Should you invest in a no-growth economy?

Baltimore…best bet for investors?

We drove back into town on Sunday night. People moped around in front of bars. Groups walked uptown from the stadium, their shoulders down, the chins dragging. The city was dark…and unhappy.

There was no joy in Baltimore on Sunday night. Baltimore is a sports town. The Ravens — the only team we know named after a poem — had lost. They would not be going to the Super Bowl.

Baltimore is a funny place. We were happy to leave it for 15 years when we lived in Europe. And we are happy to be back. Living in Europe was hard. Here it is easy. Living in Europe was chic and fashionable. Here, moving to a trailer park would be moving up in the world. Living in Europe was expensive. Baltimore, meanwhile, is one of the cheapest cities in the world.

But we’ll come back to Baltimore in a minute…

What’s in the news today? The Dow rose 83 points yesterday. The 30-year, ‘long’ bond yield dropped below 3%. The price of gold rose to $1,749.

Bond yields signal a recession. Stocks hint at a recovery… Gold? The correction in the gold market didn’t go nearly as far as we expected. And now it’s over. What to make of it? Do people expect inflation? Why are they buying gold?

We know why the Syrians are buying gold. There’s a war on. Gold has always been the thing to own in a war zone. But here, people think the economy is recovering.

The public and the investoriat seem to think all is well. We’ve just had one of our best months in stock market history. Many investors are convinced that it is the beginning of something big.

Our old friend Mark Hulbert, for example, tells us that some of the oldest and wisest of the newsletter gurus are now bullish on stocks.

We don’t have any opinion about stocks. We just don’t like them. And we figure that if they were as valuable as people think, the owners wouldn’t be in such a hurry to unload them. At least, not to us. Instead, they’d hold on.

But some people are always selling. Others always seem to be buying. Prices go up…and down…the world goes ’round and ’round…

…and who are we to argue with it?

The trouble is, the economy is not nearly as strong as most people think. There is no growth to speak of. And without growth, it doesn’t make sense to pay so much for stocks. Forbes:

The Q4 2011 GDP reading of +2.8% produced what may appear to be a respectable headline number, a full percentage point above Q3 GDP growth of 1.8%. On the surface, the Q4 report also compared favorably to an increase in real GDP of 1.7% for all of 2011. But 2.8%, even at first look, is still softer than the 3.0% gain in real GDP logged for 2010, repeating a pattern that we’ve seen over the past few years: GDP rises, only to drop off again.

Although it may be tempting to look at the economy as a glass that’s half full, I’m afraid it’s far emptier than it looks. Diving into the Q4 GDP report, we see that two-thirds of the amount of growth reported (1.9%) was due to private inventory build-up. (According to standard accounting practice, growth in inventory increases GDP, while sales of inventory reduces it.) Drilling further, the stat that is most meaningful is the real final sales of domestic product — GDP minus the change in private inventories. This data point eked out only a 0.8% increase in Q4 2011, compared with an increase of 3.2% in Q3 2011. That is very telling.

Another weakness in consumer spending was reported by the Commerce Department: Personal income grew by 0.5% in December, up from a 0.1% rise in November. Spending was flat, however. The personal saving rate, meanwhile, was 4.0% in December, compared to 3.5% in November. Saving instead of spending may be good for consumers’ personal balances sheets, but it doesn’t do much good for an economy that needs to gain traction. Additionally, sales increases still appear to be driven by increases in debt which is not sustainable.

Without growth, the average stock will go nowhere. How could it? There’s nowhere to go. No growth means that the economy is no larger at the end of the year than it was at the beginning. So, for any company to grow, it would have to take sales and profits from some other company. For one to grow another must shrink. Overall, there would be no growth, and no capital gains for investors.

Trouble is the dividend yield of the stock market is only around 2%. That’s not enough. Take inflation and taxes into account, says our Family Office strategist, Rob Marstrand, and you need more than an 8% return just to break even.

So, if you’re buying stocks in a no-growth market…with a 2% dividend yield…you’re losing 6% on your money.

Heck, you’re much better off buying gold…or property in Baltimore.

Gold has been up every year for the last 11. Even last year, when it supposedly suffered a big correction, it still ended the year up about $300 — which is what you would have paid for a whole ounce of gold in 1999.

As for Baltimore real estate…

We’ve been looking at apartment buildings in B’more. This city is unusual, so you probably shouldn’t generalize. But we’re seeing buildings with “cap rates” of 10% and more…and return on cash as high as 20%. Interest rates are so low you can finance much of the purchase price at low cost…and leverage your investment to get a higher return.

How does that work? Well, the building we just looked at had 5 units. The sales agent explained it to us.

“You get gross rents of about $100,000 and you can buy the building for $800,000. You put down $100,000 and borrow the other $700,000. Then, you pay off your mortgage, pay the upkeep, property taxes, utilities and so forth… You also have to pay management…leave an allowance for vacancies and major repairs…and you end up with about $20,000.

“That’s your return on cash. Not bad, huh?”

Well, it’s about 10 times what you can expect from the stock market.

Trouble is…trouble. Being a landlord in an inner city is trouble. You get trouble from the tenants. Trouble from the city. Trouble from the pipes, the roof, the wires…lead…asbestos — everything. Buy city apartment buildings and you are asking for trouble.

But if you can handle the trouble, hey…see you in Charm City.

Bill Bonner
 for The Daily Reckoning