HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
As noted before, over the course of the twentieth century, the average dividend yield for the DJIA and the S&P 500 was 4.5%, and that at secular bear market lows, the dividend yield was 5% or 6% or even higher. For comparison, the current yield on the DJIA is 2.4% and 1.96% on the S&P 500.
Since history suggests this bull market in hard assets and bear market in financial assets will continue through about 2015-2020, I was trying to play out in my mind how the dividend yield could reach these levels over that time frame. The averages would need to drop 50-65%, or dividends would need to double or triple. Corporations have been raising dividends, and some of the cash-rich high-tech companies, such as Microsoft (MSFT) and Cisco (CSCO), have instituted dividends, but it was still a stretch.
Or, the other possibility is that there has been a basic change, that “it will be different this time”. As you know, one of the reasons I read history is that it is rare that it will be different this time. History repeats.
There was an interesting post at http://www.321gold.com on May 24 by Steve Saville, from which I quote directly.
“When monetary inflation was constrained by the Gold Standard, the stock market’s average dividend yield was always higher than the average yield on long-dated bonds, but the 1934-1971 phasing-out of the official link to gold permanently altered this relationship. In a world where governments and central banks can and do inflate at will, the stock market will almost always yield less than the bond market because stocks have some built in protection against inflation”.
From 1793 until Roosevelt called-in (confiscated) the gold in 1933, the US dollar had a definition: $20.66=one ounce of gold. One hundred and forty years of stability. Over this period, there was actually mild chronic deflation, which was especially pronounced in the late 1800s. America was industrializing; transportation improved, agriculture became more efficient, the price of goods actually dropped. People were encouraged to save because their money became more valuable (vida infra for more about deflation).
Prior to Roosevelt, many bonds, including US Treasury Bonds, had gold clauses, i.e., to prevent the lender from being paid back in depreciated paper money, they had the right to demand repayment in gold. Justice Brandeis lamented when the US Government unilaterally abrogated the gold clause (the government arbitrarily changed a contract, they reneged).
Under the old scenario, presuming the borrower, such as the government, a big railroad, US Steel, Standard Oil, etc, could repay the debt, the lender was guaranteed they would get their money back, plus interest. Because the stock market goes up and down, and corporations can go bankrupt, stocks had to pay a higher dividend to attract capital.
Now, without the gold standard, with the leaders our government saying that 2% inflation per year is actually their target (as previously noted, real inflation is much higher), bonds have become the riskier investment. They must pay a higher return than stocks to attract capital.
But now the Federal Reserve is keeping interest rates artificially low in their attempt to prop up housing and the economy, and to keep the government’s debt service costs as low as possible. The result is a perverted system completely divorced from natural forces, from historical norms and standards.
The Federal Reserve was formed in 1913. With gold at $20.66 per ounce, $1,000,000 would buy 48,402 ounces of gold. Today, at $1,535 per ounce, $1,000,000 will buy 651 ounces of gold. For 140 years, the US dollar held its value. Since the creation of the Federal Reserve, and the subsequent abandonment of the gold standard, the US dollar is now worth 1.3% (98.7% less) of what it was in 1913. Conversely, that 48,402 ounces of gold is now worth $74,297,070. Remember, gold has not gone up; the value (purchasing power) of the dollar, of all paper currencies, has gone down.
My insight; the only conclusion I can draw, is that we have had a paradigm shift. Dividends on stocks are lower than historical norms, and will remain so, because government policies have guaranteed there will be inflation. I am sorry to say I cannot think of a poorer investment than a 30-year US Government Bond. I also believe the problem can only fixed by dissolution of the Federal Reserve and the re-institution of a gold/commodity based currency, beyond the manipulation of politicians.
I suggest you decrease your allocation to fixed-income, and invest the proceeds in real assets, such as stocks, collectables, quality art, and gold.
(See more discussion on page 5 supporting many of the points just made).
RMD
How would gold do if we had deflation?
With deflation, the cost of assets goes down. Cash is the preferred investment. Since gold is the ultimate cash, history would expect it to do well with deflation. When the dollar was defined in terms of gold, if you had one ounce of gold, you had $20.66. If there were deflation, and a dollar could buy more than it did before, you profited.
My conclusion: Gold is also the preferred investment should we have deflation.
I was in the checkout line at Sam’s behind a physician who has been in practice for many years. I know they make good money. Their spouse is also a professional who makes good money. The merchandise was $199. Add in two $100 gift cards for their children in college for a total bill of $399.
We were talking about our families as they swipe a credit card—rejected. We continue to talk. Second card—rejected. They just smile, hand the checkout lady another card, and we continue to talk. Third card—rejected.
I pay cash for most things, and always pay cash for groceries and supplies, so I was “packin’” some real money. I said quietly “would you like me to loan you the money”?
They said nonchalantly, as if this were not an issue (maybe because it has happened before) “No, we’ve been traveling and charged some airline tickets”. Their last credit card—rejected!!! They said to the checkout lady “Just put the cart aside. My checkbook is in the car. I’ll be right back”.
RMD comment: I must admit; I have been thinking about this all weekend. This physician (their spouse is also a professional) runs their whole wallet, and all the cards are rejected. I would have been totally mortified, and looked for a hole to crawl in.
Consider this: If you were a merchant, and all of the customer’s credit cards are rejected for a $400 bill, I would be very hesitant to take a check; physician or not. In fact, as I write this, maybe it’s a good thing they didn’t take me up on that $400 loan.
Really, this is very sad. These people have made millions and can’t even cover a $400 bill with credit. I don’t wish to appear a self-promoter, but the people who most need to read my book and this newsletter are the ones who will not.
