Emotional Numbness

The President has declared opioid usage a national health emergency, and I applaud anything to help those people trapped in addiction.  Missing from the discussion, however, is the historical sweep of drug addiction.  There has never been a time in my lifetime that there was NOT a drug problem of some type.

As a boy, I remember my father making me watch a TV show about heroin.  Many decades later, I still recall one particular scene of an otherwise-upstanding young man literally laying in the gutter, while begging for more heroin.  As a teenage, I remember seeing "Reefer Madness" - a video showing marijuana as a killer of morals, which I was required to watch again in Army Officer Candidate School.  In college, the rage was LSD - a time of "turn on, tune in, and drop out."  Then, speed became popular - which would turn a lazy bum into a workaholic, until he collapsed.  The first time I saw coke, was on the hood of new Cadillac in Florida, as bankers swarmed to snort it.  Then, there was quaaludes and assorted other drugs that have crossed the stage since then and passed out of fashion.

My point is NOT that opioids are not a problem.  My point is NOT that opioid addiction is not a personal tragedy.  My point is NOT that addicts don't deserve help.  My point is that some other drug will take the place of opioids in the future.  Which drug will that be?  The most recent data from Colorado shows clearly that opioid usage has declined as marijuana has become legalized and used more regularly. 

My question is whether the drug is a cause or a symptom of another problem.  Because different drugs become fashionable at different times, I'm suspicious that there is a certain personality type that is prone to addiction.  Would it not make sense for psychologists to identify those people at an early age and begin treatment before they seek out drugs to deal with their problems?

Maybe, if Americans had taken Nancy Reagan's advice decades ago to "just say no," we would not have the opioid problem today.  But, we do!  Well-meaning admonitions like that won't give relief to those who need it.

Cold Reality

Iceland is a fascinating little island-nation with a population of a mere 335 thousand, much less than the city of Virginia Beach for example.  Often called the "land of fire and ice," it is indeed a land of contrasts from glacier-covered active volcanoes to magnificent art galleries.  Despite a jaw-breaking language, the population is remarkably well-educated and well-read.

While I believe that people are just people everywhere and that "the Russians love their children too," I did find a special, laconic disposition of Icelandic people.  Their speech is melodic and hypnotizing.  Except for their politicians, I've never seen an angry Icelandic person.

Speaking of politics, Iceland neatly separates its economic and social issues.  It is progressive on issues such as same-sex marriage and abortion but conservative on business regulation.  (It is oddly conservative on alcohol consumption!)

Karl Marx famously said that capitalistic systems may be efficient, but they are also cruel.  Iceland could have been a case-study for him.  It's economy was traditionally built on fishing and farming.  In the halcyon days of minimal worldwide financial regulation before 2008, Iceland added a potent third new industry - banking - and proceeded to make loans worldwide and, more importantly, buying derivatives, such as credit default swaps.   This country consequently became the first country to collapse during the global financial crisis, and its people suffered greatly.  One important economic tool is the currency exchange rate.  Iceland devalued its krona over 50%, which means all imports suddenly cost 50% more.  GDP promptly shrank and unemployment tripled.  They saw the cruelty of capitalism up-close and personally.

Slowly, the capitalistic Icelandic economy fought back and recovered.  Today, it has the fastest growing GDP (7.2%) among developed nations and a mere 2.6% employment.  Their economy is booming.  Banking has been replaced by tourism.  Over two million tourists visit this tiny country annually.  Construction cranes dot the horizon in their capital city of Reykjavik.

But, like people are the same everywhere, politicians are the same everywhere.  Icelanders are voting today to replace their year-old government, because the leader's father wrote a letter asking for a pardon or "honor restitution" for a pedophile.  Understandably, snap elections were called immediately, and we will know soon enough who the new leader will be, but it doesn't really matter, because Iceland will continue to be socially progressive and economically conservative.

Iceland is a must-see country!  Go, see it now . . . 

A Fake Hatchet Job ?

Hundreds of times, I've posed the question of "is 6% a good portfolio return?"  The answer, of course, is -- it depends!  If you take very little risk and get a 6% return, it is a good return.  If you take a lot of risk and only get a 6% return, it is a terrible return.  Your return has no meaning without knowing how much risk you took.

You would expect a novice who knows nothing about risk and investment management to make the mistake of ignoring risk, but you would expect something more from The Wall Street Journal.  They just completed a lengthy expose' on the use of Morningstar's star ratings of mutual funds, which is the starting point of any discussion of mutual funds.  A fund can have as many a five stars, but that doesn't have any predictive value.  Few five star funds remain that way for ten years.  Their investment returns can vary wildly from very good to very bad. 

