Worthless Stress Standards For Banks

The regulators are at it again, in attempting to bulk up bank capital in the event of future financial meltdowns.

How important are these so-called stress tests for banks anyway? Much of what comes from the regulators in Washington can be taken with a grain of salt after the politics are removed. Particularly with passage of last year’s Dodd-Frank Act.

Stress tests are actually a combination of individual financial evaluations. They can entail bank loss estimates, measured as percentages of holdings on first-lien mortgages, and second-lien mortgages, or credit cards, or commercial real estate loans. Estimated bank earnings are considered.

Added to the hodgepodge of risk percentages is the reserve status of each bank. The level of what is referred to as Tier 1 capital is important.

To complicate matters more, some unrealized losses on assets could become losses in the future, so the Tier 1 weightings may have to be adjusted. Obviously, stress tests are not fixed so their results can give varying interpretations.

That is the basic fallacy behind stress test talk, or regulation upon regulation imposition from Washington. It is too much about subjective, theoretical nothingness.

And it is the reason why the administration is running what was a minor recession into a major depression. Bank assets were “marked to market” daily when asset values were hard to determine, during what I refer to as the Great Financial Meltdown. ( See the Earl J. Weinreb NewsHole® comments.)

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The Random Matrix Theory

The Random Matrix Theory has come into the recent financial news.

This is the fancy term for an application of mathematical science used for securities evaluation. I have discussed it in past blogs with regard to how different types of securities act in various markets; how they are “correlated.” Or how different stocks within the S&P 500 relate.

The idea is to improve an investment portfolio’s risk management.

In general, practical terms, and to give a simple example, when stocks go down, bonds were usually supposed to go up. This supposedly mitigated market risk. Or when domestic stocks drop, overseas stocks rise. Or the opposite.

Of course, this doesn’t always happen. Both sectors in each instance can go down or up at the same time. The subject is complicated. ( See the Earl J. Weinreb NewsHole® comments.)

College Should Teach Everyone Basic Economics

It seems, the more college students we have, the less knowledge the American public has about basics. Take fundamental economics.

College does not appear to educate its students to the dangers from politicians in office, and ensuing problems that will engulf them when the students leave school.

The media never adequately take up that educational function.

If youth were truly aware of the effects of the monetary inflation we are setting up for them and future generations, they would be up in arms at the government, to stop the economic mess.

Budget-busting spending at all government levels will have dire consequences for the present and coming American job future.

The Rising Money Supply

The average increase in our monetary base has risen about 5% since 1961. For the supposed Y2K emergency and the 9/11 catastrophe, it rose 10%.

These days the increase is well over 100% and rapidly rising. Yet, we listen to Obama administration and Federal Reserve officials who keep telling us all this will be taken care of.

The U. S. Treasury issues bonds to pay for its debts but those bonds will not easily be refunded. Also, there is little likelihood the economy will expand to soak up any of that paper the government is printing through the Federal Reserve system. Inflation will show up sharply as soon as the economy starts to fully recover. ( See the Earl J. Weinreb NewsHole® comments.)

Using Oil Reserve to Temporarily Cut Prices

The oil reserve we have is expressly for emergencies, and never should be used to countervail price movements. That’s because tapping it is useless in combating the OPEC monopoly which can adjust its supply to demand whenever it desires.

The best way for America to cut oil prices is to use its oil and related energy supplies.

But its leftist energy political influences prevent this. For political reasons and the fact that leftists have little knowledge of how the economic laws of supply and demand work.

Chinese and Indian Gold

Gold jewelry bars and coin ownership have lots to do with gold commodity pricing. As opposed to the influence of gold investors and traders who have no interest in the metal in the form of jewelry.

This preference varies by country. It’s been conventionally very high in China and in India. In the U,S, it’s use its use is primarily when the inflation risk is high, but primarily when the dollar’s value becomes risky as a reserve currency.

The value of gold can go higher if the Chinese government begins to think more like Americans running from the weak dollar. But right now, .that still may not be likely.

State 529 College-Savings Plans

State 529 college-savings plans vary; not all states issue them.

Plans differ, depending on the options available in each state. As you know, I like only low cost index funds as investments, So your choice ought to be made on any overall, net advantages your state plan may give you.

