 Earning
Income in an Age of Inflation
By Howard Ruff
The Ruff Times
Aug 27, 2007
Many of my readers are retired
or widows who need regular income from their investments. How
can you get income when you have bought into my vision and converted
your savings into gold and silver, rather than bonds, utility
stocks or dividend-paying stocks, all of which are less and less
viable in an age of inflation (do the math)?
The usual Wall Street counsel
for retired older people is to buy "conservative" bonds
or dividend-paying blue-chip stocks. In fact, now that many Wall
Street advisors are now worried about the immediate future of
the stock market, especially "growth stocks," they
are going back to the old standby, "shift more of your holdings
into more conservative investments," like bonds.
- Here is an oddball idea that
flies in the face of conventional wisdom. Buy gold and silver
bullion coins and you can sell off say 8%, or whatever you need,
of your coins each year for income. This strategy has several
advantages. If I am right about the bull market in the metals,
the remaining coins will appreciate faster than your withdrawal.
Your capital will keep growing. If you wait a year before you
sell some, you will pay the long-term capital-gains-tax rate,
rather than the higher personal-income-tax rate you would be
paying on bond interest.
a
- If you choose the coin-selling
strategy, you should own an assortment of various-sized gold
and silver coins and semi-numismatics to make it convenient as
described in Chapter13 of my most recent book Ruff's Little Book
of Big Fortunes in Gold and Silver. Go to my website (www.rufftimes.com)
for more information.
No, No No!! Bad Choices!
Bonds are an especially bad idea in a time of rising interest
rates, and they will be rising for the foreseeable future. But
why are bonds such a bad idea?
- You shouldn't lock yourself
into low bond yields when rates are rising, which they always
do when inflation is rising. If you do, in the future you will
look with envy on those who waited and are getting higher rates.
a
- When interest rates rise,
the market value of bonds goes down, and that is also true of
any fixed-return investment. What you gain in income will be
more than offset by capital losses. In the '70s, I watched as
interest rates climbed above 18%, and bonds (even super-safe
T-bonds) lost up to half of their market value, and so did dividend-paying
stocks.
So what's to be done? There
are several alternatives, some of them very unorthodox, and some
are only for the future.
- Buy shares of a money-market
fund for future income as rates rise. Money market funds are
mutual funds that invest strictly in short term securities, like
short-term Treasury bills that mature in three months or less.
Sometimes they even buy overnight bank securities. The fund managers
will turn over their whole portfolio in as little as a month
or less, reinvesting them at higher yields as interest rates
rise. The law requires that they pass on the yields to you, and
maintain shares at the same price. They are as close to being
riskless as you can find in this risky world.
You can write a check against
your account giving you ultimate flexibility. In the '70s, I
was one of the first to advise and teach my followers about money-market
funds, as few people had even heard of them, and few advisors
were paying attention to them, except as temporary parking places
for money that was in between other investments.
The money-market fund I use
is Fidelity.
- The neat thing is that you
can withdraw your funds at any time by simply writing a check
against them. You get the high yield of a bank CD with the liquidity
of a low-yielding checking account. In the '70s, interest rates
rose to as high as 18% and the yield on the money-market I recommended
did accordingly. The same thing should happen in this inflationary
age. Rates are low now as this is written, but they will rise.
Use your money-market fund
for large transactions, rather than a no-yield to low-yield bank
checking account. Don't get sucked into a bank "money-market
account." They are the banks' reaction to the competition
of legitimate money-market funds. They are not the same. They
are merely bank deposits competing badly with higher yields than
they used to pay before they were forced to compete. They are
usually just CDs masquerading as money-market funds, complete
with the deceptive label. In the '70s, interest rates and money-market
fund yields rose to as high as 18%. The same thing should happen
in this inflationary market. Rates are low now as this is written,
but they will rise over the next few years. They always do when
inflation is the order of the day.
When money-market funds first
burst upon the scene in the late '70s, bankers considered them
a serious threat. They already had Regulation Q, which, in effect,
prevented them from raising interest rates for demand depositors.
Do to lobbying by bankers, these accounts were limited by law
to very, very low interest rates. Savers were saving their liquid
money in low-yielding passbook accounts rather than tying up
their money in high-yielding CDs, and the banks were loaning
out the money very profitably at much higher interest rates.
Shortly after we moved to Utah,
I found myself in the middle of a fight to the death between
the banking industry and the money-market funds. There was a
bill before the state legislature which had already passed the
Upper House and seemed to be a slam dunk in the Lower House.
It was very deceptive because it would require money-market funds
to set aside the same kind of cash reserves banks had to set
aside, forcing them to lower their interest yields to say alive.
It would also have driven money-market funds out of the state
of Utah, as federal law would not permit the funds to discriminate
by states, and they had no such pressure in the other 49 states.
I got a call from a representative
of the mutual-fund industry who asked me to use my influence
on state legislators (assuming I had such) to help kill the bill.
I agreed because I realized it was simply an anti-competitive
attack by the banks. I prepared an article for The Ruff Times
and had copies placed on every legislator's desk the night before
the final vote. I was asked to be the last speaker before "the
conference of the whole," meaning the whole legislature.
