Sunday's Democratic Investment Advice

Do you still have a little wealth left over from the Clinton economy that Bush hasn't managed to destroy? I thought I'd start a discussion of ethical, responsible, Democratic, progressive investments that you may wish to consider.

1. Series I U.S. Savings Bonds. To keep the U.S. Government solvent until a Democratic president can restore financial order in 2005, you ought to consider this terrific investment. Right now they're paying 1.1% plus the CPI inflation rate. (If there's deflation, the 1.1% return is the minimum.) Returns are exempt from state and local taxes, and deferred for federal income tax purposes. The Clinton Administration (Larry Summers and Bob Rubin) invented I-Bonds, by the way.

You can buy them on the Internet using your airline miles or cash back credit card. (Pay the balance in full, of course, and make sure they don't count as cash advances.) Cool progressives appear on many bonds, e.g. Martin Luther King, Jr. Returns are totally tax free if you use them for certain purposes, such as a child's education, and follow the rules.

If you are fortunate to be able to max out your I Bonds, you might consider TIPS (Treasury Inflation Protected Securities) as well.

2. Certain municipal bonds. Exempt from federal and many state and local taxes. Buy the ones that finance schools, sewage treatment plants, cogeneration, mass transit, and certain municipal waste projects. Don't buy highway or fossil fuel plant bonds. Most must be purchased through a fund or broker. (I do not recommend trading with brokers, nor do I recommend individual munis unless you plan to hold them to maturity. Individual munis are difficult to trade cost-effectively.) As the Bush Administration burdens states and cities with ever-increasing expenses, you can help lower their interest expenses.

3. iShares. These country-specific funds let you choose France, Germany, Canada, and other countries with progressive, anti-war policies. The funds are indexed and trade on the NASDAQ, and they have relatively low expenses. Downside is that there's significant risk investing in just one country, both because of economic factors and exchange rate factors. Also, there are many odious corporations based in friendly countries, so it's not a pure play. If you use these I suggest picking a group of countries at once.

4. Foreign currencies. You may wish to invest some funds in Euro-denominated vehicles, for example, to diversify your currency risk. There are international and country-specific bond funds, for example.

5. "Ethical" mutual funds, such as Ethical Funds. Watch out for high investment expenses, and make sure the investment objectives match yours. (For example, I believe nuclear power is better than, say, fossil fuel power.)

6. Individual progressive corporations (stocks and bonds). Bonus points if you can invest directly, through the company web site. (Anyone have specific recommendations here?) Be sure to diversify.

7. Your own ethical business. If you have an idea for a progressive-oriented business that can keep the lights on at least, invest in yourself.

8. Distressed properties (at HUD auctions, for example). If you can rehab crack houses and turn them into quality working class housing, you're a hero.

9. Your education. Student loan interest rates are lower than ever. Invest in yourself and your potential future earning power, and use your spare time in college to help elect Democrats.

Investments to avoid: precious metals (gold, silver, etc.) except for metal recycling, most commodities (e.g. pork bellies), many large multinationals, GNMA funds (probably contributes to urban and suburban sprawl), funds related to questionable countries (e.g. non-democracies), and travel and tourism industries (except eco-tourism).

Please don't forget to PAY YOUR CREDIT CARD DEBT. Credit card interest payments help fund the GOP, if you look at campaign contributions. (Avoid those ATM fees while you're at it. Plenty of ways to do that, such as doing business with a credit union.)

No way, dude (or dudette)! The Fed has explicitly stated that they stand ready to mercilessly debase the dollar to reflate the economy. Precious metals (especially gold) will be one of the best, if not the best, performing asset class over the next decade. Shun gold at your financial peril.

Euros are much friendlier to the environment, especially if it's a number in a computer rather than coinage or bills. Moreover, gold and other precious metals have experienced long term declines in value, and there's a substantial risk that could continue.

The inflation-protected securities (e.g. I Bonds) are another way to hedge against U.S. dollar inflation or deflation. Their rate-of-return adjusts upward with the CPI, so your purchasing power (real value) is protected. If there's deflation, you earn the minimum fixed rate, currently 1.1 percent. If the value of your gold or silver goes down, you're stuck. If you're concerned that the U.S. Government will default, you can also add some inflation-protected securities from other countries, such as the French OATi, Canadian Real Return Bonds (RRBs), or Icelandic Treasuries, to pick three examples. There's some currency risk, especially short term, with those securities, but they may be an excellent choice in a diversified portfolio.

gold and other precious metals have experienced long term declines in value, and there's a substantial risk that could continue.

True, gold and silver have been in a 20-year bear market, but I see very little downside risk at this point. In light of the dollar's inevitable fate (the result of the US running an unsustainably massive current account deficit for too long), gold is a can't-lose proposition (on an intermediate- to long-term basis) in my opinion. If you want to talk about substantial risk, the post-Bretton Woods international monetary regime is at substantial risk of collapsing within a decade in my opinion. There will be a massive exodus from fiat currency (and paper assets in general) to hard currency (assets) in the not too distant future. Mark my words.

