Interest Instruments For Today
Chris Laird
One of the most interesting studies about wealth, and finance is what interest rates are doing. Being a theoretical type person, I really like to think about what the present levels of interest are telling us about the economic environment.
My last article, INTEREST, was a kind of introduction to a rather... bold view that I am coming to have... about what the presently low interest rates world wide are telling us.
If you have been reading my articles at my beloved Gold-Eagle.com (my favorite site , not the least reason for which is Dr. V likes to publish my brilliant commentary... ;) )... hehehe... but if you have been reading my articles you will find that I have a common refrain that there is only one thing I feel comfortable recommending to people as a wealth hedge and preserver.. Gold...and I am the most reticent guy about making any recommendation to people.
Have you ever wondered why that is my constant refrain?
It is NOT because I don't believe in investing per se. It is because these present times do not call for it as a practice and there are a thousand reasons as to why. And pathologically low interest rates tell me one heck of a lot about as to why that is.
Well, this view that I have developed is a rather restricted set of worthwhile financial things to own....
Interest rates today basically are the ultimate vehicle to determine what is worth owning... and what the economic appetite is for things, and also tell us a great deal about macro economic trends... you can take an interest rate take on all economic questions worth thinking about...that even includes the Gold bullion discussion.
After studying the gold markets for years, I have come to some rather drastic conclusions about financial instruments that pay interest...for these present pathological economic times, and they lead me to the view that gold is about the best thing on the planet to own... this is based on long term views... not short term ones, or gains...
When interest rates are so pathologically low, instigated by long term central bank excess liquidity for decades, with Japan being case study number one since about 1990.... and spreading the low interest pathology to the entire world that does business with Japan, and ... who does not???
So since everyone does big business with Japan, naturally after Japan abuses interest rates so badly by offering ZERO rates for almost 15 years, now the whole world is caught up in that trap.
That practice has made it impossible for normal economic forces to work and take hold and lead to real sustainable growth,... and on and on and on....I could write a book about it, and maybe I will...
Therefore, since Japan, the US, and listen to this friends, China too, has been abusing interest for so long we therefore are not talking about having to recover from a mere hangover, but we are talking about long term damage to the world economic organism.
What happens when you have long term damage to an organism or population of organisms? You have to wait till the NEXT generation of those organisms to manifest before you see normal health there.
In this sense, the long term damage to this generation world wide from suffering from the low interest rate pathology is that the world will have to wait for the NEXT generation to recover from the widespread illness and pathologies that the abuse of interest has inflicted on THIS generation... meaning?
Only a depression will shake us out of the low interest plague, and all of its manifestations, like bubbles, rampant speculation, and un heard of and unimaginable levels of indebtedness.
Hence, my refrain that there are no worthwhile investments, because the interest rates offered are so low that :
- It isn't worthwhile to invest because the risks are too high and returns too low, tho people keep trying.
- It isn't worthwhile to save because interest is too low (except for saving in GOLD).
- Indebtedness, the opposite to saving, is pathological now everywhere.
- and so on and so on and so on......
Interest rates price money.... set boundaries on supply and demand... price and discount the future, etc. Like gold, interest rates are one of the couple of main drivers and indicators of all things economic...
Now, let me get to one of the main points. In my last article, INTEREST, I said that investing in any financial instrument today is a bad idea.... because interest rates are so pathologically low that... the returns available for conservative instruments are not worthwhile, and analogously, same conclusion for more speculative instruments. And this persistence of low or zero or negative real rates is causing massive damage to all sectors of the economies that have these rates.
In that article, I said that the interest rate paradigm, that a person must receive at least some interest on his wealth...no matter what else happens, is a paradigm that has not a lot of use for today. I stated in that article that if you are investing in any interest vehicle, you are ultimately lending YOUR money to speculators.... because that is where the demand for money is being created right now.
Tell me, are you comfortable with the idea that your money ultimately is being loaned to the speculators in our bubble markets that we are all appalled by?????
If not, then you might want to read my studies on how interest rates work, and why I have come to the conclusions that all financial instruments are not worth much today....
I had a subscriber ask me,
"Chris, I know that you don't give investment advice but only like to do commentary, but, I have this Canadian energy bond instrument that pays about 10 pct, would you classify that as a speculative type investment?"
Now who would think some kind of energy bond with a rather reasonable yield could be classified as a speculative instrument? Well, Chris Laird thinks so, that's who. Why? Because I have recently simplified my definition of investment and speculation. I'll put up the definitions here, but to jump to the point, the reason that Canadian Bond instrument is speculative and not conservative in my view is because of the YIELD it is offering, and that yield is 4 points over the Historical interest rates of about 6% real rates. We could adjust this for real rates but that is not necessary to make the argument.
The fact that it is a bond involving one of the hottest and best hard asset sectors, energy, MAKES NO DIFFERENCE. The yield is so far over the present ridiculous zero real rates that it is speculative by my definition.
I don't think that kind of conclusion is so terribly brilliant, because many people have long known that high interest rates mean high risk... but since I define investing and speculating ONLY in terms of interest and glean out all the other noise like "energy sector" , "hard asset"... and so on, I can make clear rational judgments that I can provide good rationale for, to other people.
The fact that I choose to define investing/speculating in this simplified manner is actually a good thing, even for those who would disagree with me. Because they can compare the exact logic and reasons and data that I use to compare notes... which is all fine with me. I may always be right , wink, but it doesn't mean people don't have good disagreements......
