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April 11, 2011

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Congatulations on a well written profile. My best friend and closest colleague at Lockheed was also a Ferguson - as a "Son of Fergus" you must know, it's one of the great Scottish Lowland Clans.
Clan Motto: Dulcius Ex Asperis (Sweeter after difficulties).
My friend retired early but in order to start his own software company, which although very small has been very successful and made him a ton of money. Another Ferguson that I enjoy hearing speak is Niall Ferguson, a well known Harvard Historian and the author of, "The Ascent of Money".

I also share all of your worries and concerns about the future of the US economy, especially the ever increasing debt problem. I saw a chart of the national debt on CNN this morning and there was a dramatic change in its slope after 911 because of the Iraq and Afghanistan wars and it was also exacerbated by the unfunded tax cut for the wealthy, and the unfunded Medicare Part D prescription drug plan. So much for Republican fiscal conservatism! We are at a tipping point right now, if the deficits don't start coming down very, very soon it may be too late, and that's not just my opinion, but that of many economists and scholars. Obama ran on the idea of a universal healthcare plan and is locked in to it, but we are now seeing the effects of government subsidized universal health and education programs on the economies of most of the European countries, France and Britain in particular.

I don't have my portfolio in dollar independant securities but then I'm 34 years older than you, retired for over 18 years and wealthy enough to absorb the rising costs of food, healthcare & taxes etc. plus our expensive days of buying homes, paying off mortgages, raising children, and going on lots of overseas vacations are over.

Haha--I like that "child-free not child-less". Thanks for your openness!

@Old Limey - Thank you :) I occassionally read Niall's columns and articles, but haven't yet read any of his books. I'd say I agree with him about half the time; for example, I agree that you can't mix Keynesian and Monetarist policies with any success (not that we won't try, mind you), but I disagree that Larry Summers saved America from another Great Drepression; from where I sit, the game is still playing.

Yeah, I've come to understand that both parties only disagree in the method of how to bankrupt us. I suppose I respect the Democrats at bit more - at least they look you in the eye when they are ravaging the public coffers. I consider myself a Libertarian, although I don't agree with them 100% either.

You're probably going to be fine, but you may wish to consider something like TIPS as a type of wealth preservation. It's not a guaranteed wealth preserver, but at least they'll appreciate as CPI rises. Assuming of course, you haven't already done so :)

@Amanda - Yes, it was a choice. No kids, and we're happy about the decision.

Rod:
I have looked at TIPS and other Inflation Protected Securities but the 1/3 of my portfolio that is easily traded (unlike the CDs and Municipal bonds that I own) is currently in 3 mutual funds. One is a high yield bond fund (2011 APR=19.94%), the second is a Select Income fund (2011 APR=12.76%) and the third is a Commercial Real Estate Income fund (2011 APR=12.05%).

The Barclay's ETF that holds Treasury IPS (symbol TIP) has a 2011 APR of 8.4% but it has an ugly chart with 5-6 times the downside volatility of the funds I own because it only holds treasury securities and also because being an ETF it attracts day traders. I sold an inflation protected bond fund (2011 APR=10.82%) last week that held variable rate corporate securities and reinvested the money the next day only because I became dissatisfied when it started underperforming the other three funds that I own.

Since I watch my holdings every day and because I have no qualms about selling an underperforming fund and moving into something much better I don't worry about my investments. You can't plan these things ahead of time. It's better to react to fairly recent data and, as soon as you become convinced, jump from one type of income fund to another. By the way, the charts you see on the Internet for a lot of bond and income funds are often not adjusted for the monthly or quarterly distributions that the funds pay out making the charts analytically worthless for my needs. That's why I like using a proprietary database that employs a lady I have got to know quite well that does nothing else but stay on top of including all of the fund distributions that take place.

Rob,

I must be missing something. I don't see how your math works. You mention you are 42 and hope to retire at 55 (13 years). You also mention you net worth is $500K and your retirement target is $2.7 million. How do you get from here to there? Please let me know I would love to get your expected return so I can retire early to!

"Commodities are great now, but probably won’t be in 20 years."

And you're planning to become an agricultural landlord? When farmland has gone up what, 200% over the last 10 years?