Morningstar doesn't promise that a five star fund will increase in value.  They look at the risk-return relationship of the mutual fund, the level of fees charged in comparison to similar funds, the qualifications of the portfolio manager, the strength of the mutual fund sponsors and other factors.  Morningstar merely estimates if the particular fund has the tools and integrity to continuing earning five stars.  There is more to life and more to investing than getting a 6% portfolio return.

Your independent judgement of mutual funds cannot be out-sourced, but Morningstar is a good place to start your studies.  It is a launch pad, not a landing pad.

One would not expect to read "fake news" in the conservative Wall Street Journal . . . nor an article as misleading as this one.  What did Morningstar do wrong to deserve such a "hatchet job?"

Parsing Capital Goods Orders

Economists have been waiting for the economic data to become misleading due to the impact of our terrible hurricane season.  Fortunately, the monthly "durables report" helps separate the one-time data from the more durable.  It is one of the more important monthly reports.

Overall, capital goods order rose another 2.2% in September, following a 2.0% jump the previous month.  That is a very strong increase, with stronger than expected growth in civilian aircraft sales and weaker than expected growth in auto sales, despite the hurricane damage to cars.  Stripping out defense spending and civilian aircraft sales, the rate of growth drops to a still very robust 1.3% monthly increase in capital goods orders.  Over the last quarter, this has risen at a very strong 11.3% annualized rate.

Bottom Line:  the one-time impact of the hurricanes has been less than expected and has not yet confused the economic data.  More importantly, the underlying data continues to look strong.

Party on, Garth!

It Matters

Janet Yellen has been Chairman of the Federal Reserve System since the retirement of Ben Bernanke, but her term expires in February, and President Trump is looking for her replacement.  She has indicated that she would like to continue in her current job, but is opposed by the Area 51 Republicans primarily because she was originally appointed by former President Obama.  The first choice of Area 51 Republicans is Stanford professor John Taylor, whose formulaic approach to regulating would be more predictable and less flexible in a crisis than now. 

Gary Cohn is the current Chairman of the President's Economic Advisors and is supported by the establishment Republicans.  With a long career at Goldman Sachs, he is probably too stained to be appointed, despite his other impressive qualifications.  Or, those establishment Republicans could content themselves with Kevin Warsh, who is very young and unproven but has already served a partial term as a Fed Governor under a Republican administration. 

Democrats would be most content with the reappointment of Janet Yellen or current Fed Governor Jerome Powell, who are less likely to raise rates quickly.  Democrats also know their opinion doesn't matter on this.

The President is a real estate developer, who are generally heavy borrowers and therefore prefer lower interest rates.  Besides, increasing interest rates will increase the cost of carrying our $20 trillion of government bonds, which takes money away from other Trump priorities.  It also decreases consumer spending by voters.  I would not be surprised if the President supports the Democrats on this important appointment and appoints either Yellen or Powell.  If so, expect little disruption in the credit markets. 

Clear Sailing

As a long-time member of the National Association of Business Economics, I follow their surveys closely.  In their latest, it is clear they see no prospect of recession during the next two years.  Here are some thoughts:

Look at the sharp rise in earnings from the third quarter (Q3) of this year to the next quarter.  Obviously, other members are more optimistic than I am, and I hope they are right.

Also, notice the declining growth in earnings while sales remains relatively flat.  That is a normal behavior for later stages of the business cycle.  But, we are not near the end of the business cycle.

A Time and A Place

During the Great Depression, Democrats faced a moribund economy and needed to jump-start it.  To do so, they adopted Keynesian economics which calls for deficit spending.  This is sometimes called "demand-side" economics and is the mirror image of "supply-side" economics, which has been adopted by Republicans.

One calls for the government to increase its demand for goods & services, while the other calls for businesses to increase the supply of goods & service whenever they get a tax cut.  BOTH jump-start stagnant economies, and BOTH cause huge government deficits, and BOTH promise the deficits are temporary, which will decrease over time, as the economy gains strength.

Does either approach make sense now, in 2017?  NO!  This is time for Austrian economics.

Nobody likes to admit the economy is doing just fine.  It doesn't need to be jump-started.  Trump's cutting of red-tape will do more good for the economy than a tax cut will.  When the economy is doing well, you don't cut taxes -- you should repay debt incurred during the last round of supply-side or demand-side deficit creation.  That's the Austrian approach, i.e., balance revenue & expenses whenever possible and keep debt minimal.

