Monday, July 9, 2012

Negative Interest Bonds

Lets see if I have this right. France is selling bonds and promises to pay less than the bonds cost. This is like me asking to borrow $1,000 and saying I will only pay back $900. Why would anyone buy those bonds?

The only reason an investor would buy those bonds is if they believed we were going to see deflation. The United States on the other hand is holding interest rates at about zero. These low rates mean that there is little reason for saving money. But, wait, there is more going on.

Let us assume for the moment that we are going to see deflation or at a minimum a continuation of zero interest. Where should you put your money. While, I am broke, it is still a valid question. My answer will surprise you, put your money in the stock market and keep it there, don't day trade. Buy a stock and hold it.

People look at the stock market and want to get out; but, I advise against it. Here is my logic. If we have deflation the value of your cash may become meaningless. If we have hyperinflation, the same result. Land and stock will adjust against the economy so you will still have an asset that you can sell.

Wild swings in the stock market are often intentional. The purpose is to scare people into selling when the market is fluctuating wildly. Buy stock in things that people will need no matter what the economy. I do not recommend buying gold or silver for a simple reason. The government can confiscate gold and silver at a rate that they set as was done during the depression. A bill passed in the last few years requires all sales of gold over $500 (I believe that was the amount, I wrote a post about it at the time) to be recorded and reported.

I do remember in 2007 when the housing market was beginning to crash and our economic gurus such as Bernanke, Greenspan and Paulson all said that the market would have a soft landing and that the sub-prime mess would not rollover to the rest of the housing market or the stock market. They were not wrong, they lied. They knew what was coming and so did the people in congress otherwise congress would have called for their being replaced. After all, it is either the biggest economic mistake in history or they lied.

We are seeing economic manipulation on a grand scale. The Libor scandal is just one aspect, the whole of the markets have been manipulated. Insider trading, interest rate manipulation, bank bailouts which turn into bonuses for doing a bad job. Complete and utter fraud in the real estate market and every other market.

How does this effect the average person, lets consider. Your taxes support the Federal Reserve which loans money to banks at near zero interest. The banks then lend it to you at up to 30% interest (credit card debt) while giving home loans at 4%. They are betting you will pay on secured debt or lose your home and they will have an asset. As the economy deflates and you make less, that 30% interest rate becomes impossible to meet.

There has been a lot of talk about student loan debts. The interest rate on them was set to go up; but, the lower rate has been extended for a time. In simplest terms we are seeing the economic pie shrink. There will be winners and losers as always when these things occur, the question is how are we going to deal with the tens of millions of people who are willing to work when there is no work, do we just let them starve in the streets, is that who we have become?

There is currently talk about reducing food stamps. We are told how some people misuse them and don't buy healthy and these extreme examples are used to justify not helping the people who survive on them and use them properly. It is odd that the same people who fear we are becoming a third world nation recommend that we have the same social policy as Mexico, ignore the poor.

Many people have just shut down and given up. They go through life day to day just waiting for the next shoe to drop and it will. When an economy contracts like this, the corruption in the system gets exposed. At least the corruption that they want exposed does.

Warren Buffet said it best, this is class warfare and the rich are winning. They win because they set the rules of the game. We do not live in a capitalist society and it is not because of social programs. It is because the economy is not a free market. The rules are written by industry and sold to us by the politicians and the media.

Poached Eggs

I ate poached eggs for dinner. You get no decent post.