Monday, December 31, 2012

Gold's Complex Relationships

Given that the world was supposed to have already ended this month, according to the long-dead Maya, and given that America is supposed to end in a few days from stumbling over the Fiscal Cliff, according to the way-too-lively Media, it is a wonder that gold has declined in value over the past few months.  After all, it is supposed to be the refuge of last resort.  Financial advisors have long argued that gold will always have some value -- no matter what!

The standard drivers of all commodities are, of course, supply and demand.  However, the nation buying the most gold per person is India, whose economy has taken a pronounced swoon.  To a lesser extent, the same is true for China.  Reduced demand for gold therefore reduced the value of gold.

A less understood relationship driving the value of gold is the value of the dollar.  With rising economic anxiety, investors worldwide have been buying dollars as a refuge of last resort, which drives up the value of the dollar.  No matter what happens to America, the belief is that dollars will still command respect and retain value overseas.  When the dollar rises in value, the value of gold decreases in this country.

When America resolves its current fiscal crisis and when Europe resolves its current financial crisis and when it is more clear that China is resuming its economic growth, the dollar will fall in value, and the price of gold should increase.

However, there is another relationship that should be examined.  Take a look at this graph:

It suggests that you should continue to hold gold as an investment as long as you believe our debt level will continue to rise.  After all, borrowing money to pay entitlements -- puts more dollars into the economy -- without putting more gold into the economy.  According to the Monetarist school of economics, that means more dollars chasing the same amount of gold; strongly suggesting that gold will resume its rise.

Now, if sequestration actually takes place, our deficit should decrease.  Does that mean our national debt level would eventually decrease, pushing down the price of gold?  If it does, I'll sell it then . . . not now.

Saturday, December 29, 2012

Gripping Reality

Like most people, I remember when President Kennedy was shot.  It was a terrible tragedy, indeed!  But, America grieved, pulled itself together, and continued to be America.

I also remember when America cared about "who shot JR?"  It was a manufactured media event and made the word "media-hype" commonplace.

Shooting the President was horrible, while shooting JR was a simple marketing ploy by advertisers of the Dallas TV show.  Now -- how does the 24/7 hoopla about the Fiscal Cliff compare to those two past events?

The Fiscal Cliff is very real and contains genuine drama.  However, because of the need to find advertisers for the TV news, the media coverage is frantic 24/7, suggesting that chaos is coming -- little old ladies in nursing homes will be thrown into the street, milk will turn sour before it reaches the grocery store and dogs will chase cats.

Right now, economists are doing a lot of hand-wringing about this week's report that there was a large, unexpected drop in consumer confidence from 71 to 65 -- duh!  Who didn't expect it?  Only economists who don't watch the news didn't expect the drop.

As I write this, the futures market indicates the Dow will lose over 300 points when it opens Monday morning.  Compare that with the 777 point loss the day Congress failed to approve TARP.  This tells me investors still hold out some hope for a deal.  (Of course, if there was a "grand bargain" that was permanent and included curbs on entitlements, I would not be surprised to see the Dow rise 1,000 points.  A deal to kick the can a short distance will not impress the market).

My expectation is that America will be embarrassed, slip into a slight recession if the fall is prolonged, and then it will continue to be America.  This is a time to discuss Democracy 2.0 -- NOT a time to panic.

Going over the Fiscal Cliff is a stupid body-blow -- NOT a death-blow.  Think of it as an excuse to have a drink on New Year's Eve . . . like you really needed an excuse.

Friday, December 28, 2012

Paratroopers and Idiots

It was a cold February morning in 1968 that I jumped out of a perfectly good airplane.  As an officer, I had to be the first one to jump out, ostensibly to show my men I was not afraid.  Of course, that was not true.  I was very afraid, but I was completely resolute to do my job -- no matter what!

Standing alone in the doorway, waiting to jump, I put my hands outside the door on the skin of the plane.  (When I looked down and noticed the toes of my boots were sticking over the edge, I confess a certain passing queasiness.)  The door was just behind the engine props, where it was very cold, very noisy, and very turbulent from the prop-blast.

It was too loud to hear anything, so the jump-master simply slapped my backside when it was time to jump.   I fell for a few long seconds before feeling the sudden jerk of my parachute, which was a beautiful sight when I looked up.  Looking down, the view was also beautiful.  But, the big difference was the quiet.  It doesn't take long for the airplane to be far enough away to be out of ear-shot.  It was downright pleasant -- a beautiful view, quiet, and a new-found sense of accomplishment!

So, what could be wrong?  Oh, yeah . . . the ground was coming up to me at 18 feet per second, which focuses the mind.  After the initial rush of panic, the paratrooper will begin guiding his parachute to a safe landing spot, quickly turning the chute to face into the wind just before impact, arrange his body into a "parachute-landing-fall" or PLF position, and wait to react quickly at impact.

It will be a cold January morning in 2013 when the United States stupidly jumps over The Cliff.  As the three sides (Republicans, Democrats, and Tea Party) step to the edge, none has the courage to go first, but all are resolute that they will pander to their political base -- no matter what!

At first, the fall will be almost pleasant, because nothing apparent is happening.  All three sides will have a new-found sense of accomplishment!  After all, they did stand on some principle important to their partisan base.  At some point, they will look down and see reality approaching them rapidly.  But, will they know what to do?

Paratroopers often joke that only an idiot would jump out of a perfectly good airplane.  If that is the case, Congress certainly has a lot of paratroopers!

Over a month ago, I wrote about my surprise at how angry voters are about this self-inflicted wound and actually felt some slight sympathy for the poor, ignorant, elected-idiots.  Hopefully, they spent a few days at home over the Holiday and heard from enough of us -- to realize wisdom does not lie in a political platform.

Of course, the nation will survive this.  Even if we endure another recession, it won't be the last one.  What may not survive is our pride or our sense of accomplishment.  Our forefathers designed and built a wonderful system of governance, which worked for centuries . . . until we elected Puritans who by definition always know the correct way to do everything and cannot compromise on anything.

Thursday, December 27, 2012

Economists on Sesame Street ??

In 1946, Dr. Benjamin Spock published his classic book on child-rearing and raised my generation.  In 1969, Jim Henson came on the television with his classic show Sesame Street and raised my daughter's generation.  One of the most annoying characters on that show was Count von Count, who insisted on counting everything and then telling everybody about it.  Examples would be bricks in a wall or clouds in a sky . . . like, who cares?  Count von Count is the role model for almost every economist, who start with counting everything and then feel compelled to explain it . . . like, who cares?

One example would be Opportunity Cost of an aircraft carrier.  Count von Count would count the dollars and tell you what it cost, say, $2 billion.  An economist might say the aircraft carrier cost 2.1 hospitals and 3.7 nursing homes.  Or, which would you choose:  another war machine or a college education for ten thousand kids?  Of course, opportunity cost choices have to be made at the personal level as well.  Suppose you can send your kid to college and retire at age 67 or you can retire at 62 but your kid won't have a college education.  Count von Count cannot make those decisions, because he only counts.  But, economists insist we try to understand what we won't have . . . when we choose what we will have.

Now consider the idea of Capacity Utilization.  It measures how fully the existing factories are being used to produce things.  It got down to 67% during the recession and is now about 78%.  It is commonly used as an advance indicator of inflation.  When it approaches 85%, say hello to inflation.

I just finished reading a report on our manufacturing industrial capacity, which is only 63% of what it was five years ago!  Now, think  about that -- we have reduced the capacity by at least a third, while increasing utilization of the remaining only ten or eleven percent!  While there has been much media coverage about the rebirth of the manufacturing sector since the recession, it has flattened since the first quarter of 2012.  Businesses are sitting on almost $2 TRILLION in cash, waiting for the smoke to clear and they know how to invest it.

Lastly, think about the Output Gap.  Not even Count von Count could give you the size of the Output Gap, which measures the difference between what we do actually produce and what we could produce.  Economists might estimate the average income for a family of four would increase from $47,000 annually to $60,000.  Average education would increase.  Retirement age for the non-self-employed might drop.  Think about it -- how would our world be different, if Congress would get out of the way and we could produce all we are capable of doing?

So, what is the Opportunity Cost of our system of government?

