Ponzi Schemes In Collectibles?

The idea behind a Ponzi scheme is to pay off old investors with proceeds of funds received from new sources.

Most investors have no idea how easy it is to become a victim of a Ponzi scheme in art collectibles. Some of the art that has been peddled over the past fifty years, particularly work of celebrities rather than true artists, have been subjects of these activities.

Talent was purely and solely in the mind of agents and handlers. Many so-called “experts” have made careers out of these artistic “would-be’s.”

You could have a house painter cover a sheet of canvas with white or red paint and create millions of dollars worth of art that questionable experts will fawn over.

The values of such art can be actually nil. Everyone relies on what I refer to as the Bigger Fool Theory. That someone dumber than they will come along and bail them out by buying their fantasy.

Ponzi rules beyond just the financial world.

Economics 101, Part 2

You cannot borrow forever without hurting economic expansion because you crowd out funds required for private business to operate normally.

Every dollar taken by government crowds out a dollar that can be used in private industry. Stagnation along with out-of-hand inflation results. The proof of this has been shown over and over for centuries, around the world.

Heavy government spells disaster, after the politicians who cause this are far out of the picture.

Government Debt Affects Your Future

Some Economics 101, if you are not yet concerned about heavy government financing by enormous borrowing.

This spending, as if there will be no tomorrow, is the equivalent of printing paper money, or creating an equivalent obnoxious tax on the value of whatever assets you may have

Governments can only overcome extraordinary spending and the potential problems they entail, by expanding the economy.

But if the government is heavily borrowing and literally printing money or taxing, to overcome its budget deficits, it will be sharply curtailing any necessary economic expansion.

Therefore, forget about jobs and prosperity.

Too Much Regulation

The Obama administration along with Congress continually call for more regulatory supervision over banks and other financial entities.

There are almost a dozen such regulatory federal agencies right now. Perhaps the problem has been too much regulation that overlaps.

Some thing else is to blame for our problems. From the SEC and Federal Reserve on down the list, what is needed is more transparency, not more regulation.

The biggest villain of the subprime debacle was Fannie Mae and Freddie Mac, which were regulated. But nothing was done about their ongoing excesses except what went on publicly and politically in Congress.

The financial media did not think it was important enough for proper comment, and populist political considerations at the time saw to it that proper remedies were never available.

In short: Liberal politicians who wanted housing for those who could ill-afford them rolled the dice and America lost.

Regulation had little to do with it.

Financial Media Failings

It is sad but I feel it is, nevertheless true, the majority of securities analysts on Wall Street could not operate the smallest business of their own effectively. Yet, they constantly choose to critique top business executives, in the way they run multi-billion dollar operations.

What is more, Wall Street experts have an extremely limited time horizon. While a business operator must look years ahead, those involved with securities usually operate with a day-to-day or month to month perspective.

No media financial expert has had to pass any qualifications test to determine business expertise. The public assumes critics know what they are talking about when it comes to such punditry.

After years of observation, I assure you, that public assumption is wrong.

Derivatives and Sovereign Debt

The Greek problem is a case of overwhelming, out-of- control sovereign, or government debt, gone berserk. It’s a classic lesson for all countries to observe because others are destined to trip up in similar fashion before long. Spend and spend, as many countries do, especially the U.S., and the same quagmire can result.

Lots of talk also exists about Greek derivative exposure as a percentage of capital of different banks. Information from the U. S. Office of the Comptroller of the Currency shows how high bank derivative positions are, particularly with Greece, And that little has been done in reducing derivative positions since the American financial meltdown. Derivatives are currently a $605 trillion market.

This “concern” is constantly studied and reported in the media and despite all the hand wringing, derivatives are not quite the boogie man they are purported to be at every hint of debt problems.

Perhaps because they are so little understood, certainly by politicians, and most of the financial media.

When Will Real Inflation Start?

We are looking ahead to high inflation and tough politics, the price of huge government spending. That one thing is certain about our future economy. Something you can bet on. Present government spending is bound to result in massive inflation. Sooner or later.

Inflation has been held under wraps primarily because our economy is in a deep recession. As soon as a recovery is underway, more and more inflationary signs will emerge.

