So where to put your money now?
YOU COULD WRITE A BOOK
The first thing to say is that everyone is different, and anyone who invests based on a TV interview here, a magazine article there – and then takes a different tack based on a blog entry from some guy who also offers eggplant recipes – is clearly not going about this the right way.
The right way is to have an overall plan, good money habits, and a life perspective that serves you well.
To cover all this adequately (or even inadequately, depending on your review) could take an entire book. Having said that, let's say some more . . . with a wide lens before we pan in.
BROAD THEMES
We've known for some time that residential real estate was a bubble, and have been wary of it even back when it was only modestly inflated – e.g., this column from October, 2002. It seems obvious now, yet many got burned.
If you watched (or read) Whitney Tilson's segment on this past Sunday's '60 Minutes,' you know there's a lot more pain ahead, as the Alt-A and Option ARM mortgage default wave sweeps in even as the subprime foreclosures gradually get absorbed.
We've known for some time that interest rates, or certainly short-term rates, would likely stay low. E.g., here, in March of 2007. This week the Fed took its short-term rate down to zero (how's that for low?) and explicitly stated its intent not just to keep short-term rates low for a long time, but long-term rates as well.
Normally, the Fed tools have limited effect on long-term rates, which are determined by supply and demand. Ah, but if the Fed itself becomes a massive buyer, that can drive the price of bonds up – and, thus, interest rates down.*
*Interest rates are the converse of bond prices, as light is the converse of dark: if it's getting lighter, it is also, and to precisely the same degree, getting less dark. If a bond that is slated to pay $50 a year for 30 years trades hands for $1,000, it yields its owner 5% a year. But if it later can fetch its owner no more than $800 when he goes to sell it, the new owner gets a current yield of 6.25% on his investment ($50 on $800 = 6.25%). In this example, interest rates have gone up. If the Fed were then to come in with massive purchases, competing with private investors to buy bonds and driving their prices up to the point that this same bond fetched $1,250, then whoever bought it – the Fed or your neighbor – would be getting $50 a year on $1,250, which is to say 4%. That is how the Fed would drive down long-term rates.
It may or may not work as hoped. "The market" might be so alarmed to see the Fed printing trillions of dollars to buy bonds and mortgages that it might begin to fear for the strength of the dollar . . . and to fear the inflation they might expect eventually to result from so much money-printing . . . and thus sell their long-term bonds almost as fast as – or (oops!) even faster than – the Fed is buying them.
We've known for a long time we face challenges. There's the challenge of better preparing our kids to compete in the global marketplace. There's the challenge of maintaining our aging infrastructure – and our aging population. There's the challenge of terrorism. The challenge of global climate change.
And have I ever mentioned that the National Debt – under $1 trillion when President Reagan was Inaugurated – will be "around $10 trillion" when President Bush finally leaves?
In fact, it will be even higher, as it turns out.
Which means nothing in absolute dollars (trillions? shmillions? who can keep track?) but quite a lot when expressed relative to the size of our economy: around 30% of GDP when Reagan took over, closing in on 80% by the time Bush leaves, and inevitably rocketing rapidly higher (as it must and should for a while, so long as we're borrowing to make smart investments in our future).
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