President Trump is drinking the supply-side Kool-Aid, when he actually needs a good Austrian beer!  Let the economy grow and use the surpluses (once we get some) to repay debt.  Cutting spending is good, cutting taxes is not . . . at least, not now!

Losing Our Focus

Political parties are obstacles to clear thinking.  My Democratic friends are incensed that Trump & Company colluded with the Russians, while my Republican friends call it a "big nothing-burger."  Their thinking is polluted.  Neither has identified the all-important issue: 

THE RUSSIANS HACKED OUR ELECTION! 

We should be talking about punishment for the Russians.  We must have an agreement with the Russians never to do this again, or we must launch a major cyber attack on them immediately.  Why are we talking about "nothing-burgers?"  Whether it impacted the election or not is totally irrelevant.  Do you think they were trying to NOT impact the election?

THE RUSSIANS HACKED OUR ELECTION!

To my Democratic friends, show some faith in Mueller.  He is like a tumor, growing more malignant every day.  If anybody at Trump & Company colluded with the Russians, Mueller will identify it.  There are only two things you can do -- Be patient and focus on the important issue:

THE RUSSIANS HACKED OUR ELECTION!

To my Republican friends, get out of denial.  If somebody colluded with Russia, they sold out their countrymen, both Republicans and Democrats and deserve to punished.  If not, this too shall pass.  Your job is to focus on the important issue:

THE RUSSIANS HACKED OUR ELECTION!

There must be retribution!  How would you do it?  When?  Would you negotiate a preemptive treaty with the Russians or just attack?  Do you limit the attack to cyber-attacks or extend to military attacks?  How can anybody talk about "nothing-burgers" when the United States has been attacked?  Remember:

THE RUSSIANS HACKED OUR ELECTION!

Nothing else matters . . . nothing else matters . . . 

Good Guy Finished First

University of Chicago professor Richard Thaler wins this year's Nobel prize for economics for his groundbreaking discovery that human beings are . . . well, human!

You see, for the sake of convenience, economists have always assumed that people act rationally, in their own best interest.  Supply-siders like to believe taxpayers would set aside any tax savings and invest it to "create jobs," despite over-whelming evidence that people either just save it or pay down debt instead.  When gas prices drop, do people use their cost savings to create jobs or switch to premium gas or make another trip to McDonald's with the kids?  It is irrational that the overwhelming number of baby-boomers have no savings, but who needs savings if you're going to live forever?  Are people rational decision-makers?  No!

People behave irrationally, because they are . . . well, people.

Dr. Thaler elaborated that obvious fact and developed ways to make economic assumptions about human behavior.  He is the father of "behavioral economics" and absolutely deserves the Nobel prize.

Yep, a good guy with a great sense-of-humor finally finished first!

A wider perspective is that economics has been dominated by econometrics or applied statistics for the last twenty years or so.  I can see the tide is changing, and there is finally room in economics for non-economictricians, who can actually speak "human." 

Third Quarter Wrap-Up

For those interested in my latest column for Inside Business, you can read it here:

https://pilotonline.com/inside-business/news/columns/third-quarter-outlook-economy-chugging-along-expert-column/article_e2f86efe-3ee9-559c-a7a8-31576b0f61c1.html 

Labor Market

Even though the United States LOST 33 thousand jobs in September, the jobs-market is HOT!  The unemployment rate is only 4.2%.  The more important U-6 level of unemployment, which includes the long-term unemployed and those only marginally attached to the workforce, like those who hold serial part-time jobs, has fallen to only 8.3%, which is the lowest level since 2007.

The only reason the U.S. lost jobs last month was due to the hurricanes.  Many of our economic data points will be skewed by this over the next few months, so we have to "look around" the data.  If you look around today's jobs-report, you will see the jobs-market is HOT!

If you still have a kid living in your basement, who believes he/she cannot get a job, NOW would be a good time to evict them forcefully if necessary.  Do them a favor and EVICT them.  It is not even tough love, it is just love to evict them. Of course, there is something called "frictional unemployment" that recognizes a job in Oklahoma is not much good for a person in North Carolina, who doesn't even know a job opening exists.  That's why they call it a job-search, which is so simple on the internet.

Despite the good news that the jobs-market is HOT, the stock market was not happy.  The conventional wisdom is that the Fed is more likely to raise interest rates when the job-market is HOT.  Interestingly, the current Fed-head, Janet Yellen, finds the relationship between jobs and inflation is not as strong as before.  With unemployment so low for so long, inflation should be a problem now, but it is not, contrary to what hand-wringers say.  I do believe Yellen will again raise interest rates in December anyway, not because she wants to preclude an inflationary outbreak but because it will be her last opportunity to do so before her term expires -- a fitting "swan song."

