Danger?

The Economist - not known for resorting to scare tactics to attract readers - had an interesting cover last week, which depicted Alan Greenspan, in runner's attire, handing off to another runner a baton made from a lit stick of dynamite. On the dynamite were the words "The Economy". Here's their reasoning for the cover:

Mr Greenspan's departure could well mark a high point for America's economy, with a period of sluggish growth ahead. This is not so much because he is leaving, but because of what he is leaving behind: the biggest economic imbalances in American history.

Further getting to the biscuit of meaning:

The Economist has long criticised Mr Greenspan for not trying to restrain the stockmarket bubble in the late 1990s, and then, after it burst, for inflating a housing bubble by holding interest rates low for so long. The problem is not the rising asset prices themselves but rather their effect on the economy. By borrowing against capital gains on their homes, households have been able to consume more than they earn. Robust consumer spending has boosted GDP growth, but at the cost of a negative personal saving rate, a growing burden of household debt and a huge current-account deficit.

And to the crux of that biscuit:

But America's domestic demand needs to grow more slowly in order to bring the saving rate and the current-account deficit back to sustainable levels. If demand fails to slow, he will need to push rates higher. This will be risky, given households' heavy debts. After 13 increases in interest rates, the tide of easy money is now flowing out, and many American households are going to be shockingly exposed. In the words of Warren Buffett, “It's only when the tide goes out that you can see who's swimming naked.”

So what does it mean to us schlubs? Here are a few thoughts, open for analysis:

1. Have some cash on-hand. 3 months expenses is a good beginning figure. 6 months is better. Keep it in short-term investments, as rates are rising. Some savings accounts & money markets are paying 4% or more today.

2. Whatever debt you have, get the rates low and locked. If you can't get the rates lower, pay off the debt, but be careful to retain some cash.

3. If you have particularly low rates on any debt, avoid paying it off. Yes, you read that right. Resist the urge to pay off debt at really low rates of interest (if those rates are fixed). Take for instance a credit card balance I have that was brought into existence to pay off a car loan and student loan balance. At the time, rates were pitiful and this card issuer offered me a 2.9% balance transfer with no fees involved. I leapt at it and have resisted paying it off since. While I hate the idea of debt, I am incurring that debt at no cost to me. I have cash elsewhere earning 4% and given taxes, it's a wash. One caveat: watch like a hawk that you do not miss a minimum payment. Mine is structured such that if I do, I am liable for an instantaneously higher rate. I can see them wringing their hands, just waiting for me to miss a payment.

4. Do you own any gold? Is now the time to buy? It's a hard play for most of us. At $560+ an ounce, how much can the average man own? If you don't have more than $25K in cash, I think personally I'd skip it. What's your take? Mine is that short of hyperinflation, I don't think it's a good play for the schlub.

5. If rates continue to rise, the overall equities markets will be hurt. Now would not be the time to get excited about stocks. There will always be value plays, but do you even know what I'm talking about? If not, forget investing in stocks today.

Thoughts?