Flutterby™! : Economics 2004-01-14 16:44:51.643375+00

Economics

2004-01-14 16:44:51.643375+00 by Dan Lyke 5 comments

So say you're someone who, since sometime in 2000, has believed that the stock market is massively overvalued. So you've got some cash in money markets. Say you saw the writing on the wall, but still weren't smart enough to move that from U.S. dollars to Euros three months ago.

Now say you've suddenly realized that the way the Federal Reserve is going to deal with the overvalued stock market is by encouraging inflation (as they've been hinting with all of this "deflation scare" talk). Say you've also realized that the way the Bush administration is going to deal with the over-priced real estate market is by encouraging ~~overpopulation~~ immigration to bring the value of the real estate up to the costs of it.

Is it still to move that money into an overseas currency? A lot of U.S. companies are making investments in China and India, is it a reasonable strategy for an individual investor to make similar decisions? How do we not piss in our own beds, and yet still have a reasonable shot at retirement?

#Comment Re: Economics made: 2004-01-14 17:22:36.920744+00 by: aiworks

Buying foreign currency right now seems a bit like "buying high." We're already seeing a Bank of Japan intervention (thus the $'s relative stability vs. the yen). European central banks are taking notice and will certainly respond at some point (probably after the Q1 economic numbers are out). Currency markets are so heavily regulated that free market rules and expectations don't tend to apply for very long.

Now, I don't think that there will be a gain in the $ any time soon; I just think that it will stall. I doubt there's any money to be made espcially once you consider the task and associated costs of actually doing the money changing.

If you have an allure to foreign currencies right now, what about precious metals? The fundamentals that are moving U.S. currency exchange are moving precious metals prices. Plus, there's much less manipulation of that market.

#Comment Re: Economics made: 2004-01-14 18:03:34.884457+00 by: sethg

Whenever I think about questions like this, my brain gets tied up in knots. Then I remember (a) Burton Malkiel's observation that when investors try to time the market, even when they are professional fund managers, they almost always sell low and buy high; (b) Philip Greenspun's advice that even if you could

get an extra percentage point or two on your portfolio by obsessively checking the business news and shuffling your money around, you gain very little on a dollars-per-hour basis.

Choose a mixture of stocks, bonds, and cash instruments that's appropriate for your distance from retirement and your level of risk aversion, and then go off and do something else. (E.g., goof off on the Net.)

#Comment Re: Economics made: 2004-01-14 19:25:55.411309+00 by: ziffle

#Comment Re: Economics made: 2004-01-14 19:27:52.516119+00 by: Dan Lyke

Actually, I'm not thinking about trying to time buying, I'm thinking about what a reasonable investment mix for the next 5 years might be, or, if I were going to make more personal investments in business, where those should be focused. Does it make sense to start a company focused at, say, amateur product and idea development in the U.S., or would taking those same concepts and targeting an emerging Chinese market make more sense?

So really this isn't about the money I have sitting in a specific money market account as much as it is about career and life strategies.

#Comment Re: Economics made: 2004-01-16 14:23:05.837753+00 by: sethg

A financial-planner friend of mine turned me on to IRA/CDs. You can go to a bank and buy a CD that goes in a Roth IRA account. If you suddenly need the money back because of a financial emergency, you can withdraw the principal from a Roth without any tax penalty; if you don't, then the interest accumulates tax-free; you get the benefit of FDIC insurance. I am using this strategy to park my "one year's living expenses to withdraw in case of layoff" money. Of course, if inflation spikes, I'm screwed, but imports are a relatively small proportion of the US economy, so an exchange-rate shift that makes imports more expensive is not going to do much for the general inflation rate.

If you're seriously concerned about inflation, check out the Vanguard Inflation-Protected Securities Fund (VIPSX), which buys T-bills that are indexed to inflation. If you're willing to accept higher volatility and inflation risk in exchange for a higher long-term yield, I would go for municipal funds or a short-term corporate bond fund.

As for what kind of company to start, if you're not familiar with the Chinese market already, I would advise against trying to start a business that targets it -- there's just too much risk of getting shafted by a competitor, or even an overseas partner, that has better connections than you. When I was unemployed, Kenan Sahin, who founded a company where I used to work, advised me to look at the medical-device industry: with an aging population, the market for these things is going to grow, and more and more of them have embedded software. I ended up with a job in a different sector, but his advice still doesn't sound bad.