And, by the way, who is raising the current generation anyway . . . ???

Tuesday, December 25, 2012

WinterFest 2012

At the end of another long, exhausting year and facing yet another cold, dark winter, it is not surprising that the first type of clinical depression cataloged by psychologists was seasonal depression, occurring this time every year.  Different societies have long recognized the extra need for merriment at this time of year.  So . . .

  To my Christian friends . . . . . . . . . . . Merry Christmas!
     To my Jewish friends . . . . . . . . . . . .   Happy Hannukkah!
 To my black friends . . . . . . . . . . . . .  Happy Kwanzaa!
To my politically correct friends . . . .  Happy Holidays!

I do believe this time next year will be a better time.  After all, this is the time of year when we identify ourselves as either "glass half-full" or "glass half-empty" people.  Choose wisely!

Monday, December 24, 2012

2013 Christmas Wish

What is the most powerful business or industry in this country?  No, it is not the defense industry, even though it can blow everything into tiny pieces whenever it likes.  No, it is not the political business, even though it can destroy everything we love and cherish.  No, it is not the religion business, even though it can send us on a lifetime of guilt trips.

The most powerful industry in the country is the advertising business.  It tells us what to buy.  It tells us what to eat.  It tells us who to vote for.  It even tells us what to believe.  It is so strong that it has destroyed our privacy without as much as a whimper of complaint from us.  (Of course, they say they needed to destroy it -- in order to get us advertising we are interested in and sparing us from other advertising -- in order to charge sellers higher fees for placing the ads.)

But, 65% of every advertising dollar spent buys time on television.  Therefore, the advertising industry will destroy anything that threatens its domination of our television sets.

For years, the over-whelming number of complaints received by the Federal Communications Commission involved the excessively-loud and intrusive commercials.  For years, the advertising industry would allow the FCC to do nothing.  Finally in 2010, Congress passed the Commercial Advertisement Loudness Mitigation Act (the CALM Act).  For over two years, the advertising industry has been "litigating" the new law line-by-line to slow down implementation.  Even conservative pundits have sympathetically referred to the campaign as "regulator-abuse."

Last Wednesday, the FCC announced it needs yet another year to study how to turn down the volume.  It would be good for America if one industry did not have so much power!  Maybe, Santa Claus will bring us some peace & quiet . . . some CALM sanity next Christmas . . .  but I doubt it!

Saturday, December 22, 2012

The Serenity of Falling ??

In our rush to fall over the Fiscal Cliff, I took a wrong turn onto Memory Lane and ran into the classic 1991 video by Chris Isaak called "Wicked Game" -- where he was so blissfully serene about falling . . . in love . . . if not into recession, like us?  If the temporary state of falling is so blissful, America could use some more of it!

Here are some of my current thoughts on falling:

Q -- Will the United States of America go over the Fiscal Cliff?
A -- Yes!

Q -- Does it matter?
A --  Yes, but the world will not end (despite what the Mayans predict).  However, this failure demonstrates our continuing inability to govern ourselves and makes it almost certain we'll receive our second credit downgrade.

Q -- What will happen after year-end?
A -- If a deal is reached in the first week or so, there will be minimal impact on the economy.  If there is no deal until the latter part of January, the risk of causing a recession increases dramatically.

Q -- How bad will the recession be?
A -- It depends on how long we continue to fall before a deal is struck.  Early resolution minimizes economic damage.  Econometric models have predicted as much as a 6.4% GDP decrease, similar to the 2008 recession.  Unemployment would quickly pass 10% again.

Q -- You don't seem particularly concerned about taxes increasing?
A -- Increasing any taxes certainly will not help the economy in the short run, but I believe any tax increases will be limited to "the successful and the lucky," allowing the vast consuming middle class to continue the recovery.  There is no shortage of capital at this time.

Q -- How will the stock market handle all this?
A -- It will continue to leak value until it smells a deal, when I expect a strong rally.  

Q -- Why do you seem so sanguine about it?
A -- The market is telling me there is considerable underlying strength.  After the Republican "Plan B" was pulled late on Thursday night, Dow futures immediately dropped 297 points.  By the time the market closed on Friday afternoon, it was down only 120 points.

Q -- Will history be kind to Obama about all this?
A -- I doubt it, because he ignored his opportunity to be a "transformational" president by not aggressively curbing entitlements.

Q -- What is the "lesson-learned" for you?
A -- While politicians complain about what regulators do to business, they should also complain about what the politicians do to the economy!

If you don't feel blissfully serene yet, just Google that video . . . and think about what's really important!

Thursday, December 20, 2012

. . . Worth 1,000 (misleading) Words!

If a picture is worth a thousand words, how much is a cartoon worth?  Take a look at this one, which has more humor than truth:

It shows Fed Head Ben Bernanke shoveling a huge pile of existing cash into a fire, where it is destroyed forever.  It makes the point that the average American is unaware the problem is increasing, just as a frog will be peacefully cooked-to-death when the water temperature rises slowly enough.

It is true that the average American is not panicking.  (But, then again, the average American doesn't over-react nearly as much as the average investor does.)  

However, is it fair to say Bernanke is destroying a existing pile of cash or wealth?  To answer that, it is necessary to look at the accounting.

The Treasury (not the Fed) needs to spend money for Social Security payments, as an example.  Of course, the Treasury needs cash to cover all those checks.  To get cash, they issue Treasury bonds.  (Normally, investors like pension funds were the biggest buyers.  China has also bought about $1.2 TRILLION of Treasury bonds.  Today, the Fed buys about 75% of all bonds issued by the Treasury Department.)

When the Fed buys the bonds from the Treasury, it credits its books with new assets purchased (the bonds) and credits the checking account of the Treasury with cash.  So far so good -- the Fed has bought AAA-quality bonds, and the Treasury now has brand-new cash to pay Social Security checks.  However, note there was no huge pile of existing cash.  The Fed simply manufactured or "printed" it.

Someday, the Fed will want to start reducing the amount of cash it has put into the economy.  To do that, they will start selling the bonds it holds on its balance sheet -- selling them to more traditional investors or foreigners.   The accounting is that the Fed debits bonds owned on its balance sheet and debits cash owned by the new bond buyer -- sucking cash out of the bond buyer's checking account and therefore out of the economy.

Of course, that will not happen until the Treasury stops selling more bonds than there is demand for those bonds from those same traditional investors and foreigners.  (It is a theoretical but inconceivable scenario that the Fed would attempt to sell them too soon, which would cause chaos in the market - don't worry about that scenario!)

But, why has the already huge increase in the money supply NOT raised the temperature enough to cause inflation or at least to start warming-up the frog?

Skipping the formulas, the reason is that nothing is being done with the new money.  It is not being spent and has no "multiplier" effect.  According to the Keynesian economists, the increased saving by consumers reflects how shell-shocked consumers were during the last recession.  According to Monetarists, it is the banks who are not lending, instead of the consumers who are not spending.  Of course, the data suggests both are right, but the trend is changing. Consumers are now showing more interest in spending than banks are in lending.

When this newly-created money by the Fed is no longer "dead money," the frog will be in trouble!

Stay tuned . . . I'll let you know before that happens . . .

Tuesday, December 18, 2012


As a boy, I remember my parents fretting over whatever I was reading -- fearful I suppose that I would read something that would send me careening down that "broad and well-traveled road."  Yet, there was no shortage of reading materials that "all is lost," and  America is lost!  There were relentless parallels between the fall of Rome and the fall of Washington.

About twenty years ago, I started reading one of those dryly intellectual magazines, called The Futurist and published by the World Future Society.  I still remember an article in 1993 that "Western culture was in crisis, marked by increasing pessimism about the future . . . intractable economic difficulties, widening social gulf, and worsening environmental degradation . . ."

Fortunately, the author of that article has just updated himself with "Whatever Happened to Western Civilization?"  He points out that such warnings usually say "the sky will fall" within the next decade, and he then lists the reasons that his predictions of cultural collapse did not occur over last nineteen years.  He concludes by saying it will just take another two decades for America to collapse.

Having never lived without a prediction of America's collapse, I'm wondering if such predictions always exist in all cultures?  Or, is free speech the only needed ingredient to predict collapse?  Did such predictions exist in the old Soviet Union where there was no First Amendment to protect free speech?  Do human beings have a need to believe collapse is imminent?  Are they just the "glass-half-full" crowd?

