Heavy Government Debt Spells Disaster

You can be sure that government debt will spell disaster for taxpayers; even for citizens who don’t pay taxes but who worry about the cost of living.

The extravagance of government spending can easily be borrowed away. That debt of today is being financed at very low, abnormally low, interest cost. Those costs will easily double and triple. Perhaps go higher. Long term rates can conceivably reach 18% or so from under 4%.

So we are looking at astronomical debt, with poor prospects of an economy expanding in that atmosphere, where it can accommodate that debt.

The public will eventually see that today’s spending is only a down payment on future costs, to be paid by heavy taxes and a more worthless dollar. Yes, if taxes don’t foot the bill, a worthless, inflated dollar will.

Can Big Fund Investors Cut Fees?

You would think that huge institutional investors would be able to get better terms as investors than do smaller investors. To an extent, mutual funds reduce expenses to some clients who keep larger balances. This is perfectly logical and it’s legal.

But Uncle Sam is not happy about such action if it is done by organized major investors, in unison. Endowments, foundations and pension funds, as part of the group, Institutional Limited Partners Association (ILPA), use buyout or private equity funds for special deals. The group’s 215 members have more than one trillion dollars at work.

They would like to negotiate lower terms than they have been getting. But it would be against the law.

The Stimulus Bait and Switch

The word, “Stimulus,” has evolved in its usage by politicians. The old meaning had been perfectly useful in economics and economic parlance. But it has now become a cover for politicians who conveniently use the term to describe or hide other motives they may have.

What the bulk of the population in the U. S.thinks of when Washington attempts to stimulate the economy is spending that will get business wheels moving again, employers hiring and consumers buying. As quickly as possible. Not next year or the year after.

I have always maintained: Poor psychology is what makes deep economic recessions linger on. A true stimulus must promptly change that poor psychology.

But when only a small amount of stimulus money is actually designed to be spent quickly, another motive is apparent. When the vast bulk of stimulus money is designed to be a slush fund to bail out or expand federal and state government jobs, the goal is primarily different.

Enormous amounts are being spent for the future socialization of a large percentage of the economy, and not for actual economic stimulus today.

Government Debt and Retirement

Concerned about heavy government financing by enormous borrowing, the equivalent of printing money, or the need to tax?

An economics basic: Funds for financing business and government are in a Zero Sum game. Funds needed by government to finance huge debt have to displace funds needed by industry. Economists of every stripe concede that. This problem will get worse.

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

But if the government is heavily taxing while borrowing and literally printing money to balance its budget deficit, it will be curtailing that necessary economic expansion.

You cannot borrow forever without hurting expansion because you crowd out funds required for private business to operate normally. There is bound to be business stagnation.

The only result has to be inflation. The proof of this has been shown over and over, around the world for centuries.

Credit Default Swaps Are Back

Credit Default Swaps (CDS) are back and that’s not bad. Except when left-leaning politicians in Washington are looking for scapegoats.

They’re an insurance policy in the event the issuer of a bond or note defaults. They come in handy in volatile markets. Credit Default Swaps make it easier to sell bonds and notes because traders are willing to deal and trade in them to facilitate the bond/note markets.

Of course Credit Default Swaps were the type of obligations that well-known financial meltdown victims had. So they became the targets of official abuse. Underlying causes of the meltdown can be attributed to government policies directly, as I have noted before, in my comments.

CDS’ reputation got sullied but in time will be repaired, as they ought to be. They are a valid and useful investment vehicle when traded in open markets.

Fannie Mae and Freddie Mac: Big Time Again

Fannie Mae and Freddie Mac and the FHA now back more than nine out of ten home mortgage loans. They do not operate the same way they did when they primarily instigated the subprime crisis.

The U.S. Government is now the conservator of Fannie and Freddie. It recently put in $127 billion into the system and pledged more if needed. The mortgage pair are still in precarious condition.

Overactive Investment Advisers

Here is a simple way to check on overactive investment advisers, based on my experience with studies of how they operate.

As you probably know from my reports, I find professional advisers too expensive for most ordinary investors. They take as much as 20% and more of earnings when their cut is 1½% or more of assets managed. Only investors who require estate and tax advice need additional consultation.

To make themselves appear necessary, advisers will make up portfolios with as much as ten and more individual funds when just a few, low cost funds will do. But the odd assortment appears to be the result of more selective investment thought. The end result is meaningless, apart from marketing the adviser’s service.

I have written volumes about the subject, but to sum up, let me repeat a simple lesson: Once you learn investment basics, you can manage with low-cost index mutual funds, (See the Earl J Weinreb NewsHole® comments.)

Really Need a Money Manager?

Another investment basic: Avoid money managers if you can. Why pay a fee of 1% to 2% of your assets? This will amount to about 20% or more of your earnings a year. If you invest in a hedge fund, you pay 20% or more of earnings off the top, plus that percentage management fee.

Only a minute number of money managers prove to be frauds, but you will sleep better by staying away from them all.