When will real inflation actually start? When either there will be an increase in bank lending or the Federal Reserve will increase purchases of massive amounts of accumulating government debt. Or both.

Such action would increase substantial money growth.

Unions and Congress will object to higher interest costs in any attempt to dampen bank lending. Because of the obvious effect on jobs and housing.

Remember the Phillips Curve policy: That aims to stop inflation by causing unemployment. The Fed does has a mandate to prevent inflation and job loss. But it can choose to work on inflation or jobs, not both tasks at any one time.

What is the Federal Reserve?

The public hears lots about the Federal Reserve system but they actually know little about the mechanics of the country’s central banking system, which goes back to 1913.

The president appoints and the U. S. Senate confirms the Governor to a four-year term. Currently, it’s Ben Bernanke. The president also appoints the seven Board of Governors of the Federal Reserve System, each with 14 year terms.

The seven board governors oversee the twelve banks. These are privately owned by member banks in their region. Each of these twelve regional banks have nine member boards that represent financial institutions and stakeholders in their districts. They are technically owners, not accountable to Washington politicians, and theoretically, at least, represent their own districts.

The Federal Open Market Committee (FOMC) is not part of that process. It’s in charge of the Fed’s Open Market Operations which handles the nation’s monetary policy. It is composed of twelve voting members, seven from the Federal Reserve Board and five from among the regional Federal Reserve Bank presidents.The New York Federal Reserve Bank president is always on the FOMC, while the others rotate one-year terms by special formula.

They are relatively independent of the usual Washington political input, though recent Obama administration and Congressional pressures have been mounting.

Immediate Annuities Are Not Inflation Proof

Immediate annuities, sometimes referred to as personal pensions, are bought for a life time. They are the fixed income type.

Immediate annuities provide a set income. Payments can sometimes be adjusted annually and some companies do allow minor adjustments, according to an index, or other variables. Various payout options may be available, including income for a spouse.

Payments are taxed using a formula where each payment consists of earnings and the rest, a non-taxable return of capital.

The problem with a fixed annuity is always the specter of inflation. There is little you can do to thwart the increasing loss of purchasing power of the funds you receive each year.

Variable Annuities Are Not Simple Investments

Most folks, particularly seniors, are not getting exactly what they think they are, when they opt for variable annuities. They are buying life insurance as well as investing for return.

But the subject is complex, and the education the client gets comes solely from a sales person who is highly motivated by commissions that may well compensate the sale transaction more than the investor.

The plan is tax deferred and can provide payouts for a fixed period or for life. And provides a payout based on variable interest rates. Returns are also dependent on market performance of an underlying investment portfolio. There may be options for payouts, through withdrawals and a death benefit, because of the insurance inclusion.

But beware of potential slick deals: Many offerings involving variable annuities are made in states where action still has not been taken, to those who are sick and are expected to soon die, where there is no medical exam. The policies are then sold by the holders for cash right after purchase, in violation of insurance contract stipulation.

The lesson to be learned here. Be careful of insurance offers of any kind that you may get. If it sounds like you are getting too much for too little, check and check again.

The Genius Behind Buying or Selling on Stock Tips

When you buy a stock you have heard about in the newspaper, or over the radio or TV, how well ahead of the game you do feel you are?

Assuming there is no scam involved and the report is honest, you are automatically the victim of the law of supply and demand.

How many investors will be acting on this advice, thus tilting the odds against you?

The same if the advice were to tell the public to sell. A massive move to sell would affect the supply/demand equation against the seller.

Any investor with common sense avoids media pundits offering market tips that affect supply/demand balance.

When Not to Buy a Home

Buy a home when you need space and convenience for your family. Your preferences ought to reflect the size of your family and how comfortably you wish to live, the school district you prefer for your kids, and other lifestyle factors.

As for the financial benefits of home ownership, your home should be the least of your investment considerations. If residential real estate sounded like an excellent speculation a few years ago, the more recent disastrous slump can be a worthwhile lesson.

For buying or renting a home cost analysis, figure the benefits of either for yourself. Account for them before and after tax returns and deductions. Actually run off both types of returns, as renter or homeowner, to see how the IRS deductions work for you.

And then be sure to include what a renter saves by not paying for maintenance, upkeep, depreciation and constant repairs.

