|
Plunging
Interest Rates can have a Golden Lining
Dr Richard Appel
June 25, 2004
A change in
the psychology and actions of a large segment of the American
population was severely altered when the Federal Reserve Board
aggressively drove down short-term interest rates. For several
years short- term rates on 90 day Treasury Bills were quite stable.
They offered their holders annual rates of return above 4%, and
occasionally exceeded 5%. In fact, 2000 witnessed these short
rates rise above 6%. When that occurred, the lives of the investors
who owned these and other short-term monetary instruments seemed
certain to improve. This was due to their belief that the added
income accruing from these investments would increase their purchasing
capacity, and would allow them to experience an easy, more worry-free
existence. They felt that they could lead a more comfortable
life because their incomes had improved. Unfortunately, this
mind-set was as short-lived as the fleeting +6% interest rates.
For many, this brief period of contentment was soon replaced
by the worst of all worlds.
A large and growing contingent of Americans live on fixed incomes.
They are either retired or soon to be, and their primary source
of income is largely generated from dividend or interest bearing
accounts, or instruments whose rate of return is predicated upon
the interest rate level. They may have savings accounts of one
form or another, bonds or annuities, or one of a multitude of
interest sensitive products. These individuals use the principle
or interest generated by their investments to supplement their
social security payments. Further, many of the throngs of baby
boomers plan to shortly join their ranks, when they too will
retire. Many individuals from this latter group are increasing
their more stable investment type holdings as they near retirement,
and their aversion to risk rises.
We all structure our lifestyles based upon the amount of income
that we expect to receive on either a weekly, monthly, or annual
basis. This is the sum of earnings from our employment, investments,
various businesses, as well as our anticipated interest and dividend
payments. When one approaches or reaches retirement, the primary
source of their lifelong income, their salaries, is removed from
their income equation. It may be replaced by social security
or other retirement benefits, but seldom are these as great as
the salaries that they will no longer receive. Further, retirees
desire a greater sense of security because their income is limited
and they must rely on their finite, life-time accumulated wealth.
To this end they husband their assets in the best fashion that
they can. This motivates many to shun equities and other forms
of investments due to their great volatility, and the potential
for losing their assets from falling market prices.
Due to the enormous population of baby boomers, our nation consists
of an increasing number of families that are dependent upon the
returns from their interest sensitive investments. If their income
is stable, they will have one less thing about which to be concerned.
To these people, fluctuating interest rates pose great risk.
They have already planned their spending decisions around their
new income, and can suffer great hardship if their income stream
is impaired. This will occur when interest rates sharply fall.
Interest rates rose strongly in late1999, and peaked in 2000.
When that occurred, 90 day Treasury Bills offered their owners
an annual rates of return in the 6.50% range. This was significantly
higher than the 4.50% to 5.50% rates that these instruments yielded
for the prior several years. While it lasted, the more robust
yields offered those who heavily relied upon their interest and
dividend returns a ray of hope. They thought that this was the
beginning of better times for them because they anticipated increased
weekly or monthly interest payments. Unfortunately, from that
fleeting high point interest rates in general, and short-term
ones in particular, began to plummet.
In September, 1999, a Dow Theory Bear Market was signaled. Later,
in January, 2000, the U.S. stock market as measured by the Dow
Industrials peaked, and shortly thereafter the economy began
to show signs of weakness. By the end of 2000, anecdotal evidence
of an economic decline was already building. This was largely
due to the earlier fiscal and monetary policies that the government
and Fed had executed. These first fostered and then perpetuated,
the unsustainably high standard of living that this nation enjoyed
for decades. Recognizing the potential for a severe economic
collapse created by this condition, Alan Greenspan understandably
became quite concerned.
In the winter of 2000, Alan Greenspan's response to the falling
stock market and weakening economy, was to abruptly force down
interest rates. After all, whenever faced with a contracting
economy, that was the same method that all earlier Federal Reserve
chairmen used for the prior six decades. Greenspan knew that
this action worked! By reducing interest rates, the Fed chairman
similarly hoped to stimulate business and investment, to reverse
the economic decline and soften the stock market's fall. Unfortunately,
the declining interest rate environment wreaked havoc upon those
who were accustomed to the higher and relatively stable interest
rate levels of the past. These people became trapped, and were
forced to live on a significantly smaller income.
Finally, when interest rates bottomed in the summer 2003, 90
day Treasury Bill rates were yielding below 1%. This placed thousands
upon thousands of households in the precarious position of not
knowing how they would continue the living standards to which
they had become accustomed. Those who could earlier, comfortably
survive solely on their dividend and interest payments, now had
to use some of their principle. Others who were already also
living off of their assets were forced to draw them down at a
faster rate. In both instances, fear ran through those who were
now forced to face the possibility that they might outlive their
assets. Panic set in among many of these individuals.
Faced with the real fear of having to either sharply curtail
their spending or to run out of assets and become destitute,
many of these people entered the stock market in the hope of
achieving a better return on their assets. These people joined
others who faced a similar fate, but who began acting in this
fashion when interest rates first entered their steep decline.
