Why Retirees must hate Bernanke

"The S&P 500 rebounded from its worst week so far this year to retake a four-year high on Monday after Federal Reserve Chairman Ben Bernanke signaled supportive monetary policy will remain even though the job picture has begun to improve." -Reuters

Today has to be one of those days when retirees have to be reminded about how much they have been screwed over by Ben Bernanke. They are one of the largest victims of Bernanke's "easy money" policies.

For example: let's say you've hit retirement with $1M combined through savings and 401K, and your house is paid off. You're just ready to enjoy retirement, no high-rolling lifestyles in your dreams. Get a 5% annual return through a combination of long-term CD's and some some fixed income mutual funds, and you've mentally penciled in 50K a year with some social security on top of that. So maybe $70K year total. No need to save anymore, so all of travel plans you've put off are now a reality.

But then because of Bernanke and the Fed, instead of that 5% a year, you're looking at a 2.5%. Just like that, you're yearly cash flow is down $25K a year. 4 cruises in 1 year, just went down to 2 cruises.

And of course, that's a lot of potential discretionary spend that has been taken out of the economy.

3 Principal Themes for Making Long Term Allocation Decisions

1. People and companies are working on great things everyday. Everyday a new solution is being discovered, a new client is being signed up, a new and more efficient process is being developed.

2. Natural Resources and Precious Metals are getting more depleted. At the same time, someone (see point 1) is working on a substitute or alternative away from that resource or metal.

3. Debt that is currently exists is either maintaining the same nominal value or is getting paid down.

How do I incorporate these themes into my long-term allocations?

1 - 1. I know I should always have some allocation to stocks. Everyday there is some company that is doing something that is making their company more valuable to society. However, on the flip side, what they're doing may effectively eliminate the need for another company. Thus my general slant is to invest in small caps and avoid large caps.

2 -1. I know there will always exist the risk of short-term shocks to the supply of natural resources and metals. This can create huge pricing shocks that affects our society, such as the price of gas and oil. But longer term the great people on earth will find a substitute away from that resource. So I'm willing to buy commodity related ETFs, but my time frame will be less than stocks. And I won't care that I miss out on a long-term rally within commodities.

3-1. I know when interest rates are low I want to consider taking on debt (borrowing). If I take out a mortgage to buy a house, an the home price increases, the value of debt will not increase with it. Conversely, I don't want to provide debt (lend) when interest rates are low. This is effectively what buying a government bond does.

3 Reasons not to buy Government Bonds

Many of us, when we look at the investment choices for our 401K will see a U.S. Government Bond Fund as one of the options. Or, when speaking to a financial advisor, will hear the advisor recommend allocating some of our investments to government bonds. Here on Anti-Economist, I clearly recommend against that, and for 3 reasons.

1. I don't like the government borrowing money and especially not $14 Trillion. So why should I help encourage that behavior by lending them money (which is what buying a government bond does?) The government is like this guy Rusty who went to my high school, and was always asking to borrow money. Whether or not they pay back is irrelevant at some point - it's just annoying.

2. I already lend the money government, albeit not by choice. That is because 1/3 of this $14T is owed to the Social Security Trust Fund, which everyone pays 7% of their wages into each year.

3. The government does not even use fair practices in determining the interest rate they pay. When it gets higher than they want to pay, then the Fed, which is part of the government, implements "Quantitative Easing" in an attempt to lower the interest rates. This is already on top of them forcing the Social Security Trust Fund to lend them money (point 2). So even if I got past points 1 & 2, I still would not lend the government money due to the poor business practices they play.

These are all non-financial reasons that I think should lead the thought process before the financial reasons. Financial reasons are "risk and reward', "default risk", 'interest rates", and whether 2% 3% 4% 6% 8% ... is high enough. As you know here on Anti-Economist we focus on the non-financial reasons first.