bonds Archives - Zenconomics

Another Reason to Diversify into Precious Metals

Once upon a time, interest rates conveyed critical information about securities: the higher the rate, the riskier the investment.

Today, bond yields communicate little about underlying security risk and are arguably misleading. Consider the 1.57% yield on 10-year Spanish bonds. That level of return is hardly commensurate for a country suffering 23.9% unemployment.

The culprit for deceptive interest rates is a familiar one. Across the globe, central banks have suppressed rates to fend off crises or boost sagging economies—and zero percent is not the lowest band for this type of manipulation.

As an investor interested in precious metals, you’ve likely watched the growing number of countries shifting from zero interest rate policies (ZIRP) to negative interest rate policies (NIRP). Government bond yields in Germany, Switzerland, Japan, France, Holland, Denmark, and a handful of other countries have recently turned negative.

Negative real interest rates are nothing new, but we are talking about governments actually charging for the privilege of parking money with them. Yet another good reason to diversify into precious metals.

This shift from zero interest rate policies to negative interest rate policies epitomizes how detached financial markets have become from reality. More alarming, these radical polices exacerbate existing market distortions. By punishing bondholders, central bankers are forcing investors up the risk ladder, whether it be into junk bonds or equities.

You are better off tucking cash under your mattress than paying some profligate government to hold your money. But of course, there’s a better way. The utter insanity of a NIRP illustrates the critical importance of diversifying away from fiat currencies… and into previous metals.

Article originally posted in the February issue of Smart Metals Investor at HardAssetsAlliance.com.

MyRA-QE Taper Connection

submitted by jwithrow.

We have a question for you:

Is it a coincidence that the government has introduced the “myRA” plans just as the Federal Reserve has begun to taper its quantitative easing programs?

Let’s think this thing through for a minute.

We know:

China is now a net-seller of U.S. Treasuries so the Federal Reserve has had to step in and purchase U.S. Treasury Bonds in increasing quantities to support government spending.
The average American saves for retirement in a qualified retirement plan focusing primarily on mutual funds, exchange traded funds, and stocks with bonds comprising a small portion of the allocation.
The proposed myRA plans are designed to focus on U.S. Treasury Bonds.
The Federal Reserve’s quantitative easing programs have pumped massive amounts of liquidity into the system which has resulted in a broad increase of stock prices across the board.
Tapering QE will withdraw liquidity from the system which will almost certainly result in a broad decrease of stock prices across the board and quite possibly a severe stock market crash.
A falling stock market would likely cause many Americans to seek investment options that they deem “safer”.
The government is already hard-selling their myRA plans stating that there is “no risk to lose what you put in”.

Hmm.

Maybe our benevolent bureaucrats really do think that myRA plans will help the common man.

But we hold dearly to a personal mantra:

Maximize Capital,
Minimize Crap,
Never Trust the Government.

With that mantra echoing in our mind, we can’t help but be a little suspicious – something funny seems to be afoot.

What do you think?

Qualified Retirement Plans

submitted by jwithrow.

Qualified retirement plans have their roots in the Employee Retirement Income Security Act (ERISA) that was enacted in 1972.

The most common qualified retirement plans are the 401(k) and the IRA (individual retirement account). These plans allow individuals to contribute funds to their account on a pre-tax basis to be invested predominantly in stocks, bonds, mutual funds, and exchange traded funds. Taxes on investment gains are allowed to be deferred until distributions from the account are taken. Individuals may begin to take distributions without an early withdrawal penalty once they reach age 59.5. Any distributions prior to age 59.5 will be subject to a 10% early distribution penalty. Individuals are required to take a minimum distribution annually once they reach age 70.5. Distributions will be taxed at the individual’s ‘ordinary’ tax rate.

Mainstream financial thinking suggests that qualified retirement plans are the absolute best way to save for retirement because these plans enable you to invest funds on a pre-tax basis during your peak earning years and the investment gains can grow tax-deferred until retirement when your income is lower.

This way of thinking makes a number of assumptions.

The first assumption is that the investments held within the qualified retirement plan will consistently grow in value and they will not experience any significant losses to principal at any time which would serve to stunt the plan’s growth.

The second assumption is that the individual is not capable of effectively using capital during his/her peak earning years to develop diversified income streams that would provide significant income during retirement years. Maybe this would better be stated as the assumption that there is actually a “peak earning period” in an individual’s life.

The third assumption is that the rules governing qualified retirement plans will never change. Mainstream personal finance assumes that the early-distribution penalty will always be 10% and the qualified distribution age will always be 59.5. Mainstream personal finance assumes that ‘ordinary’ tax rates will always be what they are currently. (We say that there is nothing ordinary about the income tax at all!)

What’s overlooked here is the fact that qualified retirement plans are a government-created solution to government-created problems: Onerous taxation and a constantly devalued dollar that make it very difficult for the average American to save for retirement.

Pay very close attention to the language that must be used to discuss qualified retirement plans. In talking about these plans one must use words like allow, may, require, and penalty. In other words, these plans consist of permissions and requirements. People are given permission by the government to contribute funds on a pre-tax basis. And they are given permission to defer taxes on their investments. But they are required to leave all funds in the account until they reach a certain age or they will be penalized.

Any time permission is required to do something it follows that the permission could also be withdrawn at some point in the future. Otherwise one would not need permission to do whatever it is.

If you recognize that qualified retirement plans are a government-created solution to a government-created problem then a very important question must be asked: What happens if the government decides that there are bigger problems than Americans saving too little?

For example, what if government’s biggest problem became the need to finance out of control spending?

Cyprus and Poland have provided two possible answers to that question and the trend suggests that the rules governing qualified retirement plans could very suddenly become less favorable for the individuals using them at some unknown point in the future. The “myRA” proposal seems to be the first step in this direction.

So we can’t help but be skeptical of qualified retirement accounts. It just doesn’t add up. IRS approved tax shelters as a government solution to taxation and inflation? It seems to us that cutting spending, cutting taxes, cutting inflation, and returning to sound money would be a much better solution.

So we will continue to stay away from qualified retirement plans in favor of the IBC strategy for maximizing capital. This strategy, if implemented correctly, does not expose our principal to loss, it offers us access to our capital at any time for any reason, and it offers favorable tax treatment as well. All without requiring us to adhere to silly IRS rules about what we can and cannot do with our money depending on how old we are.

It just makes more sense.