Worrying about Investments

[snafu]

I am getting quite nervous about my USA investments. It started with the downgrading of USA debt. I keep reading about the lower than expected new home sales, lower retail spending, a banking sector in a mess, an under-employent [not benefit eligible or only PT] figure of 15%, the deficit tracking $ 1.3 T on an upward trajectory, interest rates at new lows and gold prices screaming 'inflation.'

How does the government see keeping super-inflation at bay? Do they raise interest rates in-spite of promises? Will the world de-valuate American currency? When debt reaches 120% of GDP you see that result in Greece today. The Banks will write-off 50% of their Greek Bonds and those effects will be bumped down the line.

What will you do to protect yourself financially?

[KTP]

First, Greece debt is like 160% of GDP...they hope to get it down to 120% by 2020.

USA can also print money, Greece can't.

If you have some money in inflation adjusted bonds, like Ibonds, you can at least know that your purchasing power in the USA will keep up with inflation. In the long run stocks also eventually rise with inflation because when the tube of toothpaste goes from $2 to $4, Procter and Gamble makes that much more revenue and profit. When oil goes from $100 to $500 a barrel, do you think Exxon will be nice and not raise prices? The shareholders are betting they will choose to raise prices and increase revenue to match inflation.

I am currently at 40% domestic stocks, 20% international stocks, 20% bonds, 20% cash. I feel pretty comforatable.

[kv968]

If you have some money in inflation adjusted bonds, like Ibonds, you can at least know that your purchasing power in the USA will keep up with inflation. In the long run stocks also eventually rise with inflation because when the tube of toothpaste goes from $2 to $4, Procter and Gamble makes that much more revenue and profit. When oil goes from $100 to $500 a barrel, do you think Exxon will be nice and not raise prices? The shareholders are betting they will choose to raise prices and increase revenue to match inflation.

I am currently at 40% domestic stocks, 20% international stocks, 20% bonds, 20% cash. I feel pretty comforatable.

Stocks such as P&G may rise with inflation, but their raising of prices won't necessarily add to profits. It would increase their revenue, but their profits will most likely stay the same, if not go down, if they're having to pay more for the supplies to make their products. All they're basically doing with the rising prices is passing along their increased costs.

Oil exploration companies such as Exxon or Chevron on the other hand could make more profits if oil rises. If it costs them say $50 to produce a barrel of oil and prices go from $100-$110 then that would mostly just be profit. However refiners, or "downstreamers", such as Sunoco or Valero that mainly buy the oil and convert it to gasoline would see their profit margins tighten since they have to pay the prevailing price of oil. Sure they would charge more for gas but that mostly would again be just to cover their increasing costs.

[kv968]

I am getting quite nervous about my USA investments. It started with the downgrading of USA debt. I keep reading about the lower than expected new home sales, lower retail spending, a banking sector in a mess, an under-employent [not benefit eligible or only PT] figure of 15%, the deficit tracking $ 1.3 T on an upward trajectory, interest rates at new lows and gold prices screaming 'inflation.'

How does the government see keeping super-inflation at bay? Do they raise interest rates in-spite of promises? Will the world de-valuate American currency? When debt reaches 120% of GDP you see that result in Greece today. The Banks will write-off 50% of their Greek Bonds and those effects will be bumped down the line.

What will you do to protect yourself financially?

Yeah, we're in quite a mess. However as far as super-inflation, I don't think you have to worry about that. Higher inflation will be coming but I doubt any sort of hyper-inflation.

The Fed has pumped a lot of money into the economy, which would typically cause inflation, however the velocity of money has slowed so much due to the lack of lending by the banks that for now it hasn't had that affect. Once the banks start loaning again and the velocity picks up, then you can expect them to start raising interest rates to combat inflation. It's a very delicate game they're playing for sure.

As far as what to do? Your guess is as good as mine. Everyone's situation is different but I'm planning on staying in stocks while also making sure I have some exposure to commodities, precious metals and TIPS. I personally wouldn't go crazy in those sectors but I will make sure I have some in the portfolio. I've also been holding more cash than usual just for the ability to buy when things get cheap.

[jpg7n16]

Stocks such as P&G may rise with inflation, but their raising of prices won't necessarily add to profits. It would increase their revenue, but their profits will most likely stay the same, if not go down, if they're having to pay more for the supplies to make their products. All they're basically doing with the rising prices is passing along their increased costs.

Except usually, large companies like that have a profit percentage built into the price.

If P&G has a 35% profit built in, if costs go up, so will the price and therefore the profits

Fictional toothpaste example
Cost 1980: $1, times 1.35 = $1.35 (built in profit of $0.35)
Cost 2000: $2, times 1.35 = $2.70 (built in profit of $0.70)

Obv it's more complicated than that, but in general - if profit margins stay the same by design, inflation means rising profits.

(Though the purchasing power of those profits is less, but that's another story)

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As far as the OP is concerned, I still believe in the long term, things will be just fine. Short term, who knows? In the next 3 years, stocks may fall 30% again. It could happen. But they could also shoot up another 30%.

I'm planning based on a 30-40-50 year time horizon. And at least historically speaking, the stock market has never averaged less than 5% over those timeframes. Even including through the great depression.

[97guns]

gold and silver is the best hedge against inflation

[jpg7n16]

gold and silver is the best hedge against inflation

Evidence?

Studies actually show that equities are the best hedge against inflation.

Gold not a reliable inflation hedge-study | Reuters

[kv968]

Except usually, large companies like that have a profit percentage built into the price.