In my work, writing about financial events, I have come to see various paradigms, maxims of investment, sayings, market adages, and so on that are so numerous, many of them out of date or just wrong for these times, that I feel like I'm in a hot room with about 50 flies to kill and only one flyswatter...
This is one reason why I like to use tools like interest rates to make analysis, because its a big can of RAID for all the flying bad paradigms... it just cuts to the chase real fast, dropping flies in bunches.
Any way, If you read my stuff you find that I cover many topics... I like to range around and look at everything....and that makes me able to make analysis that has a lot of breadth behind it, all based on reality and not chart forecasting... just facts.
I recently read one commentator who said that "we can use technical analysis and ignore all the NOISE of the financial news, because the markets discount everything, so good TA makes us able to make good judgments and so on...."
I gritted my teeth when I read that one... do I see another fly????? Damn IT!
I thought I got all of them! There's another one! Damn!
Now don't get me wrong some TA is alright, not great but alright.. but sheesh!
Saying that we can use TA and just ignore all the news 'noise'... what the hell?
Now about using interest rates as a tool. Now interest rates ARE the preeminent analytical data set for understanding the trends, news, and making discernments about what is happening. I can use interest rates to do a heck of a lot, and in that sense, using a chart to look at interest rates will tell us a lot of worthwhile information....
But a chart on a stock? On an Index???? such analysis leave one heck of a lot to be desired, and this is done ALL the time and is a bad use of a good tool, chart work....
Using chart work to cut through all the financial news, realities, data and so on??? GIVE ME A BREAK!
Guess which market maxim/bad paradigm that is based on??? the faulty view that markets are so efficient. that is the basis of using TA only to make calls and analysis, if markets are so efficient then you can use the chart trends to make good calls... but what if markets aren't efficient so much anymore but rather choppy, illiquid or over liquid, manipulated...etc etc... Maybe using charting only and depending on the BAD PARADIGM that markets are efficient today....is not such a good idea??
Anyway, I'm not really worried about proving this point, because in a Darwinian sense, the people doing that stuff will be making lots of bad calls, and that particular fly will die on its own.... just make sure it doesn't leave maggots in your carcass eh?
(maybe that's a little strong, but what the hell... If I worried all the time about the possibility of pissing off some people, you wouldn't really want to be a reader of mine.....) Obviously I have some strong convictions and I tell what I believe, not what I think will make me a big list of subscribers...
If the news letter were to be a small group because I don't really talk about all the popular ideas and thinking and sectors... so what??? I can do a lot of things else like write a book, and my footprint is so low my friends, that I can live so cheaply you would probably not believe it, and I get that done in Los Angeles too, not a cheap place to live..... I'll tell you something.... would you believe that I can live very well on 1000 bucks a month???? and If I had to, I could cut that in Half and still be writing too? with broadband????
How does he do it???? ;) Well for one thing I owe zero, use my low footprint paradigm to the max and drive a 20 year old Jed Clampet truck, tho I could easily drive a nice new one.... among other things....
But I don't think the women will go along with that too well so I don't get lots of them.... hahahahahaahah!
I was thinking of the acid test for my future wife, if such a creature is alive on earth...What I'm going to do is, on the first date, take her to lunch to...take a guess???? and see how she reacts... to McDonalds!
AHAHAHAHAHAAHA! I'm serious! At least I will be able to tell if she loves me and not my MONEY! When I do that the first time, I'll let you know the outcome, it may be a good story.... If it doesn't work out I still have my tabby cat, Baby, who sleeps with me every night anyway.
I do have one thing that is somewhat costly that I CHERISH, that is my 35 ft. cruising sailboat, the Pelican. Guess where I'm writing you now from????? ( Seagull cries just now....in agreement.)
One funny:
When I was growing up, my grandmother, Alice Widener, publisher of USA magazine, lived like a semi princess in Manhattan Island NY, in a gorgeous apartment overlooking the East river, on the 18th floor with a view you just would NOT believe.. She entertained dignitaries there (real ones, including writers from the Wall street journal, and US generals, including Gen. Westmoreland, Belgian ambassadors, and so on, and was the cultured woman par excellence, feeding them filet mignon dinners with French sauces (they always came back)... needless to say, I wonder what she would say about my low footprint lifestyle? That woman was something else! Spoke 5 languages...
When we were young, she called us Laird kids "California beach savages" ..... from her Ivory tower...in good humor tho...
Now, maybe I can go live with Bill Bonner in one of his French Chateaus???? maybe he would let me live there renting one of his 35 rooms for 100 bucks a month. He definitely sounds like a very nice man.. You know what? I might just ask him too...And If I do, I'll let you know what he says good or bad... too hahahahahaha really! If he lets me, then I can brag about living in a Chateau... on 500 bucks a month...wouldn't that be a gas! You know, I think that I am sort of a French citizen at heart...I'll live on bread, wine and cheese, and.... oh I'm getting carried away now...
But I think I could fit in....I speak some French, and I can do an excellent accent too... (Why, living in LA, I didn't to the Spanish I'll never know...)
By the way, the newsletter is doing very well in spite of my non concern about pissing off possible readers....and saying things rather bold like there aren't any investments....but speculations only.
Chris Laird
Editor-in-chief,
PrudentSquirrel Newsletter
www.prudentsquirrel.com
August 10, 2005
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