How are your investments "dollar independent" ? You have a house and stocks. I didn't hear any mention to Gold, Silver, etc. You also mention your retirement plan is to purchase Annutities, that is not dollar indepenent.

I would also like to hear how you will get from 500K net worth to 2.7M in 11 years (from 42 to 53 years old). What's your assumption of annual returns if you are saving 25% of income?

I'm also curious about how the farmland would get you rich. Huh?

@Old Limey: I'm glad to hear you monitor your investments daily and are not afraid to move them around; Treasury bonds and commercial real estate are on unstable footing these days and for anyone else, I'd be suggesting they get out of them now (assuming your fund has T-bills alongside whatever munis it would hold). I concur - recent data should be the driver for any investment decisions; I look to the past to tell me what might happen, look to the present to see what's happening and then look to the future to see what's likely to happen based on the first two. One concern I have is not moving fast enough or aggressively enough when I get that new data - I tend to over-analyse new data when I get it. I don't want to dig in to your finances (I'll wait for your profile, perhaps?), but I do hope you have some assets that are dollar protected/independent. I'm aware of too many fortunes lost because thier owners kept everything in the local currency.

@Joe: As I said, I look at investing differently than most do. I not only factor inflation into the costs I'll incur, but also in the investments that I have, over and above any nominal dollar gains. I have yearly milestones that I must meet to keep on track with retirement at 55, 60 and 65, and I've met those milestones so far - even exceeded them a little. I believe I'll continue to meet them, but as I said, there are a lot of years between now and then, so I'm not getting my hopes up, but everyone needs goals to strive towards. However, as the past has taught us, inflation tends to be a permanent thing; once prices go up they tend to stay there (as currency in circulation rarely is recalled). Based on what I see, we're looking at accelerating inflation this year and probably into next year; the kind of inflation where everything goes up by a significant factor (20% or more). I believe I have placed enough of my wealth into those things that will increase in dollar terms (i.e. - preserve the wealth) to at least keep pace with inflation. If I am correct, I'll have quite a bit of a bump in dollar terms this year, and again meet the milestones (quite a bit as in 20% gain, or $100k, above what it would grow with the investments I'm making; I expect to be at a net worth of $600-$650k by year's end). If I am not, then I'll have to recalculate the number of dollars I would expect to need in retirement, as my overhead would also not be as expensive as I'd expect. Remember - dollars to me are an accounting unit; $2.7 million of them is just the number I see that represents the wealth I need to retire. Ask me again next year, and I might tell you I need $1 million of them or $5 million of them.

Some of the things I've invested in that have given me decent dollar increases: Silver bullion (300% gain), Copper/Silver/Platinum/Gold mines (stocks) (200-300% gain) and Euros (40% gain). I'm stopping investment in the metals and switching to Potash; so far, I'm down, but I DCA my investments, so I'll be up soon. I don't like advising people on what to invest in specifically (I don't want to be responsible for any losses, and I have been wrong before), but I think agribusiness in general will be doing well.

@Pop: Very true - farmland has gone up 200% in the last 10 years. Corn has gone up 400%, class 3 milk has gone up 200% and potash has gone up 250%; more importantly, rents have gone up 200% as well. That's inflation for you. In the end you have to determine if your investment will see growth; I know a few people who refused to invest in crude once it broke $30/barrel because "oil was in a bubble and it was foolish to invest in it at these high prices". As I said to Joe, I believe that agribusiness in general will be a very profitable industry to be in for the next 10 years or so, as industrial metals were a very profitable industry to be in the last 10 years. And, since I don't want to be a farmer, I think a landowner is the next best thing.

@Tony: 80% of my net worth is dollar dependent (or US-based), mainly due to land and my wife's pension (I can't control that pension, and the managers are very US-centric). The 20% that is foreign, that I can control, is mainly in stocks in foreign companies and foreign currencies. I also hold gold and silver, mainly silver, which is neither foreign or domestic in these terms - but is dollar independent (I put those into my "assets versus instrument" hedge). Once we retire, I believe we'll be past our current situation and can then settle on some annuities to generate a monthly income to compensate for our overhead. If I'm wrong and we're still in the thick of it, I'll adjust our plans. As I said, I can't predict the future, I can only see what's possible and plan accordingly.