I don't know!  But, the need to believe in decline needs to be studied . . .

I do know economic collapse awaits this country if we don't resolve the rapidly growing national debt, primarily by curbing entitlements.  I do know that the free enterprise system, which is combining the economic system of capitalism with the political system of democracy, is the greatest intellectual invention of all time.

I don't know about cultural collapse.  If we can watch twenty children get massacred and then do nothing, maybe we deserve to collapse?

It could be the study of history has just made us too aware that America's time on center-stage is probably limited, but it is not a law. After all, there has never been a free enterprise system on center-stage before!

Enough about decline already . . . please!

Saturday, December 15, 2012

Stupid Simplicity in a Complex World

The stock market is more than computers and concepts.  It is a living, breathing source of energy and wealth.  I never tire of studying of it.  It is a rare occasion indeed when I watch anything other than CNBC or Bloomberg.  Yesterday was one of those days.

Watching the horror of Newtown was gripping.  So much pain and so much heartbreak and so  utterly senseless!  My heart goes out to the family and friends of the dead and wounded.

Because Americans are a "fix-it" people, there will be debate about how to preclude similar tragedies in the future.  The National Rifle Association (NRA) has already requested a hiatus from any such "policy" discussion right now.  Of course, they would . . . out of respect for the dead, I'm sure.

I am not a registered-Republican nor registered-Democrat, but I am a registered "gun-nut" -- as I have a concealed weapons permit.  I have lots of guns and know my family and friends are safer because of my guns.  I fully support the Second Amendment.

That said, the NRA does America a great disservice when it insists on maintaining the simplicity of the Second Amendment in an increasingly complex world.  Scratch an NRA member and he'll warn "slippery-slope" --  because any regulation on guns will inevitably lead to the confiscation of all guns and our complete surrender to the jack-booted storm-troopers in black helicopters.

Is it really too inconvenient to change the "gun-show" loophole, where any psychopath can buy a gun without a background check?  Is it really too expensive to have a psychologist meet anyone attempting to buy a $1,000 automatic weapon?  Are there no limits on the weaponry necessary to guard my home?  How about a field of fire laid down by a ring of Claymores?  Is every restraint on gun ownership by definition unreasonable?  In order to get my concealed weapons permit, I only had to pay $35.  I could easily have been another post-traumatic stress veteran, but nobody asked.

It is not simply a question of how many guns are necessary.  Switzerland is a peaceful nation, not known for such tragedies as Newtown, but it has more rifles per capita than any other nation.  After 2-years of required national service, each soldier returns home with his rifle, which makes sense for a small, mountainous nation that is easily over-run from all sides.  Are we really so arrogant that we cannot learn anything from other nations?  What is the NRA really afraid of?

 While the stock market is a living, breathing source of energy and wealth, discussion of the Second Amendment remains fossilized in 1776.  Just as there are no guaranties in the stock market, there are no guaranties that any 21st century discussion of an 18th century worry would preclude a single future tragedy. But, it is a long overdue discussion!  The paranoid NRA should be ashamed!

My right to bear arms should not trump your right to discuss the "slippery-slope!"

Friday, December 14, 2012

Choosing Greatness . . . I hope!

When he was running for the Democratic nomination in 2008, President Obama said he wanted to be a "transformational President" like Reagan, i.e., one who changes the trajectory of history.  I hope he still wants that, because he now has the opportunity.

It is now clear that taxes will increase for both the successful and the lucky, but that is what is expected from Democrats.  That helps the revenue side of the problem.  But, there has been almost no information about his plans to control the spending side of the problem, especially entitlements.

Just as nobody could have opened up trade with China except a China-hater, such as Richard Nixon, nobody can attack the entitlement problem except an an entitlement-lover, like most any Democrat.

If Obama wants to be just another "tax & spend" Democratic president, he can just raise taxes on the successful and the lucky. However, if he truly wants to be a transformational president, he now has the opportunity . . . by reigning in the explosive growth in entitlement spending.

Only he can make that choice . . . let us pray that Barack Obama is indeed a transformational President!

Wednesday, December 12, 2012

Favorite Professor

When I was studying at Wharton, my favorite professor was Dr. Jeremy Siegel, author of The Future for Investors, and I have followed him closely ever since.

In his latest commentary, he thinks that, while there are problems with the latest Jobs Report, it is clear that the economy continues to improve.

More interestingly, he believes the odds of resolving the Fiscal Cliff before December 31st are 2-1 in favor of resolution and a 90% probability of resolution before January 31st -- before damage to the economy becomes significant.

Dr. Siegel is also a well-known bull and believes the Dow could jump 500-1,000 points, if there is "a deal that comes half way to Obama's tax rates."

There is a certain euphoria building about resolution of the Fiscal Cliff problem.  Both the Finance Minister of Australia and Jamie Dimon, CEO of JP Morgan, have predicted the U.S. will return to its traditionally dominant role in the world economy, with our "fiscal and moral authority restored" -- when, not if -- we avoid the Fiscal Cliff without "kicking-the-can."  So close . . . yet, so far!

I am beginning to lean in that direction as well.  A few months ago, I wrote about the uncertainty of three wet blankets on the U.S. stock market, i.e., the election, the Fiscal Cliff, and the European Financial Crisis.  (Uncertainty keeps the stock market down.)  We have now survived the election, and it looks increasingly likely we can avoid the Fiscal Cliff.  In addition, while it is very subtle, the European Financial Crisis is morphing from a scary financial crisis into a routine recession.  If so, we will have thrown off the three wet blankets -- finally -- and may be ready to grow again.

The irony is that 92 companies in the S&P 500 have already lowered their profit estimates for this quarter, compared with only 25 that have raised them.  That ratio of 3.7 to 1 is the worst in eleven years -- hardly a bullish sign.  So, who is right -- all those corporate officers or my old professor?

Keep your fingers crossed that my old professor is right and the Dow jumps 500-1,000 points!

Tuesday, December 11, 2012

Four Year Anniversary . . . Already?

Maybe, you remember where you were . . . when Kennedy was assassinated.  Of course, you must also  remember where you were . . . when you learned who shot J.R.  But, where were you four years ago today . . . when we learned about Bernie Madoff?   (It's hard to believe it has already been four years.)

It was actually three months later that I recall more vividly, when I was sitting next to an elderly couple in Boca Raton, who were Madoff victims, as they discussed how their family relationships were being changed as a result of their financial loss.  It was because of them that I wrote my one-and-only novel called Paybacks:  A Novel of Ponzi Schemes and Families, which to my surprise won two awards.  Bernie indeed changed my life in that small way.  In a wider sense, he also changed my life by changing the regulators, who are now much more strident and demanding.

Numerous other Ponzi schemes have been discovered since then, and I wish I had kept a log of them.  Unscrupulous financial advisors continue to prey upon investors.  Of course, the regulators can only do so much to protect them.  Investors must take some responsibility to protect themselves.

The most important thing investors can do to protect themselves is this:  Make sure the investment manager does NOT have custody of your assets.  The custodian must prepare your monthly statements, not your investment manager.  If an unscrupulous financial advisor prepares your financial statements, he can send you a fraudulent statement every month.  You MUST have a third-party custodian to protect your assets.

CNBC has a good video on this, and I encourage everybody to watch it at

Please watch it . . . don't make me write another book!

Sunday, December 9, 2012

Kicking a Smaller Can . . . .

The public is focused on the unknown of whether we will or will not go over the Fiscal Cliff.  Of course, nobody knows the answer with certainty.

What is known is this:  My taxes are increasing.

What is NOT known is this:  What spending will decrease?

The President has always advocated for a "balanced solution" to the deficit and national debt, which means BOTH tax increases and spending cuts.  There is so much attention paid to the tax increase and precious little attention paid to the spending cuts.

The second biggest mistake we can make is to make further cuts in spending for infrastructure.  It has already been deferred too long and will be a real "job creator."  The biggest mistake we can make is to ignore the 800-pound gorilla, which is entitlements. This is "non-discretionary spending," as the total drain on tax revenue is not determined by anybody.  The best known are Medicare, Medicaid, and Social Security.  Depending on how measured, they consume up to 70% of every dollar spent.  In other words, two out of every three dollars spent goes into old, sick and/or poor people.  How much is enough?

