Retiring in an Era of Declining Purchasing Power

I asked frequent contributor Harun I. to briefly address a topic which has long concerned him: the impact of our declining purchasing power on those with fixed incomes, and what hedging strategies they might use to lessen such losses.

In terms of what one share of the Dow Jones Industrial index buys in commodities, the "new highs" in the stock market are nowhere near new highs in actual purchasing power; our dollars buy less and less actual goods, despite the endless cheerleading we are constantly bombarded with about "low inflation" and "the strong dollar." Here is a chart which prices the Dow Jones Industrials Average in gold as well as dollars:

Please go to www.oftwominds.com/blog.html to view the charts.

One key concept here is the idea of hedging one's retirement income by buying and holding gold and/or non-dollar currencies, and prudently purchasing commodities or energy futures as hedges. In other words: by moving dollar assets to gold and other currencies, and purchasing futures, you may be able to retain far more purchasing power than if you left your nestegg in dollars or dollar-denominated bonds.

Here are Harun's comments, which reference an Excel spreadsheet that opens in a second window. (Mac and Linux users: if the link doesn't open, please download the file and open it in the appropriate software.)


"If you study the spreadsheet you will notice that, if you retired with 1 million dollars in 1986 you would have had pretty good purchasing power. Left un-hedged that purchasing power dropped off dramatically. I didn’t adjust for any interest received because at these numbers it wouldn’t have mattered much. Even if you had 1 million is bonds at 6% throwing off 60K/yr., you are still living on a fixed income. I didn’t adjust for taxes or commissions either.

Purchasing power improved from 1986-2002 because the dollar went to 120 or thereabouts. Even locking in the dollar value in 2002 would have not changed the picture much.

The Dollar hedge was a bust. Your situation wasn’t improved much. The Gold hedge worked much better in terms of purchasing gold and a basket of commodities but did not offset the increases in energy enough. This means that perhaps it would have been prudent to purchase energy futures/options as well as gold.

There are different ways to hedge with different instruments. This is just one example but I think it shows that, if you live long enough, due to flawed policies that require ever increasing expansion of credit and money, the very real risk of having your standard of living decline dramatically exists. (emphasis added)

It is time that we all stop looking at the futures markets with the casino mindset. There is a very valid and valuable economic function of these markets. Used prudently, they can protect us from declines in our standard of living due to rising prices. Who, after 20 years of retirement wants to have their ability to put fuel in their vehicle fall by 90%? Keep in mind that this is just a discussion on goods. The costs of medical services are spiraling, as we all well know.

Who can look at the spreadsheet and still believe that retirement is a time where we must become risk averse? Becoming a millionaire (yawn) is not that big of a deal when you really look at what it means. Every gadget we use dollars to buy today is dollars that lose the opportunity to grow to serve us in the future. And to think that the savings rate is negative; what are people thinking?"

For another perspective on the loss of purchasing power, here is a chart of the Consumer Price Index components, 1978 - 2004:

Please go to www.oftwominds.com/blog.html to view the charts.

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The Hazards of Technical Analysis

The problem with technical analysis of the stock and bond market is the same one which plagues the rest of life: you can always find evidence for what you've already decided will happen.

Here are Exhibits A, B and C: three respected technical analysts, all of whom were calling for "more upside" as their read of the charts indicated more bullish action--just days before the market started tanking:

Marketwatch analyst Michael Ashbaugh, whose analysis swings all the way from super-bullish to mildly cautious, saw only more bullish gains ahead: Sentiment backdrop favors further upside (June 5, 2007)

Barron's Michael Kahn has been warning of a toppy, ageing market for weeks, but he caved in on June 4 and hyped retail stocks--a surefire way to lose money as an exhausted, worried consumer finally gets a grip on reality, i.e. his or her wealth and income is declining daily even as their credit costs are rising: Retail Stocks on the Mend (June 4, 2007)

Then there's Ralph Acampora, another perma-bull dating back to Louis Rukeyser's TV entertainment, Wall Street Week; unsurprisingly, Ralph sees bargains galore and a number of stocks set to begin huge multi-year rallies--in other words, same story as always: Charting the Bull's Next Move (June 4, 2007)

In contrast, here were the entries you read here, explaining why bond yields had to rise: Why Interest Rates Will Have to Rise (May 30, 2007)

or going back a bit further, to January's Inflation/Deflation V: Bonds and the Dollar (January 12, 2007)

or March's Bonds, Interest Rates and Gold (March 6, 2007)

And why the stock market looked ripe for a decline: Don't Cough (May 12, 2007)

The Moon's a Balloon--And About to Pop (May 18, 2007)

Stock Market Needs Suckers, John Q. Public Wary (June 1, 2007)

Friday, the Bulls roared back, reclaiming over 1% of the week's losses. So does this mean the Bulls are back in charge and the three analysts are absolutely right? Maybe. Here is a 5-year chart of the long-bonds exchange-traded fund, the TLT. If you want to find some bullish evidence in this chart, you have quite a challenge:

Please go to www.oftwominds.com/blog.html to view the charts.

