Quarters, dimes, and bitcoins

Bitcoins have soared to nearly $3,000 apiece at a speed that most certainly is the tragic arc of a bubble. When is the best time to buy a currency? When it’s new or, at the very least, extraordinarily cheap. Here’s a small example.

Back in the Cretaceous period – ok, 1964 – the government announced that dimes and quarters, then 90% silver, would be made of copper coated with nickel, starting in 1965. (Half dollars of 40% silver were minted until 1970.)

Image result for standing liberty quarterWhile the government had changed coin design from time to time, it hadn’t fiddled with the composition of silver coinage before. In 1964, it wasn’t uncommon to find silver standing Liberty quarters in your pocket. They were a beautiful coin designed by sculptor Hermon Atkins MacNeil and were minted from 1916 through 1930. They were replaced by the familiar Washington quarter.

My mother, at the time, saved as many silver quarters and dimes as she could: I still have them. Coin dealers call them “junk silver,” because they are too worn to have any real value as collectibles. Nevertheless, they are 90% silver. How did they fare as an investment?

Not too badly. As of June 10, each silver quarter would be worth $3.11, if you melted it down and sold it for its silver content. That’s a gain of 1,144% over the years, handily beating the 691% cumulative rise in inflation since 1964.

We certainly weren’t in a position to stash gold coins. My mom was a high-school secretary, and my dad was a government worker. Also,  the U.S. didn’t make gold coins, and hadn’t since the Great Depression. And private ownership of gold was illegal until January 1, 1975.

One could argue that we could have done better in the stock market, and that’s true, with one itty-bitty problem: Most stock investments available to the public were pretty awful, laden with outrageous fees and commissions. The Vanguard 500 Stock Index fund was just a twinkle in Jack Bogle’s eye. (As a side note: The fund’s current $3,000 minimum initial investment was the equivalent of $23,577 back in 1964).

One big boost to silver’s price, at least in 1964, was that the government had a significant interest in keeping silver prices low: If silver broke $1.29 an ounce, the Treasury would face a wave of redemptions from silver certificates. At $1.29 an ounce, people could melt their silver coins and sell them at a profit. (As an interesting historical fact, U.S. silver coins had ridges, or reeding, on their edges so you can tell if people have shaved a bit off the side. The tradition continued through the later, less valuable copper-nickel coins.) In any event, the government was the main player in the silver market, and so we acquired our silver at an artificially low price.

While Bitcoin may be in its infancy, it’s by no means cheap, especially since it has no intrinsic value. You can melt your silver and make a nice sculpture, if you’re so inclined, Image result for frankensteinor use it for weird electrical experiments. Even dollars, while primarily an intellectual construct, have the backing of the U.S. government and every other government in the world, at least indirectly.

Back in 2011, you could have bought a bitcoin for $1. After a brief surge to $31, bitcoins fell back to $2. By design, the number of bitcoins is limited, so at least in theory, they will retain some of their value – unless, of course, a new shiny internet object comes about. And at the moment, there are about 100 cryptocurrencies available. I can’t imagine people collecting them. At least with my dimes and nickels, I can think of my mother and smile.

Cheap won’t always save you

I keep hearing that emerging markets are historically cheap, and that if you don’t like the high stock valuations in the U.S., you should add emerging markets to your portfolio. There are lots of reasons to add emerging markets, but being a panacea for high U.S. prices is not one of them, as I explain in my most recent column for InvestmentNews.

Rockets’ red glare, redux

When you live near Washington, as I do, the military is never far from your mind. As I mentioned in this post, Fort Washington, which failed to defend the area in 1812, was not far from my home when I was growing up. You can’t drive down any street in Northern Virginia without running into a historical marker about the Civil War. The Pentagon, Arlington National Cemetery and the World War II Memorial are an easy drive from here.

One of Fort Washington’s guns. 

Back in July 2015, I noted that defense stocks seemed like a decent investment idea, given the enormous amounts of money the nation spends on the military — currently $619 billion. I’m happy to report that the two aerospace & defense ETFs mentioned in the post,  iShares US Aerospace & Defense (ITA) and SPDR Aerospace & Defense (XAR), have risen at an annualized 13.94% and 11.14%, respectively, since I published the post. The Standard & Poor’s 500 stock index has risen at a 6.92% pace.

Before I do a victory lap in a shiny new F-35, however, I should note that timing is everything. Before the election, SPDR Aerospace & Defense (XAR) lagged the S&P 500, rising at a 2.11% pace, vs. 3.32% for the S&P.  iShares US Aerospace & Defense (ITA) faredm s0mewhat better, gaining 6.05%.

Hey kids! Let’s go to the Civil War reenactment! It will be fun!

