Friday, March 27, 2015

A False Cresendo

Before being crushed by the falling sky that they always predict, American neo-conservatives were the only ones predicting an orgy of violence and death in Iraq after the withdrawal of U.S. forces.  However, nobody predicted the Arab Spring, when the governments of several Arab governments including Tunisia, Egypt, and Libya collapsed suddenly into bloodshed.  And, NOBODY foresaw an epic clash between Sunni Islam and Shia Islam in the budding war in Yemen.

As an American taxpayer tired of sending boatloads of dollars to keep Muslims from killing each other, I secretly wish for a climactic "mother-of-all-battles" to conclude this centuries old conflict between Sunni and Shia.  But, this war in Yemen will not do that.  Many more Muslims will be killed, and the hatred between both sects will only harden.

Maybe, the only way to solve such an intractable problem like this . . . is for Starbuck's to write "Islam Together" on all their cups?

Thursday, March 26, 2015

Prohibitive Opportunity Cost

One of the most useful concepts in economics is that of "opportunity cost," which means that everything has two costs, i.e., the dollar cost and the opportunity cost.  An example is that a man's suit might cost $300, which is the dollar cost.  The opportunity cost might be a man's suit costs three ladies' dresses and a pair of ladies'shoes.  The classic example is that our nation can have one new aircraft carrier or it can have one new hospital, fifteen outpatient centers, and a transportation system for patients -- which do we prefer?  What opportunities are we willing to give up, in order to get something else?

For many years, I have devoted much of my time to studying and thinking about investing and financial planning.  I think I know a good deal about those subjects.  But, there is an opportunity cost to spending so much time on those subjects.

I know nothing about televisions and the bewildering universe of high-tech electronics surrounding televisions!  That is the opportunity cost to me for studying the things I love.

A few months ago, I went into Best Buy and could not get past the question of "LCD, LED or plasma."  Huh?  So, being able to recognize what I that don't know, I hired a consultant to go back to Best Buy with me.  His dollar cost is part of my opportunity cost.

Today, I am the proud owner of 50" Sony Smart TV, Ultra HD, Wi-Fi certified, 3-D television complete with 3-D glasses.  Huh?  I'm not sure what all that means, but all the components seem to work together, it fits the room, and it looks unbelievable.  The best part is that I didn't have to spend much time learning about all this technology.  The time I would have to spend to understand all that would have been a prohibitive opportunity cost for me.

Remember the good-old-days when the only question was "black & white or color" . . . ?  For a person to make such a high-tech bundle of decisions . . . well, it does require expertise, and I'll pay for somebody else to have that expertise!

Wednesday, March 25, 2015

Speed Limit 2.2

When I was a young economics student in the last century, a GDP growth rate of 4% was good but not extraordinary.  It was at this rate the economy could grow without igniting inflation.  By the beginning of the Global Financial Crisis (GFC) in 2008, that maximum growth rate was close to 2.8%.  Today, it is probably only 2.2%.

So, why has this maximum safe speed continued to drop, especially since the recovery began in 2009?  One primary reason is that state and local government spending decreased significantly since the GFC and is now just getting back to 2008 levels.  Another reason is that consumers have worked hard on reducing debt by spending less (good in the long run but bad in the short run).  Also, our exports have suffered as the dollar rose against the currency of most other nations.

But, enough attention has not been paid to our aging workforce   The current inflow of new workers is not replacing the outflow of baby boomers retiring or just dying.  The workforce used to grow at 0.9% per year but is now growing at only 0.6% a year -- sounds small but actually makes a big difference.  Productivity per worker used to grow at 1.9% per year but is now expected to grow at only 1.6% going forward, as the benefits of the computer revolution fade into diminishing returns.

Why didn't Japan benefit as much as the U.S. from the computer revolution?  It doesn't matter how much your productivity gains are if your workforce is decreasing.