You may well be surprised to find you are better off as a renter.

Bank Capital Cushions Can be Misleading

I recently noted a published article about basic bank capital. It referred to Tier 1 banking capitalization standards created under what is called the Basel 3 agreement.

This is purported to make the global banking system safer; banks must have more equity capital, while they make safer loans.

Asian banks generally have a far greater amount of such funds, around 10%, as compared, for example, to about 6% in Britain and the U.S.. But other safety factors come into play. The type and grade of loans are also important.

Asian banks, learning from the past, do not have as much proprietary trading as American and British banks, If of any significance at this time. Then again, much of the talk about proprietary trading has been relatively blown out of proportion to its importance in each bank’s case.

The bugaboo with regard to the solid state of bank capital is more than just numbers, it has to do with mark-to-market accounting principles during panic-driven emergencies.

Bank and investment company net worth figures were daily being devalued to so-called “toxic” levels. They actually became fictitious, brought on by an illiquid market, where true fair value was impossible to determine.

I feel that was instrumental in bringing on the financial panic and financial meltdown that still affects the global economy.

Total Mutual Fund Returns

I recently discussed bond fund yields and total returns. With regard to the latter, many funds make it easy for their investors by publishing quarterly as well as annual reports.

They take the SEC yield, calculated under SEC procedures. That is, the reinvested portfolio dividends. Also accounting for all expenses and fees.

The funds’ reports therefore include income from yield plus changes in price over the periods noted.

Investment Firm Risk Management

When an investment house or hedge fund has many positions, the risk of the house depends on how risks of those positions are related. If it is likely that all perform poorly at the same time, a higher probability of a huge portfolio loss exists.

Obviously, managers diversify risk by the type of investments they make. The idea is to be sure that securities which may fall in a certain market will be counter-balanced by others that will profit in that environment. The trick is mitigating hazard by manipulating correlation.

These risky correlations or probabilities of investment positions acting alike are often difficult to estimate and are subject to change over time. They may change abruptly. If small, there isn’t too much to fear. If unexpectedly large, random and sudden, there can be catastrophe.

In such instances, risk managers can never be expected to know what these correlations ought to exactly be. That is where investment fiascoes occur.

Investment Advisers and Short-Term Bias

I have always advised against the use of management advisers for most investors because of cost. Even a charge of 1½% if assets can be enormous. That can easily work out to 15% to 25% of total returns each year on a typical investment portfolio.

That is relatively cheap as advisor fees go, if there are no percentage cuts of income earned, as is the case with most hedge fund management.

But wait, there is yet another problem in dealing with managers. They have a short-term bias that may definitely hurt clients.

Most move their accounts’ holdings around, on the assumption customers want “action” for their money. Leave an account stable for a year and the clients may feel they are paying all that money for nothing, especially if kept somewhat inactive.

So, what may be good for the client may be bad for the manager’s marketing of his business.

The TARP Bailout Failure

Under the Troubled Asset Relief Program, or TARP, Special Treasury Department Inspector General, or watchdog, Neil Barofsky, submits a quarterly review to Congress.

With TARP, the federal government bailed out financial institutions with hundreds of billions. Both the Bush and Obama administrations insisted that banks would stop lending had there not been this aid. And that our entire financial system would have collapsed.

The watchdog was asked last fall whether TARP was "working," He replied: "It really depends on your perspective. We were then advised by the Treasury that TARP’s purpose was to increase lending. Today we are told that TARP was to prevent systemic collapse. " Lending has not increased, Barofsky said, but "it appears that we've avoided a total systemic collapse."

The watchdog's current report to Congress says that TARP can only be called a success if the program "is both managed well and its positive effects are enduring."

But the management of the program by the Obama administration is being criticized. And it is difficult to see how lasting and positive TARP effects will be.

One argument for the bailout was that the banks were too big to fail. But those banks have since gotten much bigger by government sponsorship. And with additional government guarantees, it has become more explicit that these banks have become too big to fail.

"Even if TARP saved our financial system from driving off a cliff back in 2008," says Barofsky, "absent meaningful reform, we are still driving on the same winding road.”

