TIME Venezuela

Venezuela Is Slowly Coming Apart—and President Nicolas Maduro May Pay the Price

A boy with blood on his chest kneels in front of police after 14-year-old student Kluiver Roa died during a protest in San Cristobal, Venezuela, Feb. 24, 2015.
Carlos Eduardo Ramirez—Reuters A boy with blood on his chest kneels in front of police after 14-year-old student Kluiver Roa died during a protest in San Cristobal, Venezuela, Feb. 24, 2015.

Hyperinflation and shortages of basic goods have Venezuelans angry—and looking for new leadership

CARACAS – Amid the death of a 14-year-old boy killed by a policeman during anti-government unrest, the arrest of a key opposition mayor by armed government intelligence agents and talk of a coup plot against the government spearheaded by Washington, this last week also saw another another turn in Venezuela’s growing crisis. At DolarToday, a website little known outside of Venezuela that has become a key indicator of the country’s black market exchange rate, the bolívar local currency passed the psychological barrier of 200 per greenback. Four years ago, the dollar cost eight bolívares per dollar; five months ago it was 100; now it is already at 221 and counting. This rapid deterioration in the value of the local currency, 61% drop against the dollar over the last year, is one of the best indicators of just how much trouble Venezuela—and President Nicolas Maduro—is in.

While many in Venezuela have little direct engagement with the dollar—the country’s foreign exchange is strictly controlled—the currency crisis pervades everyday life. It means many doctors and engineers earn the equivalent of just a dollar a day and prefer instead to drive taxis or smuggle pasta or gas across the border to Colombia. It means that those who want to buy basic goods for their families must line up for hours every day due to shortages, and hoping all the time that shelves won’t be empty. It means that stealing is more valuable than working, fueling one of the world’s highest crime rates and the murder of one police officer nearly every day.

It means that people like Yormina Alguilera, a street cleaner earning the same as the minimum wage of doctor or engineer, are giving up. “We’re in crisis,” she said, taking a break from the sun at a fruit stall in the square at Caracas’ 23 de enero barrio, as murals of Che Guevara and Hugo Chávez loom over. Alguilera voted for Maduro and his predecessor Chávez, “but never again,” she said. “At least under Chávez I could get things. It’s a mess with Maduro and there’s no end in sight. Things are getting worse every day.”

Maduro, who was elected after the death of Chávez in 2013, is in serious trouble. His approval ratings are in the low twenties, according to Datanálisis, a respected local pollster. This time last year, the president faced down Venezuela’s biggest anti-government protests in more than a decade, and now they appear to be starting up again. In San Cristóbal, on the country’s border with Colombia and where unrest was sparked last February by similar though less severe economic problems, 14-year-old Kluiberth Roa was killed with a rubber bullet by police. That tragedy has only sparked further public anger.

Supermarket lines often run into the hundreds if not thousands due to shortages of the most basic goods, from shampoo to condoms. Inflation last year was near 70%. The economy, which has long been propped up by high crude prices, is crumbling as oil has tumbled over the last few months. (A barrel of Venezuela oil sells for half what it did a year ago; the country obtains 96% of foreign currency from oil.) Maduro has blamed this on an “economic war” being waged by the opposition with a hand from the United States, but many ordinary Venezuelans don’t believe that. “They talk about an economic war but we’re certainly not winning it,” said Aida Guedez Álvarez, a 61-year-old housewife buying a watermelon in 23 de enero. “I voted for Maduro but I’ve been deceived, like everybody else.”

Maduro’s government faces tough legislative elections later this year. “The government isn’t necessarily falling but it is weak and losing its leadership,” said Reinaldo Manrique, 24, an accounting student and student leader who was one of the very first detained for protesting in San Cristóbal, last year, sparking nationwide unrest. “But you know what? The leaders of the opposition are even more weak.”