When I arrived at the State
Capitol and went to the chamber room, I saw the galleries full
of bankers glaring at their legislative constituents on the floor
from every small town in Utah.
A week before this, I had had
a call from Ezra Taft Benson, former Secretary of Agriculture
who was a close friend and also a member of the Quorum of the
Twelve Apostles of the LDS church. He had read my Ruff Times
article on the subject, and he asked me to meet with the president
of the Utah Banker's Association because "they have explained
this bill to me," and he wanted me to listen.
In today's political environment
with the Romney candidacy, a lot of people are unjustifiably
worried that Mormon elected officials will sometimes be forced
to travel in lock-step as the church wants them to. This was
a test of those fears. I listened to Elder Benson's banker friend,
and was unconvinced, and so reported to Elder Benson. He said
to me, "Thank you for listening and thanks for caring."
So I set about to lecture these legislators against this anti-competitive
bill.
I was the last speaker. The
room was full of electricity as I stood at the rostrum. I argued
that this was an anti-competitive bill sponsored by a competitive
industry group, and many of the legislators had been swept into
to office on the basis of the Reagan revolution, whose free-market
principles were in direct contradiction.
After I spoke and before the
final vote, there was a recess. I went to the cloak room to wait.
While I was there, one legislator, who was the son of an LDS
General Authority and was the floor leader for the bankers, cornered
me to argue. He is a nice fellow, but he was just plain wrong,
and he was accompanied by about five of his legislator friends
who listened very intently to the discussion.
Shortly after, this the legislature
voted. Four of the five men who were with us changed their votes,
and the bill was defeated by four votes, rather than being passed
by five as everyone expected.
Radio, TV and print reporters
were swarming all over the place trying to figure out how the
expected outcome was changed. They were interviewing people right
and left, totally ignoring me. At the time, I had not yet achieved
the notoriety I would have over the next few years, so as far
as they were concerned, I was a non-entity. But we prevented
the money-market funds from being driven out of the state of
Utah, giving the bankers free reign.
Partly as a result of this
and partly as the success of this new investment medium, nationwide,
the bankers lobbied to eliminate Regulation Q, and were now forced
to compete and offer higher interest rates on liquid accounts
to compete with the money-market funds, which is now the case.
Regulation Q had been driving investors into higher yielding
CDs, which would lock up the money for months for the bankers
to use, and they could still make a nice profit loaning it out
at higher rates. Small savers were no longer locked into infinitesimal
yields, and the Money-market Funds became the worthy competitor
they are today.
- Canadian Oil and Gas Funds
have been paying 9
to 15% annually. With the soaring price of crude oil, natural
gas and gas at the pump, these high yields should continue into
the foreseeable future.
Under Canadian tax laws, as
these funds invest in oil and gas production (which is what they
do), if they pay out most of their income (over 95%) as dividends,
they are not taxed at the fund level, so there is little double
taxation like other corporations, cutting into their dividend
yields. So savers needing or wanting high yields have swarmed
to them.
Recently, the Canadian government
(like all tax-hungry, predatory governments) announced they would
start taxing them. But the resulting investor uproar caused them
to modify the proposal so that when, and if, they taxed them,
they would exempt the funds which were already in existence before
that date and they would be grandfathered for four years. Of
course, that has cut off the development of new funds. Most of
these older funds still have very high yields.
These stocks have several advantages
as the price of oil climbs, which it will. Not only will the
dividend increase with rising oil prices, but the stocks will
also go up with rising oil, and the dividend will increase as
the subsequent rising profits are passed onto you.
Here is a partial list; there are several other acceptable
ones. You can receive a complete Investment Menu in each issue
of The Ruff Times. It lists all of my recommended investments,
including stocks and necessary updates (www.rufftimes.com).
Advantage Energy Income
Fund (AVN.UN-T) yielding
14.6%, Baytex Energy Trust (BTE.UN-T) yielding 11.2%,
Enerplus Resources Fund (ERF) yielding 11.3%, and Paramount
Energy Trust (PMT.UN-T) yielding 13.9%.
These trusts are designed to
generate income. They take approximately 1% of the yield to cover
expenses, and the rest is paid out in dividends to shareholders.
They are a great income investment, as long as oil prices rise
or even remain stable. If you believe oil prices will fall, I
will cover all bets. Current yields change daily, so call Jim
Raby at National Securities (800-431-4488) for the latest quotes
and his recommendations. Unlike most other brokers who cannot
buy foreign (Canadian) stocks, Jim's firm can, so he is a great
resource. I have no financial interest in your transactions with
Raby. You're welcome.
- There is also one other possibility
in the future. Gold and silver-mining stocks, as they soar, may
find themselves with more cash than they know what to do with
from profitable mining. They may pay big dividends in the future.
They now pay only nominal ones.
Howard Ruff
Archives
email: corporate@rufftimes.com
website: www.rufftimes.com
To get more
of Howard's gold insights for middle class investors you can
read Ruff's latest book Ruff's Little
Book of Big Fortunes in Gold and Silver or subscribe to his newsletter The
Ruff Times.
You can learn more about these on Ruff's website, www.rufftimes.com.
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