In 1970, just 9.9% of our population was over the age of 65.  By 2010, that had increased to 13.0% and is expected to reach 16.8% by 2020.  We're getting old!  The baby bust since 1970 is hurting us.  Forget Paul Ehrlich's classic best-seller The Population Bomb in 1968.  We baby boomers should have been making more babies instead of just making love.  That chicken has come home!

While I religiously avoid inflammatory rhetoric, I must ignore my nationalistic leanings to express my gratitude for those brave undocumented workers who come great distances to help their young families and to help our old ones.  We need you!

Monday, March 23, 2015

The Second Time Around

The first President Bush once joked that the best thing about being president was that he didn't have to eat broccoli anymore.  Late night comedians promptly had fodder for a variety of jokes about "negative goals."  You know, the goal for your kid is that he or she grows up and becomes a non-politician.  The goal of athletes is to NOT win, and all that.

Negative goals also exist for retirees, like NOT living at the poverty level.  One retiree I know had a goal of NOT working.  He didn't have any positive goals that I ever knew, like finishing his college degree or hiking the Appalachian trial or taking a cruise or anything else.  His only goal was simply to NOT work.

Maybe, if a person worked in a coal mine, inhaling coal dust, digging the carbon out of a hole a mile deep, then his perception of work would be understandably different from someone who worked in an office all his life.  I do understand that but suspect that is an extreme example.

A new survey by Merrill Lynch found that 42% of existing retirees either have worked or are planning to work during retirement.  Among workers, otherwise known as pre-retirees, fully 72% expect to work during retirement.

Of course, I understand the baby-boomer generation got blindsided by the death of corporate pensions and were slow to grasp the benefits of defined contribution plans, like 401(k)'s.  Still, according to the survey, "retirees are four times as likely to say they are continuing to work because they want to rather than because they must."

Eighty-three percent of the "working" retirees only work part-time.  Sixty percent of them went into entirely new fields.   Incredibly,  one-third of working retirees now own their their own business.

The world of retirement has changed.  No longer does an employee get a gold watch before going off to die somewhere else.  Longevity has changed all that.  Retirement now offers an opportunity for a second career, a second opportunity for growth and a cure for the retirement boredom or emptiness that financial planners see so often.

Sunday, March 22, 2015

A Pressure Release Valve

I feel qualified to discuss economics, investing, and financial planning.  However, I feel unqualified to discuss religion . . . which I will now discuss.

For convenience, let's assume everybody on Earth is either a Christian, a Jew, a Hindu, a Buddhist, or a Muslim.  That's five major religions.  Yet, a disproportionate share of world disorder involves Islam.  While all religions have zealots or "true believers," my observation has been that all major religions are able to marginalize their extremists except Islam.

Do you remember the crazy preacher of Westboro Baptist Church in Topeka, Kansas who thought it was a good idea for his congregation to travel around the country, demonstrating at the funerals for our fallen heroes, who died in Iraq & Afghanistan, simply because they died fighting for a country that tolerates gay people?  He was a Christian extremist, whose 15-minutes of fame have thankfully passed.  More importantly, his Biblical poison didn't spread.  He was marginalized, but why?

Increasingly, religion is our country is capitalistic or atomized into independent units.  Preachers rise or fall based on their ability to sell "The Word."  Just as there is a market for tofu, there is a market for extreme religion, but it is a really small market in the U.S.   Except for hot-button social issues like abortion and homosexuality, our government stays relatively un-involved in our religion.  Our extremists are able to vent their spleen without government approval or disapproval.  We have a pressure-release valve for extremism.  Is this the same case in Islam?

A friend tells me that my thinking is flawed, as there are not five major religions but six.  His point is that there are two Islams, i.e., Sunni Islam and Shia Islam, which are wholly different.  The troubles of the world revolve around that divide.  We are just caught up in their civil war.  I understand his point, but still believe that the many respective governments of both Islams are so supportive of religion that they actually encourage extremism.

The first amendment of the Constitution says "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof."

That's a good rule!  Maybe Islamic governments should try it . . .