Another consideration should be the advantage or disadvantage for a student when seeking a scholarship, in having a 529. Is its tax benefit worth having, in view of the scholarship determination by the school, despite any investment benefits you may get?

Incidentally, some states offer lotteries to bolster 529 use. Such merchandising makes the program suspicious.

The Same Poor Advisory Misconceptions

Advisers keep making the same portfolio errors. They keep suggesting more stock holdings than corporate bonds in the investor’s earlier years, in the assumption that stocks will earn more.

This with the further hypothesis that there will be no heavy future inflation and that past high stock returns were accurate.

They also never utilize or even consider the principles of duration, and that bonds will return higher income with future inflation. ( See the Earl J. Weinreb NewsHole® comments.)

Pundit Investment Achievements

Be careful of pundits who claim how well they have beaten the averages by trying to time and then trade the market. Chances are they have not been as successful as they say.

Apart from not providing accurate comparisons (whether dividends are or aren’t included in the figures compared) they invariably forget to tell you of tax bites of their short=term trades. Most folks have most of their investments in taxable accounts, so any short-term profits are severely reduced by IRS rules.

And remember, studies show that timing the markets is a fools’ game even among the supposed experts. ( See the Earl J. Weinreb NewsHole® comments.)

Making Overseas Investments

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

If you do buy overseas investments to broaden this strategy, 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. and acts as a currency hedge. ( See the Earl J. Weinreb NewsHole® comments.)

The U.S. Becoming Another Greece?

When you add the total obligations of the U.S., you find them much higher in terms of GDP and other standards than that of Greece.

Yet, America is supposed to be the leader of the free world, not a tiny, struggling country. We are called on to be a global leader as an economic catalyst and a defender of democratic principles.

Unfortunately, the politicians responsible for the real financial crisis-to-come, as the result of U.S. debt, may be out of office when disaster occurs.

And the blame then will be placed on the shoulders of administrations who will be around to attempt to clean up the impossible mess.

Financial Meltdowns Inevitable?

Leave it to left-leaning politicians to make a mess out of an ordinary economic cycle and blame it on others.

What was a simple sub-prime mortgage problem, that normally would lead to a minor recession, has become a near Depression, comparable in many ways to that of the 1930’s, because of political meddling and bumbling.

The Great Depression observers see how Franklin D. Roosevelt overreacted with over-spending. Then he over-taxed and over-regulated business and created a Depression psychology that prevailed until World War II, which acted as a giant economic stimulus.

The same political meddling and bumbling is occurring today. The extraordinary spending has produced a crises, in the form of senseless, business-stifling regulation and taxes, and eventual over-powering inflation.

Bankers’ and Athlete Salary Comparisons

Politicians usually do not understand basic economics. Most never have to hire anyone within a free, supply-and-demand, employment market. Therefore, those who lean Left contribute nonsensical rules, opinions and regulations on the matter.

And neither does the brainwashed public, which stands for it. Especially the ardent sports followers.

Taxpayer money used to bail out banks got public attention only when they went into executive salaries and bonuses.

Athletes probably get far too much salary for what they do. Yet the taxpayers never complain. Yet, ball parks and thus ball clubs are invariably subsidized by state and local taxpayers. Each time a new ball park is built, you can be sure some government entity helped in its financing, whether it be in cash, tax abatement or bond funding.

”Penny” Stock Disadvantages

So-called penny stocks can’t be bought or sold for pennies any more. They can also be priced for a few dollars a share.

By definition, they are really any shares of small companies whose values are often doubtful at best.

Their managements’ or promoters issue large numbers of shares, whose prices are low, but with values that are often minimal, if any.

Yet, those who ought to know better buy them. They think something priced low has to be a bargain. That is the best way to get fleeced.

Does it always make any difference when buying higher priced stocks? Not if you still cannot determine value. And most analysts on Wall Street cannot truly do this from outside the companies, looking in. Analysts really are often guessing at what goes on in the companies whose stocks they evaluate.

It’s the reason why I always suggest investment in low-cost, indexed mutual funds or exchange traded funds (ETFs). ( See the Earl J Weinreb NewsHole® comments.)

Media Financial Ignorance

I have constantly criticized the mainstream media as being too politicized to properly educate the public. The financial as well as ordinary media bear guilt for this.

