The Phantom Social Security Trust Fund

I just came across another article in a major financial media column. It reports the Social Security trust fund will be exhausted by 2037.

But there is no Social Security trust fund. It is a mere figment of a government politician’s imagination that dutiful media columnists repeat. Money taken from present-day workers goes into general funds, in effect to pay for current Social Security outlay.

It’s a Ponzi scheme, not a trust fund. It’s not comparable to a reserve-investment of a private insurance company program that politicians these days love to demonize to suit their purposes.

Leftist Billionaires?

There always are top dogs in the most socialist of socialist societies. The Namenclatura in Soviet Russia all lived like multi-millionaires, and probably had plenty more stashed safely abroad “just in case.”

In the U.S., their policies when in office don’t necessarily create wealth for the public. They may believe in high taxes on public citizens; they may want to redistribute wealth of others. Whatever it is they seek, they manage to make lots of money for themselves in some way.

Perhaps they do consulting and advising, or have some political connection even when they have no apparent left-leaning political connection.

Look about and see how this is true in this country among those who carry on battles for the “little guy,” while flying about in their private jets, and living in their many grandiose homes both here and abroad.

Their stand for the poor never means they have taken vows for personal poverty. In fact, they have managed to become billionaires while in pursuit of their leftward careers.

Private Capital Competes with Government Spending

Here is an Economics 101 lesson most folks never learn from the media.

They never get basic economics from most college attendance these days either. And I am referring to those who actually take formal economics courses at school, interspersed with whatever else colleges teach.

The basic economics rule is this: When the government spends a dollar which it must borrow or tax, there is one dollar less in the private sector with which to invest for public benefit.

That produces innate damage that government do-gooders overlook in their zeal to help the community.

Is the Misery Index Around the Corner?

Remember the Misery Index? Those of you who were not around or were too young in the 1970s may not have heard of it.

That index combined the unemployment and the inflation rates. It reached a high of 22 in 1980. The Misery Index confronted Ronald Reagan when he got into office, during what was the worst recession since the Great Depression of the 1930s.

The media does a poor job of relating this bit of news. A few years from now when inflation takes hold because of our huge budget deficits, the Misery Index will no doubt be back in vogue.

Are the Rich Getting Richer While the Poor are Poorer?

Whether the rich are becoming richer and the poor are getting poorer depends on the observer trying to make a point from the political Left. And what the left-slanted media wants you to know.

Take, for example, a November 13, 2007 report from the Treasury Department, entitled "Income Mobility in the United States from 1996 to 2005. These are not the only data that tell a diametrically opposite slant from the usual political and media story that the rich are getting richer and the poor are getting poorer. A previous Treasury Department study showed similar patterns in individual income changes between 1979 and 1988.

These studies of same individuals show patterns different than the patterns the Left want you to see.

Similarly, a study conducted at the University of Michigan, following the same individuals over an even longer span of time, found most people moving from income bracket to income bracket over time — especially among those who began in the bottom 20%.

The University of Michigan Panel Survey on Income Dynamics showed that, among people who were in the bottom 20% income bracket in 1975, only 5% were still in that category in 1991. Nearly six times as many of them were now in the top 20% in 1991.

The Left sneers at income mobility as a myth. But the facts speak for themselves.

Hedge Funds After the Financial Meltdown

How has the hedge fund industry been affected by the financial meltdown?

Apart from the fact that many have folded because of disastrous financial returns, while the glamour of the industry has somewhat faded, hedge funds are still a viable business that is attracting heavy investors.

Invested funds are now a little easier to get out from. Investors have more leeway with management and can be more particular with regard to terms on withdrawal of their investments.

However, hedge fund charges are not much lower. Management fees generally are still set at 1½% of managed assets and 20% of profits generated. Sought-after funds charge even more, as in the past.

Hedge funds operate in different ways with varying objectives. They have a tougher row to hoe in this economy. But they remain a factor because only they in the investment industry, have the REAL speculative funds these days

Must Wall Street Be in Bed With Regulatory Agencies?

The question always comes up, especially when financial and business calamities occur: Is Wall Street too close to regulatory officials and agencies?

Particularly the major brokers and investment bankers in Wall Street, whose officials are often tapped to become the regulators.

But then, who else has the needed experience?

Unfortunately, too often we have bureaucrats in Washington who operate or supervise what affects mega-business operations. Despite the fact they have never, ever, successfully operated a pushcart on their own.

