I understand when one talks about Equity Premium one is talking about
risk free investments, but what type of conservative investment is that
Is it bonds, or maney market funds, or ...?
Wishing you all a Happy 207
What political instability are you anticipating. A coup? Keeping this in
financial planning, what political instability do think in the realm of
reality would threaten US Gov't inflation-protected securities?
Well, bearing in mind that this is not a "prediction" but offered as
a possibility only -- the current polarization of the US is reaching
a level similar to that preceding the Civil War. There are major social
gulfs and wildly differing schemes/strategies of governance, many of
which involve devaluing some large groups of people. I suspect that
serious civil strife, if not war, become very possible in the coming
generation (hence the "next 40" years of my original remark).
In any case, the assumption that the US is somehow magically immune
to massive political upheaval is historically naive. That becomes
more pressingly true as the US loses its hugely dominant late 20th
century role in the world economy.
While all of this is true, it's not like the waste matter is going to
hit the rotating blades suddenly. I would hazard that we'll get plenty
of warning if things start to go sour. And even if we don't, your other
investments are likely to suffer as well. The real point here is that
U.S. notes are pretty close to risk-free as compared to the
alternatives. Unless you have something else in mind?
Primarily, global diversification, with US bills no more than 50% of
one's non-equity allocation. And equities more likely 40/60 US/Global
than a more equal or US-dominant split. There really _isn't_ any such
thing as a "riskless" vehicle, though I am not disagreeing that for
now the TIPS come about as close as you're going to get. But indeed,
watch out for fans spinning up and more matter heading their way...
What to do in that eventuality, I couldn't say.
I think we lack a sense of history here. Before the Civil War,
Congressmen were attending Congress armed, because they feared violent
assault in the House.
At the time of desegregation in the 1950s and 60s, you had State
Governors mobilising the National Guard to block desegregation. You
had civil disorder, later urban terrorism (during the Vietnam War),
cities burning. You had a government running an extensive and secret
campaign against its political enemies.
The US is in no sense divided like this, now. Whilst I have my doubts
about emerging theocratic and authoritarian tendencies in American
politics, fundamentally Americans are close together on any number of
divisive social issues (abortion perhaps being the one standout).
This past election was emblematic of that: one party drifted too far to
the extremes, and the other party ran a series of candidates much to
the right of the existing caucus, and picked up a lot of votes and
seats. Consider Kansas: so alienated was the local Republican party by
a theocratic takeover, that they reregistered and ran as Democrats, and
won. I wouldn't necessarily call this a Democratic victory, but
certainly a victory for centrism.
Relevant Considerations to Investors
A. Where there is an element of danger that is relevant to investors is
in the size of the US 'triple deficit' (government, balance of trade,
current account) and the necessary rebalancing that will have to take
If the US were to reenter Great Depression like conditions, then
obviously the possibility of a far right government is there: Huey Long
was no joke, in his time. Katrina showed that no nation is far from a
degree of civil chaos, in the right conditions.
B. The second danger is around energy policy. 1. is Peak Oil, which is
tendentious, but no one doubts that if world oil production is about to
peak, then the world's largest oil consumer and importer is in serious
trouble. US society and infrastructure is built around the
availability of cheap oil, and if that were to be no longer the case,
even on a 2020 scenario, let alone a 2007 scenario, there would be
serious economic and social dislocations.
2. is a growing dependence on oil (and gas) supplies from politically
unstable regions, in particular the Middle East. A coup in Saudi
Arabia could cripple the US economy, so too could a war with Iran.
3. is Global Warming. There is now no longer any reasonable scientific
doubt about global climate change and the man-made origins of that
change. The impact for investors on many industries of that change
(particularly the insurance industry, but also agriculture, defence
etc.) will be very great. So too will the impact of the necessary
abatement measures: most significantly for the utility industry (coal
is about 1/3rd of world CO2 emissions), also for transport and
automotive, aviation (the fastest growing source of greenhouse gases).
It's very unlikely the US would disavow its debts. The US is not
Argentina. In the case of fixed income, a strategy of inflation is
quite possible (almost inevitable to an extent). In the case of real
return/TIPS bonds, about all the US can do is use a CPI measure that
doesn't fully reflect inflation (some evidence that this has occurred).
services investors buy (like healthcare and old age homes) will rise
faster than CPI. So there is a considerable risk in that.
As did Britain in the 20th. The question is more about how the US
adjusts, domestically and internationally, to a different role.
I'm not sure one gets advanced warning of the S-H-T-F. Russia's
default was only obvious to the market, in retrospect.
If one is truly gloomy, then a 5% weighting in gold (the metal, coins,
shares) is prudent. Probably more weighted towards the bullion and
coins, rather than shares (stock exchanges can be suspended, company
assets can be stolen a la Russia).
The world is jumping on the Uranium bandwagon, right now. They are
right about the fundamentals of uranium supply and demand, but I
suspect it is now too late, as an investor, to play.
International diversification is a good thing, generally. I would note
that the largest US companies have very significant international
exposure. The old number I heard was 40% of the earnings of the SP500
were from overseas operations.
This is a good point, but I think it's difficult to compare the U.S.
monetary situation today with that of Russia in 1998. Arguably, the
main problem for Russia was that their tax revenues didn't cover their
interest payments. The U.S. isn't there (yet).
Bull. But we should continue this discussion via email (if desired) as
I would need to go into non-financial arguments. Having said this, I
agree with your comment on the cost of abatement measures.
Well, a regular immediate annuity would carry the inflation risk, so
inflation-indexed would take that away.
The only remain risk (I think) is that the insurer default, which others
here have pointed out has never happened. So short of the fertilizer
hitting the fan in terms of hyperinflation/civil war type issues, I'd
say you are ok calling that risk free.
(who sells inflation indexed immediate annuities?)
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-HW "Skip" Weldon