Did I mention the jobs-market is HOT?  Now, go worry about something else . . .

Advantage: Males ?

On the first Monday of each month, the Department of Labor releases its closely-watched "jobs report."  Democrats focus on the unemployment rate and advocate more help for the unemployed.  Republicans focus on the labor force participation rate (LFPR) and complain people are obviously lazy.  (The LFPR loosely measures what proportion of the population either works or wants to work, with the rest being too lazy to support their families.)  The LFPR is currently 62.9%, which is much improved but still suggests 37.1% are students, homemakers, or "useless."

During the global financial crisis, the unemployment rate was very high and the LFPR was low.  Fortunately, that has reversed.   There is no question that, once unemployment benefits expire, the long-term unemployed often fall out of the work force.  (Frankly, if I was a unemployed factory worker stuck in some backwater town of the Midwest during 2009, I would have also been tempted to simply watch "Wheel of Fortune" every day.)

That's the old spin on LFPR.  Inside that number today, there are some interesting changes going on, particularly that women are more likely to be part of the workforce and men are less likely.  One reason is that man-dominated manufacturing sector has not recovered enough but has been mechanized enough that the sector now needs fewer workers.  The female-dominated service sector, on the other hand, has continued to grow, increasing demand for more workers.

Also, with longer life expectencies and the demise of pension plans, we watched the number of males over age 55 retiring actually decline for many years.  Men over 55 were working longer, because they had to!  That appears to be changing now, as more men over 55 are now retiring than entering the market.  That is not true for women.  Stuck in lower-paying service sector jobs, women over 55 continue to flood the labor market.  Another reason for this is that women are less-likely to be disabled and can actually work longer, having been stuck in jobs that were less physically demanding.  Plus, with their longer life expectencies, they need a larger retirement "nest egg" than men do.  Women have to work longer.

Assuming work is bad, it looks like things are getting better for older men, while getting worse for older women.

One More Time

I like guns.

How many times have I started a blog with that simple statement?  After each mass tragedy, I try to explain all gun owners are not gun nuts and not all gun nuts are "Area 51" Libertarians.  There are degrees of madness.

My father originally taught me about guns, when I was a little boy.  They were tools, like hammers or saws.  You kept them nearby, in case you saw a snake or a rabbit for the dinner stew.  Guns were mere tools!

I remember my grandfather showing me his shotguns, saying he was ready for the Communists to come over the hill in mountainous rural Virginia during the late 1950's.  He knew perfectly well that was not going to happen but found it a convenient justification for his shotgun collection.  He had no idea of Ayn Rand's Libertarian beliefs of evil Federal government forces trying to enslave us.  He just wanted a justification.

Often as a boy, I saw shotguns but never saw a fully-automatic assault rifle until I was in the Army.  They were useful in spraying rice paddies or other open areas with maximum firepower.  They had no purpose except killing other human beings.  Is that a mere tool?  A hammer drives nails.  Assault rifles kill humans.

Now, our country is terrorized by "Area 51" gun-nuts, who swear any regulation on guns is a slippery slope to confiscation of all guns.  They are simply NUTS!  The NRA started off legitimately but has descended into madness.  It is now clearly a terrorist organization and should be treated as such.  They are the most dangerous lobbyists in America.  While they have a convenient "slippery slope" theory, they have no decency as human beings.

From a regulatory standpoint, Americans can "walk and chew gum at the same time."  We can allow the sale of handguns while forbidding the sale of bazookas.

From a psychological standpoint, I've never seen any research that a guy with 43 guns has some sort of penis-related issues but would not be surprised.

From a religious standpoint, since you can buy a $50 conversion kit on the internet to convert your semi-automatic rifle into a fully automatic one, I pray that whomever sold those kits to the Las Vegas shooter burns in hell forever!

Letting Grudges Go

Many times, my late mother cautioned me not to carry a grudge.  She wisely said the weight of that grudge gets heavier over time.

I've just finished watching the epic new documentary by Ken Burns on "The Vietnam War" and  thought of her advice frequently.  That film is a seminal and definitive work on a long-running national agony and is highly recommended.  During the closing credits, Paul McCartney's iconic song "Let It Be" played mournfully, and I wished that was possible.  I want to let it be and realized then that the grudge may have become heavy.

