Here’s the deal: You buy a one-year Treasury bill that will pay you $100,000 at maturity. It costs you $99,952 (T bills are prediscounted). Your broker charges you $60 to execute the transaction. Since the fee exceeds the interest, you have actually lost money for your trouble.
Or try this: You invest $100,000 in one of Fidelity’s government money market funds. After a month goes by, you check your account and find that in return for the use of your $100,000 you have earned the grand sum of one dollar.
Now you see why, despite the dreadful economic numbers, the stock market keeps climbing. There are, for most people, only three reservoirs available for storing wealth: stocks, bonds, and real estate. Real estate, long regarded as a sure-fire investment, is now poison. Bonds pay next to nothing unless you accept high risk or go long-term. So it’s back to the stock-market casino. The CNBC anchors tell you that the economic numbers are not dreadful at all, ignoring (1) the unemployment rate, (2) the national debt, (3) the budget deficit, and (4) the balance of trade.
There is another reason for the Dow’s ascent: If you are a wealthy European, do you really want your money sitting in pounds or francs or lira? No, so you buy dollar-denominated assets. You tell yourself that your wealth is safe in the U.S. because the U.S. is too big to fail. (Where have we heard that before?)
Buying stocks of good companies is not stupid. If you are worried that eventually runaway inflation will eat you alive, consider this: If you buy one share of Apple stock, you own one 910-millionth of the Company. Now, assuming that Apple doesn’t have to sell more stock ($23 billion in the bank says they won’t) you will still own one 910-millionth of the Company no matter what happens to the dollar. So, in a sense, Apple is an inflation hedge. The same can be said of other companies that have strong balance sheets and good growth prospects. Alas, there aren’t many companies that make it through that filter. And remember, some respected economists say that deflation, not inflation, is the more likely danger.
These are strange times, the strangest I’ve seen in a half century of market-watching. The federal government is selling zillions of short-term bills and notes at zero cost. Banks can get almost as good a deal, thanks to the Fed. Borrowing at less than 1 percent and lending at, say, 6 percent is nice work if you can get it.
It reminds me of an old joke about the fellow who shows up at his school’s reunion in a private helicopter, much to the surprise of his classmates who remember him as the dumbest kid in school, especially in mathematics.
“How on earth did you amass such wealth?” one classmate asks him.
“It was easy,” he answered. “I make these gadgets for 1 cent and I sell them for 5 cents, and you’d be amazed at how that 4 percent adds up.”