Hire an accountant, a CPA, and if you have considerable funds, you must have a tax attorney. Otherwise, avoid expensive money managers by sticking to plain, low-management-cost funds. ( See my Earl J Weinreb NewsHole® comments.)

Protecting Against Ponzi Schemes

Sometimes it’s not easy to protect against Ponzi schemes. Despite what the media tells you, after popularized frauds occur. But there are basics you can follow to reduce odds of falling into traps that entice frauds.

A basic way to avoid investment frauds: Stick to plain vanilla investing vehicles from low-cost, plain vanilla investment funds. They are the ones with the lowest-cost management fees, who have been in business for years.

Avoid those who appear to pay off far better than the plain vanilla, low-cost investment funds. The hotshots who get publicity from ignorant or complicit “friends” or from media public relations.

Investment Goals by Individual Needs

Characteristics of individual investors must be considered when making investments. General media advice or suggestions can be totally misleading because they invariably disregard individual circumstances. Namely. the investor’s age and ability to take risks.

You can afford to take losses in your youth when you have time to recoup errors that you cannot afford when you are on in years, or retired.

Investors must also consider risk by taking into account their knowledge of the securities markets; and each, distinctive personal situation in addition to age; such as number of dependents, financial status and investing-comfort.

Therefore, much advice and commentary is universally misused by ambitious gurus we encounter in the media. ( See the Earl J Weinreb NewsHole® comments.)

Investment Asset Allocation in Down Markets

The early 2009 bear-market in stocks had also been accompanied by a massive sell-off in bonds. The domestic market’s experience had been paralleled overseas as well.

That was not supposed to happen. When stocks in the past were weak, bond prices had generally shown strength. But in recent years this has not been the case.

Therefore asset allocation did not help in that bear market. Using different asset classes to get high a return at a lower risk was unattainable.

Alternatives to conventional stock/bond formulas to balance market fluctuations are thus not sure-fire answers. But advisers love to recommend a variety with the aid of 20/20 hindsight.

Collectibles are not the answer either, in protecting against market downturns. because of a lack of ready marketability and poor resale margin factors.

Some investors use various combinations of gold holdings. Still others, questionable short-term commodity trading antics.

Over the long run, diversification among different asset classes has produced much higher returns, along with lower risk. ( See the Earl J Weinreb NewsHole® comments.)

Timing the Stock Market Again? Forget It

The financial media has a nasty habit it will never lose. Providing comments on timing the securities markets. It cannot stop this habit for a good reason. Securities-timing articles fill space. In blogs, books, periodic publications, over the air, and on the internet.

Yet, independent research constantly shows that market timing never works consistently. Mutual fund management companies know that in-and-out investors never do as well as their buy-and-hold long-term statistics show.

Remember: Reading a financial article telling how a rally trend in one security class may be finished, and it may be time to get into another type, should be a danger signal, not a buy opportunity.

Social Security: Another Ponzi Scheme

Everyone by now is familiar with Ponzi schemes. The loose definition describes a scam whereby someone takes funds from an investor and skips town. But there are variations and degrees of scam sophistication.

Generally, a so-called money manager takes funds from investors and after a while decides to use at least some of the funds for himself. He pays off original investors with funds received from new investors. When everyone wants their money back at once, and there isn’t any to give them, the frauds are uncovered.

But there are many schemes which, unfortunately, escape notoriety. They are Ponzi schemes, but are never labeled as such. Take Social Security as the perfect example

It started off as a so-called insurance program, but never was comparable to what you get from a private company. There are no locked-up reserves. Active workers were taxed so that they could get future retirement benefits from taxes placed on other, active. workers.

This was fine when there were as many as seven or more active workers for every retiree. But now there is a point where there will not be enough workers to pay retirees. And the scam is being exposed. (See the Earl J Weinreb NewsHole® comments on this subject.)

Regulating Booms and Severe Recessions

The whole purpose of the Obama administration’s crusade to regulate the economy more than it already is, amounts to a foolhardy attempt to smooth out the booms and severe financial jolts and recessions of the past.

The U. S. has repeatedly been through a recurring economic cycle over many, many years. Other economies around the world have experienced the same.

The bottom line: Over-regulation or overly-strict regulation never works. The effort always has a short term goal, but it is, nevertheless, used because it’s always a political measure to temper public unrest.

Conventional regulation in the latest financial downturn just didn’t help. There was the usual political factor that overrode all supervision that the regulation afforded. Easy money and the subprime crisis were the babies that Congress and the Obama administration created, not the lack of supervision.

I have commentated on this repeatedly, mentioning how simple bank guarantees and not having “mark-to market” accounting for banks in an emergency, would have helped. (Also see past Earl J Weinreb NewsHole® comments.)

Bank Bailouts and Government Folly

The bank bailout idea was an academic and practical failure, done by academics, most of whom were not work-a-day bankers, and Wall Streeters with securities trading background.

They saw to it that banks had acquired more clean capital and reserves, having gotten rid of much of their questionable assets. So far so good for the economy.