As I responded to Joe, my goal is 53 - something I'm trying to work towards, not something I'm all that confident I can achieved. 55 is a much more realistic number, and 60 isn't out of the question either. But, by having that goal, I am giving myself the encouragement to continue to stick to my plan; if 53 looks like it's going to be achievable, I'll start looking at 50 and if 55 is beginning to slip, I'll re-target to 55.

@MC: Farmland won't make me rich, but it'll add a stream of revenue that will adjust with inflation and increase my wealth. It will also knock my assets to instruments ratio out of whack, which is good, because I'm going to have more paper than assets soon and I need to balance it out.

"Based on what I see, we're looking at accelerating inflation this year and probably into next year; the kind of inflation where everything goes up by a significant factor (20% or more)"

everything goes up by 20% in the next year? I see the potential for inflation and welcome a moderate amount but this 20% figure is a bit hyperbolic don't you think? You have been predicting inflation for the last 2 years and it still isn't here in any real sense. The inflation that is here is localized to commodities and energy which while a problem for many is not evidence of broad based runaway inflation due to easy money and increasing labor costs. It's more indicative of tightness in the supply demand equation.

Eventually there will be some broad based inflation but we didn't even have 20% inflation during the stagflation and misery index of the late 70s and early 80s.

Have you thought through what this would look like and what would drive it? Are the jobs all coming back along with 20% salary increases? If not where is the money going to come from to purchase the goods that have all increased in price by 20%. Inflation is caused by too much money chasing too few goods. Do consumers have too much money? Are there too few goods (other than some commodities)? The reason this cannot occur in the time frame you suggest is that there is no mechanism to make it happen.

Things don't happen in a vacuum regardless of what monetary theory suggests might happen based solely on the money supply. The money supply may have increased but the velocity of money has actually decreased. The money isn't going anywhere, its sitting. Money supply has been increasing for 2 years, yet no inflation. When does the theory start working and when does the fact that it didn't work reveal that the theory is broken. Until money starts finding its way into people's hands, the existence of it will not cause inflation.

I don't know what the future holds but I am confident of this: In this year and into the next, there will be nothing remotely close to "the kind of inflation where EVERYTHING goes up by a significant factor (20% or more)"

When we finish 2012 having no more than moderate inflation (less than 5%) will that change anything for your outlook or just move your prediction out a year as it has done for the past two years?

@Apex - I'm talking prices here, not CPI. A 20% increase in, say, gasoline from it's current $4.00 would be a price per gallon of $4.80 (which, by the way, is significantly higher then the last time we had a conversation on inflation, and yet you still think there is none.) If you still insist that everything costs the same as it did back in the 1990's and will continue to do so, take a look at these:

http://www.nytimes.com/2011/02/15/business/15prices.html?_r=1
http://www.usatoday.com/money/industries/retail/2011-03-30-wal-mart-ceo-expects-inflation_N.htm

and here's one for your reliance on hedonics for low prices:

http://blogs.wsj.com/economics/2011/04/12/u-s-can-no-longer-rely-on-importing-low-inflation/

I don't mean to sound aggressive here, but the other folks were asking me what my thinking was surrounding my numbers. I've said a few times I could be wrong, but I have to plan based on what I believe will happen, and make spot decisions based on what I see happening now. Oil has been over $100 a barrel, cotton over $1.50 per pound, corn over $6.00 per bushel, silver over $20 an ounce and copper has been over $4 per pound for months now. These are at or over the numbers we had when we had a near financial collapse in '08, yet no such collapse is evident now. Yes - I focus on commodities and energy because they are the basis from which we make the things we use; if I focused on LCD TVs or cars, I'd always be behind the curve because price increases in finished goods tend to lag increase in commodities and energy.

I see inflation and you don't. Honestly, I'm not sure at this point what you think inflation is, which might be why we seem to be at odds over this topic.