The only "trial balloon" I've heard taken seriously is raising the age of Medicare eligibility from age 65 to age 67.  Given that Obama initially supported a "single-payer" system for ObamaCare, I cannot imagine he would be willing to do this.  What I don't want is another thousand pages of regulations.  (Personally, I would prefer to see public executions of those convicted of Medicare or Medicaid fraud.  However, the greatest waste in our Medicare system is "end-of-life" spending, when heroic efforts are made to save the hopeless.  Unfortunately, "death-panel" is a radio-active four-letter word and is beyond discussion.)

So, how are we going to re-write the 2,500 pages of Internal Revenue Code, containing 5.6 million words as well as all entitlement programs in the next two weeks?  The answer is . . . We're not!

The best we can hope for is a binding framework to resolve the myriad remaining issues.  For example, we can agree to raise the highest marginal tax rate by 2% now, but that increase expires in six months unless agreement is reached to cut entitlements by 6%.  It would be a step in the right direction, even though it is still "kicking the can down the road."  At least, it is a smaller can . . . containing only entitlement reform.

The stock market would react somewhat positively to such a deal, as it precludes an immediate recession.  Still, it maintains and continues the massive uncertainty, which means it also postpones real economic recovery . . . but for only six months.

Isn't it a shame that it takes a crisis to bring about change?  What kind of crisis would it take, for example, to address the horrendous cost of futile end-of-live medical treatments?

Friday, December 7, 2012

Raining on her sister's parade . . .

Economics is like a beautiful woman:  just enough science to be satisfying and just enough art to be mystifying.  I've been chasing her and courting her all my life!

Politics is her older, ugly sister, who talks constantly and is married to a rich know-it-all.  She's been chasing all of us.  And, she is getting faster!

The first Friday of each month should be a day of beauty, because we see the most closely-watched economic numbers of that month, i.e., the "Jobs Report," which is released at precisely 8:30 AM.  It is always fascinating to see which sectors and industries are doing better or worse.  It is important to look at the changes between unemployed and underemployed.  It is mystifying to look at the different insights from the statistical techniques employed.  I just enjoy the company of that beautiful lady!

Unfortunately, at 8:31 AM, the older, ugly sister opens her mouth and rains on her sister's parade.

Today, we learned 146 thousand jobs were created last month, about 66 thousand more than expected.  Expectations were below last month's report of 136 thousand, because the impact of SuperStorm Sandy was expected to be greater.  The unemployment rate was expected to rise from 7.9% to 8.0%.  Instead, it fell to 7.7%, which is good news.

The bad news is that the Jobs Reports for September and October were over-stated by a combined 49 thousand jobs, which sounds like today's extra jobs created were rolled forward over the last two months.  More worrisome is that the Labor Force Participation Rate dropped, meaning about 300 thousand people stopped looking for a job last month.

Overall, it was a good report.  In fact, it was too good.  I don't believe SuperStorm Sandy had no impact on the most densely-populated jobs market in the country.  We'll see what happens in two weeks when states provide their individual Jobs Reports.  But, make no mistake:  the jobs market is improving, albeit very slowly!

Of course, at precisely 8:31 AM, the ugly sister started yakking -- Democrats took credit for the continuing recovery in the jobs market and took credit for their hard work in controlling the damage from SuperStorm Sandy.  And - surprise, surprise -- Republicans asserted the larger number of jobs reported in the September and October reports were skewed higher just for political purposes, plus the slow growth rate in jobs was just further proof that high income taxpayers need to pay less tax in order to create new jobs.

Is there any way to make the ugly, older sister just shut-up??

Thursday, December 6, 2012

Independent Thinking . . .

Kent Woodward is a good friend and a strong, independent thinker.  He was kind enough to write today's blog!  It examines a simple but elegant way to enjoy the benefit of unionization, i.e., higher wages, without the inherent inefficiencies of union regulations.  It must be a good idea, because it would irritate both political parties!  Enjoy . . .

"Yesterday’s New York Times carried an article about recent efforts of labor unions to organize the “low wage end” of the workforce in cities, such as New York and Los Angeles. While workers with pay at or near the federal minimum wage (now $7.25 per hour) can be found throughout the economy, the focus was on the fast food industry, e.g., McDonald’s, Wendy’s.

Often, we think of workers at McDonald’s as teens looking to earn spending money for clothes and gas, but  many are adults, including some with families, among the workers at McDonald's and similar companies.  It's hard to imagine a family surviving on the annual take-home pay of such workers --- in Virginia, much less in New York City.  There are undoubtedly many reasons why adults end up at ages 30 to 40 working the Wendy's counter.  The person may have dropped out of school or has not been able to get training for a more highly skilled job.  Maybe, the person just doesn't have very good work habits.  Most of us would see globalization playing a part:  as our domestic economy offers fewer and fewer jobs requiring little skill or education, there are more and more such workers left to compete for the remaining low-wage jobs.

Of course, the government likely is already providing additional support to these workers in the form of food stamps, tax credits, or other subsidies.  As things stand, that is how more and more workers will likely survive:  a minimum wage job supplemented by government assistance.  Now, maybe unions (unionization) will come to the rescue of some of these workers.

But, are these our only choices:  $7.25 an hour with government assistance or unionization with higher wages, but also with all the pitfalls of a unionized workforce?  I think there is a better way!

Since we will end up paying these workers more (and there is a strong moral argument for higher pay), let's do it efficiently.  Let's raise the minimum wage to a living wage.  We will head off the unions and all the attendant inefficiencies.  And, we will reduce the amount of government by allowing these workers to earn a living directly at their jobs and not being forced to look to a government bureaucracy for handouts.

The unions are conveniently pointing the way.  Now, let’s take away the need for them and do a good thing for these hard-working citizens at the same time."

Wednesday, December 5, 2012

"Where's the Beef" in the Tax Code

Like country music, I was Supply-side before Supply-side was cool!

You'll recall Supply-side economics argues that, at some point, income tax rates can become so high that it hurts the economy and actually reduces the revenue received by the government.  (Of course, there is plenty of argument about where that point is.)

I taught the first class on Supply-side economics for the American Institute of Banking and even had lunch with the father of Supply-side economics, Arthur Laffer, back in 1979.  I embraced Ronald Reagan when he embraced Supply-side economics.

Later, like different medicines treat different physical problems, I learned that different economic strategies treat different economic problems.  I learned that Supply-side economics is most helpful with a "lumbering" economy, not with a "recovering" economy nor a "roaring" one.

So, I understand Supply-side economics!  But, for the life of me, I don't understand why Republicans are being so adamant about the marginal income tax rate instead of the effective income tax rate.  The marginal income tax rate is the tax rate paid for the highest dollar earned.  Most people are in the 28% tax bracket, which means they pay another 28 cents in extra tax for every additional dollar they earn.

I care a great deal more about the total amount of income taxes I pay.  Assuming my income is unchanged, I would rather be in the 99% tax bracket and pay $50,000 in taxes -- than be in the 28% tax bracket and pay $60,000 in taxes!  Who cares about the rate when the bottom line is more important?

The Republican argument is that Americans will stop working if their tax bracket increases from 36% to 39.7%.  Funny, I don't recall many workers quitting when rates got as high as 91% in the 1970's.  (Maybe, people work for many reasons besides mere take-home pay, especially men?)

The Democratic argument is that there is not enough additional revenue by limiting deductions for "high-income" taxpayers, and they must therefore increase the highest marginal tax rate as well.  Frankly, I don't believe one word of that.  (Those who believe all motives are sinister suspect Democrats are not as anxious to limit some deductions because those deductions benefit taxpayers who mostly live in "blue" states.)

There is an obvious deal to be done here, by hiding in the complexity of the Internal Revenue Code.  Of course, there are also political points to be scored, and we all know which is more important.

In the classic 1984 Wendy's commercial, Clara Peller asked "where's the beef?'

My question is ""what's the point?"

Monday, December 3, 2012

"Being There" . . . How to?

