On Thursday, May 6th, the
Dow Jones Industrial Average
fell almost 1,000 points, a
little more than nine
percent, in 16 minutes, and
no one knows why. At day’s
end, the DJIA was down only
342 points, and everyone
didn’t think that was too
bad…considering the place it
had visited.
Fingers of
possible blame pointed in
many directions—Greeks
bearing debt, Jihadist
glitches, automatic
computer-trading programs, a
trader’s “fat-finger”
mistake, jitters about
financial-reform
legislation, too much sugar
in Wall Street’s afternoon
power drinks, a Madoff mole
wreaking revenge.
A thousand point drop got
me to thinking.
I’d been talking to my
daughter, Molly, a few
minutes before the DJIA’s
dipsy-doodle. She works on
the speed desk at Bloomberg
News in Manhattan, feeding
headlines and financial news
into the company’s
terminals. She’s up to the
minute on this stuff; I’m a
lagging indicator, often
intentionally so. We were
talking about the future and
how to prepare for it.
I said I thought people
in their 20s and 30s were
going to have a much tougher
time earning livings and
preparing for retirement
than Baby Boomers, because
the global financial system
— and the American end of
it, in particular — seemed
increasingly volatile,
increasingly fragile and
increasingly vulnerable to
system-breakups, from both
internal and external
sources. System risks, in
short.
This got me thinking
about hedges.
Gold is often touted as a
hedge against inflation. But
when I looked at gold price
and the Consumer Price
Index, I saw that inflation
had risen with reasonable
consistency year to year
while gold was
volatile—spiking in 1980 and
during the last several
years, but lagging the CPI
for most of the years in
between. One study I
reviewed showed the average
annual rate of return on
gold between 1979 through
2008 was 5.37 percent, most
of the gain coming during
the last decade, compared
with stocks at 11.9 percent,
3-month T-bills at 5.9
percent and rare coins above
10 percent.
Gold is a fear purchase,
not an inflation hedge. If
you think it’s likely that
the world will fall apart,
you put gold in your bedroom
safe so you can buy guns and
toilet paper. If that time
comes, inflation will have
solved itself through
collapse.
Gold doesn’t behave like
a commodity, because people
buy it for reasons other
than consumption and
utility. It’s a
non-renewable resource like
oil, but it doesn’t get used
up like oil, coal and
natural gas. It seems to me
that people use it as a
financial worry bead,
fingering it more in times
of high stress.
When Molly set up her
retirement account last
year, I gave her the
conventional advice about
index funds and broad
baskets of stocks and bonds.
But what I wanted her to do
was to set up a real-estate
IRA to buy land, which she
couldn’t do.
An inflation hedge should
track inflation…and do a
little better.
Between 1999 and 2009,
the average annual inflation
rate has been 2.6 percent.
For the 10 years preceding,
it was 3 percent.
It’s difficult to measure
national returns on
timberland investments,
because tracts vary so much
in size, management, types,
length of ownership and
other factors. The database
at the
National Council of Real
Estate Investment
Fiduciaries is
widely used for comparing
investments, but it’s skewed
toward large tracts and
tax-exempt investors,
primarily pension funds. The
same bias is found in
NCREIF’s farmland index, all
of whom are tax-exempt
investors.
Nonetheless, the NCREIF
average annual timberland
return in the 20 years
between 1990 and 2009 was
2.76 percent. The average
annual return for farmland
between 1992 and 2009 was
2.74 percent.
Using the NCREIF indexes,
farmland and timberland
returns did a bit better
than inflation during the
last two decades. These
types of land investments as
measured by NCREIF are
reasonably good inflation
hedges.
A 2009 study from Jeff
Mortimer at J.P. Morgan
Investment Analytics &
Consulting found that
timberland “…has provided an
annualized return of
14.60%…” over the past 22
years while correlating
“highly with inflation….”
Looking ahead, I see
nothing that would suggest
that stocks and gold are
getting less volatile, and
the financial system in
which they function seems to
be looking more vulnerable,
more risky. Whether systemic
risk is reduced in the
future is anybody’s guess;
mine is that it will not.
Gold may be the coin of
last resort, but short of
total collapse, farmland and
timberland appear to be
better hedges against both
less-than-catastrophic
events and inflation. If
nothing else, land prices
will appreciate due to
population growth over the
long term. And if the
toilet-paper choice is
between gold bars and
leaves, well….
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