I'm not mad at John Kennedy for sending the first Special Forces units there.  "SF troopers" expect to be the tip of spear, to be the "eyes & ears."  But, their assessment was confused and tragically wrong.  However, I am mad as hell at Lyndon Johnson for escalating the war. and I'm mad as hell at Richard Nixon for uncorking a torrent of lies and deceit, as he plunged us deeper and deeper into an unwinnable war.  But, I am not mad at Gerald Ford who accepted our obvious defeat and withdrew our remaining forces, preventing the waste of more American boys, although he had to abandon almost a million of our allies.

There will be many who say this documentary ignores the nobility of trying to save a remote country from the clutches of Communism.  Likewise, there will be many who say this documentary ignores  the permanent breach of trust caused by this war between the government and the governed in America.  I'm mad as hell at both sides.  Surely, we are now post-spin and willing to accept that both sides have valid points. 

I'm mad as hell as those who labelled returning veterans as baby-killers and worse.  I'm not mad at  today's young people, whose lives are too full of exciting things to remember Vietnam -- which is just another war in a long line of wars, like Afghanistan.

And, I'm mad as hell at people of good intentions and pretty words, who believe you can successfully fight a guerrilla force with conventional forces.  Not learning that lesson has already cost the lives of many Americans in Afghanistan.

The documentary left me with one strong impression.  Other veterans have figured out a way to "let it be" and have moved past the experience.  The Vietnam Memorial has been sitting there for 35 years, and I've been too cowardly to visit.  Maybe, it is finally time to visit . . . and to find a place to bury this grudge.

Snapshots of Deep Thoughts

One of the few Wall Street firms I respect is McKinsey & Company, which is part think-tank and part strategic consultants.  They have recently published a new strategic study, identifying four "super" trends, which will shape our civilization over the long-term.  They expect these trends are so powerful that "we are in the midst of change 300 times more powerful and 10 times faster than that of the first industrial revolution."

The four super-trends are:

1.  Globalization -- (sorry, Mr. President!  The Principle of Comparative Advantage can only be slowed but not repealed.)
2.  Technology accelerators -- not technology per se but its accelerators -- like Amazon.
3.  Global age wave -- the average age is rising worldwide, and may be impacting productivity.
4.  Increasing Urbanization -- only 3.5% of America's land mass is in cities where almost half of us live -- 46 of the world's 200 cities will be in China by 2025

But, how does that impact the job of financial planners?
1.  Job obsolescence risk -- we must help clients explore and understand the vulnerabilities of their job security.
2.  Changes in investing strategies -- reconsider the holy 60/40 portfolio, Monte Carlo analysis, asset allocation, etc.
3.  A different old age -- our life expectancy has increased ten years since 1960, increasing Social Security obligations and the burden on our "nest eggs."
4.  Behavioral finance is more important -- the 24/7 onslaught of news makes clients too pessimistic - they need coaching as much as expertise.

The Perpetual Life of Alarmists

There has never been a day in my life that some intelligent person was not predicting the "sky is falling" -- the economy is crashing and you should buy gold.  For many years, I just assumed a given percentage of any society is allocated to quacks.  Now, I'm starting to see a common denominator between many of them, i.e., Ayn Rand.

Make no mistake:  I loved reading her books and think I have read everything she ever wrote.  I was taken by the need of each individual to stand up for his/her beliefs.  However, she also wrote extensively of how central government is never to be trusted, as you would expect from any Russian refugee like her.  Sinister black helicopters hover everywhere in her world.  I never accepted that vision, as it assumed the central government was more competent than anything I had ever experienced.  Apparently, many of her followers did accept that.

As a Russian refugee, her economic sympathies naturally lay with the Austrian School, that any government action merely clogs the gears of free enterprise.  So, if the central government is evil and is significantly involved in the economy, I guess it should not be surprising that Rand disciples always believe the sky really is falling.

The latest in a long line of doomsayers is Doug Casey, who describes himself as an anarcho-capitalist or someone who advocates extreme self-reliance, unfettered capitalism, and abolishment of almost the entire government.  He has long embraced gold and recently embraced bitcoin and other crypto-currencies, which are free from governmental manipulation.  He makes his living selling books about the coming collapse of western civilization, revealing a deep belief in both Austrian economics and in Ayn Rand.

He also has long advocated that Americans unleash themselves from America, by investing assets overseas and having multiple passports.  I have long distrusted anybody practicing in this area of finance.  Run -- from anybody recommending "asset protection trusts" from any island-nation!  There is something sleazy to selling passports in exotic places.  Last week, I was offered a valid passport from the island-nation of Saint Lucia for $145 thousand.