Though former Chavistas are much angrier than they were a year ago, they do not see the opposition, led loosely by two-time presidential candidate Henrique Capriles, as a viable alternative. “Of course I’d never vote for Capriles,” said Alguilera, the street cleaner. “I give up. No one will change things.” Rather than protest, students are talking of finishing their studies and leaving the country. Many who took to the streets last year have left. “I’m studying to become a primary teacher,” said Leonardo Díaz, 25, in Caracas’ Plaza Altamira, a bastion of protest. “But as soon as I graduate, I’ll leave. All my friends at university are the same.”

Capriles, who stood against both Chávez and Maduro in presidential elections, is the more moderate face of the opposition. He continues to govern the state of Miranda and at least on paper lead the opposition. The government has cracked down on its more hardline critics. Leopoldo López, a major opposition heavyweight, has remained behind bars for more than a year for his role in inciting last year’s protests. “The government is working in a barbaric way to steal from public funds, destroy the country, rob the country’s oil while it says it’s constructing a homeland!” López’s father, also called Leopoldo, told TIME. Antonio Ledezma, Caracas’ mayor, was arrested and charged earlier this month in a conspiracy to overthrow Maduro.

María Corina Machado, another more radical leader, was charged in December with involvement in a plot to assassinate Maduro. “With Maduro there is more persecution than ever,” she told TIME. Next on the government’s list appears to be Julio Borges, an opposition party coordinator. The government requested a probe into his alleged conspiracies against Maduro this week. “Every year there are elections but this is the first time the government is up with a political crisis of this magnitude,” Borges told TIME. “In Venezuela everyone is scared—including the government.”

Maduro has remained tough. “Every fascist has his day,” the president said on Ledezma’s arrest. And he still has some support. As he completed a crossword on a park bench in the wealthy La Castellana area of Caracas, Emilio Neumann backed the government’s stance. “Lopez and Ledezma are exactly where they deserve to be, behind bars,” said the 69-year-old public administrator. “After calling so many people to the streets and committing who knows how many murders.”

President Maduro must hope, if he is to see out the next couple of years, that he can persuade people like Neumann to stay on side. To do this he must turn the country’s economy around, though with three official exchange rates as well as a black market on the dollar — with a spread between the highest and lowest of them of some 3,400 per cent — it is becoming increasingly difficult to do so. Pragmatic moves such as consolidating those exchange rates or raising the price of gas, currently the world’s lowest at just a few cents per tank, are politically dangerous especially when Chavistas are turning away from Maduro.

MONEY retirement planning

The Proven Way to Retire Richer

Looking for more money for your retirement? Who isn't? This study reveals that there is one sure-fire way to get it.

Last June, the National Bureau of Economic Research with professors from the University of Pennsylvania, George Washington University, and North Carolina State University, released a study entitled “Financial Knowledge and 401(k) Investment Performance”.

In it the authors found that individuals who had the most financial knowledge — as measured through five questions about personal finance principles — had investment returns that were on average 1.3% higher annually — 9.5% versus 8.2% — than those who had the least financial knowledge.

While this difference may not sound consequential, the authors noted that it “is a substantial difference, enhancing the retirement nest egg of the most knowledgeable by 25% over a 30-year work life.”

Yes, knowing the answers to five questions had a direct correlation to having 25% more money when you retire.

So what are those questions? For example, and for the sake of brevity, here are the first three:

Interest Rate: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

Answers: More than $110, Exactly $110, Less than $110.

Inflation: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

Answers: More than today, Exactly the same, Less than today.

Risk: Is this statement True or False? Buying a single company’s stock usually provides a safer return than a stock mutual fund.

While the questions aren’t complex, they’re tough. And few people can answer all three correctly (with the answers being: More than $110, Less Than Today, and False).

So what did those people who were able to answer those questions most accurately actually do to generate the highest returns? The authors found one of the biggest reasons was that the most financially literate had the greatest propensity to hold stocks (66% of their portfolio was in equity versus 49% for those who scored lowest). And while their portfolios were more volatile, over time, they had the best results.

This is critical because it underscores the utter importance of understanding asset allocation. This measures how much of your retirement savings should be put in stocks relative to bonds. A general guideline is the “Rule of 100,” which suggests your allocation of stocks to bonds should be 100 minus your age. So, a 25-year-old should have 75% of their retirement savings in stocks.

