TAKING STOCK: Inflation and interest rates

Dear Mr. Berko:

In early March 2012, I asked you about a maturing $30,000 certificate of deposit in my individual retirement account. I was thinking about putting it in a 10-year Treasury bond yielding 3.125 percent. You said "absolutely not" because the dollar would fall, inflation would rise and interest rates would increase. So I kept that $30,000 in my IRA and missed out on two years of 3.125 percent interest. That was lousy advice, Berko. If I hadn't been so stupid listening to you, I'd be getting 3.125 percent guaranteed interest for two years and an increase in that Treasury bond price. I asked for good, honest advice, and I got a lemon from you. I bought that Treasury today, no thanks to you. You are a stupid jerk and a fraud, and this paper is making a big mistake publishing your column. What do you think about Alibaba Group stock?

-TS, Gainesville, Fla.

Dear TS:

Mea culpa. And you really take the chutzpah cupcake! It appears that the crazy interest rate and monetary policies of the Federal Reserve haven't been inflationary at all. Since 2012, the news media, economists, bankers, brokers, annuity and gold salesmen, investors, hedge fund geniuses, and bond analysts have believed inflation would smother us like toxic smog. Meanwhile, a wise man who knows all about lemons would suggest, "When life serves you lemons, make lemonade-and then find someone whose life has given him vodka and have a party." So far, inflationary pressures still remain low. Also, interest rates have declined. The dollar has become hugely stronger. Despite the consistent haranguing by Fed detractors, including me, we're having a party! For the past two years, the conspiracy theory folks (I leaned toward a bit of that, too) have oozed like termites from the woodwork and claimed that the economic reports have been a cover-up and the government has been fudging numbers. Even Sen. Rand Paul, R-Ky., and his innumerous followers counseled that the sky was falling. And with a perverse amusement, many of those good folks were terribly disappointed when the sky refused to fall. I've been following this market since 1952. I've watched more water flow over the dam than you can imagine, and I still have butterflies in my stomach about higher inflation and interest rates.

Well, pinch my toe, Clyde, and call me a jelly doughnut. I'm glad you bought that $30,000 10-year Treasury bond if it makes you less unhappy. But I know my advice ("don't buy that Treasury") also came with good vodka-a recommendation to buy BCE, Verizon, Kinder Morgan Energy Partners, Altria, Mercury General, W.P. Carey and AT&T, each yielding over 5 percent. And because you're probably a good guy, I'll explain my reasoning once again, so read my lips: Those seven solid companies pay 70 percent more than 10-year Treasury bonds, and each has raised its dividend yearly, even in lousy markets. Now, if the market crashes next month or next year or if interest rates rise, AT&T, Verizon, et al. will fall in value, but so will your Treasury bond. And the dividends from those stocks should continue to rise, and when the market goes higher (as it always has), the value of each issue will recover-and probably above your basis. The value of your fixed-income Treasury bond will trail far behind those stocks' rising dividends.

Apparently, you don't believe in the adage "once bitten, twice shy." Well, slam, bam, alacazam, Alibaba Group Holding Ltd. has been getting a lot of forced press and hype lately, but some professionals wonder whether its portals and platforms will produce the revenues and profits predicted by the toadies. Some say Alibaba will double at the opening bell; others believe it's bubble market madness. I suspect it's partially the latter. Now go have a party.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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Published: Tue, Sep 23, 2014

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