You have this evidence the way banks were pushed to accept subprime loans in order to have folks get mortgages for homes they never could afford, simply because it was a populist political idea.

Retirement Basics

Here are some retirement basics which need repetition because of the spate of poor advice investors keep getting from both the lay and financial media.

Much of that advice comes through public relations organs of financial advisers with an axe to grind. Articles you see or hear on retirement planning are primarily marketing tools, created to influence individual investors to invest in certain funds or with particular advisers.

They attempt to satisfy normal fears investors have of insufficient funds for the education of children, of not having a comfortable retirement, and simply, the fear of outliving their savings and investments.

But these fears are actually leading investors into a trap.

They are getting expensive advice for the most part. They may need estate planning and tax planning only if the size of their assets warrant it.

Otherwise, why pay 2% or more for a financial adviser who will cost them as much as 20% or more of their annual investment income? That adds up to a huge chunk of assets over the years.

Furthermore, investors need the lowest cost indexed mutual funds or exchange traded funds (ETFs) in which to invest.

Retirement basics can be quite simple for the average investor who avoids the hoopla.

What If All Millionaires Disappear?

Who will the politicians tax if millionaires disappear? Or are taxed out of existence, as those on the Left ( at least, those who have less), call the solution to all our ills?

New York State and California, which have always had the largest number of millionaires, report that their number have been falling. That is bad for politicians who love to tax them to solve state fiscal and budget problems.

Unfortunately for these high-tax states, the millionaires, and those not so wealthy, are taking precautions. Where taxing situations get onerous, they leave for other states.

Eventually, of course, the Federal government may well catch up with its millionaire citizens, with death taxes, if not those on income.

Government Debt and Your Pocketbook

This will bring the Obama administration’s spending under a better light for the average taxpayer to appreciate.

This year, about 40% of the income tax goes to pay just the interest on government debt. We are not talking about the debt principal itself; we are just keeping up with the interest which is dirt cheap at the moment.

During the Jimmie Carter administration those rates were almost five times greater than now. In addition, the debt is expected to grow by at least $9 trillion in ten years.

It will be impossible to pay the interest, least of all the principal, especially with expected higher interest rates.

This will be absolutely impossible without tremendously inflating the currency. That is, add paper to the money supply to cheapen it.

That will make the real debt less, and what the citizens own worthless.

Should You Invest Overseas?

There are always media discussions about investing at least some of your funds overseas. But nothing is definitive as to global diversification of investment funds.

Currencies are speculative and require special attention. They are probably not for the average investor.

Many large American companies are doing business overseas. So investing in the S&P 500 will give you a measure of global diversification.

If you do buy overseas investments to broaden this strategic step, there are emerging or developing, as well as developed countries in which to participate. Using indexed funds or exchange traded funds (ETFs), you can invest around the globe with varying regional emphasis.

Use indexed funds which are not hedged against currency value changes. This also helps diversify against inflation in the U.S. outracing that around the globe

Long Term Stock Holdings When Sold Into a Bear Market

We know that over the long term, stock holdings can grow a substantial amount. Any downturns can be corrected with time.

There is a problem with this thinking and, unfortunately, little an investor can do about it, except keep one’s fingers’ crossed.

Should the market flop just when an investor needs securities proceeds and has to sell stock, no planning in the world, no high-powered adviser, will help.

If you need the funds, the long term advantage of holding stocks will not help in a down market. In an emergency, selling into a bad market will create losses, despite long-term growth potential.

Apart from keeping your fingers’ crossed, it pays to anticipate smaller emergencies with some liquidity, such as short-term bond holdings.

Poor Lottery Odds

A little over $90 Billion is spent each year on legalized gambling in the U.S. The illegal amount probably far surpasses this figure.

You may wonder why lotteries flourish when odds are generally well in favor of the house, bookie or lottery sponsor and not the player. Lotteries often pay off as little as 60 cents on the dollar. So why bother playing?

Where bookies pay off in tax-free cash and the better is illegally laundering money, poor odds are reduced in favor of the bettor. So much so that the gambler’s net is actually much higher.

But then such a better is gambling on a possible stiff fine or jail sentence if caught. So, the odds continue to remain stupid.

Factors in a Credit Score

What makes up a personal credit score?

About one third of the score is composed of each of the following factors: One: The amounts you owe to other institutions. Two: Your past payment history. Three: Various miscellaneous but important credit related items.

The latter are composed of about an equal part each of the type of debt you have, your credit history and the new accounts and/or queries about debt you now have.