Oddly, his belief in "Black Swans" sounds more like a disciple of Keynesian economics (see Minsky's Moment) than Austrian economics.  But, he remains true to Rand's belief that the government of the greatest country in history exists for the sole purpose of repressing its people.

If you like Casey's alarmism, then buy his books.  If you believe Casey's alarmrism, especially in the foreseeable short-term future, then run for your life!

Salesmen & Sales Tools

Some years ago, a friend said to me:  "My stockbroker says I have a 92.4% probability of achieving my financial goals, so what can you do for me?  He was referring to a favorite sales tool of stockbrokers, i.e., a Monte Carlo Analysis.

I told him:  " Absolutely nothing, if you really believe that some canned program on a stockbroker's laptop can analyse all the unknowables of the worldwide stock markets over the next fifty years and do it accurately enough to give you that probability within a tenth of a percentage point."  We talked more, and he eventually became a client.

If you want to confuse a client, just throw a few graphs and a bunch of technical jargon at them.

One problem with Monte Carlo Analysis is that it assumes all outcomes have a normal distribution, which means it assumes an equal number of positive outcomes and of negative outcomes.  It also assumes that outcomes are random, ignoring the fact that the stock market tends to be random in the short run, cyclical in the mid-term, and trending in the long run.

Another problem with Monte Carlo Analysis is that it ignores the correlation between market events.  An example would be a general quickening of market gains when interest rates are lowered and the reverse when interest rates are raised.  There are numerous other correlations that are ignored.  The stockbroker-salesman would have you believe that none of those correlations affects the probability of achieving your financial goals.

The biggest problem is that Monte Carlo Analysis ignores the sequencing of outcomes.  If the stock market crashes early in your retirement, it is very likely your nest egg will never recover.  As the brilliant technical analyst Jim Otar explains it:  "It only takes a little push of small, adverse events to turn a "median" portfolio into an 'unlucky' one, however, it takes a whole lot of large, favorable events to turn a "median" portfolio into a 'lucky' one."

I love Monte Carlo, one of the world's greatest places, but I hate Monte Carlo Analysis.  You should too!

Clash of Rights

Colin Kaepernick was a quarterback for the San Francisco 49ers football team last year when he decided to remain seated or "take a knee" during the national anthem.  I condemned that action by a wealthy player, whose only experience with uniforms was the sports-type.  However, at no point have I questioned his right to free speech  -- but is no place safe from serious subjects?  Is there no place I can go where that I can be free of every quack's opinion?  That's the purpose of the public square, whether newspapers, television, or dirt in front of the courthouse.  Do your demonstrating there!

You cannot demonstrate in the middle of the street for safety reasons.  Likewise, you cannot scream "fire" in a crowded theater for the same reason, but a demonstrator can follow you into a public restroom and stand outside the stall to convince you they are victimized.  That is their right, sorry about your privacy.  Some sports stadiums are publicly-owned and some are privately-owned.  All are subject to the right to free speech of anybody feeling aggrieved for any thing.  Even churches are subject to demonstrations.  What about those crazy Baptists from Kansas who demonstrate at the funerals of our fallen heroes?  Does their right to free speech override the wishes of the dead soldier's family.  Unfortunately, yes.  Does their right to free speech override my enjoyment -- at all times and in all places?

What is wrong with enjoying a simple sporting event, or must we wait until absolutely no American is feeling aggrieved or victimized . . . about anything?  Football is one of my guilty pleasures.  Is it wrong to enjoy it without a painful reminder that my country is racist?

I will defend to the death your right to free speech  . . . but not everywhere.  

The Duty to Discard

I have settled estates and administered many trusts, as well as doing the estate planning for maybe a thousand people, but I will now add a new rule to estate planning - the Duty to Discard.  It is indeed a duty of each person.

No parent wants their children to fight among themselves, much less over minor possessions.  However, some of the kids will become angry with other siblings over who gets things like Mom's favorite clock or Dad's favorite shotgun.  There are ways to prevent this.

Every possession is not a priceless treasure.

No parent wants the child's pain of losing a parent to be greater than necessary.  Yet, aren't you making it more difficult if your children have to decide whether to keep Dad's old military uniform or Mom's photo album of her trip to California . . . or whether to discard those items.  If kept, they will just remain in a storage unit for the life of the child, when a grandchild must decide what to keep or discard. 

Also, do you want to add guilt to the grief your children feel?  If discarding your old uniform suggests the child will think less often about you, does that mean they will never think about you without the uniform?  Of course not, every kid walks around with a thousand memories in their head.  They don't need the myriad trinkets collected over a lifetime to remember you.  They will never forget you, regardless of the trinkets.