Bond Fund Yield and Returns

How do bond funds compute returns? Several ways:

Historical bond fund income yields get complicated. Some examples: Distribution yield or income produced over the latest 30-day period. Or income projected on an annualized basis. Results are then divided by the share price. Or take the trailing 12-month yield, based on income paid over 12 months, divided by the share price, plus capital gains over that time.

To simplify matters: Look for the SEC yield, calculated under SEC procedures. It approximates total yield in a bond portfolio for the past 30 days, assuming the bonds are held to maturity and portfolio dividends are reinvested. It takes into account all expenses and fees. The SEC yield is close to what is termed, Net Yield to Maturity.

But income is only part of the equation with bond fund income. You have to consider return, which is composed of income from yield and the change in the fund’s price.

For your simple convenience, stick to SEC yield and always be aware of the total return by quarter or for any period you hold the fund.

Capital Gains Taxes of Mutual Funds

If you sell your shares of a mutual fund at a profit you have a capital gain. Just as with any other security.

But the fund itself might sell some of its portfolio at a profit. In such case the capital gain is passed on to you, even though you are still holding your fund shares. And even if the price of your fund went down for the year and you sold nothing, you still owe capital gains on the fund’s portfolio transaction.

That is why I advise never to buy a fund just before it is to report a dividend, especially a capital gains dividend.

Proper Use of Target Funds

Target funds are mutual fund combinations of stocks and bonds by varying percentages, depending on the number of years the investor is to hold them. The exact funds vary by fund management choice and style.

Thus, the investor buys them with an eye on his or her retirement age and expectations. Therefore, the investor ought to have a pretty good idea of his or her post-retirement plans.

All of which is not easily pre-planned. In that respect, target funds are not as practical as they are made out to be in mutual fund marketing material.

Actual retirement plans are generally contingent on variables beyond individual control. A fund you buy this year for your use ten or twenty years onward, may prove impractical. I find there are more reliable, disciplined ways to invest, implementing positive benefits available from mutual funds, but without the negatives.

Why Tax Banks?

Economics lesson 101 for all, particularly left-leaning politicians and bureaucrats.

Why a tax on fifty of the top U. S. banks? They all did not ask for government bailouts. Aid was foisted on them by so-called experts in a panic. If that is to be construed as a reason for tax imposition on those who received bailouts, why not also impose a levy on Fannie Mae and Freddy Mac for their past actions? They are truly children and wards of Uncle Sam.

That fact hasn’t entered the minds of left-leaning politicians and bureaucrats who target only private business, innocent or not.

Also, if banks are supposed to give urgent loans to desperate business in a recessionary economy, whey take their limited capital away? Each taxed dollar can produce up to seven dollars or more in desperately needed loans.

But then again, left-leaning politicians and bureaucrats are never required to learn basic economics.

Make Your Own Financial Decisions

Years ago, brokers had more influence over investor decisions than they do today. With trading charges now at such low levels, it doesn’t make much economic sense for brokers to take time giving advice.

Information you may decide to take applies as well to what you get from most investment advisers. What is more, investment advice for a fee can be costly as well as not often necessary, when tax and estate matters are not complex.

The only advisers you need are lawyers when necessary, and tax and estate experts when your investments warrant them. Otherwise, you can learn enough basics and keep to index funds. And away from the mad, eventually illusive chase of picking security “winners.”

Buying Fund Management

Whether it is a classic mutual fund or an exchange-traded fund (ETF), buying on the basis of past results is never a harbinger of future results. Research bears this out. Fund managers change positions, so you never know who will be at the job and for how long. Besides, they are always subject to conventional, unpreventable investment mishaps.

What is stable from past experience is the fund’s cost of operation. The lower the cost the better.

ETFs are growing faster than conventional mutual funds. While their cost of operation are generally lower, there are safeguards to observe in their choice. Some have a noted lack of liquidity which make for wide differences in their bid and ask spreads, or what you pay for them or get for them, when trading.

Those who specialize in arcane securities may have problems tracking proper indexes. Others may not do as well as competing ETFs in a particular index track. Also, there may be too much difference between the market trading price of some ETFs and their underlying value of holdings, or NAV (Net Asset Value).

So, it’s often not fund management, but the fund itself that you watch.

Useless Financial Regulation, Part 2

I mentioned a few days ago that government watchdogs never quite prevent what they are supposed to do.