Rod:
Whatever the future holds in store for the US economy I feel that my wife and I are in a very enviable position where our income exceeds our total expenses by a very large factor. If things ever get to the point we we are hurting then there will be blood in the streets.
Income from Investments (projected) $362,000 for 2011
Pensions & Social Security (projected) $64,500 for 2011
Total Income $426,000 for 2011

Total Federal & State income and local property taxes for 2010 were $51,000

The other thing is that we have been retired for 18 years & owned our home for 33 years, and have everything that we need so apart from food, wine, gasoline, utilities, eating out, and buying things for the garden we don't buy very much of anything these days. Neither of us get any pleasure out of buying large ticket items or being ripped off at fancy, high priced restaurants. Growing up, all of our role models lived happy lives and were very frugal so big spenders don't impress us, in fact we feel sorry for them. We used to travel internationally every year but decided that 2010 was the last year. There's nowhere left that we really want to visit and my wife's walking abilities are now somewhat limited after undergoing two hip replacements.

Today was a bad day for the stockmarket but since I am not in it I didn't suffer any damage. It was actually a good day for municipal bonds, but since I am holding them until they mature, at which time I get back par value, their daily fluctuation is of only passing interest. I feel the same way about our home and beach condo. They are valued at far more than we paid for them in 1977 and 1979, and fully paid for, so any price fluctuation is of little consequence. My three mutual funds don't hold any treasury bonds and the real estate income fund gets 75% of its 8.2% APR income from preferred stock, which is the most secure securities you can own in any company.

@Apex - I re-read your comment after dinner, and I see a few things I didn't notice at first pass:

One, you've done some reading; that's good. Educating yourself in economics - in any school of thought - will help you see the forces at play that, as Keynes said, "not one man in a million is able to diagnose." Keep reading; economics is one of those fields where you could spend your entire life doing nothing but research and still never grasp it all.

Two, you seem pretty vehement in your response, even more vehement than usual and certainly out of the emotional context of the discussion. Have you had to deny inflation to a lot of people lately?

Three, you are putting a little too much faith in the velocity of money to prove there is no inflation. I believe inflation is always a monetary event. I also believe fiat currencies work only as long as there is confidence in the currency. Confidence is being lost in the currency. Those rising commodity and energy prices you dismiss are reflective of that, as we get most of our resources from outside of the country; the nations we're buying from are demanding more dollars for the same goods. We have more dollars available to give them due to our printing. This is inflation. I don't believe we'll have the kind of hyperinflation you are alluding to. It's possible, but not probable - at least so far. That's one of the reasons I've talked about being inflation independent; the less you have to rely on goods and services that are inflation sensative, the better. I doubt we'll get to the point where I'll see a 20% increase in pay, but, yes, I see a point where I'll be charged 20% more for everything.

Four, nice jab with the "or just move your prediction out a year as it has done for the past two years?" I missed that the first time around. I could riposte, but I won't. Yes, I have been wrong about the timing; I originally thought back in 2005 that silver would hit $30 an ounce in early 2008, and it took until 2011. My information is only as good as my sources, and even I didn't think the Fed would accept subprime mortgages as collateral for currency nor did I think Congress would let it continue once it started. I'm more of a fundamentals guy when looking at charts. There is a fellow I work with who is into technicals, and we've been teaching each other; I'm hoping to get more accurate with the timing (fundamentals can tell you what will happen, but not when, and technicals can tell you when something will happen but not what).

I would like to know why you feel the need to attack me anytime I talk about inflation. I'm not trying to sell anything, nor am I getting paid by anyone to share my views. I've never said anything like "if you don't do what I do you'll suffer the consequences!" I have my analysis and I act on it; your mileage may vary. If you want to know the why's of what I'm doing, I'll be happy to tell them to you. Sometimes, I think some of my views might help people, so I ask FMF if he'd post them. Why does that bother you so much?

@Old Limey - it sounds like you are already as inflation-independent as you can get, and with your income you should be able to weather an even a sharp devaluation or a big hit to a sector or two with little concern overall to your standard of living. I seem to remember you have a high net worth as well; even the people in Zimbabwe and Belarus had months of warning before their wealth was completely destroyed, and you pay attention to your investments. I doubt we'll have a "Russian Incident" where we'll see sharp and deep devaluations in a short time (unless the US decides to balkanize as the USSR did). So, yeah - you should be fine. And, yes, it is envious :) I'm working towards a revenue stream that only exceeds my expenses by 30% or so; to have one that exceeds them by several hundred percent would be very nice indeed.

