Business Ownership and Wealth Management

Dana Barfield

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Investment Equivalent of Lipstick on a Pig

In the normal world, interest rates play a vital role in determining in what people invest.  If one can achieve a low risk, high rate of return by investing in Certificates of Deposit, then one’s investment manager should make the necessary arrangements. 

If rates are low, then normally one invests elsewhere.  Over long periods of history, a well managed stock portfolio has consistently outperformed interest earning deposits (not to be confused with a poorly managed stock portfolio which does poorly as many discovered between 2000 and 2010).

Today interest rates are low.  Under normal circumstances this suggests investing in stocks.  These are not normal circumstances!

The Federal Reserve has “printed money” so that it can buy up interest paying securities.  As a consequence of this elongated action, interest rates are artificially low.  The Fed’s actions (called QE1, QE2 and so on) are similar in that this is an attempt to make unattractive investments look attractive.  This effort was, to some degree effective, from March 2009 until July 2011.  But since then the stock markets have been increasingly ignoring the various rounds of QE (which stands for “quantitative easing”).  In fact, since the latest round, QE4, was announced in October 2012, the markets have declined a bit.

The notion of putting lipstick on a pig is a poorly disguised effort to make a pig look attractive.  Based on the picture above, this clearly does not work.  The point is this:  Under normal circumstances a pig is most unattractive.  They’re dirty, noisy, irritating, obstinate, and self absorbed.  Putting lipstick on one may cause a few to have their attention diverted away from the unattractive reality, but most see right through it. 

Under normal circumstances stocks are an excellent investment because the open market “regulates” the relationship between interest rates and investment returns.  But when the Fed alters the normal course (putting lipstick on the pig of stocks), this is no time to follow, or rely on, the normal rules.

What the Fed is truly obscuring is the fact we are looking at the decline of asset values (called deflation) as the next event on the economic calendar.  Inflation will come, and do so at a high rate, based on all the QE/Money printing.  It’s just not what happens next.  When inflation comes, the investment answers are very easy.  With the deflation, well, things are very much more complicated, requiring a different mindset and a different approach.  We’re monitoring both.

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Dana is the president of The Barfield Group, which has provided industry leading Financial Advice, Investment Services, and helped people Plan for Retirement for more than 20 years. He is a frequent speaker and writer for a variety of industry, regional, and national publications on business ownership and wealth building related topics.