One example is the way they seek out scapegoats. Such as Wall Street or major companies. Or Banks. In the form of bonuses they pay. Mind you, never athlete pay; just those evil top executives.

Another example: When someone in the financial community shorts securities while also buying for the long term, that investor is automatically deemed to be a crook by those who are not steeped in legal, risk control financial strategies. ( See the Earl J Weinreb NewsHole® comments.)

Corporate Junk Bonds and Duration

Securities analysts and media pundits often love to warn buyers of the danger of holding corporate bonds with lower grade or “junk” status. They usually advise the public to beware of potential defaults, especially when times are bad.

That can often be investment nonsense.

Financial media love to go to optimistic or pessimistic extremes. True, defaults are bad. But potential defaults are always priced into the bond prices.

So when default rates sometimes go to 10% and higher in recessions, interest rates accommodate, and the investor may still be way ahead of the game. So, the adjusted return could still be well ahead of other investment returns available.

The trick is to be fully diversified in a low cost index mutual fund or ETF, where the investor is alert to duration principles.

And most of all, diligently use duration principles. I have commented quite a bit on the explanation of duration. ( See the Earl J Weinreb NewsHole® comments.)

Outsmarting the Next Investor Never Works

I have done my independent research; it has taken me years to accomplish, but the evidence is clear.

Investors don’t have to out-smart someone else in order to win. Investing isn’t a Zero-Sum Game where there is a loser for every winner. Yet, that is the way most would-be investing pundits operate.

No one has a monopoly on smart strategies, or when to use them. For every seller, there is a buyer, probably just as smart, and informed.

The fact is, there is also no perfect investment strategy. Sticking to one’s disciplined strategy is the answer. Discipline is the solution because it logically helps tilt odds for investment success in your favor.

Adjusting the odds for success favorably is the ultimate investment goal. Discipline of strategy, rather than constant changing of investment ideas does the trick over the long run. ( See the Earl J Weinreb NewsHole® comments.)

The Media’s Failure to Educate

The financial and general media are to blame for not explaining what they report as blurbs. They talk about regulation without putting it in laymen’s terms. They do not properly explain financial risk.

Risk was never overcome by regulation and the media can more fully explain this, if they ever truly tried to find facts out for themselves and report them so the average person could understand.

Example: Fannie Mae and Freddie Mac were risky semi-government agencies who were instrumental in our subprime debacle. There was no lack of regulation. But the financial meltdown has now resulted in even more useless and restrictive regulation.

Media Financial Experts

Financial experts are all around the media. But no one is vetting them for their expertise. So be careful.

That can be dangerous for longer-term investors who permit themselves to be impressed by the advice the media offers.

No Wall Street or financial community commentator or analyst has had to pass a genuine business-achievement test to determine expertise.

Forget about some of those fancy letters that many have attached after their names. They’re supposed to signify the experts had passed some test, or belong to a group who have. The public assumes this testing and association bestows a knowledge that members know what they are talking about when it comes to financial business operations. Passing a test of conventional thinking doesn’t necessarily confirm expertise.( See the Earl J Weinreb NewsHole® comments.)

The Real Federal Debt Burden

USA TODAY has just reported information many of us have known for some time; the U.S. is spending itself into its own version of a bankrupt Greece. The problem is, unlike Greece, the whole free world depends on us and the sanctity of our dollar and its convertibility.

The USA Today report says, in part: "The (federal) debt only tells us what the government owes to the public. It doesn't take into account what's owed to seniors,veterans and retired employees," according toaccountant Sheila Weinberg, founder of the Institute for Truth in Accounting, a group that advocates better financial reporting. "Without accurate accounting, wecan't make good decisions."

The report goes on: The federal government financial condition worsened drastically last year, beyond the $1.5 trillion in new debt taken on to meet the budget deficit. There was $5.3 trillion in new obligations in 2010, for Medicare and Social Security. That added a $61.6 trillion to the total of Uncle Sam’s financial IOUs.

The deficit between spending commitments and revenues last year now equals more than one-third of the America’s gross domestic product.

Corporations would be required to count these new liabilities when they are taken on, borrowed for everything else.

Liberals and members of the Obama administrations still insist that future growth will cover this gap. But we are talking about years and years of at least 5% to 7% annual GDP growth. This is unlikely when there is nothing in the future to entice a vibrant economy but job-defeating inflation, higher interest rates that accompany inflation and the specter of higher taxes and regulation from the left.