Check your credit account often to see the accuracy of the information. If there are errors get them corrected immediately.

Fund Management Versus Fund Indexes

It has become common knowledge, except perhaps among the public, many of whom continue to buy managed mutual funds, that securities indexes outperform most managed mutual funds. What is more, this usually occurs year after year.

And in cases where a fund manager may do better than an unmanaged indexed fund or exchange traded fund (ETF), that manager often will not repeat such success in following years.

Also, managed funds have higher expense cost for fund stockholders. Indexed, unmanaged mutual funds have a decided advantage.

In a new research study done by Morningstar, Inc., another positive factor has been added. When risk taken by an average fund manager to attempt to outperform an index is considered, that manager’s efforts were found to have accomplished even less for the investor.

The additional risk of paying for management simply did not pay off.

Identify the Fundamentalists and Chartists

There are two very broad classifications of analysts on Wall Street, fundamentalists and chartists.

Fundamentalists investigate operations of companies, sales, earnings and future potential, with all its aspects. Among fundamentalists there are many variations of users or non-users of definitive strategy. Also, there are quants who look to the math of securities more than they do management evaluation.

The chartists look at the technical market. The market-pricing highs, lows, trading patterns and the volume that accompanies these patterns. There are many types of chartists, and interpreters of each type.

When you hear someone saying a market for a stock is oversold or undersold or is ready to “break out,” chances they are charting the market, and not talking about fundamentals.

Fundamentalists are more long term in their outlook than are chartists. And to complicate matters, some analysts use a combination of both analytical approaches.

I have spent decades studying well over 1,500 individual investment strategies. The upshot? I find it important that you overlook analyst recommendations if you have little understanding of where they are coming from or what they are about.

And always remember: The analyst advice you get may vary greatly, depending on the type of analysis they do.

The Proposed Financial Reforms

Under President Obama's proposed financial reforms, the government can have permanent bailout authority.

The Treasury, with the Federal Reserve’s and other regulators’ consent, could take over any financial institution that it deems a systemic risk. (The treasury secretary, is appointed by the president.)

With such seizure, the government could break contracts any company has with lenders, customers, and employees. Shareholders would have nothing to say to stop the takeover.

Yes, it’s an unconstitutional taking of property without due process or fair compensation.

Such so-called reforms are not really necessary to our way of economic life, but they will increase the power of politicians to make arbitrary economic decisions.

Politicos love power wherever and however they can get it. Unfortunately, this has become a habit in Washington these days.

The Rush to Rebalance Your Investment Portfolio

You keep hearing of the need to rebalance your investment portfolio. But is it truly necessary?

We know of suggested formulae: Keeping the ratio of stocks and bonds in your portfolio at 50%/50% or 60%/40%, and so on. I will not get into what is optimum because that is a variable, depending on many factors.

You hear about periodic rebalancing when that ratio changes due to market changes. Question: How does it improve your investment success?

The truth is, rebalancing the ratio of stocks and bonds is one of over 1500 investment strategies I have investigated. It has not always been a profitable strategy for all types of stock or bond markets. It can cause overall losses, as it did in the 2008 and 2009 financial meltdown and in some past cycles.

My suggestion is to evaluate your common stock and bond holdings in a flexible manner and not as a set ratio, depending on your age, total assets and retirement outlook.

How Good an Investment is Gold?

Most of the advertisement claims for buying gold sound good. What with inflation a certainty as a result of budget deficits, gold is an apparent inflation hedge. You can be sure the political pressures on the Federal Reserve will make it hard for the Fed not to monetize the huge debt that will augment future inflation.

But look at gold prices over the years. The price today is close to what it was at the highs of the 1980’s. With simple compound interest, gold ought to be about twice what is today.

Also, gold comes in different forms; plain coins, rare coins, and bullion, all of which must be safely stored in bank vaults or at home.

Gold is a good holding in dire emergencies. Excellent in rare coin form, for example, for refugees fleeing Europe in the 1930s. But it can be erratic and it pays no interest if just sitting around.

When the dollar weakens, gold goes up. When the dollar stabilizes, as it does periodically in relation to other currencies, gold prices fall. Some times sharply. And often gold moves with market anxieties, or supply/demand, more than mere inflation.

So be careful holding gold, as with any other investment you may have. Never treat it as a panacea to offset brutal inflation. There are alternatives.

Investment Enhancement With a Cost Factor

Numerous studies have proven that investment cost is one of the most important factors of investment performance. Mutual funds with high expenses usually result in poorer market performance. Select funds with the lowest management fees.