Friday, March 20, 2015

Fantasy Revisited

Every "C" student in every Economics 101 course in every college in every state of this country knows that a national economic policy has both a monetary policy and a fiscal policy.  Monetary policy are those actions taken by the central bank (Fed) to affect the economy.  Fiscal policy are those actions taken - or not taken - by the central government to affect the economy.

There is general agreement among economists that monetary policy has been the only tool available to recover from the Global Financial Crisis.  Fiscal policy has been absent.  It has been a one-fisted fight!  My fantasy has been to grab Obama and Boehner by their shirt collars, knock their heads together, and use my  precision Army vocabulary to verbally assault them, as well as insult their entire bloodline . . . loudly.

However, at a recent conference, I heard Alice Revlin speak.  She is the former director of the Congressional Budget Office as well as Vice Chair of the Fed.  She emphasized that the death of fiscal policy is not recent and, in fact, has been dead since 1974.  I've been reading and thinking about that comment and think she is right, but with the caveat that it has been a slow, gradual death since that time.  Past sins of Congress do not approach the uselessness of the present Congress.

But her point is well made.  While grabbing their shirt collars, I should not fantasize about saying "Mr. Obama & Mr. Boehner, your inability to compromise is seriously hurting our country both now and in the future" (translated loosely from my precision Army vocabulary).  Instead, I should address them more respectfully as "Mr. President & Mr. Speaker" because their predecessors were also guilty, even if less so.

It makes me wonder if the sins of partisan redistricting compound, like interest, and increase over time.  If Republican voters are corralled into one political district, doesn't that tend to make the congressman more highly partisan than a district that is only 50% Republican?  (Of course, the same logic applies when you corral Democratic voters into one district.)  Maybe my new fantasy should be that the cancer of partisan redistricting would be removed from the body politic?  Maybe then we could see a rebirth and recovery of fiscal policy.

Thursday, March 19, 2015

What's Wrong ??

Several times in the last few days, I've been asked what's wrong with the stock market?  I guess it must be "wrong" not to set a new record high every other day?  We're only a few percentage points from all-time highs, but that was a month ago - ancient history, I guess.

Yes, volatility in the stock market has increased, but that is a normal occurrence when the stock market is shifting gears.  Over the last few months, there has been a lot of news for the market to digest.  Oil has hit new lows.  This redistributes money within the U.S. economy.  Outside our economy, this sends some oil producers like Russia and Venezuela circling ever closer to the drain, causing geopolitical unrest.  The dollar has hit new highes.  This redistributes income from nations with expensive currencies, like the U.S., to nations with cheaper currency, like the European Union.  Also, don't forget that economy is producing over 200 thousand jobs per month.  (Interestingly, wages earned by farm workers are now growing faster than wages for high school students.)  Don't forget that talks between Greece and the EU are going poorly, and "Grexit"" is becoming a real possibility.

Of course, the biggest adjustment for the market to swallow is the Fed finally letting interest rates rise, after six years of zero rates.  Yesterday's removal of the word "patient" from the Fed's minutes does not mean the Fed is now impatient to raise interest rates.  But, the market will eventually get comfortable with the idea that the Fed can now raise rates, because the economy is actually doing better, not worse.

And, no, the possibility of systemic collapse of the financial system is not becoming more likely.  In fact, once the new rules on derivatives disclosure start in 2017, I will finally stop worrying so much about this.

Despite recent economic data that suggests the economy is stalling somewhat, it is not!  It is shifting gears to grow more later.  Worry about something else . . . like why you didn't keep your New Year's Resolution, for example.  OK, why didn't you?

Sunday, March 15, 2015

Don't . . . Eat The Rich

There has been a book, a song, and a play entitled "Eat the Rich."  It plays into a very basic human jealously, but it has been emotionally reinforced by the belief that the rich benefited unfairly during the Global Financial Crisis (GFC) of 2008/9 . . . while others were suffering.

It is often reported that the rich got richer during the GFC.  Yes, it is true they owned a larger piece of the pie or national wealth after it was all over.  But, it was a smaller pie!  Like almost everybody else, the rich lost money during the GFC.  In dollar terms, they lost more per person than those in the middle or lower classes.  In percentage terms, they lost less.