And here's the five-year chart of the Nasdaq, which I prefer over the narrow 30-stock Dow Jones Industrial Average, and the S&P 500, which has been distorted to some degree by the huge gains in financials (housing/mortgage/private equity debt bubble) and energy (oil rising from $20/barrel to $65/barrel). How low the Nasdaq will go this time around is anyone's guess, but the chart offers little support to the perma-bull chartists quoted above.

Am I just "finding Bearish cues" in these charts because that's what I've decided will happen? Perhaps--so look at the charts and make up your own mind about what they're indicating.

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Yes, Real Estate Prices Can Drop in Half--Even in Manhattan


One of the most enduring cliches of the real estate industry is that properties in "prime locations" such as Manhattan and San Francisco "never go down." Nice idea, but wrong. Let's take a look at a chart, courtesy of www.quadlet.com (link below). I've added some lines and comments to clarify the sobering reality:

In the last real estate decline in the 90s, Manhattan prices fell 40% nominally and 60% when adjusted for inflation:



If you need more evidence, then read 100 years of Commercial Real Estate prices in Manhattan (MIT):

"Then during the 1920s prices rose almost 3% yearly in real terms. The depression saw real prices drop in half, and the 1940s saw them slightly more than fully recover. Real prices dropped about 2% yearly from 1949 to 1969 and then rose 3% yearly from 1969 to the famous peak in property values of 1989. From 1989 to 1999 prices dropped in half – again adjusted for inflation."

Note in the above chart that when you adjust prices for inflation, current prices are actually lower than the peak set in the late-80s. Chart technicians would draw an inference from this: "lower highs and lower lows," meaning that the next low in the Manhattan real estate market would be significantly lower (in both nominal and real terms) than the last low.

If we extrapolate from history--and we do have 100 years of data--then we can expect Manhattan property--yes, every "prime" square inch of it--to decline 40% to 50% in nominal terms and from 50% to 60% in inflation-adjusted terms.

Any way you slice it, that's serious money being lost. Here is the link to the source of the above chart: Are Real Estate Prices Dependent on Mortgage Rates?

This data begs one nagging question: if "prime real estate" is set to drop in half, then how far will less-than-prime real estate drop?


Thank you Steven R. ($15.00) for your generous donation and your readership. I am greatly honored by your support. All contributors are listed below in acknowledgement of my gratitude.

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Love in the Time of Syphilis
and Master Narratives of Morality

I have updated the Readers Journal with a selection of lively commentaries in the weekly Journal and a stunning new essay, Love in the Time of Syphilis by Protagoras.

I highly recommend reading this essay, as it is filled with thought-provoking themes of human nature, literature and history. The central thesis is that the "master narrative" of sexual morality from 1490 through 1950 was dominated by the very real threat of a terrible death due to the ravages of syphilis, a sexually transmitted and then-incurable disease which could also be transmitted to one's offspring.

Protagoras very entertainingly reveals how this narrative, so evident in the literature of those centuries, has been lost to us. What we see with modern eyes as some sort of fusty Victorian concern with chastity and monogamy was in fact a highly practical concern with protecting oneself and one's offspring from an early death or a madness which ended in a cruel decline.

The disease was not rare, nor was it limited to the lower classes. Winston Churchill's high-born father died of the disease, to name but one example.

In our own time, HIV/AIDS traced a similar narrative in the arts, literature and film, a narrative which is already being blurred or lost as more effective treatments stave off what was until very recently a death sentence.

If we take this notion of a "master narrative" that can be lost, and apply it to the malaise gripping the print and broadcast media--the "mainstream media" or MSM--what do we get? What we have now--the collapse of a higher ethical calling.

Yes, there is the "news" which is supposed to be "objective." But the unremitting attacks by political hacks (the Karl Rove types of all political persuasions) and "politically correct" interest groups (unions, the elderly, etc. etc.) has enfeebled the media to the point that every story has to be gingerly treated in a "fair and balanced" fashion--in other words, one without any ethical compass.