I've taken my sweet time with my first post, mainly because I know I'll be assailed mercilessly for most of my mushy, centrist views.

In either case, many people agree with Boom's assessment:

http://www.atimes.com/atimes/Asian_Economy/EG15Dk01.html

and welcome to DU!

Some of those numbers are very scary. I don't see how the massive current account deficit can last. It might take a long time for reality to catch up or it could happen next year, but it certainly looks like Asia is saving the dollar for now.

If I assume you're correct, that precious metals will become attractive investments, wouldn't it make even more sense to diversify your portfolio by investing in a broader set of commodities or "hard" assets? That's the problem I have with simply saying "buy gold and silver." Why not oil? Water rights? Land? Timber? Agricultural products? Before you say, "Because gold and silver are easier to hold," there are excellent proxies for holding all of the assets I just named, and others. Gold and silver alone are extremely narrow plays, I think.

over other commodities is that they are money in addition to being commodities. They will benefit from investment demand by virtue of the collapse (or long-term decline, depending on how it plays out) of the dollar. Other commodities will also do well but the trick is picking the right ones. Let's say, for example, that the dollar collapses by 50%. US imports will decline because they've become more expensive in dollar terms, most likely resulting in a severe global recession. In such a scenario, demand for oil and other industrial commodites will fall. Some will do well, but you have to pick the right ones. But if you have a long-term time horizon (e.g., 10 years or more), most commodities are good bets.

For more info, read this
http://www.financialsense.com/transcriptions/Riverside.htm
It's a conversation between a couple of commodity bulls

If you're concerned about fiat currencies either gaining or losing value, inflation-protected securities is your answer.

Let's suppose there's runaway inflation, which is what you're arguing. The inflation protection kicks in, and your I Bond maintains its purchasing power in terms of its ability to get real goods, as measured by the CPI. (The CPI is more than fair, since there's a legitimate case to be made that it slightly overstates inflation.)

Now let's suppose there's deflation. Currency becomes more and more valuable, because you can buy more and more over time. Your I Bond keeps growing at 1.1% per year in that environment, which is an incredible deal compared to hard assets (which become less and less "valuable," because you can sell them for fewer and fewer dollars over time). Gold and silver, for example, become less and less valuable in a deflationary environment.

If you're concerned about differences between the U.S. and other countries, the answer is to get some inflation-protected bonds from lots of different countries. That'll protect your ability to vacation in France or Japan, for example, regardless of purchasing power fluctuations between countries.

Make sense?

I think mine have a base rate of 3% not 1.1%.
Gold will not lose value in a deflationary environment. The reason is that at the first whiff of deflation, the Fed will ramp the money supply with reckless abandon. Gold is a win-win situation. You win with inflation and you win with deflation because the Fed's response to deflation will be tremendously inflationary.

I have some gold myself. The way I look at it is that if I need to get out of the country, the gold will always have its value for the most part.

I wouldn't recommend buying at anything over $350.00 an oz. though.

As far as I bond go - what about deflation? At 1.1% (that's what they presently pay) it wouldn't take much deflation to make them a zero yield.

I bonds are recalculated every 6 mos. via the CPI.

It might be worth considering but now you must hold all I bonds for a year rather than 3 mos. That came be a bit of a nightmare if you happen to need the money.

:dem:

I reject investments which involve commissions or advice recommending investments with commissions.Mutual Funds sell shares of their shares which sounds like a derivative,the stock market is not about actual business creation it is a casino for gamblers.Ethical investment is about voting with a dollar which tries to change the system instead of sending it to detox like an alcoholic codependent.You ask me to play a rigged game,I would suggest investment professionals play guitar on the sidewalk if they expect money from me.

First of all, there's nothing inherently wrong with commissions per se, as long as it's a competitive market. That said, few of my suggestions involve commissions, and I also made several comments about minimizing investment expenses. I'm loathe to spend any money on transaction fees of any kind if they're unnecessary.

Second, I didn't mention any investments that could be fairly described as derivatives. Mutual funds are certainly not derivatives. A mutual fund simply allows small investors to own fractions of shares in bonds or stocks, using the collective purchasing power of several investors to get a volume discount. Otherwise you do incur huge investment expenses, even assuming you could duplicate a mutual fund's holdings.

The stock market, just like the commodities market, has both speculators and investors. There's no question that ethical companies can raise capital by selling shares (ownership). That's an important capability. The fact that there's a ready market, via speculators, to sell your shares is also important, because otherwise your investments would be locked up, and you couldn't pay for unexpected personal expenses. In fact, the more trading, the better, because that lowers transaction costs (i.e. commissions).

I would humbly suggest that sitting out capital and financial markets is not wise, especially if you care about how corporations behave. Ethically-motivated investors can certainly influence corporate behavior, and the more people so motivated the better.

Finally, keeping your money in a bank savings account involves commissions. The bank collects the difference between their lending rate and the interest rate it pays you. I call that a commission. To pick another example, precious metals investing involves commissions, often substantial. (Gold coins, for example, trade at a substantially higher price than the underlying metal price because of casting and distribution costs.) Most of the options I suggested are highly efficient markets with minimum expenses.