Government honchos have seen to it that banks now earn interest kept on reserves over at the Federal Reserve. That adds to bank earnings. But regulators cannot force the banks to make loans to their customers. Not when customers are spooked by anti-business Obama administration tax and industrial policy.

In fact, banks are now sitting with loads of available cash for industry and consumers but relatively little of it is getting out. Because they, themselves, are still afraid to lend it as they do in normal times. They can make more, investing in securities.

So much for the smart guys in government with trillions of inflationary bailout money. All they had to do to bail out banks in the first place, apart from seeing that banks added to capital, was guarantee their assets. No bailout loot required.

Regulating Hedge Funds is Impractical

Regulate investment hedge funds, and they will no longer be considered hedge funds in the true sense. Not by the definition of what an investment hedge fund does for an investor.

Hedge fund managers need secrecy in order to trade. If they tip off their intentions in advance, as strict regulation will promote, their efforts and their objectives will be neutralized. Other investors will then be able to parallel or counter strategy, to make any proposed hedging worthless or dangerous.

Besides, hedge fund activity had little to do with the financial downturn of 2008.

Over-regulation is another instance of the Obama administration’s jousting at windmills for no real purpose, other than catering to its anti-business, anti-finance industry constituency.

Are Derivatives Bad?

The politicians who love to point fingers have painted derivatives bad, and have designated them a major cause of our financial distress.

But derivatives are back, as they ought to be, because they perform an important function as a financial instrument.

What people usually don’t know: Timothy Geithner, the Secretary of the Treasury, overlooked meetings, monitoring trading of derivatives, when he headed the New York Federal Reserve. So, the mysterious workings of derivatives should not have been so foreboding, dangerous, and deadly, causing the 2008 financial meltdown.

There is now a desire that derivatives trading have tougher regulations. In effect, more collateral to be needed by traders and more clarity. I can see having transparency, but derivatives make financing cheaper in the long run.

Buying Insurance From an Estate Planner?

Be careful when buying life insurance from an estate planner. Do it with full knowledge that it is their job to sell life insurance in some form. Yes, they sell other financial products as well; various types of annuities and usually mutual funds. But their options are limited and thus, yours become restricted too.

They know about their products, but they have a conflict of interest. If they are tied to one life insurance company, you are not shopping prices and terms.

When they are selling mutual funds, you are probably not getting the lowest cost selections available. The latter have to be higher cost to warrant compensation for salesmen. and low cost mutual funds are essential to your benefit, no matter what the sales pitch may be on past or future “performance.”

As I have always said, if you need substantial estate advice, see a non-salesman accountant or lawyer, specializing in that field. (See past Earl J Weinreb NewsHole® comments.)

The Coming States’ Financial Crises

Most of the states in this country are having financial trouble. Pensions and similar contractual problems are currently making it impossible for most to balance their budgets. Tax revenues are down, while spending cuts have not kept up with demand for services and outlays.

Liberal legislators keep handing out promises and largess as if prosperity still reigned. Schools are expensive and keep growing in cost. Public service and government=worker union pressures are destructive for officials seeking budget solutions.

Unionized employees often get 70% or more of their income as retirement each year, after only thirty years or so of work. Chicanery, legal or not, is also at work. Many government pensions are permitted to be ‘spiked’ upward with overtime pay and raises, before retirement.

All this translates into big financial needs. It takes $2 million in capital funds at 5% to get one $100,000 annual pension per worker per year. (Many get that amount.) And that 5% is not easily achieved without risk of capital loss.

Bankruptcy to break pension contracts is not an option for most states; maybe for cities and towns. But they will have to freeze obligations or change contracts.

After all, Uncle Sam has first dibs on taxpayers and most states already are taking some huge cuts.

Securities Analysts Guiding Your Investments

Look to securities analysts for your investment advice?

Securities analysts constantly critique management of publicly owned companies. They claim to know what products and services companies ought to, and ought not to produce and what they should charge. Analysts ardently propose when to hire and fire top executives.

To give you investment advice, they freely put in their proverbial two cents. They suggest what securities to buy and sell.

Yet very few analysts have the hands-on ability to understand how any business operates from the inside. They are not even that proficient concerning the ivory towers of Wall Street.

As I have often said ( see them on my Earl J Weinreb NewsHole® comments), they haven’t the business experience to successfully run a pushcart.

Overlooked Investment Strategies

The financial media always discusses securities and, in passing, may mention investment strategies.

When the media does discuss investment strategies, it’s about a favorite of someone being interviewed or reviewed. Perhaps the strategy is in a public relations release disguised as financial news.

The purpose of investigations I have done of literally thousands of independent strategy studies and investing techniques, have helped me delve into the investment strategy phenomenon. ( See my Earl J Weinreb NewsHole® comments.)

My conclusions often differ with theirs. The media overlooks investment strategies and techniques because it is not up to the task, Furthermore, most reports are not objective. So such strategies get short shrift. Yet, their proper use increases the odds of investing success.