The stocks have popped because of the incoming administration’s pledge to increase military spending. Betting on what any administration can and will accomplish is, of course, a risky bet. Congress isn’t in a particularly spend-y mood, even given the election results. And judging from Mr. Trump’s objections to the cost of a new Air Force One (actually two, and it’s only Air Force One when the president is in it), some penny-pinching may be in the future for defense as well as the rest of government.

At least a fairly major increase in military spending has already been built into defense stocks. The iShares offering now sells for 21.56 times its past 12 months’ earnings, while the SPDR fund sells for 22.37. (The latter fund tends to have more small-cap stocks). The S&P 500 is at 19.86 times earnings, which is well above its average of about 16.

Could they go higher? Sure. Americans don’t object to defense spending the way they do to social spending. And everyone seems to remember that the massive spending in World War II helped push the nation out of the Great Depression. (This was a massive government spending program that we still haven’t paid off, but never mind.)


The cemetery at Gettysburg. 

Bear in mind, however, that you need two conditions to make a profitable war. First, of course, you have to win it. (Ask Germany and Japan). Second, it’s best not to fight it on your own ground. (Ask France.)  The best use for a cannon is not to use it at all.



The bulls are back in commodities

By and large, the only people who rejoice when the price of raw materials rise are the people who produce raw materials. And according to Bloomberg, those folks are doing a happy dance these days:

“The broad-based recovery in commodity markets this year has tipped several markets into bull market territory,” Mark Keenan, head of commodities research for Asia at Societe Generale SA in Singapore, said by e-mail. “Overall, sentiment is good but remains cautious, the market is evolving significantly, specifically across the oil markets.”

By general agreement, a bull market is a 20% rise from a low, and commodities have been engulfed in a bear market for nearly four years. The most recent low for the Bloomberg Commodity Index was January 20. It’s still down 50% from its high. So this is a nascent bull market, if it indeed is one.

Typically, rising raw materials prices means — duh — higher prices for stocks of miners. The most egregious is the jump in the price of gold mining stocks: The average equity gold fund is up 68% this year, while natural resources funds are up 10.51%. Broad-based commodities funds are up 7.62%.

It’s also an inflation warning: The price increases for things like steel, oil and zinc pass through the manufacturing chain and ultimately to the consumer. While the Federal Reserve has to be wary of the rotten jobs report Friday, it also has to be aware of the risk of inflation from rising commodity prices.

The Fed is also in a peculiar bind. The next chance to announce a rate hike is during the Democratic convention. After that, the Fed runs the risk of raising interest rates during a presidential election, which will, no doubt, have politicians crying foul. It may be that your best move might be to add a bit of inflation protection to your portfolio, either in the form of Treasury Inflation-Protected Securities (TIPS), or small doses of commodity-sensitive funds.

Other things to watch this week: Not a lot. Fed Chair Janet Yellen speaks today at 12:30, but it’s unlikely she’ll say, “Better refinance that mortgage now, if you know what I mean.” Wall Street is likely to overreact anyway. The biggest number to watch is Friday’s consumer sentiment survey from the University of Michigan, especially consumer’s outlooks for pay hikes.

And take a moment today to remember the day. June 6, 1944 was a very big day for many brave young men.



This darn house

Those of you who own your own homes know the guilty pleasures of real estate porn. Thanks to sites like Zillow, you can see what your house is worth, what your neighbor’s house is worth, and what the inside of the tract mansion down the street looks like. (A six-screen entertainment room? Really?)

addamsIt has been a decent year for housing, helped by an average 30-year mortgage rate of 4.17% in 2015. But mortgage rates aren’t the only factor that push up housing rates, or even, necessarily, the determining one. Home prices soared in the mid- to late 1980s, when a 30-year mortgage averaged 10.21%.

What matters more is having enough income to qualify for a mortgage. Unless you can find a true cowboy lender — and they’re rare these days — your total mortgage payment needs to be less than 31% of your gross income. Someone who earns $75,000 a year would be able to afford a total monthly mortgage payment of $1,937.50.

Other rules restrict the amount of total debt you can have when applying for a mortgage. But overall, home prices depend on affordability and demand. Baby Boomers could buy houses in the 1980s despite high interest rates because their incomes were rising and home prices were low in the early part of that decade. And they were of the age when a house made sense for raising children.

The National Association of Realtors publishes a housing affordability index, which takes into account the household income, home prices and mortgage rates. The higher the reading, the less affordable homes are for the average family. affordability

As you can see, houses aren’t terribly affordable, despite low mortgage rates. The reason: Real household income has flatlined, and home prices have soared since the start of the housing bust in 2006. Homebuilders have largely concentrated on high-end housing, causing the prices of mid- and low-priced homes to creep out of reach for many families.

With luck, real — that is to say, inflation-adjusted — incomes should improve next year. Korn Ferry Hay expected U.S. workers to get an average raise of 2.7% next year, which is entirely reasonable, given the surge in corporate profits the past five years. And homebuilders are starting to ramp up production of more modestly priced homes.