Because so many decisions are made emotionally, true financial planning has to work with those emotions for clients.  Even as a male financial planner, it is often difficult to work with male clients during certain times.

Despite an avalanche of books on the subject of the differences between men and women, I'm reading Resilient Widowers by Alinde Moore and Dorothy Stratton.  It argues that men and women adjust to the loss of their spouses differently, and I certainly cannot argue with that.

Apparently, women adjust more successfully.  One reason is that they are more adroit at identifying their own emotions early and then managing them.   Another reason is that wives traditionally outlive their husbands and are therefore not surprised when it happens.  This makes their response more predictable.  Their recovery is dependent primarily on their support network of friends & family, as well as the simple passage of time.

Men are more variable in their response to widowhood.  This makes it more difficult for their friends & loved ones to help the new widower.  Some widowers talk, some don't -- some cry, some don't -- some withdraw, some don't -- who knows?

Except for this:  "the religious beliefs and denominational affiliations of the respondents (widowers) are discussed . . . in a study fitting into four categories:  (a) those who professed no religious beliefs, (b) those who attended, or had attended, services but gave minimal thought or feeling to beliefs, (c) those who held religious beliefs that were simple, clear, and faith-based, (d) those who examined and reexamined spiritual issues philosophically and intellectually.  

Those who seemed to gain the fastest help in the movement through grief were in the third group.  They felt secure in the clear, simple faith that gave structure and meaning to suffering and loss.  The men in the fourth group engaged in philosophical searching and struggle, which was to them probably invigorating and which no doubt intensified the understandings that they finally derived.  However, the philosophical search had its more painful questioning moments at the very times when comfort would have been welcome."

The lesson-learned for me is it is not possible to know how to help any particular widower at first.  Give them time and then adjust your plans to help.  Don't try to "talk" until they "talk" first.  Don't try to encourage them to move on with life, until they bring it up.  Don't push, just follow their lead.

Sunday, December 2, 2012

Digging Into the Details

I've believed the underlying U.S. economy is stronger than most people expect but is weighted down by our politicians.  Last Thursday, we learned that GDP growth in the third quarter of this year was revised higher from 2.0% to a surprisingly strong 2.7%.  In fact, it was double the growth rate in the second quarter, which was 1.3%.

If growth had doubled, I would have been able to see it, feel it, even taste it.  So, there had to be something misleading in the numbers!  (Now, nobody is "monkeying" with the numbers for political purposes.  The numbers are what the numbers are, and the reason God made economists was to figure out what the numbers really mean.)
The third quarter growth was skewed by a 12.9% increase in defense spending, which is clearly not sustainable, especially if we go over the Fiscal Cliff.  Even more important, there was a big increase in inventories.  When that happens because business is expecting big sales, it is a good thing.  When that happens because consumers stop buying what is already in inventory, that is a bad thing.  This was a bad thing and hopefully is not sustainable! Consumer spending increased only 1.4% instead of the 2% that was expected, causing inventories to accumulate.

Business is still sitting on $2 TRILLION of cash, which would provide a huge boost to economic growth if it was invested.  However, a bad sign is that business spending on equipment & software actually fell in the third quarter, for the first time since the recession began in 2008.

Don't expect GDP growth in the fourth quarter to be nearly as technically "robust" as the third.  We will not see another 2.7% until we throw off the dead weight of live politicians.  Morgan Stanley, for example, is predicting only 0.6% growth this quarter.

With both consumers and businesses cutting back ahead of the Fiscal Cliff, we are tightening the spring and could easily enjoy a spring-loaded recovery next year . . . IF the Democrats don't over-reach (which worries me the most) and IF the Republicans don't still think compromise is a four-letter word.

Regardless of how much my taxes increase next year, my portfolio would increase much more . . . IF Washington would just make a deal . . . and almost any deal would work.  

A "perfect" deal is not necessary and certainly not worth going over the Cliff for.

Thursday, November 29, 2012

Perception vs. Thought

Obviously, there is a difference between careful, structured thoughts, which I prefer, and mere anecdotal observations, which  I try to avoid.  Still, at a large public function last night, I was struck by the intense anger I observed over the Fiscal Cliff . . . not fear but anger!

Although I yield to no one in my disgust for the elected partisans in Washington, who represent their parties instead of their country, I actually felt some small sympathy for them last night.  My sense is that the anger of the American people is rising rapidly, and that the elected partisans don't realize the tsunami of anger they will face, if they cannot agree on a deal in time.  This will far exceed the anger and shock they faced after the clown show raising the debt ceiling last year.  It will be all anger and no shock this time.

Maybe . . . just maybe . . . if they realized the pent-up anger of the American people was more important than the revenge of their political party . . . but, if frogs had wings, they wouldn't bump their back end on the ground . . .

Wednesday, November 28, 2012

Running With One Eye Open

Factoid-of-the-Day:   Averaging $161,579 per taxpayer -- the most recent IRS data shows that the top 5% of income earners enjoyed 37.4% of all "adjusted gross income" but paid 59.1% of total Federal income taxes in 2010.

Political types take that as proof-positive that the highest marginal tax rates need to be reduced, and then they're off-and-running.

Economic types take that as just another interesting data-point.

While the top 5% pay 59.1% of all Federal income taxes, what percentage of total taxes do they pay, including payroll taxes and sales taxes?   I think we all agree that workers earning salaries of $50,000 annually probably have less portfolio income (dividends & long-term capital gains) than workers making $250,000 annually.  It is important to note that portfolio dividend income pays lower income tax rates (15%)  AND that portfolio income pays no payroll tax, therefore producing more "take-home pay" than salary does.  So, why do we treat income earned from hard, sweaty work less favorably than income earned from merely owning?  (The trusty old bromide from the Supply-side school of economics is that owners or "job-creators" need lower taxes to create jobs.)

Shouldn't we also consider the sales tax, which is truly regressive.  Since poor people must spend every single dollar and save/invest nothing, that means every dollar of their income is subject to sales tax.  Since "rich" people can afford to save and/or invest some of their income, they are sheltering income from the sales tax.  So, why should the poor pay a higher percentage of their income in sales tax than "rich" people?  (The trusty old bromide from the Keynesian school of economics is that "rich" people benefit more from police and fire protection services, which are funded by sales taxes, since the "rich" have more to protect.)

Some policy wonks argue we should end the reliance on taxing income and start taxing assets instead.  I personally know a large number of people who have millions in assets but need very little income.  Therefore, they dial-down their taxable income and have their portfolios managed for lower-taxed growth, instead of higher-taxed income.  (There is a trusty old bromide from the Austrian school of economics that "if you want less of something, tax it.")

The point is NOT that the "rich" do or do not pay their fair share.  The point IS that a single factoid -- like the top 5% paying 59.1% of the taxes -- tells you precious little about the subject . . . unless you're a politician, of course.

Monday, November 26, 2012

Generational Fairness ?

Despite all the coverage of America's Fiscal Cliff, the most intransigent obstacle to America's stock market recovery is the continuing drama in Europe.  Of the 27 member states, most realize that Greece needs help -- badly.  The nation most opposed to helping is Germany (along with Finland & Denmark).  In fact, even the IMF has had harsh words for German obstructionism in the last week.  Still, I can understand the sentiment shared by 78% of the Germans of -- why should they decrease their standard of living to benefit the "lazy" Greeks, who retire at age 50?

I recall talking with a European tourist in Williamsburg one day, when she said -- "You Americans do so love your history.  It's a pity you have so little of it."  Maybe, Europe should study its history.

Imagine your grandfather owed money to my grandfather and then your grandfather fell on hard times. Fortunately, my grandfather helped your grandfather and forgave the debt.  Imagine your father owed money to my father and then your father also fell on hard times.  Fortunately, my father helped your father and again forgave your family debt.  Now, imagine I owe you money and have fallen on hard times.  Would you forgive my debt and help my family -- as my father and grandfather did to help your family?

After World War I, Germany was deeply in debt.  Some of it was written down, but most of it was forgiven, including Greece's share.  After World War II, reparations against Germany for starting the war was crippling its recovery.  Germany invaded Greece in 1941 and immediately looted the Greek National Bank.  After the war, Germany agreed it owed Greece about $14 billion in wartime damage.  At 3% interest since Germany signed the 1953 contract to repay the wartime damage, it would now have to repay $97 billion to Greece, largely eliminating this international financial crisis overnight.

