TAKING STOCK: TIPS and today's Dow

Dear Mr. Berko: My broker tells me that low interest rates are inflationary. How is this possible? As a result, he has recommended that I invest $25,000 of my $120,000 individual retirement account cash into Treasury inflation-protected securities. I would like your thoughts on them. He also believes that the market has peaked and wants me to stay out of stocks for a while. He would have me keep the remaining $95,000 in short-term liquid investments, such as money market funds and floating-rate mutual funds. I am 79 and would also appreciate your thoughts on investing the remaining $95,000. SL, Oklahoma City Dear SL: I think your broker is correct; low interest rates are inflationary, very inflationary. However, I think his recommendation of Treasury inflation-protected securities, or TIPS, misses the mark by a wide margin. This fellow appears to be an earnest, honest adviser but perhaps a little too conservative or cautious. I wonder how he meets his commission quotas and job as a broker, feeds his family and makes his mortgage and auto payments selling TIPS and recommending that his clients stay out of the market. There are two kinds of inflation. First, there's political inflation, at 1.5 percent, which is a silly number used by the Obama administration to support its economic and domestic policies. Then there's real inflation, which is probably between 9 and 14 percent. Real inflation reflects the increasing cost of fuel; rent; health, home and auto insurance; cab fare; bank fees; groceries; property taxes; prescription drugs; and fixing a car or an appliance. The ever-growing cost of these items (numerous others, too) is making life miserable for many Americans. And yes, low interest rates are disastrously inflationary, especially for retired folks, who need five times more money in savings and certificates of deposit to produce the same income they earned five years ago. I know it's hard for Americans to believe that our government would lie to them intentionally. However, since the Obama administration started to criminally fudge the inflation numbers to meet its political agenda, TIPS have become a bloody rip-off. And that's why I won't recommend them. Quite a few investors believe that your broker is right about the Dow Jones industrial average. Since mid-2009, the Federal Reserve has used extraordinary measures, forcing interest rates down to match the administration's politically calculated inflation rates. And as bond yields plummeted like coconuts from the tops of tall palm trees, investors were driven to volatile and risky equities in search of higher returns. Flooding the economy with trillions of dollars has inflated current and potential corporate earnings and pushed stock prices beyond reasonable valuations. The law of gravity applies to not only physical objects but also the more sublime objects of a financial nature, such as stock prices. The Fed's gravity-defying stimulus happily pushed stock prices and the averages to new highs, but gravity may sharply pull stock prices and the averages all the way back down. Federal Reserve Chairman Ben Bernanke, with the administration's permission, gave us a peek at his intentions in mid-April and mid-June when he spoke of reducing the Fed's stimulus. Yields on the 10-year Treasury notes jumped over 60 percent and rose from 1.6 percent to 2.7 percent. The Dow took a dive as good stocks crashed like thousands of little thunderbolts. And as you know, it didn't take long for Bernanke to reverse his position. Of course, there's the hallelujah chorus insisting that the market tumbles in mid-April and mid-June were temporary reversals and that the Fed will be able to manage the stimulus lower without affecting the market. However, my 50 years in this game have taught me that rising interest rates have always been a downer for stocks. That doesn't mean stock prices can't continue to increase, but for that to happen, future earnings would have to grow at an exceedingly strong pace to counteract the headwind of rising rates. It's a coin toss. At some point, that coin has to come down. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2013 Creators Syndicate Inc. Published: Wed, Aug 14, 2013