If P&G has a 35% profit built in, if costs go up, so will the price and therefore the profits

Fictional toothpaste example
Cost 1980: $1, times 1.35 = $1.35 (built in profit of $0.35)
Cost 2000: $2, times 1.35 = $2.70 (built in profit of $0.70)

Obv it's more complicated than that, but in general - if profit margins stay the same by design, inflation means rising profits.

(Though the purchasing power of those profits is less, but that's another story)

That's true but the problem lies within the fact that companies can't always pass the full added cost onto consumers without possibly losing competitivness. The substition factor starts to come into play.

For example, if they try to maintain that 35% profit margin while costs are rising by increasing the price, people may, and do, switch to a cheaper brand. The only way to maintain market share is to cut costs elsewhere if possible or reduce the profit margin. Of course, this is where brand loyalty comes into play and they hope people won't switch because of that.

[jpg7n16]

That's true but the problem lies within the fact that companies can't always pass the full added cost onto consumers without possibly losing competitivness. The substition factor starts to come into play.

For example, if they try to maintain that 35% profit margin while costs are rising by increasing the price, people may, and do, switch to a cheaper brand. The only way to maintain market share is to cut costs elsewhere if possible or reduce the profit margin. Of course, this is where brand loyalty comes into play and they hope people won't switch because of that.

Like I said, obv it's more complicated than that

But it's not like the competition's costs aren't increasing too. They can't continue to sell a product that costs $2 for $1.35.

This could go into a thesis on the impact of rising costs on competitive advantage Not where I was going, just pointing out that I agree with KTP that in general - inflation increases profits (which increases stock price, making consumer products stocks somewhat of a hedge against inflation)

[kv968]

Like I said, obv it's more complicated than that

But it's not like the competition's costs aren't increasing too. They can't continue to sell a product that costs $2 for $1.35.

This could go into a thesis on the impact of rising costs on competitive advantage Not where I was going, just pointing out that I agree with KTP that in general - inflation increases profits (which increases stock price, making consumer products stocks somewhat of a hedge against inflation)

Of course it all depends on what industry we're talking about, but I still can't agree that inflation would necessarily increase profits. REVENUES yes, but not profits. And sure the competition would have to raise prices also, but if it was a dollar less to begin with (i.e. generic) it would still be a dollar less with added costs. The only difference would be people would willing to switch from the "name brand" to save that dollar.

Although I will agree that stocks in general will hedge against inflation.

And I'll gladly leave the thesis writing to you jpg

[jpg7n16]

REVENUES yes, but not profits.

I guess we'll just disagree, but I'd say yes to both. In the above example, 35% profit margin, if costs doubled and they are forced to reduce to a 25% margin percent, the total actual dollar figure of profits is still higher. But most companies wouldn't do that.

$1 cost, times 1.35 = .35 profit
$2 cost, times 1.25 = .50 profit

Margin decreased. Revenues increased. Profits increased.

If costs doubled, and the kept the margin at .35 - that would reduce margins to 17%, and they'd discontinue the product to focus on more profitable ones.

And sure the competition would have to raise prices also, but if it was a dollar less to begin with (i.e. generic) it would still be a dollar less with added costs. The only difference would be people would willing to switch from the "name brand" to save that dollar.

So you're saying that if people are willing to pay $7 for a brand name vs $6 for generic (16.7% more), that they wouldn't be willing to spend $8 for brand name, vs $7 for generic (14.2% more)?

And I'll gladly leave the thesis writing to you jpg

NOOOOOOOOO!!!!!!!! haha

[aditi]

hi snafu

you have raised good question about us economy. inflation can be controlled through raising interest rate and through reserving gold from imf. By having proper combination of different securities you can save your money.

[kv968]

I guess we'll just disagree, but I'd say yes to both. In the above example, 35% profit margin, if costs doubled and they are forced to reduce to a 25% margin percent, the total actual dollar figure of profits is still higher. But most companies wouldn't do that.

$1 cost, times 1.35 = .35 profit
$2 cost, times 1.25 = .50 profit

Margin decreased. Revenues increased. Profits increased.

If costs doubled, and the kept the margin at .35 - that would reduce margins to 17%, and they'd discontinue the product to focus on more profitable ones.

We can still disagree but you're right, higher costs don't necessarily mean less profits but that would only work up to a point. However that's still assuming that they can pass along even the reduced profits. Even if they were to stick with a $0.35 profit they'd have to raise the price by 73%. To manage even a reduced 25% profit they have to raise the price 85%. Granted they may be able to do it but in a tough market I'm sure they'd be willing to still take the $0.35 profit even if it is only 17% instead of their usual 35% depending on their situation. Or as you said, they could discontinue.

So you're saying that if people are willing to pay $7 for a brand name vs $6 for generic (16.7% more), that they wouldn't be willing to spend $8 for brand name, vs $7 for generic (14.2% more)?

That's exactly what I'm saying. We like dealing with percentages which make things look different, but consumers basically see prices and that's it. Sure they may pay the extra buck increase for a name brand once, but if it goes up another buck, that generic doesn't look too bad at the old brand name price. Enough is enough after awhile.

Look at oil. OPEC, as best within their ability, would love to raise the price of oil as high as they can. However they know if they get it above ~$140/barrel people stop using as much. There is no real substitute for oil except less consumption and that's what people do when it gets too high. Same with other essential products except with them there's usually a cheaper substitute people can and do switch too if a company raises a price too high. Not sure if that made sense but I tried.

NOOOOOOOOO!!!!!!!! haha

Come on, you write the thesis and I'll come up with a catchy title