Credit Rating Agency Conflicts

A Credit Rating Agency Reform Act was passed in 2006. Nevertheless, much was left to be done to correct problems in the credit rating industry, as evidenced by the recent financial meltdown. This may have been one of the key causes of the debacle, not Wall Street “greed” so much popularized by the media.

The bulk of credit ratings are done by Moody’s, McGraw-Hill’s S&P, and Fitch Ratings, the three largest of just a handful of government-approved services.

Critics say they did poor evaluations of credit-default swaps and subprime debt issues. And thus contributed, to a great extent, to the financial downturn. There were also charges of conflicts of interest. Payments for ratings are made by firms who sponsor the evaluations. That is, those who issue the debt obligations.

The solution? What is needed is more competition. That means more credit evaluation services being recognized by our regulators.

And of course, more diligence by borrowers. That would be the ideal way to prevent serious credit rating problems from developing again.

When Derivatives Can Be a Problem

As with Greece, a government can hide its long-term, poor fiscal position with short swap, or credit default derivatives. This paper manipulation made things look what they were not with Greek’s financial deficit spending over recent years.

Using derivatives for deception is a no-no.

On the other hand, derivatives have a legitimate function in government financing, as they do in normal business and financial transactions.

Eliminating derivatives or making them tougher to write, will dry up the supply of conventional debt financing, That will simply make it tougher for governments such as Greece to get credit. They will then sell their bonds only at much higher interest cost.

The Media and Financial Problems

When the media has no idea whom to blame for the financial problems on Wall Street, they blame everyone, for the same crime, with the same offense. (The Earl J Weinreb NewsHole® comments frequently critique the media for this.)

All problems regarding the current financial troubles are treated as if they have had a similar cause, though they may have had their own. Prevention techniques would have varied for each, but are treated as a universal panacea by the media.

Example: The elimination of repos sales off the books (Lehman Brothers), which had nothing to do with the use of bank guarantees by the government, or eliminating mark-to-market accounting, for all banks.

Some in the financial media, as well as the administration have ignorantly treated each financial institution problem as part of a group, to be treated alike, by similar regulatory treatment.

Thus, every entity that has been in trouble in the recent past is tossed in the same basket; AIG, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Bear Stearns, and so on. In truth, each had its own peculiar problems and could have been rescued in its own way, probably without heavy-handed government assistance.

Our Man-Made Financial Meltdown: Part II

Further to my earlier report, and the Earl J Weinreb NewsHole® comments, I would have had the government do the following at the first signs of financial distress:

One: Buy up at bargain prices all the unsold tract homes in bubble-infested areas, such as Arizona, California and Florida. This would not have been a bailout for the builders. They would have suffered losses.

Result: it would have dried up the major excess supply of real estate and stopped the ongoing, adverse psychology that kept reducing values of the rest of the nation’s perfectly good real estate that was not too overvalued. The cost would be relatively very low, compared to the many billions and even trillions we have expended.

Two: The federal government, through one or more of its agencies, could guarantee all the loans of its banks, the way the FDIC insures deposits. Fees would be charged the banks for the guaranty.

Result: No bailout funds from taxpayers, no phony stimulus funds which really amount to political slush funds. No poor psychology that makes banks wary of making loans to small business; thus more job creation.

Three: Corporations, such as those in the automobile industry, in financial trouble, could use the bankruptcy courts for an orderly means to reorganize debts.

Result: No bailouts for outrageous union contracts, which make it impossible for any corporation to compete domestically or internationally without taxpayer assistance. And without the U. S. becoming a state socialistic society comparable to Italy’s under Benito Mussolini.

There would be no multi-trillion dollar budget deficits that are confusing and scaring large and smaller, job-creating business owners. Everyone is afraid to hire, especially with looming taxation ahead.

By now the economy would be thriving again.

Our Man-Made Financial Meltdown: Part I

I have frequently commented on various aspects of the recent financial meltdown, and how the severity of our Great Recession could have been prevented, had there been a “hands-off” attitude by government. Instead, we got the heavy-handed Obama administration version.

Those of you who have seen my Earl J. Weinreb Newshole® info will have insight on much of the situation.

That happens when you get an over-regulated attempt to spend yourself out of a financial tangle while psychologically pushing citizens and business into an ever-deepening recessionary funk.

I have felt and still do right now, that most regulators and politicians fail to understand psychology that drives the way people affect everyday economics.

I have been asked. What would you have done if you could, in practical terms?

I will answer that in my next report.

Impossible Financial Reform

Paul Volker, a former head of the federal Reserve Bank and now advisor to president Obama, wants to restrict proprietary trading among banks or bank holding companies. But when pressed he has no handle on what really describes proprietary trading activity.

(Want more information? Ask about Earl J Weinreb material on bank analysis,)

The government wants to give more power to the Fed but the agency has had lots of power up to now. The big problem is the possibility of any banking institution failing and then dragging down another.

Unfortunately, the regulators have historically never been good at this, and I doubt they ever will.

Analyzing Insurance Companies

Beware of Wall Streets insurance analysts. They are a dime a dozen, but insurance analysts in name only.