Here's how it works. If the media investigates a right-wing nest of abuse of power/corruption, it's immediately accused of "Liberal bias." If it goes after a Liberal hive of self-serving feeding at the public trough, it's immediately accused of ethnic/gender bias, or even worse, of being "mean-spirited" or "trying to stir up trouble." Duh--that's it's job, people, if "trouble" means exposing what political hacks and con-artists are trying so desperately to hide.

The net result: there is no moral center in the media. Here are some stories which have largely gone unreported (by which I mean buried on page B-19, and reported only once), I assume because they don't meet various "politically correct" litmus tests:


Active-duty personnel of the U.S. military are arranging "quickie" tours through the Green Zone in Iraq as a way of getting higher combat pay and benefits.


Newly minted "legal immigrants" who are elderly are quickly drawing Medicare benefits, including having their daughter paid $1,500/month by Medicare to act as their caregiver--all without paying a dime into the system via taxes.


U.S. military interrogators are revealing that their orders were "be creative" in extracting information, leaving them with no moral sense of what was right or wrong in their line of work.


Various politicos have been influencing the hiring and firing of U.S. prosecutors and other Judiciary appointees based on whether they were registered Republicans (good, as long as they are ethically pliable/crooked) or Democrats (bad--fire those pesky do-gooders at once)


Hedge fund managers drawing hundreds of millions a year for shuffling paper for their already-wealthy clientele are screaming because the special tax break allowing them to report annual earnings as "long term capital gains" is being threatened.

We are constantly being told the solution to the media's malaise is "local coverage". Like I want to pay a $234 per year subscription to read about hip-hop chess, another pretentious restaurant review or some local politico's pet "feel good" projects.

What's lacking is an ethical compass to guide the media to pursue abuse of power or corruption to the bitter end, regardless of what Karl Rove or his lackeys sputter, or which union or PC interest group stands to lose.

Raiding the public treasury was once upon a time a Master Narrative of wrong-doing which had to be limited or punished: power being abused, public trust pillaged and special favors rewarded. We now live in a time where this narrative has been lost, where literally everyone from fire department employees, Medicare recipients and providers, Homeland Security (sic) and private Pentagon contractors, hedge funds, the mortgage lending industry--everyone is relentlessly "gaming the system" to pile up their own benefits and profits regardless of the fact they are pilfering from public monies or ripping off the public via other means.

Meanwhile, the media stands by, lamely reporting the latest mugging or the latest phony "morality play" about gay marriage staged for distraction by political handlers, while our nation is plundered for personal gain and run aground on the reefs of debt, leaving our children and their children a broken state: broken in the sense of a shattered ethical compass, and fiscally broken in the sense of leaving them with untold trillions in debt which can never be paid off.

What will it take to restore some moral core to the media? It may well be that the rise of blogs is the thinking public's reaction to the silly shallow "balanced news" pumped out by the networks and print media. It is in this light that I reprint a recent comment made by frequent contributor Harun I. regarding the media's breathless cheerleading about the "new highs" in the Dow Jones Industrials and the S&P 500 stock indices:


"It is a great failure of the MSM to not balance their reporting of the Dow’s ‘new highs’ with equal reporting of the loss of purchasing power. The lack of objectivity of the MSM is alarming. That people have to rely on blogs written by concerned citizens and true patriots such as you is quite remarkable. On the one hand I fear for our great nation but on the other I read blogs like yours and know that there are enough good people in this country to get it back on track."

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If All the Gold's In Private Hands, Is a Gold-Backed Currency Possible?


Readers know from previously posted charts that gold has been a better investment than the stock market for the past seven years. Here is the "new record high" S&P 500 priced in gold, courtesy of frequent contributor U. Doran.

Please go to www.oftwominds.com/blog.html to view the charts.

Not so high as the mainstream and financial media makes out, eh?

Here is the issue in a nutshell. Forgive my brevity and all the complexity I have left out in trying to compress a deep and critical issue into a few lines.

Money supply (money created by "fiat" i.e. by government debt or printing presses) is exploding at 15%+ around the globe even as global growth is 4%. Massive expansion of money supply leads to inflation, which has been officially under-reported for years, though we intuitively know it is rising (and the bond market confirms this intuition). As a result, the cash in our wallets loses value every year.

In times of rapid growth of money supply, hard assets such as real estate and commodities skyrocket--exactly what we've witnessed over the past seven years.

Another result has been the declining value of the dollar in relation to other currencies--mostly the Euro, which is the only major currency which trades in a free market, i.e. "floats." (The yen is manipulated into a narrow trading range, and the yuan is pegged to the dollar.) If the dollar falls below the "line in the sand" of 80 on the Dollar Index, it could trigger a major decline of 30%-50%. Many observers consider this inevitable.