They never stop real frauds despite the effort, but produce lots of meaningless data at business and taxpayer expense. The only genuine benefits accrue to politicians who take credit for the passage of legislation.

I mentioned, for example, the reams of meaningless mutual fund folders, prospectus material and proxies that often wind up in wastepaper baskets unread. They could all be put on a couple of sheets of paper instead. And probably still not be considered important enough by the public to read.

And I spoke only of mutual funds.

The SEC has now come up with more pap that has no investor protective value. It would make money market funds tell the actual net per share value about once each month, instead of the daily $1 per share used when the investor writes checks on his account. The difference could be about $1.002 a share or $.99.97 a share, instead of the $1.00 actually and officially employed, at no cost to the investor.

In other words, no real risk difference, except to add a psychological downbeat to the financial transaction. Dismal governmental regulation during this recessionary climate. To remind the financial world that one speculating money fund last year did get into trouble in the money market.

Another instance of the SEC acting like a bull in the china shop. And the fact that our regulators are truly fallible and ought not to be so powerful as the Obama administration wants them to be.

The Next Financial Bubble?

There is an FHA bubble brewing, much as the infamous subprime disaster that still dogs our economy. In the form of the Obama administration’s sanctifying of an FHA=guarantee mortgage down payment for as little as 3 1/2%.

Since too many home owners do not have enough equity in their homes, to keep from being underwater during downturns, this is a guarantee for future disaster. To everyone but a left-leaning populist who is always prepared to blame a banker or other “capitalist” for the ensuing financial debacle.

This is economic suicide because home values are dropping at a faster pace than down payment equity. And the FHA is now taking over credit burdens for Freddie Mac and Fannie Mae in different ways. Delinquencies are eating into the FHA agency’s loan reserves ever-more quickly.

Do not be assured the Federal Reserve will be of help. They are presently in an inflating mode and will be completely useless, as they were in the recent subprime catastrophe.

A Lesson To Remember: The Cause of Our Financial Meltdown

This has to be noted periodically because the Obama administration, Congress and most of the media keep repeating misrepresentations.

Our recent financial meltdown can be outlined as follows:

One: The Fed’s monetary policy made money too cheap.

Two: Congress for years, pushed home ownership for those who could not afford it,

Three: Congress permitted Fannie Mae and Freddie Mac to take enormous risks to facilitate their populist action.

Four: Rating agencies licensed by the SEC gave questionable mortgages a AAA status.

Five: Investment bankers were thus able to sell Collateralized Debt.Obligations (CDOs) and forms of derivatives.

Six: Government-anointed financial experts allowed the value of those assets to be artificially valued downward under psychologically depressed, fictitious market conditions until the financial patients were practically dead.

Then the populist bureaucrats and politicos in government pointed fingers at the “capitalists” accusing them as being responsible for the mess.

Useless Financial Regulation

Notice that all federal financial regulation seems to be in reaction to problems that have occurred and that they never quite prevent what they are supposed to do?

Furthermore, they never seem to stop frauds or schemes. They produce lots of meaningless data, business and personal expense, to go with taxpayer outlay. The only real benefits accrue to politicians who take credit for the passage of the legislation.

What I have just said may sound silly, until you think about, for example, all the reams of meaningless mutual fund folders, prospectus material, proxies, etc. you get that wind up, unread, in wastepaper baskets. Cogent information could be put on a few sheets of paper instead, for each subject addressed.

And I’m talking only mutual funds.

Be Careful of Financial Media Investment Advice

Investment Advice in the media is offered to all readers, whether professionals or ordinary investors. So read between the lines carefully, as the information may not apply to you.

I recently saw one item where the adviser, from a major investment banking house, suggested, that “reaching” for income was risky in high yield bonds. Risky, that is, for average investors who. unlike him, were not able to borrow millions at low cost, and then invest in U. S. Treasury bonds or other assets for a profit spread of a couple of percentage points.

The Main Street investor, not knowing or able to profit from this tidbit, could be impressed by that sage advice. However, it’s very impractical indeed for a modest account.

The ability to borrow would be impossible on the terms needed by Mr. Everyman, as opposed to the professional with access to the millions in credit for the purpose.