Every possession is not a priceless heirloom.

When I do your estate planning, I will ask about your plan to discard unnecessary possessions.  It is my duty to ask.  It is your duty to make it easier for your kids, not tougher.  Losing a parent is hard enough without all these unnecessary complications!

Who Needs A Financial Advisor Anyway?

I have a wonderful client who lives in a very high-end retirement facility.  During our last meeting, she told me about her many friends who don't have a financial advisor and try to manage their nest egg with certificates of deposit.  They are just trying to reduce their expenses, as any financial advisor would recommend they do.

They see investment management as the sole function of financial advisors.  Why incur the cost of a financial advisor if you're only investing in certificates of deposit?  Fair question, indeed!

A highly-respected industry leader of mutual funds is Vanguard, who has a well-deserved reputation for controlling costs.  They did a recent analysis of the value of financial advisors,  Of course, there is an investment management aspect to it, but that ignores the value brought by asset allocation, asset location, rebalancing, and the all-important behavioral coaching.  Vanguard's analysis showed a 3% average annual improvement in portfolio returns by using an advisor.  My client's friends would be heart-broken to learn they were short-changing their returns by so much each year.

I do take issue with two aspects of Vanguard's analysis.  First, it ignored the value of estate planning.  A seemingly little thing like making sure a person's nest egg is titled properly can add enormous value.  Second, it assumes the reduction of risk has no value -- really?

Nonetheless, the value of their analysis is that it documents that financial advisors do add value.

Amortizing the Cost

In 2009, the economy was plummeting into another economic depression.  At a time when we needed a government hand, Congress achieved perfect impotence and could do nothing.  The only remaining defense was the Fed, which rose to meet the challenge, thankfully.

Libertarians became unhinged at the new "activism" of the Fed.  Of course, nobody was more upset about this than the Fed itself.  How would you like to be the last line of defense against another depression?  The Fed certainly did not ask for that job.

The next few years saw both massive and imaginative measures taken by the Fed.  However, at some point, the Fed had to be "normalized."  In December of 2015, they raised short-term interest rates for the first time in years and then did it again without significant impact on the economy.  Yesterday, they said we should expect another increase in December of this year and several next year.  The stock market just yawned.

More importantly, they said they would begin "shrinking" their balance sheet next month by $10 billion per month, eventually rising to $50 billion.  This is significant.  During the fight against depression, the Fed became the source of funds for market liquidity and for deficit spending.  They did this by buying bonds (primarily government and mortgage bonds) and putting those bonds on their balance sheet -- to the tune of almost $3 TRILLION.  Now, selling bonds by the Fed reduces liquidity, because they are paid by money from the buyers, removing that money from circulation.  Shrinking the balance sheet. by selling off the bonds it owns, could be both tricky and dangerous.

If they sold that huge quantity of bonds suddenly, the bond market would surely crash, causing interest rates to spike.  By selling the bonds slowly, the bond market should be able to absorb it.  Wall Street must have agreed, because the stock market just yawned again.

Saving the economy is not unlike buying a house, which can be done relatively quickly but then take a very long time to pay off.  It has been eight years since the Fed started its recovery operation and is just now starting to amortize the cost.  Be patient . . . and hope that you live long enough to see the balance sheet get back to normal.

Wrong Class

Recently, I found myself in a class that was primarily stockbrokers.  One of the speakers told the attendees that they had to be more than mere financial advisors.  They must also become financial coaches, he told them.

That jarred me slightly, thinking "doesn't everybody know that?"   Of course, I'm used to the world of Certified Financial Planner (R) professionals -- not stockbrokers.   In addition to our legal obligations to the client as a fiduciary , we are also trained in estate planning, retirement planning, education planning, and tax planning.  We are uniquely qualified to be a "financial coach" to our clients.  A stockbroker is a mere investment salesman.

I have no idea how many times I've given advice on buying new cars or selling old homes.  Estate planning should be a continuous process, which means a continuous flow of advice.  I've helped clients negotiate severance payments, as well as making gifts to children and grandchildren.  A growing area, unfortunately, is advising the children of clients on their education loans.  This year, I even advised a client on funding a university professorship.  That's what you call "financial coaching," not merely selling investments.

Sorry about you stockbrokers out there!  Maybe, I should be more careful in the classes I attend?

