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U.S. government T-bills.

Turtle wrote:

Jeremy Siegel and Robert Shiller consider U.S. gov't inflation-protected bonds to be the only risk-free investment.

-Will

That would seem to assume the political stability of the U. S. government. Not a bad assumption over the last 140 years, but not necessarily good for the next 140 (or even the next 40).

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?

Elizabeth Richardson

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?

-Will

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.

Michael

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 place.

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.

1. 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.

1. 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.

That becomes

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).

-Will

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.

-Will

I had a thought today - should immediate (possibly inflation-indexed) annuities be considered risk-free?

-Will

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?) JOE

Vanguard and AIG at least, though they appear to be capped at an inflation increase of 10%.

-Will

Considering how Bush has been ranting against the Social Security Trust Fund the past six years - even the President suggest US bonds are worthless.

This thread has wandered off-topic and is closed.

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-HW "Skip" Weldon Columbia, SC