Stocks – Bonds – Gold
Financial Times explains why it can't report gold price rigging
It is time to admit that I once deliberately withheld important information from readers. It was 10 years ago, the financial crisis was at its worst, and I think I did the right thing. But a decade on from the 2008 crisis (our front pages from the period are at ft.com/financialcrisis), I need to discuss it.
The moment came on September 17, two days after Lehman declared bankruptcy. That Wednesday was -- for me -- the scariest day of the crisis, when world finance came closest to all-out collapse. But I did not write as much in the Financial Times.
Was this the right call? I think so. All our competitors also shunned any photos of Manhattan bank branches. The right to free speech does not give us right to shout fire in a crowded cinema; there was the risk of a fire, and we might have lit the spark by shouting about it.
Ten years on, US banks are virtually the only players in the financial world plainly more secure than they were before. They have delivered and built up capital, and the risk of a sudden collapse is now far more distant.
The problem now is that disposing of that risk has obstructed the task of reducing other risks. Now, risks lie in bloated asset prices, levered investments, and pension funds that hold them.
The next crisis will not be about banking, but the insidious danger that pension funds deflate, leaving a generation without enough money to retire.DYI: Despite the title the article makes zero reference to any gold price manipulation. However, the reason I have posted this article is that he spot on for old fashion pension funds or 401k holders alike. A severe stock market meltdown that I’m anticipating to the likes of 60% to 75% along with junk bonds being clipped at a minimum of 50% would put current and soon to be retirees in jeopardy. If you think older folks are remaining in the work force now; when this crises hits older workers will not leave [at least voluntarily] their employment unless they are infirmed or dead!
Pension funds and 401k type of investor have been purchasing overinflated stocks since 2012 starting at one standard deviation above the mean. That level seems mundane by today’s standard but just look at the above chart and you will see at that level was the beginning of severe market declines [1907 – 1937 – 1966 – 2008 (1.5 SD)]. Instead of scaling down stock ownership as valuation continued to leap upwards money managers and individual market participants have continued to pile on with ever increasing valuations!
Benjamin Graham
Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid.
This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety.
The danger to investors lies in concentrating their purchases in the upper levels of the market.....Once valuation come back down to earth market losses for large portions for pensions [typically State and local employees] and 401k type investors will be felt for years. States or local plans will have to “jack up” taxes to fully fund their plans will meet fierce opposition from taxpayers. Most likely a compromise of some tax increases will occur along with a reduction of benefits. Neither will be mundane even with the compromise; the tax boost will be no small deal nor will the drop in benefits. Both groups will experience much pain along with lasting anger and non stop finger pointing blame game!
For
those with 401k type of programs they along with State and local government
employees will continue working and saving in a Hail Mary attempt to carve out
some sort of retirement plus waiting till age 70 for full Social Security
benefits along with continued full or part time work.
Bonds
to the Rescue?
With
ultra low bonds yields is no panacea for debt investors as future returns will
be sub par and highly likely below the rate of inflation.
Gold
Gold
is one of the bright spots. This old
fashioned investment as measured by the Dow/Gold Ratio as of 9/13/18 is 21 to 1
(rounded). Gold is trading at its
average and below average for the mining companies due its brutal bear market. DYI’s model portfolio reflects these
valuation changes.
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