Not Accumulating

A well-trained investment advisor has been taught concepts like asset allocation, Modern Portfolio Theory, re-balancing, etc.  Younger advisors tend to view these tools are revealed secrets of the investment gods.  While older advisors respect these tools, especially the time-worn wisdom of the tools, some have become suspicious that these tools work better during the accumulation phase of a person's life than the "decumulation" phase or retired phase.

Investment research has focused on accumulating assets or building a nest egg for retirement, but do those same rules apply when a retiree begins consuming the nest egg for income?  For example, Modern Portfolio Theory shows that returns can be maximized and risk reduced, by investing the portfolio into many different asset classes.  But, why does it make sense to invest any of a retiree's nest egg into small cap growth stocks which never have dividend income for the retiree, instead of large cap value stocks, which is the "happy hunting ground" for dividends?

Another questionable rule-of-thumb is that retirees should be protected from the stock market, but what is their protection from inflation?  Assume a 60/40 portfolio that is 60% stocks and 40% bonds..  Wouldn't it make more sense to spend the bonds first, allowing the stocks to appreciate as long as possible?  I know, I know . . . but what if we had another 2008/9 crash?  Have you noticed the stock market has doubled since then?  Have you noticed that many, many stocks pay higher dividends than bonds?

Just because inflation is not a problem today, we cannot assume it never will be.  With increased life expectancy, shouldn't retirees have as much protection from inflation and that permanent loss of purchasing power it causes, as from the temporary loss of principle during a recession?

For some reason, research into decumulation is mostly from Canada, not the U.S.  Canadian friends tell me they are not as consumed with leaving money for their kids, compared to Americans.  They like to "help your kids with warm hands, not cold ones."

Rules during the accumulation phase of a person's lifetime are fairly well accepted.  That body of knowledge is the conventional wisdom of accumulation.  The conventional wisdom of decumulation is still being developed.  Stay tuned . . . .

Suspended Econimation

The past is prologue to the future . . . except when it isn't!

What goes up must come down . . . except when it doesn't!

It has been 14 months since the stock market had a 5% drop, compared to an average of 6-9 months.  It has been 20 months since it had a 10% correction, compared to an average of 12-14 months.  In other words, we are overdue.  So what?

While the economy and the stock market are two different things, they are connected, and the economic data continues to look fine, not great but fine.  Economic recessions are much easier to predict that stock market corrections.  Besides, normal run-of-the-mill recessions are nothing to be feared anyway.  That's when you "buy and hold."

Geopolitical problems can always depress the stock market, but they are usually transitory.  The destruction of the Korean peninsula would not permanently depress the market but would cause a temporary 10% correction or so.

Many of the rules-of-thumb that have helped us navigate the stock market for decades seem less helpful in this environment, and this is important -- we have been in an artificial economy since 2009, suspended from reality by the Fed.  That is not a complaint - the Fed saved us from a depression by their extraordinary efforts.  The "animal spirits" that drive a strong economy cannot surface while we are in "suspended econimation."  The Fed knows this and wants to increase interest rates and shrink its balance sheet.  They have repeatedly stated their intention to do both, only to delay their plans.  President Trump is likewise a dove on interest rates, preferring low rates and a weak dollar.  He will not be pushing the Fed to do what it needs to do and what it wants to do.

The longer we live in a state of suspended econimation, the more difficult the return to economic reality in the future.  In the meantime, investors should just enjoy the ride . . . while always keeping their finger near the SELL button.

Experience Matters!

Freakonomics author, Stephen Dubner, has an excellent podcast, coincidently named Freakomonics, that is quite enjoyable when I exercise.  A  recent podcast interviewed an economics professor from GWU in Washington.  She was a native of Italy, whose accent made it difficult for me to understand her.

She discussed how the economic behavior of different generations reflects the experience of each generation.  The older generation worked at one job most of their life, with job security, healthcare, and a reasonable pension.  Younger generations changed jobs frequently, experienced long periods without healthcare, were bombarded by financial drug-dealers offering addictive credit cards, and saddled with educational loans.  The older generation sees economic behavior in black & white terms of what's right & wrong.  They don't understand the economic behavior of younger generations, who likewise don't understand the older generations.  They listen to each other but don't understand.

I thought about the professor's accent.  I knew she must be speaking English, but I swear I understood little.  The language-variable was just too great.  The difference between generations is not an age-variable but an experience-variable.  I did not grow up in Italy and struggle to understand the language.  Likewise, I did not reach adulthood in the boom-times of post WWII and struggle to understand the black & white thinking of the Greatest Generation.

It is not the job of a financial advisor to think in black & white terms of good & bad.  It is never appropriate to be morally judgmental of the younger generations.  Our job is to help each individual client understand him or herself!