For the middle and lower class, their home is usually their largest investment.  Housing also got crushed during the GFC.  If you have 10% equity in your home and if the market value drops 10%, then you have lost 100% of your equity.  The vast majority of the rich have little or no mortgage debt.  They argue their percentage of total national wealth increased because they were more risk adverse and avoided mortgages.  In other words, they were smarter.

The rich also stayed in the stock market for the long-run, even when it was down.  The other classes needed whatever cash they had in stocks and sold them, which means they missed the huge bull market that followed the GFC.  In other words, the rich were smarter.

Or, they could afford to be smarter.

Being rich means you can afford to have a nicer lifestyle, PLUS you have more choices and can choose to be smarter.

But, being smarter doesn't make you any tastier to eat . . . The rich benefited because they were lucky, not because they were bad or devious.  The rich are just people too!  Please don't eat them!!

Friday, March 13, 2015

His Due

It sounds like "inside baseball" or too hopelessly arcane to be interesting or important, but it is.  Do you believe a stockbroker should tell you the total fees he is charging you?  Or not?  Do you believe that a stockbroker should tell you when he has a conflict-of-interest with you, such as selling you a mutual fund that sends he and his wife to Hawaii for a week, instead of a better fund that does not send him to Hawaii?  Or not?

Registered financial advisors tell you these things, but stockbrokers do not.  Financial advisors are held to a "fiduciary standard" whereas stockbrokers are held to a "suitability standard" which is a much lower standard.  Stockbrokers cannot simply "cheat" you, but they don't have tell the full truth either.

For at least ten years, financial advisors have been urging the S.E.C. to make the fiduciary standard apply to stockbrokers, who have fought this vigorously.  They don't want to be held to the higher standard, as it will be more difficult to monitor compliance, and they will therefore have to "dump" small accounts.  Or, so they threaten.

Frankly, I had been losing interest in this debate, but then an 800-lb-gorilla suddenly got involved.  President Obama has come out in support of the fiduciary standard, at least for retirement accounts.  While I'm surprised he was even aware of the decade-old debate, all I can say is . . . thank you, Mr. President!

Wednesday, March 11, 2015

Shouting Truth To Power

The Fed was created by an act of Congress and could theoretically be terminated by Congress.  So, the Fed has to be respectful of Congress.

Prior to the creation of the Fed, our economic policy consisted fiscal policy alone, i.e., controlling the economy with the Federal budget and regulation.  The purpose of the Fed was to manage monetary policy, i.e., controlling the economy with the money supply and regulation of banking.  They wisely felt that a two-fisted or binary approach to economic policy would be more effective, and they were right!

The Chairman of the Fed is required to testify before each house of Congress twice a year, producing four very dull performances.  The Fed Head is always respectful, maybe more respectful than he should be.  For the last forty years, we have had an active monetary policy but a passive fiscal policy.  Congress has been unable to balance their budget over a year, as Austrian economists want, or over a business cycle, as Keynesian economists want.

One time, Fed Head Paul Volcker warned Congress he would "break the back" of inflation by himself, since Congress could not control its spending and taxing.  He promptly raised interest rates to traumatic levels, plunging America into a full-blown recession.  Congress howled but did nothing to improve their handling of fiscal policy.  Fortunately, the recession did as expected, reducing inflation.  Brinksmanship paid off!

His successor was Alan Greenspan, who used obtuse vocabulary to confuse and intimidate Congress but never threatened them.  Ever the Libertarian, he would sometimes make snide remarks, such as that companies would never do anything that threatened their own existence.  (Ask Lehman Brothers!)  He enjoyed a cozy relationship with Congress.

Next was Ben Bernanke, who famously said he didn't believe in brinksmanship with Congress.  He used monetary policy to steer the economy alone, without benefit of fiscal policy.  (I have the greatest respect for him and the single-handed role he played during the Global Financial Crisis.)  While he was always clear that he would appreciate some help from Congress, he never called them irresponsible.