Some have suggested that rule should be revised to the rule of 110 or 120 — and my gut reaction is 110 sounds about right — but you get the general idea.

This vital distinction is important because over the long-term stocks outlandishly outperform bonds. If you’d invested $100 in both stocks and bonds in 1928, your $100 in bonds would be worth roughly $7,000 at the end of 2014. But that $100 investment in stocks would be worth more than 40 times more, at $290,000, as shown below:

Of course, between the end of 2007 and 2008, the stock investment fell from $178,000 to $113,000, whereas the bonds grew from $5,000 to $6,000, displaying why someone who needs the money sooner rather than later should stick to bonds. But a 40-year-old who won’t retire for another 20 (or more) years can weather that storm.

Whether it’s $100 or $1,000,000, watching an investment fall by nearly 40% in value is gut wrenching. But in investing, and in life, patience is key, and as Warren Buffett once said, “The stock market serves as a relocation center at which money is moved from the active to the patient.”

While everyone’s personal circumstances are different (my risk tolerance is vastly greater now than it will be in 30 years) knowing that you can be comfortable allocating a sizable amount of your retirement savings to stocks will yield dramatically better results over time.

MONEY Shopping

Girl Scouts Raise Cookie Prices

Ashley Rubin, 9, holds a sign during Girl Scout Troop 582's cookie training session at Beach Vineyard Church in Panama City Beach, Florida, 2015.
Heather Leiphart—AP Ashley Rubin, 9, holds a sign during Girl Scout Troop 582's cookie training session at Beach Vineyard Church in Panama City Beach, Florida, 2015.

Stocking up on your favorite Thin Mints and Samoas could put a bigger dent in your wallet this year.

Five bucks for a box of Thin Mints? That’s how much Girl Scout cookie fans will pay in some regions of California, up from $4 a year ago. In parts of the South, prices will rise to $4 a box from $3.50.

As cookie-selling season gets under way, Girl Scout councils in San Diego, Orange County, and Greater Los Angeles are hiking prices for the first time in a decade. The increase will bring more money into local scout troops—about 27% more per box by their estimates, the WSJ reports. Each council sets prices in its own region (in the New York area, prices are staying at $4.)

In March, the Girl Scouts announced that they were taking cookie sales online. It also introduced three new flavors for 2015. This latest change is attributed to increased prices charged by the baker (up 19%) and higher operating costs (up 28%), according to a statement from the Greater Los Angeles Council.

Price hike or no, the Girl Scouts say you’re still getting a bargain. At the local rate of inflation, a box of cookies should actually cost $5.84.

MONEY

Fed Holds Rates Steady as Economic Plot Thickens

The Federal Reserve has said it won't raise rates before summer. But the economy picture is no less complex as the date approaches.

The Federal Reserve wrapped up a two-day meeting in Washington Wednesday, leaving short-term interest rates unchanged at near historic lows.

The move was widely expected: The central bank indicated as recently as December that investors weren’t likely to see a rate hike before summer. But the Fed’s actions were being closely watched nonetheless. With the summer deadline now two months closer, recent moves by the European Central Bank to bolster the continent’s economy have complicated the Fed’s upcoming choice.

The upshot is that for now U.S. consumers should be able to rest assured. Ultra-low interest rates mean borrowing costs for mortgages and other loans are unlikely to climb dramatically. But investors won’t have it so easy: Stock and bond traders will continue to fret about U.S. and European officials’ decisions, meaning more volatility like the sharp drop in Treasury yields (and rise in bond values) that took place earlier this month.

The Fed’s last meeting took place in mid-December amid feelings of increasing economic optimism. The U.S. economy had logged 3.9% GDP growth in the third quarter and the November jobs report was one of the best in months. That’s largely continued. Throw in an assist from cheap gas, and it’s no surprise the President Obama felt safe bragging about the ecomony in last week’s State of the Union.

In short, many Americans are beginning to feel like things are normal again. That’s usually the signal for the Federal Reserve to return interest rates to a more regular footing. Raising rates can slow economic growth — that’s why the Fed doesn’t want to move to soon. But keeping them low can stoke inflation. At 1.6%, well below the Fed’s 2% target, that’s not an immediate problem. The worry is that once inflation starts to rise, it can quickly get out of control.

