Wayne Scott wscott@kingslawmedia.

africa

Thu, May 20, 2021 at 2:51 PM

In September 1981, investors could buy a 10-year US government bond yielding

nearly 16%.

Now, inflation was a lot higher in the 1980s than it is today. But even after
adjusting for inflation, the average annual yield for any investor who held that
1981 bond to maturity over the next decade would have been 5.7% per year.
Today, that same 10 year bond yields just 1.495%. But the official inflation rate in
the United States is also 2.4%. This means that, after adjusting for inflation, your net
yield today is NEGATIVE.

What’s even more incredible is that there are obvious signs inflation may be on the
rise; for example, the most recent Producer Price Index of wholesale price inflation
reached its highest level since 2009.

Yet simultaneously the Federal Reserve keeps saying that they want to keep
interest rates low. And they’re doing their best to push the 10-year yield even
lower than 1.495%.

In other words, inflation could go higher, and interest rates lower. So anyone who
buys bonds will actually suffer negative yields after adjusting for inflation. Retirees--
along with pension funds and charitable endowments-- often buy fixed income
investments (like bonds) because of their perceived safety and predictability.

The stock market can be all over the map. Some days it’s up, some days it’s
down. But bonds (in theory) are stable investments that pay a fixed sum of cash, every
single month or quarter.

But it’s gotten to the point now that those ‘safe’ investments can actually cost you
money, especially after adjusting for inflation.

Anyone who actually wants to earn a halfway decent return on investment must now
seek out riskier and more volatile assets. Stocks are the next best choice for most
people. But the stock market has become absurdly overpriced. There are still
undervalued gems, but they’re more and more difficult to find. We also see the market
starting to correct itself, but at what cost?
Coca Cola is a great example of how overpriced the market is; Coke’s earnings
actually peaked in 2010, more than a decade ago. At that time, the company
earned $2.53 per share and had $14 billion in long-term debt.

Its earnings have been in decline ever since. Last year Coca Cola earned $1.79 per
share, a decline of 30% from its peak in 2010. And over the same period its long-
term debt has nearly tripled to $40 billion.

Revenue is down, earnings are down, free cash flow is down, debt is up. Any
rational person would look at this data and conclude that Coca Cola’s stock price
should have been in the dumps since 2010.

But that’s not the case. Coke stock has more than doubled, and it’s not far off
from its all-time high.

This makes absolutely no sense, yet it exemplifies the sorts of risks that stock
market investors have to take today, simply because-- as the saying
goes--“There is no alternative.”

If interest rates were at normal levels, no sane investor would pay record high. If
interest rates were at normal levels, no sane investor would pay record high
prices for a declining business. But this is what people feel compelled to do with their
money now because it doesn’t seem like they have any other option.

To Warren Buffett, stocks aren’t securities to be traded. Instead, they represent

shares in a business, and shareholders should view themselves as partners in that
business. And the best investments are “wonderful,” well-managed
businesses that can be acquired at a discount.

This year Buffett summarized his ethos by saying: “Productive assets such as
farms, real estate, and yes, business ownership, produce wealth-- lots of it. Most
owners of such properties will be rewarded.”

One issue Buffett didn’t mention in this annual report is the sad state of finances for
nearly every pension fund in the world… and that makes retirement
prospects even more bleak.

Take Social Security, for example, is underfunded by tens of trillions of dollars

according to the program’s Trustees (which include the Treasury Secretary of the
United States).
Social Security’s finances have been so mismanaged that the trust funds are set to
run out of money as early as 2029. And it’s not like the federal government (which
already runs a multi-trillion dollar deficit) is in any position to bail out the
program.

So retirees really do face bleak prospects.

This isn’t intended to be a downer, but hopefully a call to action. Because there’s
plenty you can do about it.

Only a handful of people in the world have the ability to set interest rates and
inflation policy, or to manage Social Security back to health. Chances are you’re not
one of them. Neither am I.

But we do have the power to use every tool at our disposal to fix these challenges for
ourselves. And that’s the bottom line: unless you want to be like Buffett and still be
working in your 90s (only because he must like to), you absolutely have to either
set aside more money in savings, or you have to start a business or become a
part of a business that will supply you with current and/or future streams of
stable recurring revenue.

There are plenty of ways to do that. For example, anyone with the ability to
generate side income can set up a solo 401(k) and set aside north of $50,000 per year
for retirement in an incredibly tax advantaged way.

That side income can be just about anything; simply put, you could drop-ship and sell
products on Ebay or Amazon, start your own website, consult, drive for Uber, flip real
estate, etc. You will have to work for it, but it can be done. Every start-up venture is an
experiment that seeks to answer a question or solve a problem.

Whatever your talents and skills are (and I’m sure they’re numerous), you can set up a
robust retirement structure and dramatically boost your retirement savings. You just
need the right information… and the willingness to take action.

Just a thought........