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It seems that many
“investment professionals” would have you believe that there are only
two investment classes, namely stocks and bonds. They talk endlessly
about the mix of the two. That you should be heavier into stocks when you
are young and heavier into bonds as you get older. Lately some are
advising on moving more of your money out of “risky” stocks into
the “safety” of bonds.
Niall Ferguson tells
of the Cotton Bonds of the CSA in his new book, “The Assent of Money”.
He speculates that the financial fall of New Orleans was a greater
disaster than both Gettysburg and Vicksburg. During the War for Southern
Independence the South tried to finance the war with bonds. It did not
take long before all the capital in the South was exhausted. The South
then faced the grim prospect of selling bonds while in the middle of an invasion.
They convinced the small French firm of Emile Erlanger & Company to sell
Cotton Bonds. These bonds paid a 7% coupon and a 20 year
maturity. At that maturity they could be converted to cotton at pre war
prices. After Union Admiral Farragut seized control of New Orleans in
the spring of 1862 the South became even more desperate. During the war
cotton prices soared four times higher than pre war prices. The amount
of cotton that entered English ports from the South dribbled to a mere 3% of
the pre war amount. It was known as the cotton famine in the mill towns
of England. In spite of the risk of running the Union blockade the
price of the cotton backed bonds doubled in Europe. The CSA government
also sought to withhold cotton in order to pressure England to enter the war in
support of the South. Of course if the bond holders could not get paid
for their coupons and the underpinning cotton was beyond their reach then the
bonds simply become worthless. By 1863 the English mills had found new
sources of cotton in India, China and Egypt. The cotton bonds became
worthless and the South had to resort to printing money without backing.
If only the South had been able to hold onto New Orleans for a few more months
until after the 1862 harvest had been sent to Europe perhaps the financing
would have been quite different. Who knows how it may have ended with
the additional financing? At any rate, hyperinflation set in and the end
finally came.
Many investment
professionals are trying to steer investors into bonds but the investor must
consider the ability of the entity that issues the bonds to repay the loan.
Many States and municipalities are getting hit with both barrels right now.
Income is down from sales taxes and property taxes while the demand for
services such as unemployment and uninsured medical costs are rising. Expect
many States and municipalities to default without massive federal revenue
sharing interventions (which will only further strain the federal government’s
credit). Even the mighty Treasury bond may come under fire if foreign investors
lose faith and not only quite purchasing them but start to sell them. So
remember that “safe bonds” are only safe if the issuer can repay
them with something of equal value at maturity (if it can repay them at all).
I am reminded of Ecclesiastes 11:2
“Give a portion to seven, and also to eight; for thou knowest not what
evil shall be upon the earth.” (KJV) While some give
credit to King Solomon for Ecclesiastes others are not so sure. At any
rate it is wise council. There are at least seven different investment
classes: stocks, bonds, cash, real estate, commodities, precious metals
and collectables.
With stocks it is more important to be invested
in the correct sector than in an individual investment within that
sector. Pick the right sector & diversify within that sector and
you can weather any storm with confidence. Even though the market in general
is doing poorly some sectors are doing much better than others.
Bonds are a promise to pay into the
future. BEWARE long bonds in an inflationary market. If you think
that inflation is set to rise beware of bonds denominated in dollars.
Always consider a borrowers ability to repay a loan.
It is always prudent to keep some cash around.
At least 6 months of living expenses in an emergency fund is a good
idea. A bit outside the banking system is also prudent right now.
Many people are finding out the hard way
that residential real estate is not an investment but a lifestyle expense.
If most people are honest with themselves, over the long run their house just
keeps up with inflation. By “real estate” I am speaking of income
producing property.
Commodities have seen spectacular gains and
drops in the past year. Copper, lead, coffee, corn, beans, sugar, wheat
and crude oil are just a few examples. Ask any farmer and he will tell
you that he speculates in commodities. Any time you plant in the spring
and have no idea what the price will be in the fall you are keeping your eye on
the commodities market the entire growing season. ETFs are now
available for most commodities and make it easier than ever to invest in this
market. If you have never invested here GO SLOW at first. Do not
ignore this sector even though it can be dangerous. Just do your
homework and wait for an opportunity for a small investment.
Collectables are as numerous an investment
choice as the stock market. Almost anything goes in this class.
If you choose to invest in a collectable make sure it is something you are
passionate about and enjoy. Become an expert and spend time researching
the item and the market for the item. Also ENJOY your collection.
Finally precious metals are the last investment
class. My absolute favorite saying is, “Put 10% of your entire net
worth into precious metals and pray that they go to zero.” Does anyone
ever purchase fire insurance and then get upset if their house does not burn
down? Precious metals are financial insurance. If your precious
metals loose value it normally means that the other six classes (or the other
90% of your wealth) are smoking hot and doing quite well. HOWEVER, when
the other 90% of your investments are in the toilet it is that little 10% invested
in precious metals that will save you and allow you to start over. Do not
skimp and buy a cheap lifeboat with a storm on the horizon. If you feel
the risk of financial strife is great right now move up to a 15 or 20%
allocation in precious metals until the storm passes. Investing without
a portion of your wealth in precious metals is simply INVESTING WITHOUT A NET.
Remember to invest a portion in all seven
classes to one degree or another. King Solomon was indeed both wealthy and
wise.
Larry Laborde
Silver Trading
Company
www.silvertrading.net
Larry lives in the occupied South with his wife Puddy and sells precious
metals at the Silver Trading Company. Larry can be contacted at llabord@aol.com. You can view his web site
at www.silvertrading.net.
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