Want to test them? Ask if they can read what is called a Convention Blank. These are the annual filings the companies make with the various state insurance departments. Very few, if any, current analysts can understand them. Therefore, they are not capable insurance analysts.

As a former Wall Street insurance analyst, I rarely found anyone on the Street giving advice on insurance company securities who took the trouble to truly learn how to understand the policies the companies wrote, and the reserves behind them. There are Earl J. Weinreb insurance handbooks on the subject.

Unfortunately, this lack of Wall Street insurance knowledge persists, based on commentaries I see in the media.

The earnings and book values they spout must, therefore, always be suspect.

MBA Financial Course Suggestion

There have been many suggestions on practical courses for graduate students seeking an MBA for a career on Wall Street.

One is the result of my observing the successes, failures and foibles that I have noted on Wall Street. You probably have seen Earl J. Weinreb comments on this subject many times in the past.

One has to do with the study of failures of the many mathematical models that have been devised to reduce risk. Simply, the models have not cut investment risk that is their primary objective.

I am not talking about the well-discussed Black Swan concept of risk that happens once every fifty years or more. Concerning events such as the current financial meltdown. But they regard the constant use of financial models which don’t seem to work as they are intended to do.

The truth is, some complex models work but they are destined to eventually fail, no matter the brain-power and effort applied.

Regulators Never Agree

How secure is it to use strict regulation when regulators themselves do not agree on what to do?

The twelve regional Fed banks all have regulatory duties. But within them there are often disputes on what exactly is to be done.

The many supervisors and regulators within the system have different functions, with varying answers as a result of their observations. Always, a human element governs what they feel must be accomplished.

Errors inevitably turn up with individual decisions and action that would not happen with free markets. This fact has been established from years of experience.

Remember what I have said in the past about the better predictability of futures markets, as opposed to that of a small group of experts.

Analyzing Bank Stocks

Be extremely careful of Wall Street analysts telling you how good or bad a bank or insurance company is for you to buy, or bad to sell.

The current deep financial slowdown, like all recessions, is started when business people and consumers get pessimistic and stop spending or buying.

Rumors are often bandied about banks, fomented by bank analysts who cannot possibly see a bank’s asset portfolio. That makes for self-fulfilling events. Especially when bank holdings must then be marked-to-market.

Fear frenzy takes hold as analysts persist in this self-fulfilling bearish sentiment. This occurred to help set off and exaggerate our current deep recession.

Bank analysts are certainly never privy to complicated derivative portfolio information, or “repo” positions, if they know so little of the plain-vanilla type. And if they were, they could not understand the inherent complexities.

Yet every negative word they can utter can doom the soundest financial institution, to the point where that organization truly sinks towards insolvency.

Financial Consumer Tips

How can you be a smart financial services consumer?

Look at the fine print. It’s basic and not complicated when you bother to read carefully.

Another tip is remembering that there is no such thing as a free lunch. You pay for what you get in one way or another.

Be sure to figure out what you are getting. Consider comparable costs and what you pay for, in return for something you could receive that is better. Take time and use a calculator when necessary. Most often you don’t have to be a math whiz.

And remember, anything the government gives you is your money, either in the form of direct or hidden taxes, or worthless currency down the road.

Unfortunately, too many politicians make an art of getting votes on the premise that all of you are looking for that free lunch.

Should You Buy Whole Life insurance?

Be careful of sales pitches and the tax deferred benefits behind whole life insurance. This form combines life protection and savings at a fixed return. It’s an expensive form of both.

Whole life is not a true investment vehicle, despite the sales pitches. Were you to buy term insurance separately for protection and invest the difference in a secure, low=cost, income=based mutual fund, where dividends are reinvested, you would do far, far better.

Even these days when other secure investment options may appear to be hard to find, they are available.

If you refuse to receive your financial education from sales people.

Government Regulations of Consumer Finance

The Administration feels they have a new behavioral concept, in providing the consumer with what is best when shopping for complex financial products.

Examples: When looking for shorter-term mortgages or those longer-term, or adjustable-rate, versus standard term mortgages. Or whether to choose a prepayment option despite penalties. Or the question of which down payment to place on mortgages.

So the Administration has been thinking of simplified versions of financial choices for simpleton consumers, that takes the burden away. It takes the term plain-vanilla to a new level, by suggesting a preferred option for all.

I can see having all choices spelled out on two sheets of paper, in large print and in plain English. The problem, however, is that such a standard option would soon become the only one available.

You can be sure that the threat of a lawsuit from an enterprising lawyer would drive away any other product from being sold by a financial institution.

You will then get what the government thinks is good for you.

Investing in the Present Market

Investing in the present market is not simple, not that investing ever is, at any time.

But you can simplify the process a bit by specifying your aims. Financial media reports and suggestions often fail to point this out.

Examples: Are your goals short term or not? Are you taking proper consideration of your age? What are your feelings about risks?

Also, consider the economy. We have more than an ordinary recession today. It may not bounce back for several years.

