Stimulus”

With an economic “stimulus” package coming our way, we should at least be aware of what it means. If you are one of the lucky welfare recipients, you might want to invest that money carefully.

This so-called stimulus package proposed by the President and revised by the Congress will send checks to anyone that earned income last year (above $3,000). Unfortunately, if you made “too much” according to the enlightened and philanthropic bureaucrats, then you may get nothing, even though you probably pay far more in taxes than those receiving checks. If you have a child, you will get an additional $300. Two children: $600. Three children: $900. And so on to infinity.

This is just a pure redistribution of wealth, pure and simple. It will not stimulate anything because the money has to come from somewhere. If it were that easy, why does the government have to be so stingy? Why not send checks to everyone for $50, 000 a piece? That would be some major stimuli.

Since the government is not cutting spending at all, the only way to fund this scheme is to borrow the money or print the money. There is no free lunch.

So if you are not getting a check, don’t worry. The poor saps will be wondering why food and gas are so expensive next year. Of course, most will have spent their checks by then. And even if you are getting a nice check, you can be wise with it.

If you have credit card debt or any other bad debt without a low interest rate, you should obviously pay this off. You should also make sure you have some kind of an emergency fund that is liquid.

But if you can invest, then you can hopefully protect yourself from these destructive government policies. Look at getting out of things that are dependent on the U.S. dollar doing well. As the government prints money to send out the checks, it will continue to devalue the dollars we have. We should own hard assets or funds that invest in hard assets.

If the government continues creating money out of thin air so blatantly, you will see real estate turn around in the next several years. As the dollar continues to devalue, a hard asset like real estate will probably go up. It is going down right now because it was a bubble where too much money went in too fast. But it will reverse if we see high inflation.

A true economic stimulus plan would require more savings and investments for individuals and corporations. The government should reduce spending while cutting taxes and regulations. But since it is not, we have to invest accordingly.

I am bearish on the stock market for the short and intermediate term. The Federal Reserve has been way too loose with its monetary policy for the last 2 decades. There shouldn’t be a Federal Reserve (“Fed”) because the market should determine interest rates as well as the money that we use. But if we are going to have a Fed, they can at least not be reckless. Alan Greenspan, who used to be a follower of Ayn Rand and praised a gold-backed currency, has been one of the biggest inflaters (counterfeiters) ever.

The Fed is now in a predicament. It can have a tight monetary stance/higher interest rates, which will cause a tough recession. This is what it should do. It would be painful for a couple of years, but then we could get rid of the bad investment and go forward with prosperity. The other choice is to have a loose monetary policy/lower interest rates. This may hold off a recession or make a recession milder than it otherwise would have been. But this would result in higher inflation and lay the groundwork for a more severe recession/depression in the future.

Chances are, the Fed will inflate. Helicopter Ben Bernanke will live up to his name. If lowering interest rates doesn’t provide enough money to the market, then he will have to drop money out of helicopters as he once suggested.

When Bernanke made the point that the Fed can always inject money into the system, he was correct. He simply said that if low interest rates don’t work, they can theoretically threaten to drop money from helicopters (inflate) and it will do the job. He wasn’t really saying he would do it, only that it is possible. That is essentially what the economic “stimulus” package it doing. It is creating money out of thin air to inject into the market.

The Fed will probably not disappoint (the politicians, that is) and will continue to inflate. Therefore, I would bet on more inflation in the future, but a recession in the near term is still likely. If you are going to own stocks, then you can put a small portion in defense stocks. With Ron Paul having little chance to become the next president, you can probably count on the next president to continue with more war. We can’t be sure which way Obama would go, but even he is not likely to completely withdraw troops from Iraq. Defense is probably the safest bet with stocks.