Costs also include fund brokerage charges not included in your fund's expense ratio. The cost of buying and selling securities is passed on to you. Therefore, it's advisable to stick with mutual funds that have low transaction volume.

A 2008 Lipper study discovered that buy-and-hold investors with mutual funds in taxable accounts lost to taxes between 1.3% to 2.2% of their annual returns over the past 10 years. Minimizing the impact of taxes should therefore be an investor priority.

One way to minimize a tax bill is to invest in tax-efficient investments that distribute little capital gains. Exchange traded funds, or ETFs, can help lower tax distributions.

Predicting the Financial Future

Predicting the financial future is exceedingly difficult. Many complex, contingent factors and possibilities come into play, so that your picture of what may be ahead is bound to be adjusted by events you may never contemplate or imagine.

Only politicians are certain they can foresee and plan the future. We know how successful they are if we have our eyes open.

The solution? Be flexible. Prepare for various possibilities. Human economists are often wrong and are susceptible to extremes of optimism and pessimism. Flexibility enables you to make necessary changes to suit events as they occur.

Portfolio Enhancement by Diversification

Diversification is a common investment procedure. But going about it can be complicated.

Diversification is achieved only to some extent by the quantity of stocks in a portfolio. It’s gotten mostly by asset classes in the mix, as well of geography. Where around the world investments are located.

Many investors buy several mutual funds and therefore believe they are adequately diversified. But on closer inspection, they merely have duplicated much of their portfolios and have just added the same securities with each fund holding.

I find that indexed funds or exchange traded funds (ETFs) provide the same diversification, and at lower cost.

Inflation Protection by Buying TIPS?

TIPS are bonds issued by the federal government (through a bank, broker, or the Treasury) for five, ten and twenty year maturities. Their value grows to the extent of rising inflation. TIPS can also be bought in the form of mutual funds and ETFs.

Investors buy them for inflation protection, more than for interest they pay, which is comparatively low. With no inflation, returns are insignificant.

State and local taxes do not apply on U.S. Treasury obligations. However, additional interest paid because of inflation will be subject to federal tax (except in IRA accounts.)

Why buy them? I have never considered TIPS a valid bond inflation hedge, despite the publicity they get in the financial media.

TIPS have been bid up by demand, in excess of face value for that vaunted inflation protection. But you can get protection elsewhere. Even with other bond funds, yielding much higher returns and protection. You get that in diversified funds that reinvest interest every six months through shorter duration.

Investment Portfolio Evaluation by Risk

Risk goes beyond statistical numbers such as what is called standard deviation. That is a $1000 term used by financial analysts looking at investment portfolios. It’s a term that really need not concern individual, everyday, non-professional investors. (The return you get from gains and losses you may expect about two thirds of the time over a year.)

Investors for example, should subject themselves to consideration of manager risk by choosing an investment portfolio that's fully actively managed. What happens if your investment manager leaves or fails to do as well as in the past? That is manager risk that can't be measured by numbers or statistics alone.

A well designed portfolio will consider your acceptable risk. or 'risk tolerance.' Your investment time objective age, psychology and investment goals are other factors. More importantly, who will be managing your portfolio?

I personally recommend mutual funds or exchange traded funds (ETFs). Better still, I always suggest non-managed funds, those indexed to foreign and domestic standards you want to emulate, such as the S&P 500, as one example.

Paying 2% to 3% of your assets as a minimum charge to investment advisers can represent as much as 20% or more of you annual investment income. And you will be receiving little practical advice in return.

I repeat what I often say: I do not recommend investment advisers unless you are extremely wealthy. In that case, you certainly need a tax accountant, lawyer, and/or an estate specialist.

The Auto Cash for Clunkers Fiasco- Our Recap

Here is “I told you so” worth telling.

Because it teaches basic economics. Something left-leaning politicians ought to learn as well.

The automobile cash for clunkers program was slated to fail for a multitude of reasons. All of which I had outlined before. The misconceived plan had disrupted the new car, the used car, and the scrap metal markets. Plus, it cost taxpayers billions. Moreover, it set a bad example of government meddling. That accomplished lots of governmental mischief in one fell swoop.

All it did was show that politicians were “doing something.” And the economic results show that the politicians made the auto picture worse. The auto industry today is worse off than if it were left alone a few months ago.

Buying Annuities?

Many folks, perhaps the majority who buy them, are not totally familiar with annuities and their varieties.

