Permanent Value Inc. - Registered Investment Advisor

Planning Perspective

Because inflation plays such a key factor in planning out your financial strategy due to its steady erosion of the purchasing power of your savings, I wanted to give you the half yearly update according to an expert, Morningstar’s director of economic analysis Robert Johnson, *“I think we’ve seen the worst of inflation,” who bases his view on what’s happening to commodities prices and on some developments in key components of the Consumer Price Index.   Forget all that money the Federal Reserve has been printing and all the borrowing the U.S. Treasury has been doing and continues to do. Inflation, at least in the short term, has peaked.   Central in Johnson’s thinking is the fall in domestic refined gasoline prices at the pump, down now from a high of $3.98/gal in April to $3.61 today, according to the AAA daily survey. That’s a 10% decline in a product that constitutes 5% of the Labor Department’s CPI.  Also an important factor, says Johnson, are three major back-to-back declines in basic food prices over the past three months. “Basic food prices — for things like vegetables and fruits — have fallen 10%, 7% and 7% in the last three months,” he said.  Adding to his confidence that the worse of inflation is behind the U.S. economy is an apparent tapering off of the disruption in auto manufacturing caused by the triple calamity in Japan this spring which made key parts for auto production such as on-board computers and certain paints nearly impossible to obtain. “Toyota’s car production went from 110-120,000 cars/month before the earthquake and tsunami down to a post-disaster 30,000 units,” Johnson said, “but now they’re back up to 90,000 cars.”  He said that a shortage of cars — not just of Toyotas, but of almost all brands — had led to a sharp rise in prices for what, again, is a big piece of the CPI, with prices of new cars rising by 1% or more per month for several months.  “That rise was because of a supply shortage,” he said, “and now that shortage seems to be ending. I think soon we’ll be seeing a return of incentives for car buyers.”  In addition to declines in key parts of the CPI, such as food, cars and fuel, Johnson said there are other good reasons to think inflation pressures won’t return in the near term. “It doesn’t look like housing will explode on the upside again anytime soon,” he said, “though rents could rise.” Housing represents a whopping 40% of the CPI. “And we’re not likely to see wages rising either.”  But what about all that government red ink?  “Well, longer term, of course, you do have a lot of government debt, but then businesses have reduced their debt significantly since the financial crisis, and consumer debt is down a lot too, so there is a kind of compensating factor,” he said.  For now though, Johnson thinks inflation is not a big concern, at least here in the U.S.
While this alleviates some of our short term concern, circumstances can change and we have to make sure your assets and the protection you’ve provided for them stay ahead of inflation.    By factoring this into you financial plan we want to ensure that you do not lose purchasing power and your ability to maintain your current lifestyle over the long-term.

Second Quarter Review

The Markets

If that looks like Greek to you, that’s because, well, it is. It’s Greek for “extend and pretend” and that’s what happened last week to Greece’s debt problem.

Deeply in debt, Greece’s parliament passed legislation filled with tax increases, spending cuts, and privatization plans “aimed at meeting European Union aid requirements and staving off default,” according to the Sydney Morning Herald and Bloomberg. By passing the austerity plan, Greece is now in line to receive as much as $124 billion in new financing to keep the country afloat.

With immediate default now off the table, investors breathed a sigh of relief and helped send the S&P 500 to its biggest weekly gain in two years, according to Bloomberg.

A positive manufacturing report from the Institute for Supply Management, a rebound in auto sales, and strong quarterly earnings from Nike also helped send the market soaring, according to CNBC.

It’s rather amazing how sentiment in the financial markets can change so quickly. The market had fallen in seven of the previous eight weeks on various economic and political concerns, but then exploded like a supernova last week. One thing we can say about the financial markets is there’s never a dull moment!

Returns

Notes: * This newsletter was prepared by Peak Advisor Alliance. * The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. * The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. * The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.* Past performance does not guarantee future results.* You cannot invest directly in an index.* Consult your financial professional before making any investment decision.

What to Watch in the Second Half of the Year

With the first half of 2011 now history, here are a few things that made the headlines and may affect the markets over the second half of the year, according to The Wall Street Journal:

• The Dow Jones Industrial Average had a volatile six months, but managed to end June on a high note and finish the first half of the year up 7.2%.

What to Watch: The end of quantitative easing, ongoing European sovereign-debt issues, and the U.S. budget battle could keep investors on edge over the summer. In addition, any signs that the current “soft patch” in the economy could turn into a new recession would not be received well by investors.

• Various commodities took a price hit the past couple months including crude oil, wheat, corn, copper, and silver. Yet, by historical standards, many commodity prices are still very high and causing discomfort to consumers around the world.