Since Germany was forgiven it's debts, it has produced an economic miracle, while the Greeks have indulged themselves shamelessly on entitlements and early retirements.  Now the tables are turned.  The Greeks owe more money to the Germans and others than they can afford to pay.  So far, the rescue operations have not been enough to save Greece.  The primary obstacle is Germany, but the question is whether Germany will return the favor of forgiving debt of Greece -- the same favor that Greece has shown to Germany in the past.

If you are Angela Merkel, how do you tell the German people they should lower the standard of living for their children to support the "lazy" Greeks, just because Greece forgave the debt that the past two generations of Germans owed?  She could say that history demands it!

But, since she faces re-election in September next year, I doubt she will even ask the question.  Still, I pray she has the courage to do the right thing and "fall on her sword" before then.

Thursday, November 22, 2012

I am thankful . . .

. . . for the gift of living in a great country, which it still is.

. . . for the military, which preserves our opportunity to be great.

. . . for the constitutional right of privacy, if there is any left.

. . .  for freedom of religion, if not freedom from religion.

. . . for the economic system of capitalism, despite its often cruel shortcomings.

. . .  for the political system of democracy, even when tortured by partisanship.

. . . for Republicans, at least those who vote for increases in tax revenue.

. . . for Democrats, at least those who vote for decreases in entitlement spending.

. . . for economists, who valiantly try to perfect their imperfect art.

. . . for stock markets, which allocate capital from the least productive to the most, theoretically.

. . . for great ideals, which must struggle in a world of flawed humans.

. . . for my clients and friends, who are also my family.

. . . for a day when we remember our blessings . . . now, what are yours?

Wednesday, November 21, 2012

Either-Or . . . or, Neither ?

Not all relationships have meaning.  For example, take a look at this chart:

Chart of the Day

It shows the Dow divided by the price of gold and suggests two possibilities:  Either the stock market is too low or the price of gold is too high.  Which is it?

At first blush, you might say the great uncertainty we're experiencing is scaring investors out of the stock market and into the "security" of gold.  But, notice the chart begins in 1978, covering the last 34 years.  The downward trend begins about year 2000.

Since that time, our national budget surplus has turned into an annual deficit -- following two unfunded tax cuts, two unfunded wars, and a huge unfunded drug program for seniors.  (Unfunded means tax cuts were not matched with spending cuts or that spending increases were not matched with tax increases.  This is similar to Congress thinking they can suspend the laws of gravity.)  This long period of increasing deficit spending suggests gold is over-priced -- compared to stocks.

Also suggesting the price of gold has risen too much, the demand for gold as jewelry increased significantly in Asia in general and India in particular during their explosive growth over the last twelve years.  

Traditionally, gold acted as a "store of value," meaning people would buy some gold coins and hide them in their safe deposit boxes.  Increasingly, gold has become an alternative to currency investing.  Investors can speculate or bet on the Euro falling by buying gold on the stock market (see GLD), which is not included in the Dow or the S&P 500.  This increased demand for gold drove up the price of gold without simultaneously driving up the Dow or S&P 500.

This chart suggests a simple binary relationship that is more coincidental than meaningful.  I believe that both soon will soon turn bullish -- regardless of what this chart suggests.

Tuesday, November 20, 2012

Risk OR Return ?

How do you know if your investment manager is doing a good job?  Large institutional investors assign their investment manager with a benchmark and then compare investment performance with the benchmark.  (The S&P 500 is the most common benchmark.)

The latest study shows that four out five managers failed this test both last year and this year.  So, how do you measure your investment manager?

Some years ago, I had lunch with two security analysts.  They were both extremely bright, highly educated, and both were assigned to "Big Pharma" or drug stocks.  Yet, they disagreed over whether Pfizer or Merck was the better stock.  Like all males, they started competing -- on who had read the most footnotes in the financial statements.

There was a time when superior financial information in the hands of superior intelligence was likely to produce superior investment returns.  That is much less common today.  One reason is that superior information is hard to find, because information is everywhere.  (Sometimes, superior information can even be illegal.)  Today, we often find that superior political information is more important than superior financial information.

According to CNBC, many advisors have concluded there is no advantage in studying large companies and are using index funds or ETFs for exposure to that asset group.  This is called "passive investing."  At the same time, they are using mutual funds for smaller companies, where information is more difficult to find and evaluate.  This is called "active" investing.  Individual stock purchases are limited to those companies where the advisor has strong convictions.  Additionally, advisors are increasing cash levels during times of increasing uncertainty, partially discarding the "buy and hold" faith of our fathers.

I think that should, in fact, be the definition of a good investment advisor.  He/she is more interested in minimizing risk than maximizing investment returns.  Being measured against some arbitrary benchmark never made any sense.

So, how do you know if your investment manager is doing a good job?  There are some "risk-adjusted" investment measures available, but they also contain some troubling assumptions and should be viewed with caution.

So, how do you know if your investment manager is doing a good job?  How do you know if your spouse is doing a good job?  How do you know if your best friend is doing a good job?  How do you know if your lawyer or your CPA is doing a good job?

You just know!

Friday, November 16, 2012

But Wait !!

The uncertainty of the election is gone.  You may not like the outcome, but removing uncertainty is always a good thing for the stock market.

But wait!  The markets are now obsessing over the Fiscal Cliff -- with endless nuanced arguments both ways.  Again, getting it behind us is more important to the stock market than the details.  Pundits seem to think there is a one-third chance that the elected partisans will work out a deal before the deadline, a one-third chance they will work it out at the year-end deadline, and a one-third chance we'll go over the Cliff and stay there.

The market is down 5% since the election and continues to leak slowly, like an old tire.  But, when we get closer to year-end, I expect the market will over-react and leak more rapidly next month.  My current thinking is that time will be a good time to start buying stocks again.

But wait!  Shortly afterwards, it will be time to raise the debt ceiling again.  While the Tea Party may be swayed enough by Main Street and by Wall Street to hide the fact they actually compromised on something (by hiding in the complexity of the Internal Revenue Code), they will have no place to hide on the debt ceiling vote, which is a "yes or no" vote.  I expect they will fall on their swords, get our credit downgraded again, and let loose the bears on Wall Street.  Getting this behind us should be a second buying opportunity.

But wait!  Then, the markets will begin obsessing over the European crisis.  This is important -- that crisis has morphed over the last few months.  Originally, it was a pure financial crisis and had the possibility of becoming a Lehman-scale disaster.  Now, the European Central Bank has taken extraordinary steps in the style of the U.S. Federal Reserve and made it clear there will be no "Lehmans" in Europe.  This kicked the can a LONG way down the road, greatly reducing the risk of a financial crisis.  However, Europe has now settled in a double-dip recession, which appears to be more saucer-shaped than tea-cup-shaped.  This is good news.  Even better, the "boss-hog" of Europe itself, Germany, is slipping into recession itself.  Up to this point, Germany has wisely crammed badly-needed austerity down the throat of the Greeks, the Italians, and the Spanish.  But, at this point, it is necessary to push growth again, instead of austerity -- to keep Germany itself out of recession.  When that happens and we get that worry behind us, there will be a third buying opportunity!

But wait!  There will be something else to worry about -- there always is!

Monday, November 12, 2012

Thank You, G.I. Joe

I have only the highest respect and appreciation for America's combat veterans!  They truly put everything on the line, asking for so little in return.

Despite technically being an all-volunteer military, many soldiers find themselves in combat involuntarily, as their units were transferred before they could get out.  Some are there because they are true patriots, trying to save Motherhood and the Flag.  Some are true "James Bond" professionals doing a job.  Some are there because they are simply adrenaline-junkies and just need the rush.  Some are there because they are wrestling with internal demons and must face death in order to test themselves.  Some are just plain misfits!  They are truly a rag-tag group.

And, I love every single one of them!

Unfortunately, Veteran's Day is now just another lavish benefit for the government employees in general and postal employees in particular, who don't get enough holidays, I guess.  I suppose it is also good for retailers.  Parades do seem to have some appeal for the World War II veterans.  Korea and Vietnam veterans are used to living in the shadows, but they do enjoy basking in the reflected after-glow of the Iraq/Afghan veterans.

