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LD’s Dollars and Sense “Central Station”

By Larry Doyle on January 2, 2009 at 2:27 PM in Current Affairs

monte-carlo_train_station-f Happy New Year!!! I hope for all our loyal followers that 2009 is a successful year in every regard.

I hope that our work here at NQ helps you gain greater financial wisdom and insights.

We’ll be continuing to run our regular departures from “Central Station” (LD’s Dollars and Sense “Central Station” is a financial Q/A session) throughout the year.

Grab a coffee, sit right down, bring a friend along as we discuss issues from Wall St. to Main St. on both a macro and micro level. Remember there are no bad questions.

For our new readers and followers I am selling nothing and do not pretend to have all the answers. All I promise is that I will always provide honest and forthright answers based upon my 25+ years of experience on Wall St. and in the markets.

We’ll be departing momentarily, so …..Aaaaaaaall Aboard!!

HARP

ere’s a startling fact: Because of the soaring price of zinc, it now costs nearly a penny-and-a-half to produce a penny. If the U.S. Mint were a for-profit business, the next step would be pretty automatic — it would shut down penny production or quickly reduce the penny’s cost by changing its content. The Mint, however, has the luxury of considering what is best for the country as a whole in making such a momentous decision.

What is in the interest of the nation? It should discontinue minting the dear old penny.

The bottom line is that it’s not just the Mint that’s losing money on pennies. The Federal Reserve, banks, retailers and customers lose millions more because of the costs of toting around and handling these nearly worthless coins. Time is money, and conservative estimates of the value of our time lost using pennies exceed $300 million per year.

http://www.usatoday.com/news/opinion/editorials/2006-07-11-penny-edit_x.htm
NewHampster

But the only time most Americans show any sort of caring or decency is when we leave 2 pennies in the little tray at the 7Eleven. Leaving nickels for the next guy would be out of the question.
Tricia Spiegel

LE, if you had a few dollars left, even after everything had shrunk way down in your modest portfolio, what would you do with it?
LD

Tricia….I am of the opinion that certain sectors of the bond market represent the best relative value. I would not purchase government bonds as they seem overvalued given the massive flight to quality that occurred over the last half of 2008.

I do think that higher quality municipal bonds, and well managed high grade bond funds look attractive.

Two managers that I highlighted last week as being among the best in the business are Jeff Gundlach from Trust Company of the West and Bob Rodriguez of First Pacific Advisors.

My personal opinion is that the equity markets will likley retest the market lows made on November 20th and may very well make new lows beyond there of another 10%. Against that backdrop I think that the bond market has already priced in a deeper recession than is being priced into the equity market.

I would utilize a “dollar cost averaging” technique in which you make fixed dollar investments each month vs a single investment. You will not be fully right or wrong via the dollar cost averaging approach.
Tricia Spiegel

Thank you very much. I really appreciate getting this information.
MPC

LD-
What are your thoughts on the U.S. national debt? Will there be a tipping point when it will blow up in our faces, or will the world just indefinitely slog along buying debt and maintaining “faith” in the U.S. to pay back the loan? What might be the consequences of such a blow-up?
LD

MPC….

Not that our government would ever publicly state it but I think they would be happy to see our dollar devalued thus allowing them to pay off the national debt in the future with cheaper dollars.

The devaluation of the dollar would also help our exports by making our products look relatively cheaper to consumers overseas. All other things being equal an increase in our exports would help stimulate our economy. We know, however, that all other things are never equal.

What are the consequences, though, of a cheaper dollar? Inflation and the chance that investment dollars which have financed our debt actually flee our markets.

Thus, this risk of devaluation is a very high risk and high stakes proposition.

I do think that a number of countries would also not mind seeing their currencies fall in value, though, for the benefit of trade via increased exports.

I do think that there is a chance of significant devaluations of a number of global currencies, including the US$, leading to increases in interest rates via an increase in inflation.

That development would prolong a global economic slowdown and cause “stagflation” which last occurred in the early 1980s. Stagflation being a slowing economy accompanied by increasing inflation. U-G-L-Y!!

I hope you also saw my second response to your question regarding literature. Initially I just listed newspapers and periodicals and then further added some books that I like.
bart

LD,

If you have a little extra, as Pat mentioned, would paying down a mortgage a little faster be a good use of the money?
LD

Bart,

Obviously everybody’s situation is different so an answer provided to one would not apply to all.

I am always a big proponent of increased savings and increasing equity in one’s home so paying off the mortgage can help accomplish both those goals.

However, a few questions need to be addressed to determine if paying off the mortgage is the best use of the funds.

1. what is the rate on the mortgage?
2. is it fixed, adjustable?
3. is there negative amortization, meaning that the princiopal is growing?
4. what is your effective tax rate?

The reason for these questions is to determine the after tax cost benefit of paying down a mortgage vs taking those funds and making an investment.

If you have a relatively low rate mortgage, it may actually be beneficial to take funds and invest in a high quality municipal fund or high quality bond fund and generate a higher after tax return.

Again in making that assessment you have to understand the risks inherent in the fund. (credit risk, interest rate risk, market risk)

It is not often that the returns on bond funds are higher than effective mortgage rates. Given this anomlay it represents an opportunity but you need to assess your personal situation prior to making that determination.

Hope this helps.
Lizzy

Given the government’s penchant for bailing everything out do you think that our currency will become worthless and our Social Security benefits survive?
LD

I do not think that our currency will become worthless but I do think it will lose value primarily vs the Japanese yen and the Swiss franc.
I think that we may see a devaluation of a number of currencies. Looking at it another way, I think there is a strong likelihood of inflation down the road.

Our Social Security benefits will survive for the very simple reason that the government can continue to print money. I do think, though, that Social Security benefits will ultimately be directed to those under a certain net worth. I also would not be surprized if SS extends the age when people can start to collect as the average life expectancy has extended.
MPC

I did catch your follow up post, LD. There’s a couple of books on there that I’ve considered before and at least 1 or 2 that have been recommended by others in the past. Definitely be picking some of those up in the future.