What to Watch: China, India, and Brazil are a major source of commodity demand and they are trying to rein in price inflation by slowing their economy. How successfully they manage this may determine the future demand for commodities and, by extension, impact inflationary pressure.

• The initial public offering of internet stars LinkedIn and Pandora stirred talk of a new internet bubble. LinkedIn, for example, doubled in price on its opening day.

What to Watch: While we’re not close to the hysteria from late 1999, any signs of a bubble bear watching because when they burst, it’s usually painful for the markets.

• Interest rates on U.S. government securities dropped significantly in the past few weeks as concern about a slowing U.S. economy and debt troubles in Europe caused investors to flee to the perceived safety of U.S. treasuries. However, interest rates turned up at the end of the second quarter as the Greek situation eased and some data on the U.S. economy improved.

What to Watch: Any significant change in the level of interest rates – either up or down – could move the stock market. With macro issues such as the end of quantitative easing, an uneven U.S. recovery, European debt woes, and the Washington budget battle still swirling around, interest rates could be volatile and we’ll continue monitoring them.

With macro events continuing to dominate the headlines, investors seem to be alternately optimistic and despondent about the markets depending on which way the macro winds blow. This topsy-turvy market makes it psychologically difficult for investors but, we’re doing our best to maintain an even keel on your behalf.

Weekly Focus – Happy Independence Day!

So let freedom ring from the prodigious hilltops of New Hampshire.
Let freedom ring from the mighty mountains of New York.
Let freedom ring from the heightening Alleghenies of Pennsylvania!
Let freedom ring from the snowcapped Rockies of Colorado!
Let freedom ring from the curvaceous peaks of California!
But not only that; let freedom ring from Stone Mountain of Georgia!
Let freedom ring from Lookout Mountain of Tennessee!
Let freedom ring from every hill and every molehill of Mississippi.
From every mountainside, let freedom ring.

– Martin Luther King, Jr.

President’s Message

HALF TIME REPORT…

Given that we are half way through the year, it seems appropriate that we would give you a half time report on the world and how we are adapting your financial strategy to reflect what is happening.  (For you NFL and NBA fans, it might be the only half time report you get all year if they don’t solve their labor disputes!)   The first half of the year had mainly been dominated politically by government change in the Middle East and economically by government debt, the debt ceiling, and the annual deficit not only here in the US but overseas as well.  We are in a period of slow economic and job growth but companies seem to be doing a good job at maximizing their profits.  Congress is finally addressing in a meaningful way the question of how much debt is too much and what is being done to not just reduce it but simply to slow down its growth!   Now you might be asking “what does this have to do with my financial strategy?”  In most financial strategies, we are either growing our income sources for future distribution or distributing from our current income sources.   Current and future interest rates have a lot to do with that and the government sets the interest rates.  Because your income is reliant on interest rates, the higher interest rates are the less you have to save to provide your future income.  Given that the government debt is about to top $15 trillion, they are very motivated to keep interest rates down because even at 2% the government has to pay out $300 billion in interest alone every year.

INFLATION…

We have been in a very low interest rate environment for some time and with the federal debt situation it looks like we will continue to do so.  This tells us that we will have to save more and acquire more incoming-producing assets than in years past.  Inflation is also a key factor because the government’s chief tool to keep down inflation is to raise interest rates and it is not able to do so effectively until it starts reducing its debt.   We’ll give some statistics on the state of current inflation in the Planner’s Perspective of this newsletter.

So we have to be aware of inflation in everything we do because it erodes the value of the money we save every year.  In fact, since 1950, the value of the dollar has declined over 90%.*   Taxes are also a key ingredient in this mix because ultimately it’s what you keep rather than what you earn or have saved that is most important.  So the three key factors in long-term investing and your financial strategy are inflation, interest rates and taxes and we have to keep all these in mind with every investment that we make.

*Source: Bureau of Labor Statistics. Web: http://stats.bls.gov/.

SUMMERTIME…FALL…

Understanding the dynamics of how your financial plan navigates these economic forces is crucial to reaching your financial goals.  Your financial strategy is a fluid and dynamic plan that updates and adjusts but doesn’t change its core principles (accumulating or distributing, protection, low volatility or high volatility, etc.).  Every meeting we have together builds upon the foundation we have established to make sure your financial goals are achieved.  We look forward to meeting with you in the fall to discuss your strategy and make any year-end adjustments that will make your strategy more effective given any income and asset changes you have made throughout the year.  Have a wonderful summer and we’ll see you this fall.