The Fed’s decision is so tough this time around because it took such extraordinary measures to prop up the economy in the wake of the Great Recession. While so far the Fed’s strategy seems to have worked, no one likes being uncharted territory. Fed officials may feel some pressure to return monetary policy to something that feels normal.

One big problem, however, is that even as the U.S. economy has improved, much of the rest of the world continues to lag. Last week struggles in Europe prompted the ECB, Europe’s equivalent of the Fed, to undertake some extraordinary actions of its own, committing to buy tens of billions of dollars in debt each month in a new bid to stimulate the continent’s economy.

With the global economy so intertwined, the Federal Reserve has to worry weakness and instability overseas could put a drag on otherwise healthy U.S. economic expansion. In particular, the ECB’s move, the equivalent of printing billions of Euros, is likely to weaken the common currency against the dollar. That will make it more expensive for U.S. companies to export their goods — ultimately hurting profits and also providing another check on U.S. inflation.

The upshot is that if the Fed was feeling ready to act sooner rather than later, the situation overseas may be giving it second thoughts. Of course, the Fed has given itself until summer to decide. So it’s got some breathing room, if not quite as much as it did in December.

But in the meantime don’t expect jittery traders to sit tight. The Dow dropped 100 points after the Fed’s announcement from 17,452 to 17,319, while Treasury yields fell as bonds rallied. You can expect more of that kind of drama.

MONEY early retirement

Get These 3 Variables Right and Retire Earlier

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Chris Clor/Getty Images

Most people overestimate what they'll need to live comfortably in retirement. The more realistic you are, the sooner you might be able to kick back.

How do you know if you can retire? Despite all the attention given to your retirement “number”—your total savings—there are several other important variables that go into the retirement equation. If you want an accurate estimate for when you could retire, you must choose reasonable values for each one of them. Get these numbers wrong, either too optimistic or too pessimistic, and it could throw off your retirement calculations by years.

In my experience, people tend to be overly pessimistic about their retirement variables. Maybe it’s all the “bad” news about retirement. Or maybe it’s an abundance of caution around this critical life decision. But if you can be realistic about these numbers without being reckless, you can potentially accelerate your retirement and the freedom it brings.

Even if you have a financial adviser, it’s a good idea to become familiar with the key retirement variables yourself. Yes, some math is required, but it’s pretty simple. And there are easy-to-use retirement calculators that can handle the details for you. So let’s take a look at these important retirement parameters.

1. Living expenses. It’s common to assume that your retirement living expenses will be a fixed percent of your pre-retirement income. But if your lifestyle is unique in any way, especially if you’re a diligent saver, these income-based estimates can be wildly inaccurate. The best way to know your expenses is to actually track them yourself. One expert says you can retire on less than 60% of your working income, which is consistent with my personal experience.

And the news about expenses gets better: The typical retirement calculation automatically increases your living expenses every year by the rate of inflation. That sounds reasonable at first glance. Yet research shows that most people’s expenses decline as they age. Studies show decreases from 16% to as much as 40% over the stages of retirement. Even with higher health-care costs, you simply can’t consume as much at 80 as you did at 60.

2. Inflation rate. Inflation remains a critical retirement variable, because it can influence your fixed living expenses and the real returns on your investments. Many fear higher inflation in the future. Pundits have been expecting it for more than a decade. Although conditions might favor higher inflation down the road, nobody knows for sure when or how it will arrive. In my opinion, trying to plan for extreme inflation is not sensible. And many retirees, myself included, experience a personal inflation rate that is below the government’s official rate, proving that you have some control over how inflation impacts your life.

3. Tax rate. Taxes are one of the most feared and loathed factors in retirement. Yet in my experience as a middle-income retiree, taxes aren’t as big a deal as they are made out to be by those with an agenda for your money (or your vote). In the lower tax brackets, income taxes are just another expense, and not a particularly large one. When calculating taxes for retirement, be especially careful to distinguish between effective and marginal tax rates. Your effective tax rate is your total tax divided by your income. Your marginal rate is the amount of tax you pay on your last dollar of income. That’s a function of your tax bracket and is nearly always much higher than your effective rate.