The last individuals who succumbed and moved their assets into
equities, would have earlier shunned the idea of taking greater
risk to maintain their living standards. They now felt desperate,
and compelled to at least entertain the prospect.
Most individuals who invest in interest bearing instruments are
conservative by nature. Prior to the last decade it was common
to hear statements like, "the stock market is a gamble".
This was because in truth it is. Only recently have such statements
as, "stocks are a form of savings" filled the airwaves.
These conservative investors had taken to heart and understood
the true nature of the stock market, and would normally have
never considered investing in equities. Yet, the combination
of their fear and the endless banter describing common stocks
as a method of savings, combined with the widely fostered belief
that stocks are assured to go higher in price over time, drove
many of these poor souls into the stock market.
This is one of the reasons why stock prices have been so well
supported during the past few years. Billions of dollars have
been drawn into them by those whose desperation caused them to
sell their conservative investments, and reinvest the proceeds
into common stocks.
Today, these frightened and hard pressed individuals have their
hopes and future pinned upon what I believe are a series of false
beliefs. First, buying stocks are not a form of savings. Ask
those who were late to the party and bought common stocks after
the Bear Market began. Also, history shows that."stocks
go higher over time" is only a half truth. This only occurs
when the frame of reference is over a period of decades.
For example, those who bought common stocks at the 1030 Dow Industrial
Bull Market peak in1966, were forced to wait over 15 years to
break even. The Dow Industrials did post a slightly higher interim
top at about 1050 in 1973, but from there it collapsed to 577
less than two short years later. It was not until 1982, when
it finally surpassed 1050. Or even worse, those who acquired
common stocks prior to the great stock market crash of 1929,
would not have recouped their losses until the late 1950's, when
the Dow Industrials and S & P 500 again first surpassed their
former peaks. How many of today's interest rate dependent investors
can wait that long?
Gold has forever been the savior of the common man. Periods of
excessive monetary creation, such as the path that the United
States is currently following, have ravaged him by inflation
unless he owned gold. In times when a country's monetary unit's
existence came into question, such as when one nation conquered
another, gold has saved the individual's wealth. So too is it
today for those who believe that the only hope for their future
exists by owning common stocks. They are misguided and should
place some of their assets into gold. If I am correct, not only
will the stock market trade far lower over time, but gold will
soar to heights never before witnessed. This will preserve both
the wealth and the future of those Americans who move their assets
into the eternal metal, gold.
The above was
excerpted from the July 2004 issue of Financial Insights ©
June 20, 2004.
Dr Richard Appel
contact
website: Financial
Insights
I publish Financial
Insights. It is a monthly newsletter in which I discuss gold,
the financial markets, as well as various junior resource stocks
that I believe offer great price appreciation potential.
Please visit
my website www.financialinsights.org where you will be
able to view previous issues of Financial Insights, as well as
the companies that I am presently following. You will also be
able to learn about me and about a special subscription offer.
CAVEAT
I expect to
have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence,
I will be putting my money where my mouth is! However, if this
troubles you please avoid those that I own! I will attempt wherever
possible, to offer stocks that I believe will allow my subscribers
to participate without unduly affecting the stock price. It is
my desire for my subscribers to purchase their stock as cheaply
as possible. I would also suggest to beginning purchasers of
these stocks, the following: always place limit orders when making
purchases. If you don't, you run the risk of paying too much
because you may inadvertently and unnecessarily raise the price.
It may take a little patience, but in the long run you will save
yourself a significant sum of money. In order to have a chance
for success in this market, you must spread your risk among several
companies. To that end, you should divide your available risk
money into equal increments. These are all specula-tions!
Never invest any money in these stocks that you could not afford
to lose all of.
Please call
the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS
is written and published by Dr. Richard Appel and is made available
for informational purposes only. Dr. Appel pledges to disclose
if he directly or indirectly has a position in any of the securities
mentioned. He will make every effort to obtain information from
sources believed to be reliable, but its accuracy and completeness
cannot be guaranteed. Dr. Appel encourages your letters and emails,
but cannot respond personally. Be assured that all letters will
be read and considered for response in future letters. It is
in your best interest to contact any company in which you consider
investing, regarding their financial statements and corporate
information. Further, you should thoroughly research and consult
with a professional investment advisor before making any equity
investments. Use of any information contained herein is at the
risk of the reader without responsibility on our part. Past performance
does not guarantee future results. Dr. Appel does not purport
to offer personalized investment advice and is not a registered
investment advisor. The information herein may contain forward-looking
information within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. In accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the statements contained
herein that look forward in time, which include everything other
than historical information, involve risks and uncertainties
that may affect the company's actual results of operations. ©
2004 by Dr. Richard S. Appel. All rights are reserved. Parts
of the above may be reproduced in context, for inclusion in other
publications if the publisher's name and address are also included
for credit.
_______________
321gold Inc
|