And inflation will be around, probably quite heavily, in a couple of years.

Economic stagnation and high inflation could be the types that stifle corporate profits. It means, also, that bond purchases ought to be in low-cost bond funds, with low duration, and with dividends that are periodically reinvested. (I have commented a good deal about bonds and inflation in the past and will in the future.)

No Average Investment Returns?

Investors are lulled into complacency with the false knowledge acquired about “average” returns. They hear what securities have earned on average going back years, and they then project the figures into the future.

These long-term averages are wrong. Indexes on which they are based may well be skewed. Years ago, companies that failed may not have been included in the statistics used today; therefore the results were overly positive.

In addition, there are steep investment-experience cycles which affect average results at any time. Furthermore, you may need funds just when your portfolio is in a down trend, or has recently been in one, and hasn’t had time to average out.

Thus, whenever you hear securities will bring you average returns, think again about what that number really is. No doubt lower.

Random Finance

Many of us are not familiar with the odds of random finance. It affects our outlook on financial matters.

Take one example: Flip 100 coins, heads or tails; there is a 75% chance of a streak of 6 or more. And a 10% chance of a streak of 10 or more

Look what this does when we observe what analysts say about securities’ markets. Why they are up or down. You hear comments after market closings about events which really reflect randomness. But the comments attribute specific causes only that occur in the minds of the commentators.

Sporting event progress is not the purview of this blog, but the same randomness prevails, and should be kept in mind.

Retirement Planning Hardly Ever Works

Retirement planners always arrange models. They take into account investments and diversification, along with outlay plans, and any number of probabilities. One is the Monte Carlo simulation, a well-known model used by investment advisers for this purpose.

But the usual investment planning fails to work in real life. For many reasons.

Obviously, a major financial market debacle is one. But other unforeseen events happen; such as illnesses, a job loss, or business failure. Unexpected educational expenses can crop up. The result of a lifetime of retirement planning is often just failure.

The solution is to be realistic. Be prepared to work at least part-time past what you had originally thought would have been retirement age.

A Financial and Legal Analytical Can of Worms

Law suits arise when credit rating agencies, who judge the quality of bond or derivative issues, are considered the cause of investors’ loss of money.

Making it easier to sue will open a can of worms.

The First Amendment is supposed to guard free speech. That usually protects financial analytical reports. Including opinions on structured Investment vehicles or SIVs, or derivatives, or any form of corporate and municipal bond.

A question arises in relation to an underwriting involving credit opinions, where investors lose money. As they did in the past financial meltdown.

Can analysts and their employers be sued for malpractice if their opinions have been wrong? Or are they covered by the First Amendment? What does any court decision do to those who evaluate due diligence in the future?

A move is on to sue credit agencies for alleged malpractice.

An eventual decision against them will adversely affect all analyst legal positions and considerations in the future.

Economics Made Easier

All economists more or less agree on some basic tenets of economics. These have to do with the long-term effect of deficits, and the inevitability of inflation as a result. They appear to also agree on incentives for business and, to some degree, on tax cuts for small business, in the effort to increase jobs. Other than for such basics, they differ all over the lot.

I repeat what I have often said about economics and economists. Do not be impressed by awards, especially Nobel prizes.

Economics involve many complex variables, facts to digest, unknown and the unknowable, and can be difficult to understand. It definitely is not a science.

Economists can see what has worked well in the past and what has not. There is no predictability. Modeling and planning has not worked properly in the past and will not in the future. Therefore, as one observer has said, “economics is history trying to be physics.”

There are a handful in which I have more confidence. Such as Milton Friedman, Friedrich von Hayek, among others, whose work I follow.

As I often note, politics plays a big role in the thinking of many. It produces the variations we are accustomed to, as an accommodation by economists tuned to the political interests they may favor.

Understanding Economists

I have always advised those who listen to economic opinions to find out what the politics of the economist are before taking their opinions.

Political slants color those opinions. Economics is not a true science, so comments can diverge.

Look into past of economists to see their track record. Sad to say, many of those lauded by the left media have been consistently wrong for decades or merely misinterpreted. John Maynard Keynes, for example.

Also, do not be impressed by awards, especially Nobel prizes, as some have been awarded primarily on the basis of politics.

The Current Recession: Market or Government Failure?

This is Rorschach test for those who choose to believe in free markets or state control of the economy. But first, my explanation.

In all the years before modern controls, free financial markets regulated themselves. Severe bubbles were rare, but economic cycles were common, as they are now.

Yet recessions were self-correcting, because they were market-oriented. Every economic downturn was brief, self-repairing by inherent market instincts.

There were no strict regulatory powers around, with no artificial tinkering and meddling from the use of human economic theories. And no political efforts for any correcting stimulus. Yet, the steeper the downturn, the faster and sharper the recovery in every instance.

The problem with a stimulus is that most are political and have no real economic function. Moreover, they are usually the wrong kind. That is, they are made to act too far in the future. They begin to work after the actual economic recovery. Natural market repairs are much faster than a political stimulus.