Most retirement calculators use an effective rate, but that isn’t always clear. If you mistakenly enter a marginal rate into a retirement calculator, you will grossly overestimate your tax liability and underestimate your available retirement income. For example, my marginal tax rate in my peak earning years was 28%; now that I’m retired, my effective tax rate has been around 6%. Big difference!

So there is room for optimism on some key retirement variables. But retirement planning is an exercise in reality, and the reality of the stock and bond markets right now is more negative than positive. Investment returns are one retirement variable where you cannot afford to be overly optimistic, or you could run out of money in your later years. Many experts point to current low interest rates and high market valuations as indicators that we must plan for lower returns going forward. How much should you scale back your expectations? That’s anybody’s guess, but I’m seeing estimates of from 2%-4% below the long term averages for stock returns.

Retirement analysis can be difficult and perplexing. A good retirement calculator can condense all the variables into a single view of your financial trajectory. For the most accurate picture, choose realistic values. Don’t lengthen your journey to retirement with excessive assumptions for living expenses, inflation, or tax rates. But don’t get overly confident about investment returns, either. A realistic analysis will increase your odds of working and saving the right amount, before you make the leap to retirement.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com.

Read next: Retirement Calculators Are Wrong But You Need One Anyway

MONEY Economy

The Doom and Gloom of Deflation Hasn’t Reached Our Shores—Yet

Cars fill up at the pumps at a Shell station near downtown Detroit, where the sign shows the price at $1.899 a gallon on Thursday, Jan. 1, 2015
David N. Goodman—AP Cars fill up at the pumps at a Shell station near downtown Detroit, where the sign shows the price at $1.899 a gallon on Thursday, Jan. 1, 2015. AAA Michigan said that the average cost of self-serve unleaded gasoline in the state was $1.97 a gallon, the first time the price has fallen below $2 a gallon since March 2009 and down 9 cents since the beginning of the week.

A new government report shows that prices are clearly falling, mostly due to sinking energy prices. Even so, this could keep the Fed from hiking rates for months.

You might think that falling consumer prices would be met with cheers on Wall Street, especially in the all-important holiday shopping season.

But when a new government report released on Friday showed that consumer prices in December had declined by the largest amount in six years, there was a bit of a gasp on Wall Street.

The Labor Department reported that the Consumer Price Index, perhaps the most widely followed measure of U.S. inflation, sank 0.4% in December, after dropping 0.3% in November.

This data clearly shows there is no inflation in this economy.

Yet it’s still too soon to say if there’s deflation — a quagmire that Europe is currently stuck in, where prices keep falling to the point where consumers postpone purchases, further weakening the economy.

Why?

For starters, over the past 12 months, prices in general have inched up 0.8%. While that’s the lowest yearly rate since 2009, it’s still positive.

More importantly, plummeting gasoline prices were the real culprit that drove CPI down in December and November, notes Michael Montgomery, U.S. economist for I.H.S. In fact, last month’s 9.4% decline in gas prices accounted for the entirety of the 0.4% decline in CPI, he said.

And keep in mind that several key categories of spending did rise in December, including food, electricity, and housing costs.

Overall, so-called core CPI — which strips out volatile energy and food costs — was flat last month and rose 0.1% in November.

This helps explains why Americans regard falling prices as a blessing so far — not a curse.

Consumer confidence, as measured by the University of Michigan’s consumer sentiment index, jumped to a reading of 98.2 this month, the highest point since January 2004.

But economists expect the deflation concerns to linger, as gas prices have sunk even faster this month than in December.

Already, there’s talk that the Federal Reserve might hold off raising interest rates this year because the global slowdown in general and Europe’s deflation specifically are keeping inflation at bay here at home.

This chatter—and concern—will grow if January’s CPI figures show even more falling prices.

MONEY

The Fed Sees the Economy Getting Back to Normal. The Market’s Not So Sure.