Still, it is stirring to look out the window and see neighbors flying our flag.  They do so . . . because they remember . . . and they care.  Because of that, they are indeed worth fighting for!

Sunday, November 11, 2012

The Beauty of Sausage

I was lost in my thoughts while running yesterday, when I suddenly realized that I had stopped dead-in-my-tracks.  I found myself simply standing there, because I had just realized that the negotiations over the Fiscal Cliff have already proceeded farther than they did last year -- in only three days and without Obama & Boehner even meeting face-to-face.

Anybody who has ever been involved in difficult negotiations know that the conclusion must be win-win, especially in politics . . . or, for that matter, in anything involving a male ego.  Both sides must be able to say they won!

Both parties want to trim entitlement spending.  The Democrats want more revenue.  The Republicans want to be true to Supply-side economics and keep the highest marginal tax rate low.  They will both win by hiding in the complexity of the Internal Revenue Code (IRC).

In the end, the tax rate on high-income earners will be unchanged, even though they will, in fact, be paying more in taxes.  That is because their deductions will be more limited and their access to entitlements will be more restricted.  Remember:  we can increase tax revenue without raising tax rates!

Unfortunately, it will take more than seven weeks to disguise this tilting of the tax burden toward high-income earners, and the deadline of year-end will have to be pushed back.  Of course, the deal could always fall apart if either side over-plays their hand.  (I'm talking about you, Mr. President!)

It is a brilliant, if inevitable, compromise.  Obama wins.  Boehner wins.  More importantly, America wins!  And, the deficit would finally begin falling.  Thirteen years ago, investment advisors worried about America repaying its entire debt, leaving no U.S. Treasury bonds for us to buy for our clients.  Thirteen years from now, we could be thinking the same thing again . . . it may not be probable, but it is possible!

I had almost given up on the American system of governance and have been speculating about what type of government comes after democracy fails.  Prussian politician Otto von Bismark (1815-1898) once said that making laws is even more disgusting to watch than making sausage.  The past few years in the U.S. Congress have been even more vile than Otto ever imagined . . . but maybe, just maybe . . . I've under-rated our American system of making laws.

Maybe, if I had more faith in our system of governance, I could remember to keep running?

Saturday, November 10, 2012

Longevity Trivia

I keep thinking about my classes on longevity, and there are a few unrelated things that seem to resonate more than others.

For example, life expectancy rises with both education and income.  Perhaps, the reasons are obvious, but since those people are more likely to have a financial advisor, then the average life expectancy of our clients is longer than that of the general population.  That means we should assume the actuarial tables on mortality are too low.  We should assume our clients live longer than the tables indicate.

Also, the 2-3 life expectancy advantage that women enjoy at birth narrows with age.  For example, an 80-year-old female has only a few months advantage over a typical 80-year-old man.  More interesting, men are LESS likely to be disabled at death than women.  That is largely because men are more prone to acute illness such as heart attacks and major strokes, while women are more prone to chronic illness such as bone loss and TIAs or mini-strokes.

There are 41 different actuarial tables, and actuaries argue vociferously about which one is best.  They agree with each other about as much as hyper-partisan Republicans and Democrats agree with each other.

Actuaries actually have a sense of humor??  Who knew??  Do you know the difference between an actuary and a mafia don?  The actuary knows how many people will die each year, but the mafia don knows who they are.

With 78.4 years of life expectancy, the U.S. is number 50 in the world.  (China is number 51 at 74.7 years.)  The longest life expectancy is found in Monaco, where they expect to live 89.7 years.  The nation of Afghanistan is dead-last at number 220 with an average life expectancy of 45.0 years.  Makes sense to me -- Monaco is a wealthy, peaceful enclave with a wonderful climate, while Afghanistan is a heavily-armed hell-hole with a dreadful climate.

The next time you wake up at 3AM and cannot fall back asleep, go to the website for actuaries, which is   SOA stands for the Society of Actuaries . . . zzzzzzzzzzzzzzzzz

A Fitting End

The last day of my investment conference this week was unusual -- we studied the problems of longevity.

When I was certified decades ago, it was considered prudent to estimate 7% annual income from a balanced portfolio of stocks and bonds.  That's means a person with a $100 thousand portfolio can reasonably assume an income of $7,000 annually to live on.  If that was not enough, they could take some of their principal -- but not enough to run out before they reached age 80, when most everybody would be dead anyway.

My, how the world has changed!  One of the most contentious subjects among financial advisors today is how much income can safely be distributed to clients and how long should we assume the client will live.

The "prudent" annual income level to be distributed dropped to 6%, then 5%, and then 4%.  In this class taught by actuaries, they recommended only 3.6% -- a huge drop in income from 6%.  Mostly, this reflects the lousy bond market interest rate environment, as well as the unusually volatile stock market in recent years.

And, if that isn't enough income, how much principal should we distribute to clients based on their life expectancy?  The good news is that people are living longer.  The bad news is that they are out-living their money!

Assume a person retires at 65 and that I will need to distribute some principal for the person to live on, I can divide his/her portfolio by 15 to loosely estimate how much principal I can distribute to him/her each year.  If I assume the person will live to age 90, I must divide the portfolio by 25 -- a big decrease in how much I can send him/her.

The actuaries recommend that we now assume the client will live to be 100 years old -- another big decrease in their annual spending ability.

Everybody likes to think they can cut their living expenses enough to compensate for decreased income, but I have never seen that happen.  People underestimate both the difficulty and time required to accomplish that.

It is clear that people need to work longer, save more, and take greater responsibility for managing their own health -- to ensure you can work longer.  It is not enough to wish for good health.  It takes a plan.  Health becomes another risk factor, just as a stock market crash, low interest rates, death of a spouse, etc.

When I was certified decades ago, I never suspected a good financial planner would have to involve himself in how well clients manage their health.  But, it does impact the way I should manage their portfolio!

Your homework assignment is to visit and take the examination to estimate your own life expectancy.

Friday, November 9, 2012

A True Rock-Star

Financial advisors tend to be a cynical, hard-bitten group.  They strain to merely applaud and seem to be genetically incapable of wild adulation.  So, it was surprising yesterday when our luncheon speaker was introduced.  He was Jack Bogle, founder of the Vanguard funds.  Even after 83 years of accomplishment, even he was surprised at the loud applause and standing ovation from 200 "know-it-alls" like myself.  We were indeed in the presence of a rock-star!

Jack rose to fame arguing the danger of high fees.  His Vanguard funds are among the cheapest in the industry, and I use them often.  Indeed, it was his writings that lead me to exchange-traded funds, which are generally cheaper than mutual funds.

He also argued that nobody is consistently smarter than the market in picking stocks.  He believes you should just buy an index fund that mimics the S&P 500, for example.  There are almost 15 thousand stocks out there.  Which do you study?  Which do you not study?  For example, if you assume that you even want to invest in drug stocks, how do you pick among the many drug companies worldwide?  Do you think you can see something in the financial statements that others cannot also see?  Do you think nobody talks with senior management?

Like Warren Buffett, he also believes the ideal holding period for an investment is forever.  Buy it, hold it, and watch it rise over the long term.  Like myself, he believes Monte Carlo analysis is a technology freak-show that misleads investors into thinking they are on-track to meet their financial goals.

His current campaign is to create a real fiduciary standard for financial advisors.  As discussed here frequently, the majority of financial advisors are in life insurance or stock brokerage; both of which are mere salesmen and have no legal obligation to do what is right for the client, not even to fully disclose their fees.

Of course, no two people ever agree completely.  I believe an investor should increase their cash levels (read: reduce risk) during periods of great risk, because whatever return is earned is not worth the risk assumed.  I also believe an investor benefits from rotating among the various sectors of the economy, such as investing heavily in consumer staple stocks during recession and consumer discretionary during growth.

Still, I have the highest admiration for Jack Bogle and wish him many more years of both work and life!

Thursday, November 8, 2012

Boehner, Taxes, and Egos

Yesterday, the market stopped obsessing over the election and suddenly realized the wet blanket of the Fiscal Cliff and the wet blanket of the European financial crisis were both wetter and heavier than expected.  The Dow lost over 300 points.