A stimulus as we know it is merely a misnamed bait and switch device. It should instead be called what it actually often is, a political slush fund.

Big Government and Costly Assistance

I recently noted how left-leaning politicians rely on government to remedy all ills of a relatively small population, while imposing more and more socialistic restrictions in that effort.

The bottom line is that the consumer pays dearly for ineffective do-gooding efforts.

Example: Many borrowers who use credit cards, or take out mortgages and loans, make stupid decisions. Big Government folks will tell you we need more regulations and financial product safety. Yet you cannot legislate or regulate against all stupidity. Not without consequences.Those merely translate into more costly government bureaucracy with little to show for it.

Larger print in consumer contracts will surely help. Along with better schools we already are paying for, so the public can understand basic financial contracts placed before them.

What the government effort actually does is make credit more scarce. And therefore more expensive for those with good and bad credit alike.

Big Government and Empty Promises of Assistance

Left-leaning politicians rely on Big Government to remedy all ills of a relatively small percentage of the population. They never fail to use an economic sledge hammer to accomplish this.

To cure laments of a small set of the population, they seek remedies that hurt the majority. The result is the same: Bigger Government. A greater stride to the socialist state they insist they are not really for.

While most often with no actual benefit to the subjects of the original assistance.

That is why critics feel the sole political objectives are merely to create bigger and bigger government and not to offer practical help.

Stress Tests for Banks, Part 2

An example of how foolish are the Obama administration regulators’ periodic use of so-called Stress Test evaluations of banks’ strength:

First: Publicizing the results as they have in the past is dangerous to the economy. The term itself, is a no-no because of its psychological implications with regard to the economy and the stock market.

Secondly, little of the public and only a few in the financial community fully know what each test is supposed to reflect.

Furthermore, in an emergency, the amount of capital a bank has can be wiped out because of mark-to-market accounting principles.

In the past. these were permitted, and thus caused the very financial emergencies they supposedly were meant to avoid.

How Bank Stress Tests Are Created

The stress test for the nation’s banks, suggested by regulators, is poor because it is composed of too many arbitrary factors, each of which may have weightings with only indirect relativity to each other.

Of the several factors, not one by itself is of predominant importance. The ratio of doubtful residential mortgages to capital, for example, or commercial mortgages to capital, or the types of capital, or what constitutes tier 1, or loan defaults, and which types, and potential general unemployment; all add up to figures which can become too vague when experts seek decisive answers.

Some financial official or board must still make a subjective decision to act upon such stress tests. And they can be wrong, as they have been in the recent past, in dealing with financial meltdowns.

Financial Advisers Are At it Again

Much has been said and written about the current financial meltdown and what financial institutions are doing to help resolve possible repetition.

What about the financial advisers working on behalf of investors?

It appears that they are doing what they have always done in the past. Which may be o.k. only within limits and reason.

But they are still resorting to alternative investments, which are being designed to offset any weakness in stocks and bonds. These investments are suggested for clients in the form of currencies, commodity futures and private partnerships.

However, not only are these securities-types volatile, they are expensive (fine for the advisers).

And yes, larger accounts are getting the use of math models which don’t always work, and so-called structured products, which gets us back to Square One before the infamous meltdown.

But when big fees are involved, with many financial advisers, it’s business as usual.

Playing Follow-the-Leader in Trading Markets

Some big market traders in the news earn big money in up and down markets. And if so, can their method be copied by Main Street as well as others on Wall Street?

Giant investment bank/trading groups have been specializing in high-frequency trading, and now account for a large segment of all computer-generated trading on the NYSE. Their mathematical model/code has worked for them. These math models generally do well, until you hear of an eventual foul-up.

Mathematical formulas are not for Main Street. They are not even for many on Wall Street.

Remember those that failed with collateralized debt in 2008, and at times, years earlier.

Improve Your Investment Odds

Here is a simple way to improve your investment odds, based on my experience on studies of now about 1,600 strategies, their pros and cons, and most importantly, the discipline of their use.

I have written volumes about them, but to sum up, let me repeat a simple lesson that takes little effort.

Once you learn the basics, and I repeat the term “basics,” turn off the constant noise and chatter that you get from the financial media.

All that information, mostly repetitive nonsense, does more harm than any possible good.

Improve Your Investment Odds

Here is a simple way to improve your investment odds, based on my experience on studies of now about 1,600 strategies, their pros and cons, and most importantly, the discipline of their use.

I have written volumes about them, but to sum up, let me repeat a simple lesson that takes little effort.

Once you learn the basics, and I repeat the term “basics,” turn off the constant noise and chatter that you get from the financial media.

All that information, mostly repetitive nonsense, does more harm than any possible good.

Improve Your Investment Odds

Here is a simple way to improve your investment odds, based on my experience on studies of now about 1,600 strategies, their pros and cons, and most importantly, the discipline of their use.

I have written volumes about them, but to sum up, let me repeat a simple lesson that takes little effort.

Once you learn the basics, and I repeat the term “basics,” turn off the constant noise and chatter that you get from the financial media.

