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What to do?

October 20, 2014

Today’s blog entry is also a response to a question posed to me by a reader, Robert, regarding what our options are when it comes to our personal investments.

I fear you are correct. However, I continue to invest in the market via stocks, bonds and mutual funds. I also own real estate and a variable annuity.

I worked in a system that provided me a pension and a small Social Security check. My spouse worked in a system that provided her a small pension and a Social Security benefit.

We have Medicare. We have CAHP Anthem Blue Cross as a supplement to that.

We have long term care insurance. We live frugally and within our means. We give to charity and financially assist family members.

My point being, what else can or should we do? These systems are all we have. We play by the rules set by others and hope for the best outcome.

Other than doing that, what should we do to protect ourselves? Write about that please. We respect your thoughts.

Actually, Robert’s question highlights the very reason I have cut back on my writing. I hate to be the one that yells fire in a crowded movie theater, only to announce a few seconds later that all the exits are completely blocked. When I surmise that investing in today’s financial markets is like gambling in a rigged casino, I understand that the natural response is: What option do we have? However, unlike the rigged casino, we really don’t have the option of not playing. Actually, Robert is doing everything right and that is exactly why I get so disturbed with all the manipulation occurring in our markets. In fact, this is why I write and why I hate to write on this blog — the markets are rigged, yet, truly, what are our options?

Free markets are supposed to reward good business practices and innovation and punish poor practices and redundancy. What has happened in the financial markets is beyond egregious and in my opinion has eliminated any resemblance of free markets. Interest rate expert Jim Grant has made this very claim, that nothing could be more intrinsic to free markets than interest rates that are free to set themselves based on a free market. Yet interest rates are being artificially held low (zero) by the Federal Reserve in their effort to stimulate the economy. But this action punishes savers. Any monetary or economic action that is not the result of free markets is an unnatural selection of winners and losers. Very simply, the Fed is punishing those who should have been the winners and rewarding those who should have been the losers. They are fixing the game, if you will, and not in favor of the responsible investor, or citizens for that matter.

I hope the Fed proves me wrong, that their intervention proves that everyone can be a winner, but I fear that in the long term they will be proven wrong. The biggest losers will be the next generation, who will be left holding the bag after this grand economic experiment. In the meantime, we are left to ponder “What other options do we have?” We don’t make up the rules, we can only play by them — even when the rules change mid-stream. Former Reagan economic advisor, David Stockman, best describes this current financial manipulation as “crony capitalism.”

So how should Robert invest in such a market? Really, his question is more along the lines of how to live in such an economy. What Robert is doing is absolutely right, especially living frugally and within his means. He has taken steps to protect himself and his family; he has been responsible and he has played by the rules. I write this blog for this very reason. I am beyond frustrated by the economic and monetary policy I see happening in this country for well over a decade, closer to two decades. There seems to be this blind faith that the Fed knows what it is doing and is in full control. This is the crux of my disagreement with individuals who frankly are much more qualified than I to assess the Fed’s intervention. It seems that as a result of this latest correction in the markets, for the first time a couple of mainstream financial news outlets have allowed someone to question whether the Fed actually does know what they are doing. Ironically, the major come-back by the equity markets on Friday was caused by a Fed official suggesting that maybe the quantitative easing (QE) needed to continue. That’s just what the markets wanted to hear. I tell you it must be easier for a heroin addict to stop their habit than our current financial markets kicking their QE addiction!

I have to invest other people’s money. I worry about how to invest in financial markets that, in my opinion, are rigged. As an organization we have been careful to live within our means, create a rainy day reserve and play by the rules. We have never taken undue risk, leverage or relied on debt to pay our bills. What I would like to see happen is for large institutional investors (trust funds, pension funds, endowments, insurance companies, etc.) to stand up and challenge central bank policies, legally if necessary, on behalf of all the Roberts out there.

One Comment
  1. George Fithian permalink
    October 20, 2014 10:06 pm

    Very well put Jon……and you don’t give yourself enough credit by the way.
    You’re a class act buddy.

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