Currently, the new Fed Head is Janet Yellen, and it is not yet clear how much truth she will speak to Congress.  One early observation is that she has a tendency to talk-over any idiot member of Congress, which is a step in the right direction.  You, Go, Girl!

The economy is now healing but Congress deserves no thanks.  Nobody is proud of the blunt force weapon that sequestration is!  How do we get fiscal policy working again?  Should we put the economy into recession again?   Did Paul Volcker do the right thing?  It was bad in the short term but helped America in the long term.

As long as Congress has the power to terminate the Fed, it will be difficult for the Fed to even whisper truth to power.  At the very least, the Fed should not volunteer to give up on brinksmanship.

Rand Paul is wrong!  The Fed must be strengthened and made safe from Congress.

Tuesday, March 10, 2015

Presidential Flexibility

Instead of another droll economist, yesterday's luncheon speaker was a Washington "insider."  He made  some interesting comparisons about our Presidents.  For example, both Clinton and Obama sustained large losses in the first mid-term election of their first term.  However, President Clinton is a person who wanted to be "liked" and changed his policies.  Today, he is a popular former President.  Even some Republicans respect him.  On the other hand, President Obama is so confident in his own intelligence and the correctness of his positions that he will not change them, believing it is his job to do the "right" thing and that history will be kind.

So, what recent President was most like Obama?  President George W. Bush - because he was also more concerned with being right than being liked.  He was so convinced that occupying Iraq and Afghanistan was the morally right thing to do that he ignored the growing opposition from the American people.  History has yet to be kind to his legacy.

The point our speaker was making is that Americans will not follow for very long, no matter how good a leader the President may be, unless they are being led in the right direction.  Since nobody is perfect and makes mistakes, let us hope the next President is flexible enough to lead us where we want to go, not where he thinks we should go.  But, how do you measure a person's flexibility?

Of course, maybe inflexibility is just another reflection of gerrymandering to produce rabid partisans?

Saturday, March 7, 2015


Probably, the least known part of my job is the never-ending pursuit of continuing education (CE) hours.  As a Certified Financial Planner (R) certificant, as well as a Certified Investment Management Analyst (R) certificant and a NAPFA-Registered Financial Advisor, I have to "feed" all three organizations with an unending flow of CEs.  Therefore, I attend far more conferences than the average person, because I am chasing CEs.  (I'm jealous CPAs don't have to do all this.)

Certainly, my favorite conference each year is the National Policy Conference of the National Association of Business Economics in Washington, D.C.  Most attendees are investment and planning illiterates, but they are bright - very bright - economic nerds.

Some attend wearing their red-tinted glasses and some wear their blue-tinted glasses, but most are non-partisan economic nerds, just trying to understand reality without a political agenda.  I truly enjoy this intellectual orgy of thought.

Friday, March 6, 2015

A Boring Big Deal

While everybody was watching winter's last fury for this year (I hope), the Fed released a little-noticed report on its annual "stress-tests" of the 31 largest banks in the United States.  The good news was that all 31 have passed and with relative ease.  The better news is that the test was actually severe enough to match the Global Financial Crisis of 2008/9.  We are now much better prepared than we were before.

My greatest fear has long been that we will have a "Jim Fixx moment.,"  You'll recall he was the father of running revolution who was healthy and lean but dropped dead from a heart attack.  My fear is that a derivatives blow-up, probably a credit default swap, will so weaken our banking system that it suffers a "heart attack."  That fear is now reduced . . . somewhat.

The fear largely remains due to the lack of meaningful stress tests of foreign banks.  A typical problem is that we don't know who is guaranteeing what debt to whom nor for how long.   For example, if Greece defaults, what customer of which European bank will default on his loan from the bank, causing the bank to write off that loan against its capital account.

Real progress has been made.  Now, when the ECB does what the Fed has done, I may stop feeling like Jim Fixx, even if I don't stop worrying . . . 

