Vigilant Investor

If someone were to walk into the local gym and paint bigger numbers on the weights they lift, and then start boasting to everyone else about how much stronger they’d become, they’d immediately be laughed back to reality. But the financial news appears to not be as critical.  The news wires today are telling us — without really digging into why –  that the millionaires of the world increased by 8.3% in 2006,  up to about 9.5 million individuals estimated to have that much or more in financial assets, measured in U.S. dollars.

That’s not surprising given the amount of liquidity (expanding credit) flowing around the global system these days. Which begs the question, is the world really getting wealthier, or are these folks just the beneficiaries of asset inflation measured in the heavily expanded dollar? Well, given the global M3 numbers alone, we think it’s the latter. U.S. M3 continuations raise lots of concern:

Let’s also not forget that U.S. M3 has increased by over 5 times since 1980.

Meanwhile, you can do a simple calculation on your own over at the Federal Reserve’s own CPI calculator site to find that $1 million today ain’t the $1 million of the Tycoon era.

Now, that’s merely adjusted to CPI! With CPI itself being a suspect stat given how it discounts food, energy and housing, the real adjustments are probably much worse.

All this is another reminder that those navigating these markets need to be exceptionally aware of what liquidity is doing to asset prices. In particular, investors need to be mindful that liquidity mixed into bubble psychology (which always grows blind to risk and reality) is a recipe for natural price relationships to grow very dislocated.

It’s been said the market is always right. But don’t forget, that’s often a concession to the reality that the market can remain irrational much longer than the average person can remain solvent betting against it. The question today on the minds of many on Wall Street is, what is the real value of over $ 1 trillion in mortgage backed derivatives given the Bear Stearns debacle? Given the vast amount of leverage supporting asset price trades, the same could be asked of most any asset price.

That said, anything you own today should be something you want to own five years from today in an economy that might be vastly different than what we perceive right now, and in an environment where the U.S. dollar commands far less respect, and interest rates are climbing in order to keep the heavily debt dependent U.S. economy above water.

And, as we have been saying for some time now, don’t just measure your returns in your local currency. Measure them in terms of exchange with other currencies, and especially in terms of hard assets. Can you buy more or less oil, gold, or gas than last year? More or less house? More or less health care or college? Then you will see your real rate of return. Since 2000, those returns year to year are not so good as we many think — and that’s a paradigm shift!

At any rate, if you’re new to the millionaires’ club — good for you — Better to have it than not!  Just keep it all in perspective, and don’t forget that you’re now also an even bigger taxing target!

Average 4-year private college costs have broken the $30,000 threshold. That’s according to CNNMoney.com, where they note the obvious: total costs for public and private schools costs are growing well ahead of official inflation. So what else is new?

We’ll shelve how CPI is understating real inflation for now, and focus on what’s going on with College costs. So, what’s CNNMoney’s read on rising costs?

Why costs keep climbing

In the past few years, tight government budgets have kept been cutting off non-tuition revenue from colleges, forcing schools to ask for more from students’ checkbooks.

Nor have the costs of health benefits and utilities gone down. And schools are also grappling with higher faculty salaries, especially at private institutions where faculty receive higher pay.

Well, that’s all true, but let’s not forget an important factor — the real definition of inflation: an increase in the money supply. (We mistakenly now use the term to define the consequences of this — rising prices.) In the good old U.S. of A., that’s accomplished via the credit markets, where not one dollar in circulation exists except those that have been loaned into the economy via the banking system. For details on how that works, we encourage you to tune in to our G. Edward Griffin interview.

Now, when the “powers that be” decide to create an environment, legislatively or otherwise, where interest rates are very low AND where loanable funds for education are readily available to pretty much anyone with a pulse, often backed by the implied full faith and credit of the U.S. taxpayer, wellâ€� there you have a ticket to inflated / expanding money supply.
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On the other hand, this summer brought a dramatic — and frankly, surprising improvement for the formerly suffering residents of Pennsylvania thanks to an initiative from State House Representative Mike Turzai. (R. Bradford Woods), PA residents can now deduct up to $12,000 in 529 contributions to a 529 college savings program. Moreover, the bill also eliminated the draconian rule that would have prevented PA income tax advantages for 529s sponsored by other states. That means contributors get the state deduction, and beneficiaries may make both federal and state tax-free withdrawals from any program, not just the PA sponsored program from Lincoln Financial out of Philadelphia.

There are still severe restrictive deficiencies in 529s. Why investors can’t simply be allowed the same, entire universe of investment options open to them ordinarily in any run of the mill account is beyond me. Instead, investors are shoeboxed and prevented from accessing alternative investments and management styles. With that in mind, there’s still a lot of reform and simplification due for 529s.

But PA resident’s options are now greatly expanded. No longer are they held hostage by PA tax considerations.

Incidentally, those of you looking for a comprehensive book on how to afford paying the ever mounting costs of college — consider Paying for College without going broke, linked to the image above in this post. Having read more than my share, it is IMO the best and most comprehensive starting point.