All that information, mostly repetitive nonsense, does more harm than any possible good.

Improve Your Investment Odds

Here is a simple way to improve your investment odds, based on my experience on studies of now about 1,600 strategies, their pros and cons, and most importantly, the discipline of their use.

I have written volumes about them, but to sum up, let me repeat a simple lesson that takes little effort.

Once you learn the basics, and I repeat the term “basics,” turn off the constant noise and chatter that you get from the financial media.

All that information, mostly repetitive nonsense, does more harm than any possible good.

Improve Your Investment Odds

Here is a simple way to improve your investment odds, based on my experience on studies of now about 1,600 strategies, their pros and cons, and most importantly, the discipline of their use.

I have written volumes about them, but to sum up, let me repeat a simple lesson that takes little effort.

Once you learn the basics, and I repeat the term “basics,” turn off the constant noise and chatter that you get from the financial media.

All that information, mostly repetitive nonsense, does more harm than any possible good.

Improve Your Investment Odds

Here is a simple way to improve your investment odds, based on my experience on studies of now about 1,600 strategies, their pros and cons, and most importantly, the discipline of their use.

I have written volumes about them, but to sum up, let me repeat a simple lesson that takes little effort.

Once you learn the basics, and I repeat the term “basics,” turn off the constant noise and chatter that you get from the financial media.

All that information, mostly repetitive nonsense, does more harm than any possible good.

Improve Your Investment Odds

Here is a simple way to improve your investment odds, based on my experience on studies of now about 1,600 strategies, their pros and cons, and most importantly, the discipline of their use.

I have written volumes about them, but to sum up, let me repeat a simple lesson that takes little effort.

Once you learn the basics, and I repeat the term “basics,” turn off the constant noise and chatter that you get from the financial media.

All that information, mostly repetitive nonsense, does more harm than any possible good.

Should You Become a landlord?

With commercial property prices lower the past year, many smaller would-be landlords are considering buying rental properties as a means of making better returns than possible from other investments.

Diversified corporate bond funds of lower credit ratings, but without outlandish credit risks, still offer decent yields, as do REIT mutual funds, those which invest in real estate equity trusts.

Yet, individuals who are familiar with small properties may find bargain real estate that will offer a decent return and possible capital enhancement.

But there is a danger in holding real estate on a small basis. It may be on the form of local regulations which you should know intimately. And you must be prepared to do most of your own small repairs which can be costly when assigned to outside mechanics.

FINRA and Your Investments

FINRA, the independent Financial Industry Regulatory Authority, operates from Washington, DC, and New York City, with 15 District Offices.

FINRA is involved with registering and educating industry participants. It examines securities firms; along with writing and enforcing securities rules.

FINRA also attempts to inform and educate the investing public, and provides trade reporting and other industry utilities. The Authority administers the dispute resolution forum for investors and registered firms.

The organization performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange, the International Securities Exchange and Chicago Climate Exchange.

However, they are of help only to those who constantly are aware of investment principles on their own.

A Quick Test for a Financial Adviser

I never considered the use of financial advisers a must for most investors.

For three basic reasons. First and foremost, investing principles are easy for most individuals to master. Secondly, what securities to buy is simple in the age of index funds. There is no reason to attempt to buy individual securities. I have explained why in much of my past comments and books.

What is more, adviser fees eat too much out of investment earnings. I repeat this constantly. Fees can account for as much as 20% and more of annual investor earnings.

Only those investors who have estate and tax questions need legal advisers.

Most importantly, the garden variety of advisers, that is the bulk of them, are not worth the money because their expertise is run-of-the-mill.

Want a quick test? Ask them about buying bonds with the threat of inflation. When they start talking TIPS, (for inflation-protected Treasury bonds) without asking how long you intend to hold the bonds, they have flunked the first step.

Want my answer to that question? Ask me.

When Short Selling Can Be Restricted

In a previous report I mentioned the utility and usefulness of short selling, the practice of selling borrowed securities, in the hope of buying back and repaying the borrowed security at a lower price in the future.

Without short selling, markets would become overheated and overvalued and would not be priced as rationally as they generally are.

During catastrophic financial meltdowns or other emergencies which may affect markets from functioning, it may be necessary to stop short selling just temporarily.

Currently, the SEC has unwisely placed restrictions on the use of short selling after a security is off 10% on the day. Unwise, because of the difficulty of policing that restriction in the age of lightning-fast computers.

Short Selling is Not Evil

Listen to populist politicians and the bulk of the media, and you get the impression that short sellers are bad. And short selling is what causes much of financial problems we have.

There are times when it does. But short selling usually has its place and has a proper function in the securities business.

This is the practice of selling borrowed securities, in the hope of buying back them back at lower prices in the future.

Without allowing short selling, over heated, overvalued securities would continue rising and add to dangerous bubbles and thus prevent markets from being priced more rationally.

Short selling generally keeps markets honest. Finding ways to dictate when to stop or retard its use will only exaggerate market extremes.