Tuesday, March 3, 2015

"Uncle" Jeremy Semi-Warns

My favorite professor at Wharton - the brilliant but affable Dr. Jeremy Siegel - enjoys a reputation for being an accurate forecaster as well as a "perma-bull," i.e., someone who always thinks things will get better.

Yesterday, he pointed out that the PE ratio for the S&P 500 is now 19 times last year's earnings per share.  This is significantly above the long-run trend of 16.7, suggesting the market is now fully-valued, historically speaking.  It is even more remarkable that the market is so fully-valued in the face of so many companies decreasing their future earnings, primarily due to the stronger dollar.

However, he is not calling for a market correction.  Given the historically low interest rate environment, he believes that a higher PE ratio is justified . . . at least for now.

Of course, interest rates are going up, sooner or later.  Yes, but earnings per share are also going up, sooner or later!

Stay the course . . . at least for now.

Monday, March 2, 2015

That Fearsome Number

Here, at the corner of Good Planning and Good Living, where I practice, I usually feel an obligation to teach my clients whenever possible, or at least, to help them see a wrinkle in their perspective that might be helpful.  Quite often, they teach me.

Recently, I was visiting a client and discussing the requirement that he begin taking minimum required distributions from his IRA since he had turned 70.  His demeanor changed at this, and I suspected he had a problem thinking about being 70 and asked him.  Paraphrasing now, he replied he did not, but he was very apprehensive about turning 80.

As this man was a hard-driving executive with a fondness for numbers and the gift of cold logic, I suspected his apprehension might spring from his inability to command the aging process, even though he has done a great job of managing it,  Although he is quite a good 70-year-old athlete now, he can still only manage the process, not stop it.  Some people just have a high need to control.  I think I mumbled something about the pride earned by being 80, but that didn't change his perspective much at all.

Since then, I've been thinking about the change from being 70 to being 80, as opposed from age 50 to 60 for example.  My first thought was that 80-year-olds used to be relatively rare but are now commonplace, which would make the obvious physical changes more routine and less startling.

More commonly, I see people concerned about the visible change in physical appearance by age 80.  Women fret about the loss of bone density, as men fret about the loss of muscle mass.  Is there any other word for age 80 than old?  And, is that a bad word anyway?  While there are lots of physically vibrant 70-year-olds, there are vastly fewer at age 80.

Financially, I don't see the uncertainty and fear that I see in most 50-year-olds.  80-year-olds have out-lived that fear and conquered it.  Popular wisdom says that older investors take less risk than younger investors, but there are numerous exceptions.  My least risk-adverse client is well into his 90's.

Socially, my totally unscientific observation is that 80-year-olds seek out fewer social activities but seem to enjoy them more.  By that age, I guess they know what type of activities they enjoy or maybe what type of people they want to be social with.  I would like to better understand this part of the aging process.

Beyond the physical decline, there is often both a mental decline and a psychological decline.  These are probably the greatest fears.  The science of arresting mental decline is not as advanced as the science of arresting physical decline, but it is growing faster.  At this point, doing different things with the mind, different than the mind is accustomed to doing, seems the best self-help remedy.  This is within our control.  We can, at least, practice doing different things with our mind.

The science of arresting psychological decline is still very rudimentary at this point.  Some people become extremely isolated and bitter at the world, for no apparent reason.  I suspect psychological decline is best arrested by associating with a number of different types of people and studying their psychological state.  So much research is needed in this area and so little is being done.

Twenty years ago, I recall a late client in his late 70's telling me that his mind was finally stronger than his libido, and he was glad about that.  I'm still struggling with this concept . . .

Cold logic suggests you will either live to be 80 or you will not.  If you don't, there is nothing to worry about.  If you do, you will be happier if you start planning now for the expected problems later.  Exercise your body - you know how to do that, don't you?  Exercise your mind by doing different things with it.  Exercise your psychological/emotion condition by tolerating/studying different types of people now.  Either you will plan ahead . . . or you won't.

Now, make your financial planner happy!