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SAUL LOEB—AFP/Getty Images

Why bonds are rallying even as the Fed hints at tightening.

The Federal Reserve has been signalling that it is getting ready to raise short-term interest from near-0% later this year. It recently ended its purchases of bonds under the unconventional stimulus program known as quantitative easing. Read the front-page newspaper headlines, and it looks like the era of very low interest rates is coming to an end.

But the numbers on the market tickers are telling a different story. This week the yield on safe 10-year Treasury bonds, a benchmark for long-term interest rates, tumbled to below 2%. What gives? How is it that interest rates are going down when it looks like the Fed wants to raise them?

The answer, in part, is simple. The Fed doesn’t get to set interest rates on its own. Day-to-day market commentary make it sound like interest rates can be changed with the push of a button: Fed chair Janet Yellen and the rest of Federal Open Market Committee declare that rates shall rise, and then, boom, you get a better deal on CDs and have to pay more to refinance your house.

In fact, in normal times, the Fed only sets short-term rates. What happens to rates on loans maturing years down the road is determined by investors, and it all plays out in the moment-to-moment fluctuations of yields on the bond market. When demand for bonds is high, their prices go up and yields go down; yields rise when bond prices fall. Bond investors think a lot about Fed policy, but they also have their eyes on a host of other economic fundamentals that determine how much it should cost to borrow money.

“Fed policy matters a lot in the short term,” Ben Inker, co-head of asset allocation at the mutual fund manager GMO, recently told me. “It only matters in the long-term if they show themselves to be incompetent.”

Of course, these haven’t been normal times. With the quantitative easing program, the Fed had also been buying up longer-term Treasuries. Lots of people believed that this meant yields were artificially low, and would spike once it looked like QE was over. But the end of the Fed’s bond purchases hasn’t led to a spike in rates. It turns out investors still really want to hold long-term government bonds. “I think now what people are saying is maybe rates weren’t artificially low—maybe they were low for a reason,” said Inker.

Investors like to hold Treasury bonds when they don’t care for the alternatives, such as putting money into expanding their businesses or building new office buildings, houses, and factories. And they are happier to accept low rates when they don’t see much risk of the economy overheating and producing inflation. In short, the low long-term yield on bonds reflects the market’s fairly pessimistic outlook for growth in the long term.

The latest economic numbers from the U.S. are looking healthier lately. Unemployment has come down, and consumer confidence is up. Bond markets, however, are seeing a lot of bad news abroad, and perhaps are worrying that it will spill over to the U.S. In Europe, for example, very low inflation is threatening to turn into deflation—or falling prices—which may sound nice for consumers, but reflects weak demand and makes it harder for borrowers to settle their debts.

The weak global economy has also brought down yields on other government’s bonds—Germany is paying 0.5%—which make Treasuries look like a comparatively good deal. That’s another factor keeping demand for U.S. bonds high and yields low right now.

So here’s the picture: The Fed sees an economy that’s getting stronger, and is looking to raise short-term rates sometime this year to get ahead of the risk of inflation. But markets still see plenty to worry about. Those worries may include, as economist Brad Delong has pointed out, the risk that the Fed may slow down the recovery too soon.

MONEY Federal Reserve

What Will the Fed Do Today? These Five Numbers Can Tell Us

With the economy and job markets finally looking healthy, the Federal Reserve may signal its first interest rate hike in years.

While you’ve been doing your Christmas shopping, the Federal Reserve’s Open Markets Committee — the club of officials who set short-term interest rates — has been meeting in Washington.

With the economy finally humming along, and interest rates still close to zero, market watchers are wondering how much longer the Fed will hold out before signaling its first rate hike since before the financial crisis.

That step isn’t likely to be taken Wednesday, when the two-day meeting concludes and the Fed issues an official statement. But economists do expect a significant change in the language that the Fed uses to telegraphs its policies.

In particular, the central bank has consistently stated that it will keep rates low for a “considerable time.” But a recent survey conducted by Bloomberg found that four-fifths of economists believe the Fed will drop the phrase today in order to signal a more aggressive time table — and that rates are actually likely to rise in the middle of next year.