But, there was also a hopeful development in negotiations over the Fiscal Cliff yesterday.  The Republican position has been that there is a spending problem, not a revenue problem.  Therefore, the nation doesn't need more tax revenue and just needs to cut its spending.

Speaker John Boehner announced that, in order to avoid the Fiscal Cliff, their new position was that if spending is cut enough, the Republicans will agree to more tax revenue, AS LONG AS the new taxes don't come from high-income earners like myself.  If the lower and middle income classes want to tax themselves heavier to avoid the Fiscal Cliff, that would be fine.

While there is something distasteful about this, I do understand the logic.  Almost half of the nation pays zero income tax now and should have at least a small "dog in the fight."  (In fairness, they do pay a higher percentage of their income in real estate taxes, personal property taxes, and especially sales taxes.)  Already,  high income earners pay a greatly disproportionate share of total Federal income taxes.  (Estimates vary, but assume the top 5% of the income earners in this country pay 40% of the Federal income taxes.)

The Republican position is that updating the Internal Revenue Code, which everybody agrees needs to be updated anyway, will produce all the revenue needed -- without asking the high-income earners to pay more (contrary to political spinners, few of whom are small business owners).  The Democratic position is that you should follow Romans 13:1, and that high-income earners should support the government with higher marginal tax rates.  Clearly, the devil will be found in the boring  details . . .

Boehner's announcement is a hopeful development.  Still, egos are the bane of man and the killer of all kinds of negotiations.  During the last marathon negotiations on this last year, a lot of egos got bruised.  I hope a different set of negotiators will be sitting around the table.  I fear egos as much as I fear party loyalty.  The good of the country demands neither.

Wednesday, November 7, 2012

Focused on Perspectives

One of our speakers today was the biographer of Warren Buffett, and she had some interesting anecdotes; one personal and two business.

On a personal note, she asked him what was the personal characteristic that made him so successful, and he responded with one word -- "focus."  She looked around his large corner office and noticed the heavy, wooden shutters were all closed.  The great view interfered with his focus.

Similarly, his wife told the story of one time when a bat somehow got into their house.  Despite her hysterical screaming and the emergency workers she called, Buffett never removed his eyes from the computer screen where he was playing bridge online.  He stayed focused!

From a business perspective, Buffett views cash differently.  He is famous for maintaining very high levels of cash.  Most investment advisors, however, are under pressure to minimize the level of cash in their portfolios.  (Clients sometimes object to being charged a fee when the cash is "uninvested.")  To him, cash is a call option on every asset class, and it never expires.  Buying a call option gives you the right to buy a stock for a period of time, but it is expensive.  Holding cash is very similar and a lot cheaper.

In addition, he sees risk not just as an absolute to be managed but a function of cumulative probabilities.  Space does not permit a full discussion, but suffice it to say a powerful computer would get a migraine trying to compute such a number.  In the final analysis, human judgement must estimate what computers cannot calculate.

Now, if I ignored my wife when a bat was flying around inside our home, I would be a dead investment advisor . . . 

America Loses !

A month or so ago, investment advisors were polled to see who they hoped would win the Presidential election.  As I recall, an overwhelming 85% were Romney supporters.

I'm attending an investment conference this week in Baltimore, and the mood is dour indeed.  However, world stock markets are apparently not so dour. The U.S. was up strongly yesterday, just because it was almost over.  Asia was also up strongly overnight.  The Futures market indicates a good day in both Europe and the U.S today.  Stock markets almost invariably go up-- when uncertainty goes down.

I've been arguing that there are three wet blankets on the markets: (1) the election, (2) the Fiscal Cliff, and (3) the European financial crisis.  One wet blanket has now been removed, but we find the second wet blanket or Fiscal Cliff is now even wetter than expected.

My take is that America lost the election, not because the President was retained, but because gridlock was retained.  Some analysts are predicting it may even be worse, which is actually hard to imagine.  The inability to compromise is strangling this country.  We have an obligation to thank our elected officials whenever they compromise.

There is a train coming at us, and I don't care if we get off the right side or left side of the track!

Monday, November 5, 2012

My Election Prayer

I will be happy if Mitt Romney wins the election -- IF AND ONLY IF -- the Republicans also take control of the Senate.

Likewise, I will be happy if Barack Obama wins the election -- IF AND ONLY IF -- the Democrats also take control of the House.

So, how can I be happy if the country is going in the wrong direction?  Because I remember one of the most important lessons from Infantry Officer Candidate School in the Army, which was that "indecision is intolerable" especially when your men come under attack.  It is critical that a command be given.  We even joked that it was far better to order our men to "drop your pants and climb a tree" than to do nothing and take incoming fire.  Just give a command, any command!

Gridlock during a crisis is just as intolerable as indecision under fire.  

If we maintain the status quo and gridlock survives, then the nation loses . . . no matter who is President.

If gridlock wins, we will in all probability go over the Fiscal Cliff and slip into an increasingly severe recession early next year -- increasing in severity until gridlock is finally crushed under its own weight of indecision.  

I expect to be disappointed on election day . . . no matter who is President . . . but let us pray . . .

Sunday, November 4, 2012

Maybe, The "Ultimate Absurdity" Is Not ?

Just as Supply-side economists reflexively state that a tax cut will solve any problem anywhere at any time, existentialists reflexively describe anything they don't like as simply "absurd," a word of special significance to them. Indeed, they argue that the "ultimate absurdity" is death.

This weekend, I visited a loved one who has just entered hospice.  Since then, I have been thinking of the great 1997 classic by Dr. Elisabeth Kubler-Ross entitled On Death and Dying.  The thesis of her book is that a person goes through five predictable stages before dying.  They are (1) denial & isolation, (2) anger, (3) bargaining, (4) depression, and finally (5) acceptance.  However, there is no predictable amount of time that each person needs to spend in each step, but given enough time, each person does experience each stage.

My loved one does not seem to have experienced the first three stages at all.  (Of course, it has only been a week since we all learned the bad news.)  Still, she appears to have skipped the first three stages and moved directly to stage four; quietly approaching stage five.  I would guess that is because the bad news was not really a surprise to her.

To an existentialist, all the sorrow associated with the normal biological act of dying -- especially after a long, good life -- just seems pointless.  And, it probably is!

The Bible tells us that "to be absent from the body is to present with the Lord" (2 Cor 5:8), which suggests death should not be sorrowful.  Maybe, the "ultimate absurdity" is that Christians are still frightened of death, ignoring the Bible.

But, that also reveals the ragged outer edge of existentialism.  There is more to existence than mere purpose. It is the many irrational little things that also make us human.  It is remembering a funny moment together.  It is remembering a lesson-learned together.  It is remembering an interesting expression they often said. It is remembering their smile.  Certainly, these things may have no economic importance or philosophical significance, but they do have meaning.

Probably, society does approach death in an absurd fashion, but we as individuals can remember our loved ones with whatever deep emotions we choose . . . and I will . . . and that is not absurd!

Friday, November 2, 2012

The Art & Science of Bull

All year long, the most widely anticipated economic report has been the "Jobs Report" which will be issued this morning at 8:30 AM.  Of course, as the last important economic report before the election, it also has great political significance.

Economists are expecting about 125 thousand new jobs, with the unemployment rate virtually unchanged.  (This number should not be skewed by SuperStorm Sandy, but the report next month might be.)  The economic reality is that the report would be better than a "sharp stick in the eye" but is still too anemic for a country with such an under-utilized work force.

What I enjoy about economics is that it is both a science and an art.  The number of new jobs and the unemployment rate is the science.  Knowing it is good but anemic is the art.  What I don't enjoy about economics is the political spin that follows.

If more than 125 thousand jobs were created and the unemployment rate actually drops, the Democrats will strut the recovery plan is working.  If less than 125 thousand jobs were created and the unemployment rate increases, the Republicans will offer that as proof the recovery is stalled.

Actually, since they're going to say this anyway, regardless of the numbers, does the truth even matter in politics?  You know the answer to that.  Unlike governance, politics is just another subsidiary of the all-powerful advertising business.

Watching serious economic reports being spun for political purposes is like watching one of your kids getting "slimed" with unfair rumors. It ain't no fun!