“Wow,” was All I Could Muster For a Shocked Response

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The other day I picked up a copy of the Wall Street Journal. There was an article about The Great Depression by Morgan Housel. He mentioned a big hedge fund manager thinking that today’s economy is like the 1930s.

The two times are hugely different!

“Let me count the ways”:

1. Today’s economy: Up over 2% versus down 45% then

2. Today’s economy: 89% private and 11% government vs. about three percent federal government spending in The Great Depression (government spending = more diverse economy and on-going stimulus)(also, this doesn’t include current government payouts like Social Security, Medicare, etc. and their impact in the economy)

3. Today’s economy: internet, smart phones, apps, technology, biotechnology, alternative energies vs. none of that (in other words, we have a much-stronger, more-diverse economy)

4. Today’s unemployment: 5.5% vs. 25%

5. Today’s stock market: near historic highs vs. Dow Jones down 89% (and the current market is at an historically average price, when looking at forward 12-month earnings)

6. Today’s banking: FDIC insurance covering $250,000 per account vs. no bank insurance

7. Today’s brokerage: SIPC insurance covering $500,000 per account vs. no brokerage insurance during the 1930s

8. Today’s brokerage: margin limits of $1 equity to $1 debt vs. $1 equity and up to $9 debt! (this made the stock bubble and crash of the 1930s significantly worse and is even blamed for starting the depression)

9. Today’s retirement: Social Security income vs. none

10. Today’s retirement: Medicare coverage vs. none

(Both of these programs create an on-going stimulus from government dollars and a more-stable economy)

11. Today’s liquidity: corporate and personal cash of over $4.148 trillion vs. ??? (I really don’t know how much cash was around back then. I’m pretty sure that it was less than trillions, even adjusted for inflation)

12. Today’s Federal Reserve: experienced and aware of volatility caused by rate moves vs. inexperienced and short-sighted in The Great Depression

This list could be longer but you get the idea.

What was the hedge fund guru, Ray Dalio’s point? That the Federal Reserve is ready to raise rates and this could cause a market panic and drop. So have a lot of cash.

I agree with the “have cash” idea but that’s pretty well covered with over $4 trillion in cash.

Mr. Dalio’s other point was that the Fed Reserve was going to raise rates (like in the 1930s). That’s absolutely true. Rates are at zero. Most likely, there’s only one way to go with them…up. See my post for my predictions for 2015, including rate moves.

So worry not, dear investors, we will have stock market volatility. Probably a correction. Maybe even a moderate bear market. But we may also have a near-repeat of the record gains started in the late 1980s and running all the way through the 1990s.

You don’t want to miss a “super bull market.” Have cash but own a lot of equity….

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HOW TO GUARANTEE A LOSS: Buy 5-Year CDs

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With interest rates being low for over a decade, it’s tempting to buy long-term products that pay better interest. A lot of investors will look at 30-year Treasury bonds, 5-year CDs or even long-lock-up fixed annuities.

Most of those actions are just about the worst thing you can do with Fed rates being near zero. You’ve probably heard of the seesaw relationship between interest rates and bond prices. One’s up, the other’s down. And vice versa. If you buy a 30-year T-bond, or other long-term bond, at low rates then the chances are very big that you’ll lose principal value when rates move up. Bad timing and low or negative returns.

With the CD or fixed annuity options you probably won’t get hurt. You’re not going to lose principal but you will be locked into rates that likely won’t meet or beat inflation. That means you have a real loss due to a consistently weakening dollar (inflation). A guaranteed loss.

Specifically, if you buy a 5-year certificate, with the current average yield of 1.56 percent, then you’ve lost ground to the average 3% inflation we’ve experienced. And that’s just the government figure for inflation. We all know, when you include food and fuels, real inflation is commonly believed to be even higher. So an investor needs to earn even more to really keep up and grow. But it’s possible.

Also, the fixed annuity could lock you into fees that last 4-7 years or longer. Beware of the exit details.

What’s one solution to low interest rates? Buy “alternative” bonds that have minor impact from rising rates. There’s a lot of different types out there. Also, invest overseas, add more risk categories (like real estate) and seek out sustainable, high-yield investments. Visit my site, RetireIQ.com, and request an appointment. We’ll talk about the details.