In the meantime, here are five data points the Committee is likely discussing. The statement comes out at 2 p.m.

 

GDP

GDP

The economy is growing at a healthy pace. After a blip earlier this year — widely attributed to 2013’s severe winter — the economy grew 3.9% in the third quarter. Hiking interest rates would presumably help fight off unwanted inflation. But it would also slow economic growth and could even throw the country back into a recession. That was a much bigger risk when growth was crawling along at 1% to 2% rate. With growth close to 4%, the Fed may finally be getting ready to move.

 

Payroll

Jobs

Of course, GDP growth doesn’t mean much if you can’t actually get a job. And the employment picture has been downright sluggish in recent years, even at times when the broader economy was showing signs of life. But that’s finally started to change. The most recent jobs report, which showed the economy adding 321,000 jobs in November, was widely regarded as one of the best in years.

 

Inflation

Inflation

While GDP and jobs growth may be robust enough to justify an interest rate hike, the Fed may remain cautious for several reasons. The first one is that there is not much forcing its hand. Interest rates hikes are the central bank’s main weapon for fighting inflation. But with prices rising at less than 2%, there’s not much inflation to fight. That’s good news, meaning the Fed has flexibility to keep rates low if it seems helpful.

 

stocks

Stocks

Like the economy more broadly, the stock market is doing well — up about 12% so far this year. Nonetheless the Fed will want to avoid roiling markets with unexpected news. That’s what happened during 2013’s “taper tantrum” when markets slumped after the Fed let slip plans to taper off its stimulative bond purchases. Since economists are widely expecting the Fed to hint at higher interest rates, that seems unlikely this time…but markets are always fickle.

 

oil

Oil

While the U.S. may be looking rosier, there’s still plenty to worry about in the rest of the world. One dramatic manifestation of these fears: the sudden, sharp drop in oil prices. Booming economies tend to use a lot of energy. Weakening ones less so. In many ways cheap oil helps the U.S. It’s certainly been a boon to Detroit. But it can also have destabilizing effects. It’s the key reason the ruble has crashed in the past few days. It’s also the prime suspect in the U.S. stock market swoon in past two weeks. Shares have fallen nearly 5% since Dec. 5, including 112 points on Tuesday. Those jitters are one more reason the Fed may choose to tread carefully.

MONEY Bill Gross

Here’s the Weirdest Economic Commentary You’ll Read Today

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Jim Young—Reuters

Bond guru Bill Gross is famous for his wacky but insightful market analyses, and this one is exemplary -- in both regards.

Janus Capital fund manager Bill Gross—most recently in the news for leaving PIMCO, the bond fund giant he co-founded—today published commentary on the global economy and financial markets in his typically quirky style.

Before turning to some important points on inflation, Gross spends a couple paragraphs waxing Yoda-like about humanity… and how he’s made of sand:

I am a philosophical nomad disguised in Western clothing, a wondering drifter, masquerading in a suit near a California beach. Sand forms the foundation of my being and its porosity is at once my greatest strength and deepest wound. I have become after 70 years, a man who believes that no belief is sacred. I have ideals and moral standards, but I believe them specific to me. Had I inherited your body and ego, “I” could just as clearly have assumed “yours.” If so, I wonder, if values are relative, then what are mortals to make of them, and what would a judging God make of us? If a collective humanity is to be rooted in sandy loam, spreading its ideological seeds through howling winds only to root in mutant form at different places and different times, can we judge an individual life?

Then, against all odds, he steers these elaborate metaphors into a commentary on U.S. fiscal and monetary policy—and it turns out he has some important points to make.

Here are the four of them, roughly translated:

  1. Young people should (and do) fear inflation because it means their retirement portfolios will be cut in half or more.
  2. But these days, deflation is just as dangerous a threat as inflation, because the economy has become dependent on inflation to shrink our debt.
  3. The problem is that the monetary policy approach that would ordinarily prevent deflation—printing more money—is not helping to create true growth. “Prices go up, but not the right prices. Alibaba’s stock goes from $68 on opening day to $92 in the first minute, but wages simply sit there for years on end,” Gross writes.
  4. The solution Gross suggests for making the “right prices” go up is government fiscal stimulus — a surprising policy suggestion from a bond fund manager. But he also points out that government spending is a tough sell, thanks to fears about the very debt that makes us dependent on inflation.

