The long game of wealth accumulation is about the proper allocation of your capital. Traditionally, you do this first by keeping liquid with insured cash deposits, short duration U.S. treasuries, and quality bonds. Second, by owning real estate, defined as land and the buildings and natural resources upon it. Third, by owning quality variable securities like stocks and bonds. Last, you can buy speculative assets such as art, insurance, collectibles, and durable commodities such as gold, silver, and precious stones.

So much for tradition! Cash savings, U.S. treasuries, and quality bonds have negative real rates (after tax interest earned adjusted for inflation). While segments of EC (European Community) have explicitly implemented negative rates, our U.S. Treasury has opted for a stealthier approach. This approach allows inflation to deflate savings while holding rates near zero. But why on Earth do they want to do that? It's not because the economy is punk, its working just fine, it's because... wait for it...FISCAL POLICY!  There can be little doubt at this point that the Federal Reserve is holding rates low as a direct result of the failure of our elected officials to address the huge structural issues of our entitlement system. The Federal Reserve is helping the U.S. Treasury to buy time for our economy while congress and the executive dither. Until this issue is resolved there is no choice but to hold real rates negative. There are no free lunches. Real interest rates have to stay negative with too many economic free riders in the future. This is not political ideology, it's just math. It's the reason why you hear more and more doom prognosticators on the radio and TV, it doesn't require an advanced degree in economics, billions of dollars of wealth, or some insightful mastery of finance to figure out. It's logic, 1=1.

When you hear politicians talk about good fiscal policy and getting the country growing again that is code for a future where the social security net doesn't overwhelm the economy. The solutions that are available to policy makers today are only through monetary policy.  Setting the risk free rate of money negative makes the benefits of savings in the future smaller, and induces people to save and work for longer to meet future needs. Another option is to restructure the U.S. Treasure's debt by pushing out maturities and exchanging it at lower rates. Curiously enough the process of doing this looks a lot like quantitative easing. By themselves these actions will not solve the problem, they will only buy time. The problem can only be resolved through fiscal policy. It cannot be solved by taxing or borrowing more. Better tax policy can help. Borrowing to build more efficient infrastructure and encourage productive enterprise helps. Unfortunately, these options have become overly subject to the political whim, gerrymandering, special interests, and corruption. Bridges to nowhere, investment boondoggles, tanks, fighter jets, and gunships that the pentagon doesn't want or need only promote growth in an imperialistic sense, and not in a healthy long term and economically sustaining way. Logically this leaves one alternative and that is benefit cuts, and this can be achieved in two different ways. One by directly reducing the size of benefits paid (hard for politicians) and second by compelling those headed for retirement to work for longer (hard for savers.)

Productivity, the measure of how efficiently the US worker produces products has been trending down for some years and has actually been negative for over a year, while labor costs have started to rise. In the 1970's during a period of higher than average inflation and unemployment there was a term used to describe it - STAGFLATION.  If you turn the economic relationships upside-down, you see something very much like stagflation. Today there is low unemployment and low inflation, but just like the 1970's we observe poor productivity. Drilling down into the data we find that much of this was correlated with the energy sector, and the dramatic way technology displaced labor. History often rhymes, but in this case demographics and how the US economy is tied to the rest of the world is setting things up differently. Instead of moving into their most productive years, as they were 40 years ago, the Baby Boomers are moving into retirement. Furthermore, the world currency markets and interest rates have become far more interdependent on the policies of the U.S. Federal Reserve. The question of whether we will see higher interest rates is now also tied to whether we get better fiscal policy in the rest of the world.

The great thing about a market based system is that over the long term it rights itself. The market works as a discounting mechanism. It discounts the costs and benefits of events in the future. It's the invisible hand that helps guide the economy, but when it veers off track, undoubtedly one can point to the mistakes made in fiscal and monetary policy and the unintended consequences thereof. Hopefully, sooner rather than later, our electorate will steer policy back on track. Unfortunately, the window for this to happen in an economically stable way is starting to close. The evidence of this can be seen in the skittishness of the stock market, it is starting to sense a binomial outcome in the future. The last two rapid drops in the market, September 2015 and February 2016, are indications that investors can't make up their minds about something looming. Are we going to get good fiscal policy or bad fiscal policy, higher interest rates or lower interest rates? The market appears to be discounting a bifurcated future, one which is worth more, and one which is worth less.  The market reads bad fiscal policy as lower rates for longer and good fiscal policy as higher rates sooner. Good fiscal policy will equal a lower stock market in the short term. Bad policy will equal a higher market for longer. It's a Catch 22 situation and the market's volatility reflects it.

I don't advise on commodities, art, or precious stones. I primarily advise on stocks and the stock market. I do this by estimating the future value of the cash flows a company which is represented by a stock produces, and then applying a premium for the intermediate risk or volatility one expects to hold it for 5-10 years. Today the broad market is offering investors roughly a 5% return with a few +/- 20% dips and rises over 3-18 month periods along the way. That's a 3% before tax real rate of return after applying the Federal Reserves stated goal of 2% average inflation. I prefer to be a net buyer of stocks when the market offers a 5% before tax real rate and a net seller when it's below 3%. Today, if you need to raise some cash look to sell sparingly into the market when the S&P 500 is near or above 2100, and if you want to put some money to work buy heartily on dips near or below 1860. Meanwhile, be patient. It's an election year, enjoy the spectacle, and, if you can, take advantage of our bifurcated market.