@Rod,

You had two attempts to read my comment and still think that I said there was no inflation anywhere and that I am attacking you. I clearly said there was inflation in the exact same areas that you are pointing out, namely commodities and energy. And to clarify, I don't mean there is no inflation, but that inflation is tame as it has been for decades, so I do not think things cost the same as they did in 1990. Clearly they do not.

My only attack is on your statement about 20% inflation on "everything" in about the next year. Those are your words. Maybe you don't actually mean 20% inflation on everything, but that is what you said, and that is all I am attacking not you.

I have no personal reason to be defending against the inflation argument. In fact, an uptick in inflation would help me. But 20% annual inflation in the next year? In nearly 250 years inflation has gotten to 20% twice. The Revolutionary war and the Civil War. WWI & WWII didn't even do it. Since WWII we have been no where near 20% and yet in the next 12 months you predict we are are going to go from less than 2% to over 20%. That's fiction, and if you are going to put a prediction like that out there, I am going to attack it because I consider it pretty nonsensical.

http://visualecon.wpengine.com/wp-content/uploads/2008/05/inflation-history.jpg

I realize you mentioned something about not meaning CPI but prices. I am not sure what that means because the CPI measures prices. But if you want to go down the path that the government is cooking the CPI books, well then nothing can ever be said to convince you because all evidence to the contrary is simply a forgery.

@Apex:

"You had two attempts to read my comment and still think that I said there was no inflation anywhere and that I am attacking you."
"Maybe you don't actually mean 20% inflation on everything, but that is what you said, and that is all I am attacking not you."

Okay, you have me there. I shouldn't have said:

"the kind of inflation where everything goes up by a significant factor (20% or more)"

I should have said:

"the kind of inflation where prices will rise in a broad-based fashion encompassing unexpected areas of consumption such as utilites, clothes, non-perishable goods, imported merchandise, gasoline and the other goods and services that make up our standard of living will go up by a significant factor (20% or more), excluding those areas where supply/demand forces are out of whack such as housing."

But, I thought I was having a conversation, not being put on the stand, so I used a little shorthand.

I did not claim you said there was no inflation anywhere, I said you don't see inflation, which was a direct response to your statement:

"You have been predicting inflation for the last 2 years and it still isn't here in any real sense."

I disagree with you; I think it's here in a very real sense and have numbers to back me. There are other numbers that say it isn't here; use the numbers you want.

"...so I do not think things cost the same as they did in 1990. Clearly they do not."

I never said that you claim things cost the same as they did in 1990, I said you claim things cost the same they did in the 1990's. In one of our conversation in the past, you stated:

April 01, 2009 at 04:01 PM
"...I bought Blue Jeans for around 30 bucks in 1999, still cost about 30 bucks. Shirts about the same..."

You use your Blue Jeans Index and I use others.

"But 20% annual inflation in the next year?"

Again, I'm not suggesting CPI will grow 20% annually or monthly - I'm saying we'll see a sharp increase in prices.

"I am not sure what that means because the CPI measures prices. But if you want to go down the path that the government is cooking the CPI books, well then nothing can ever be said to convince you because all evidence to the contrary is simply a forgery."

The CPI measures prices on a basket of goods and services. Housing, for example, is one of those goods. If housing prices stay flat or decrease, this will bring down the overall total. Or, in this case, will retard the upward growth in the rest of the basket. So, you can have a 20% increase in a wide variety of prices without having a CPI at 20%. This isn't rocket science here; you should consider digging a little into the CPI calculations and weighting. The housing portion of the CPI is weighted at about 40% of the total calculation and includes home values/rental equivalents, household energy needs, utilities, general maintenance and household furnishings. The BLS has been increasing the weight of home values/rental equivalents for the last three years; this means that as housing prices flucutate, it has a larger impact on the overall CPI. In a nutshell, when you are looking at the CPI to determine if the price of a loaf of bread will rise, housing is impacting your calculations. So no - I don't look at the CPI to gauge how prices will move. You, of course, should feel free to use the CPI to gauge prices.

I've said this to you before, and I'll say it again: this is my analysis that I am acting on. You disagree. Great - go plan for your future based on your own analysis. My system is working for me; when it doesn't, I'll find another that will. In the meantime, though, keep reading; one of these days we'll be able to have a conversation.

Rob,
if you are right I would put all my money in commodities. i think you are being alarmist but I wish you well.

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