To start with, they should know what are available. That begins with knowing that the conventional annuity guarantees a fixed amount of income that returns both principal and interest. There is no hedge against inflation.

Then there is the variable annuity or an equity-indexed annuity. It returns the higher of a fixed interest rate or an index such as the Standard & Poor’s 500 Stock Index. Other methods may be used and can be controversial.

Downsides of annuities that many investors overlook include steep early surrender costs and insurance charges that they may not need and which they are incurring.

Therefore, buying annuities may not be what the salesmen promise for everyone.

Don’t Overlook the Psychological Role of Recessions.

Amidst the vast bulk of discussions on the economy, and when we will be getting out of this deep recession, we overlook the role of psychology.

Psychology is what gets us into recessions to begin with, and eventually, it is what gets us out. Certainly psychology gets us into booms that cause busts. And helps foster downward economic spirals.

Yes, there was the subprime mess. But that was only accentuated by a jittery market that affected pricing of those assets. I have commented on that in the past.

We were in the midst of a presidential election campaign, when Democrats wanting to get in, painted an even bleaker economic picture, and succeeded at that effort by aggravating subprime market pricing.

Much of what happens is our outlook on the economy’s future.

Frequent Trading to Beat the Next Guy

It is a tough business for small traders. You need volume to compete with big guys. You need the math models, but even assuming you have them, the packaging of securities is important. Buying and selling spreads kill you,

The average spread on the NYSE’s electronic Arca platform is about 3 cents for larger capitalized stocks and as much as 9 to 10 cents for smaller cap stocks. You are looking for gains in pennies.

This is no game for amateurs who never stop trying to beat the odds.

High-Frequency and Flash Trading

Traders use powerful computers and special software to trade at great speed. This makes it possible to get special efficiency in pricing when buying and selling securities. I will get into those details at another time.

Advantages accrue to all those who use the system, which can include small investors who have accounts with institutions such as mutual funds and pension funds.

Yet politicians often complain that such trading hurts the “little guy.” What high-frequency and flash trading does is help compete among existing stock exchanges, some of whom may not have yet installed their version of faster trading and computer software.

That is the extent of all the hullabaloo you hear, other than populist ignorance by politicians.

Stop Ganging Up on Wall Street

It is the job as well as the obligation of any investment manager, including those of hedge funds, to get the best return they can. Otherwise they’re doing a rotten job.

Clients can be rich individuals, or pension funds whose members are all types of private and public industry workers, These managers have a fiduciary duty to look after their clients’ money.

When the Obama administration and the reporters that make up the media, in their ignorance, look for a suitable scapegoat for government shortcomings, they often blame Wall Street for financial and business problems. Though the very underpinnings of the problems come from governmental missteps.

I find many villains on Wall Street. They are specific culprits who may do stupid and sometimes venal acts. Not general villains as painted by politicos or the majority of the media, just because they work on Wall Street.

The Taxpayer and Bank Mark-to-Market Accounting

Is cash flow bank analysis better than mark-to-market accounting?

Taxpayers and banks being bailed out would both be better off if the government were to buy bank assets at "net realizable value." This would be based on an evaluation of an asset’s current cash flow, discounted by expected credit losses over time.

Accounting rules relating to assets, including mortgage-backed securities, require that they be marked-to-market if held for trading, or held "available for sale." Most banks hold such assets in one of these two accounts, Thus mark-to-market rules apply.

But what happens when there is no real genuine market for these assets? The banks first find the net realizable value for the portfolio. That is, what the value of the cash flow would bring in a fully functioning market. That would include discounts for factors such as anticipated future losses. Many of the banks' most troubled assets are flowing cash near expected rates, and therefore their net realizable values are higher than the values which have been written down.

After establishing a net realizable value, the banks mark the assets to market. Thus write-downs happen.

Because there are few buyers, market value are heavily reduced. Potential buyers have no assurance they will be able to resell the assets. Therefore, mark-to-market rules make banks discount their assets' values. and produce write-downs that impair capital.

If the government bought assets at their net realizable values, and not marked-down values, the capital positions of the major banks would improve.

The taxpayer could not be hurt. Because cash flows will determine value, the government should be able to sell such assets in the future at about what it paid.

In short: Much of the banking problems we have had, could have been avoided with clearer thinking by the regulatory experts we have been depending upon. A lesson to remember when we allow Washington to fix all our financial ills. They could have been self-corrected by marketplace principles.