These are some wise insights, despite the strange introduction. Actually, there’s evidence that Gross may be in on the joke when it comes to purple prose, or at least that he’s actively cultivating his reputation as an eccentric genius. In any case, today’s commentary wasn’t necessarily Gross’s strangest. He has in the past mused about his dead cat, Cracker Jacks, crows, and, as in the following passage, sneezing:

There’s nothing like a good sneeze; maybe a hot shower or an ice cream sandwich, but no – nothing else even comes close. A sneeze is, to be candid, sort of half erotic, a release of pressure that feels oh so good either before or just after the Achoo! The air, along with 100,000 germs, comes shooting out of your nose faster than a race car at the Indy 500. It feels sooooo good that people used to sneeze on purpose. They’d use snuff and stick it up their nose; the tobacco high and the resultant nasal explosion being the fashion of the times. Healthier than some of the stuff people stick up their nose these days I suppose, but then that’s a generational thing. My generation is closer to the snuff than that other stuff.

The latter commentary, titled “Achoo!”, goes on for another two paragraphs about sneezing before turning to neutral policy rates.

MONEY Gold

What I Tell Clients Who Want to Buy Gold

Stacks of gold bars
Mike Groll—AP

Sometimes people want gold because of greed, sometimes because of fear. Here's what you should know before you buy it.

“Okay,” the client said at the end of our meeting, after I had recommended my investment strategy, “I’ve just got one more question.”

“Go ahead,” I said.

“What about gold?”

“Why gold?” I asked. I’ve found that the reasons people give me really vary. When they say they want to buy gold, there’s some deeper issue we need to get at. “What is it about gold that appeals to you?”

“It’s low right now. You believe in buy low, sell high, right? I want to earn more than I can from bonds. There’s always a market for gold, no matter what happens.”

Hmmm. The client is expressing both greed and fear. It’s usually one or the other.

So I tried to explain:

You don’t invest in gold; you speculate on gold. Gold grows in value when someone else will speculate more than you did when you bought it. Perhaps it rises and falls with inflation. An exhaustive 2013 article in Financial Analysts Journal concluded that’s not really true. The authors found that the price of gold rises…when it rises. The price of gold fall…when it falls.

There’s some evidence that gold has kept its value in relation to a loaf of bread. The problem is that this comparison goes back the reign of the Babylonian king Nebuchadnezzar in 562 BC. For most investors, that time frame is way too long.

Some people want gold in case all hell breaks loose. It makes them feel safer than boring bonds. I can understand where they’re coming from. Bonds are almost purely conceptual because most people don’t ever even get a piece of paper saying they own them. These people want gold so they can make a run for it if necessary. Like I said, I understand: I like feeling safe, too.

If you’re in this camp, you could use 1-2% of your portfolio to buy some gold. Take physical custody of it. Put it in your safe at home.

Remember the practicalities. Small coins will probably work best; you don’t want to be stuck trying to get change for $1,000 gold bars when the banks have closed. Gold weighs a lot so just buy enough to get you over the border. You don’t want your stash to slow you down when you’re sneaking away in the night.

Still not feeling secure? To take the next step down this road, add the following to your safe: guns, ammo, water, and copy of Mad Max or other favorite movie of this genre. The Book of Eli was okay and 2012 was even better.

However, none of these movies features a post-apocalyptic gold standard. According to them, if and when all hell breaks loose, you’ll want guns, ammo, gasoline, and perhaps a jet.

———-

Bridget Sullivan Mermel helps clients throughout the country with her comprehensive fee-only financial planning firm based in Chicago. She’s the author of the upcoming book More Money, More Meaning. Both a certified public accountant and a certified financial planner, she specializes in helping clients lower their tax burden with tax-smart investing.

Read next: Dubai’s Kids Now Worth Their Weight (Loss) in Gold

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