Millennials, who are a larger generation than Boomers, will be slow to enter the housing market, however. They have too much college debt, and they’re paid too little to buy the few modestly priced homes on the market. Assuming mortgage rates will remain modest, it could be a few years yet before the next housing boom.









This year’s market: Better than it looks

We all have certain rituals for the end of the year. Some of us make contributions to charity. Others take down the Christmas decorations. Yet others light bonfires and bathe in the blood of an oak tree. It’s all a way to mark the end of yet another rotation around the sun, and celebrate a new one.

Janus, the two-headed god of beginnings and endings.

Those of us who write about personal finance like to look back on the year’s market performance, which, unlike detonating fireworks over the neighbors’ roofs, is legal in all 50 states. And the basic takeaway this year was that it could have been worse. As of yesterday, the Standard and Poor’s 500 stock index was up 3.08%, assuming reinvested dividends.

Boring, yes? Yes. But still a better return than the average money market fund — 0.02% — and intermediate-term corporate bonds, which returned 1.08%.

The top-performing funds had two things in common. First, they avoided energy, which fell more than 20% for the year. Of the 10 top-performing diversified U.S. stock funds in the Morningstar database, not one had any exposure to energy.

The other: At least some exposure to the MAGS — Microsoft, Amazon, Google and Salesforce. Polen Growth Institutional (POLIX), the current top-performing diversified fund with a 16.8% gain this year, has about 8% of its assets in Google. Brown Sustainable Growth (BAFWX), up 15%, has Amazon as its largest holding. Prudential Jennison Select Growth, up 14.5%, has Amazon, Google and Salesforce.

All of which will tell you nothing about what will work in 2016, a year with an unusual number of variables: A presidential election with no incumbent, the first year of rising interest rates since your bond manager graduated college, and some of the lowest commodity prices since the Taft administration. It should be an interesting year.



The week ahead

“You’ll want all day tomorrow, I suppose?” said Scrooge.
“If quite convenient, Sir.”
“It’s not convenient,” said Scrooge, “and it’s not fair. If I was to stop half-a-crown for it, you’d think yourself ill-used, I ‘ll be bound?”
The clerk smiled faintly.
“And yet,” said Scrooge, “you don’t think me ill-used, when I pay a day’s wages for no work.”
The clerk observed that it was only once a year.
“A poor excuse for picking a man’s pocket every twenty-fifth of December!” said Scrooge, buttoning his great-coat to the chin. “But I suppose you must have the whole day. Be here all the earlier next morning!’

christmas_carolWe have a holiday-shortened week this week, with relatively little to make Scrooge smile. Today, the only indicator of importance, the Chciago Fed National Activity index, fell to -.30 in November from 0.17 in October, indicating a slowing economy. Employment was up, meaning that Mr. Scrooge might have to give his clerk a raise, but housing and consumer spending were down.

Tuesday, we have gross domestic product, expected to dip slightly in the third estimate for the second quarter. This could indicate relatively low inflation for the rest of the year, something that will make trading commodities a bit more problematic for Scrooge.

Also Tuesday: Existing home sales for November, also expected to fall somewhat, thanks to the declining fortunes of the oil patch.

Scrooge had a very small fire, but the clerk’s fire was so very much smaller that it looked like one coal. But he couldn’t replenish it, for Scrooge kept the coal-box in his own room; and so surely as the clerk came in with the shovel, the master predicted that it would be necessary for them to part. Wherefore the clerk put on his white comforter, and tried to warm himself at the candle; in which effort, not being a man of a strong imagination, he failed.

Wednesday is the EIA petroleum inventories report, which could prompt Scrooge to switch from coal to oil. Oil prices continue to plunge, and home heating bills should be modest this year, should it ever get colder.

Also on deck Wednesday: University of Michigan consumer sentiment, which has been on the rally recently, thanks to increased hiring and low gas prices. This will not impress Scrooge.


“A few of us are endeavouring to raise a fund to buy the Poor some meat and drink, and means of warmth,” said the gentleman. “We choose this time, because it is a time, of all others, when Want is keenly felt, and Abundance rejoices. What shall I put you down for?”

“Nothing!” Scrooge replied.

“You wish to be anonymous?”

“I wish to be left alone,” said Scrooge. “Since you ask me what I wish, gentlemen, that is my answer. I don’t make merry myself at Christmas and I can’t afford to make idle people merry. I help to support the establishments I have mentioned: they cost enough: and those who are badly off must go there.”

“Many can’t go there; and many would rather die.”

“If they would rather die,” said Scrooge, “they had better do it, and decrease the surplus population.”

Finally, on Christmas Eve, we have jobless claims, currently at their lowest level since 1972. Expect the four-week average to remain at those levels. And, of course, be on the lookout for ghosts.