With a coordination that I am sure both found embarrassing, The New York Times and The Wall Street Journal both ran stories on Saturday with tips on how to deal with a bout of deflation.
This raises several questions. Do we expect deflation? If so, why? What is deflation, anyway? Why is it so bad? Is the advice from these two giants of the mainstream any good? And what was it about last weekend that inspired them to write about, of all things, deflation?
That’s a long post’s worth of rhetorical questions. So, without further ado, let’s dive right in. Personally, I do not expect deflation in the near term, at least not enough to notice. Whether or not it is expected, or even seriously worried about, in the larger investment community is a harder question to answer.
The WSJ opens its piece telling us that “The markets are signaling that a bout of deflation may be coming.” But the only market indicator cited is a rally in bonds. True, the yield on 10-year Treasuries is down this year, although it is up from where it was at the end of 2008. And yet a rally in bonds is not exactly an unambiguous statement about deflation. The bond market goes up and down all the time. Why is this rally a deflation prediction?
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SmartMoney carried an item the other day about how, according to a new survey, those crazy kids have found another way to act foolishly. They are 
taking less risk with their investments.
The factual basis for believing that younger people are taking less risk is a little thin, a single question on a survey of affluent Americans (Aflo-Americans?) done by Merrill Lynch. Still, it confirms my previously held beliefs and even fits into predictions of the future I made more than a year ago, so I am going to go with it.
52% of those under 34 described themselves as having a low risk tolerance. That is more than either the 35 – 50 age group (45%) or 51 – 64 group (46%). Only the oldest, and presumably retired, 64+ group came in at a higher rate of low tolerance, at 55%.
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I seem to be on a niceness streak lately. Yesterday brought another item written by somebody other than me which I nevertheless liked. Try as Investors Might, So Much Depends on 
Chance, from The Wall Street Journal, tells us that a person’s lifetime of investment returns is dependent primarily on accidents of birth rather than skill.
We spend a lot of time wrestling with investment selection angst. This mutual fund or that one, active or passive, 20% in bonds or 50% in bonds, and so on. Those are important and hard questions, but there is a forest-for-the-trees danger here.
The biggest driver of long-term investment returns is not an investor’s skill but the overall market returns over the period. In other words, whether you wind up living large or living modestly at 70 is largely luck.
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Today I am going to explain something complicated, so pay attention. Particularly if you write for the Wall Street Journal. My topic has to do with the
exotic topic of homeownership.
Many homeowners owe money on a special type of loan collateralized by the house, called a mortgage. Sometimes, they “refinance” these mortgages, often to take advantage of a lower interest rate. Generally, that is no more complicated than paying off lender A with money borrowed from lender B.
However, and here is where it gets really confusing, sometimes the money from lender B is not the exact same amount owed to lender A. If more money comes from lender B, then the refinancing is termed “cash-out.” It is called that because the borrower actually leaves the closing with more cash than they had previously.
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By now, you have either put a little of your precious savings into gold or you have thought about it seriously. With the advent of gold ETFs (technically a misnomer, they are not truly Fs) it 
has never been easier to buy and sell the stuff. And at around $1200 an ounce, gold is up an impressive 50% or so since the fall of ‘08 and has gained an annualized 12.4% a year for the past decade.
Of course, for most investors, the fact that gold has done well lately is more or less the entire argument in favor of buying it. Subtle justifications are available, but, let’s face it, none of them are as powerful as the primal urge to join the party while you still can.
But when you get down to it, gold is one the more peculiar investments out there. Although it is an exaggeration to say that it is a substance of no intrinsic value, it has several industrial uses and would undoubtedly have many more if it were not so expensive, gold lacks some basic characteristics of a typical investment.
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Economics, Investing, Media | Frank Curmudgeon | 
August 11, 2010 12:59 pm | 
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