As the dollar weakens, investors and traders start backing away from their reliance on the dollar as a placeholder of value and as a currency used for trading. For instance, Kuwait split raises questions over longevity of the dollar (link courtesy of U. Doran).

Net result: owners of dollars (i.e. Americans and overseas owners of dollars or U.S.-denominated debt) find their purchasing power reduced/devastated. Many observers believe a pan-Asian currency will arise to replace the dollar: China, Japan, Korea on single currency unit. Many believe that any such currency will have to be backed by gold to have any "staying power."


For background on the issue of gold-backed currency, here are three links provided by U. Doran. I especially recommend the first one:

The Once and Future Money

The End Of National Currency

Gold and Economic Freedom (by Dr. Alan Greenspan, 1966)

So far so good. But as astute reader Don E. explains, there's a fly in the ointment for any gold-backed currency: most of the world's gold is in private hands:

"This idea presented itself as a problem last week when I read Anatal Fekete’s commentary on the preponderance of gold having moved from the hands of governments, central banks, to private holders. Gold Vanishing into Private Hoards.

This idea bothered me inasmuch as I began to wonder how on earth we will ever get back to a sane policy, a gold standard, where money really is money if the banks don’t have the gold to back it. Gradually I came to some understanding of the mechanics of this.

I read a lot of economic commentary, and if it is well-written and fairly simple I can follow along. You will find my own thoughts at least simple. Money is a store of value and a medium of exchange. Who determines the value of money? Those who hold whatever backs it. Presently we are in a state where money is not backed; it is all fiat currency - money by government decree only, having no intrinsic value. Who then sets its value?

Well, money, let’s just say ‘the dollar’ is not money, not any more. It is a commodity, a produced item, much like a farmer produces potatoes. As a commodity it is for sale on the open market and can be bought, at the very end of the line, with gold, with real money. Jim Sinclair likes to say that the value of gold does not change, only the value of the dollar does. I have read that many times without really grasping what it means - call me slow.

In my case it means that my pension from the State of California and the County of Alameda and the Social Security System comes to me not as real money, but as a commodity of ever decreasing value. Should those folk all send me potatoes I could eat them, and I could eat them as well in ten years as today. This is not the case with dollars. How many potatoes will my dollars buy in ten years? Not as many as today.

This brings me around to my small epiphany. It doesn’t matter if most of the gold is in private hands, because the market will always fix a value on the commodity-dollar. At least so long as this particular commodity is needed. It will be needed for quite some time as this commodity is what we pay rent, shop, buy services, and get taxed in. We will get squeezed as our personal stream of this commodity becomes worth less and less - what else is new?

But no matter who holds the gold the commodity-dollar will have some value, set by those who own the gold. Gold moving into private hands must simply be some part of the cycle of rebalancing. Do the governments finally get enough of it back to back a true-money currency? Probably sooner of later. Maybe countries where it is mined extensively, Canada?, will fill their coffers from domestic production and bring back real money.

This is most certainly not the way the various governments want it, but print and spend must have its consequence. The private holders of gold will do a much better job of keeping our money correctly valued than our governments have. Market price must trump lies. While this doesn’t bode will for those of us paid in commodity-dollars, or worse, on fixed incomes, it does have a tinge of justice to it that makes me smile. Actually, I can’t imagine why I am smiling as the burden of the printers’ deceit will fall on all our heads with traumatic force regardless of our complicity in the fraud. Down the garden path and into the weedy fields we go.

It is my family’s good fortune that we have accrued some gold in the meantime. Most have not. If I had fifty pounds of it hidden in the rafters I don’t think it would be enough at this point.

As an aside, what assets aren’t in gold are in Canada. We live in Maine and drove up to a border town a couple of years back and opened a Canadian account with some cash from the sale of a home. In the meantime we have rolled over our remaining IRA into a Canadian Broker and trade only in Canadian stocks and keep all the cash in Loonies. Our present vulnerability lies in our pensions. Our home is paid off and doesn’t really count as it is where we live and secure as such.

So, all this is pretty obvious and simplistic, but coming to grips with the idea of money as a manufactured commodity, and gold in private hands as the arbiter of this commodity’s value has somehow cleared my thinking a bit. Don E., who never promised a deep and probing analysis."

Governments can of course confiscate all privately held gold, as the U.S. government did in the 1930s. Yes, it was a crime to own coined gold or bullion in the U.S.A. It doesn't take much imagination to speculate that a nation, or perhaps many nations, could decide to create a gold-backed currency by confiscating their citizens' gold and paying them in paper for the privilege of giving their gold to the State.

Not a reassuring thought, to be sure.

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