Also remember this: I doubt if these are the only credit cards they have, and those may be maxed out as well. Considering their credit limit is probably 5-figures on each card, it is safe to say they are currently in hock to the credit card companies for a minimum of $50K. The cost just to service this debt could be approaching $1,000 per month.
Iphone, Ipad, Facebook, LinkedIn (LNKD). Social networking and instant communications are all people seem to talk about. A friend told me last month their phone bill showed that their 22-year old daughter recorded more than 4000 texts. That is approximately 130 texts per day !!!
RMD comment: There has been a revolution in instant communications; it is useful, it can even be lifesaving. But remember; time is money. Don’t waste your valuable time, or let others waste your time, on inane, worthless digital/internet blabbering.
This is what I suggest: Make an analogy to ordering a test. The only reason a physician should ever order a test is if you will act on the results. You don’t order a test to confirm what you already know, or if it won’t change treatment, or to “cover yourself” to prevent a law suit (at least I didn’t). The only reason to use such instant communication is if it will result in a material change. Otherwise, you are wasting money, and more importantly, your time.
I would further suggest you consider an employee policy for texting, etc. Example: no personal phone calls on the job, no personal texts.
Wall Street Journal: 5/24/11. “Although many forces buffet the US economy, the near-zero interest rate policy of the Federal Reserve is the prime contributor of the current bout with stagflation”.
RMD comment: Already discussed in detail above (and see more on page 5). Also note that the artificially low interest rates aren’t too popular with the elderly, with anyone on a fixed income, who expected their CDs and bonds to produce two or three times the income they do now.
I want to thank you for your concern about my personal safety. I received many emails after the terrible tornado in Joplin, MO on May 22. Joplin is 5 hours southwest of Columbia.
There were more storms on Wednesday, with another dozen deaths in the Midwest. There were several funnel clouds in Columbia, although none touched down. As soon as the sirens went off, I went around grabbing irreplaceable things and taking them to the basement. Although my recently-purchased Bingham painting would be a loss to society, it is insured. Photos, scrapbooks and diaries are more important to me. I also took my clarinet and a pistol, to be able to signal should I be caught in the rubble.
I hope you will make a generous donation to help with the clean-up. Be aware that scam artists take advantage of everything, including natural disasters. Stick to well-known, legit charities, such as the Salvation Army or United Way.
I have read the following books recently.
Wild Bill Donovan: The Spymaster Who Created the OSS and Modern American Espionage (Waller, Free Press). Donovan was a brave man, a real-life hero. When he received the National Security Medal in 1957; he was the first person ever to be awarded the nation’s four highest decorations, including the Medal of Honor.
This is the most I have ever read about J. Edgar Hoover, and not one word was good. When Donovan died in 1959 of atherosclerotic-induced dementia (diagnosed at Mayo), Hoover circulated a rumor that he had died of syphilis.
America’s Medicis: The Rockefellers and their Astonishing Cultural Legacy (Loebl, Harper). John Sr. is one of my heros: He endowed my med school Alma Mater, the University of Chicago. He created hundreds of thousands of jobs and billions of wealth, and was as instrumental as anyone in making the US the greatest industrial power in the world. John Jr., now also a hero of mine, gave the money away. Senior and Junior defined philanthropy in the US. They deserve our respect. If you like art, you will love this book.
Green Hell: How Environmentalists Plan to Control Your Life and What You Can do to Stop Them (Milloy, Regency). He says “The central concept of this book is that there is hardly any area of your life that the greens consider off-limits to intrusion. There is almost no personal behavior of yours that they consider too trivial or too sacrosanct to regulate”.
As mentioned in the last letter, I believe Mr. Obama will use regulations as a basic strategy to attack capital and redistribute wealth. Obama-care, the EPA, HIPAA, OSHA, the NLRB, the Consumer Protection Agency: all sound good, but the regulations will stifle our economy (and hurt your pocketbook).
I recommend you read this book. No matter where you are in the political spectrum, it will probably make you mad. All I ask is you read it with an open mind.
Pox: An American History (Willrich, Penguin Press). Physicians and non-physicians will find this history of smallpox interesting. Ex: in the Franco-Prussian War (1870-1), the thoroughly-vaccinated Prussian Army of 800,000 men suffered just 457 deaths from smallpox. The smaller, sparsely-vaccinated French Army suffered 23,375 deaths.
Many years ago I saw what I still consider the best public service commercial ever. The person was holding a vial of DPT vaccine and said “Years ago, parents would have given everything they owned to have their children vaccinated. Now, people won’t even take it when it’s free”. In my opinion, taking a vaccine to prevent anything is the easiest medical decision you will ever make.
Follow-up from page 2. Today’s Barron’s interviewed Dennis Stattman, Portfolio Manager and Team Leader, BlackRock Global Allocation (MDLOX). Stattman and his team manage $83B, $53B in MDLOX, which since March, 2000, has beaten the S&P 500 by an average of 8.3% per year.
I am quoting what I believe are bullet points.
1) “It (the macro environment) is an artificial environment because of extraordinary government measures.
2) The Fed has destabilized the outlook toward the value of the dollar.
3) Unfortunately, the Fed has rendered unpredictable the store-of-value function of the dollar.
4) Our big deviation from the benchmark (target asset allocation) is in fixed income, where we are very underweight and where we have a short duration…It is just very hard to see US fixed income as representing an attractive investment alternative.
5) It (the TIPS-implied break even rate of inflation, 2.23%) seems optimistically low for future inflation.
6) We have (a big position in) gold because there isn’t a major currency that we can get comfortable with”.
RMD comment: As I have been recommending since I began writing this letter in 2006, decrease your investments denominated in US dollars, and increase your
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