Media-Preferred Securities

Media-preferred securities lists are good for filling space in newspapers, magazines and blogs. They make good reading for investors thinking of ideas.

Those lists do little for investors who take the advice because those who devise lists are usually off the mark.

It’s very difficult to pick securities that are going to go up in a short time. Top executives in the companies themselves know little about how well their corporate securities will do in the marketplace, where conditions other than their company’s fortunes affect market value. How can you depend upon a analyst working from a perspective outside the company?

That is why index funds so often outperform managed security portfolios. ( See the Earl J Weinreb NewsHole® comments.)

Timing Securities Transactions

Buying, selling or holding securities evaluations are not simple to make. They’re often the basis of media articles because they fill space. And the media invariably get explanations wrong.

The strategy an investor should use will depend on the original investment intent when the securities are purchased. What is the purpose of the purchase? What is the reasoning in terms of investor age, goals, risk accommodation, and psychology?

And, most importantly, the extent of discipline the investor has decided to employ to keep to that strategy.

Provided, the investor is one of the few who can be really disciplined. ( See the Earl J Weinreb NewsHole® comments.)

Investment Advisers Are Back

Despite getting burned in 2008, investors keep coming back to advisers who cost them as much as 25% or more of their investment income. (Calculate the average fee of 1½% of investment assets against average investment income and you get an idea of what money advisers get from clients each year.)

The trend for using investment advisers appears to be growing; the fact these same folks were generally unable to help prevent the damage from past market debacles has not hurt adviser reputations.

You can easily invest in low-cost index mutual funds and ETFs, using common sense as I always recommend. Avoid advisers, except for necessary lawyers, accountants and tax experts you may need. ( See the Earl J Weinreb NewsHole® comments.)

ReCap: Fannie Mae and Freddie Mac as Unsung Villains

Fannie Mae and its related Freddie Mac are private companies which had been blessed with special government backing. The Democrat party took them under its wings as a special means of helping the “poor” and minorities. It also became a political device to “overcome” so-called red-lining, where minorities allegedly could not get loans because banks unfairly turned them down for credit. Fannie Mae and Freddie Mac helped out.

Hundreds of billions of dollars were soon involved. Influential liberal politicians had friendly execs employed, with incentives to augment the gigantic volume of systemic mortgage growth and guarantees.

Over the years many observers noted the accumulated danger but the ensconced liberal Congressional influence, exemplified by representative Barney Frank, pooh-poohed any attempt at reducing the growing risks to the entire mortgage system.

We know now about the subprime debacle as the banks attempted to cope with the toxic assets that has resulted from being fed Fannie Mae and Freddie Mac fare. Blame has been placed on the shoulders of the bankers by the politicians who were actually responsible.

We get more of the same, regulation with Representative’s Frank’s name attached to it: Dodd-Frank legislation. You can expect more of the same fiasco resulting unless cooler heads prevail in correcting that bit of legislation.

Proper Whole Life Insurance Evaluation

Comparisons between whole life insurance and term insurance are usually simplified by the issue of price. Whole life is more expensive when you shop for protection.

On the other hand, for those who need forced savings and who would not put what they would save from lower term life premiums periodically into proper, low cost mutual funds, whole life is still a choice.

Particularly because whole life policy earnings, while lower, are tax exempted.

Another comparison often overlooked: There is always an extended term option in a whole life policy; the policyholder can convert the contract into term insurance at a later date, and without the need of a physical exam, even if otherwise un-insurable. ( See the Earl J. Weinreb NewsHole® comments.)

Stock Brokers as Advisers

New SEC regulations want to see that stock brokers will have to treat their clients differently than in the past, if they already do not.

Of course it won’t do much for most investment portfolios, but it will make bureaucrats feel better.

In the old days a broker had to be sure that an investment was ”suitable” for a client. What was suitable was often debatable, but that is what makes securities markets as erratic as they are.

Now the broker is supposed to have a “fiduciary duty” toward the client. according to SEC intentions. That should open a hornet’s nest of endless legal problems.

The main result of this is to give investors more ammunition to sue brokers for real or imagined damages. That offers more power to the lawyers. And to give brokers the excuse to become more profitable "advisers."

Investment Analyst Shortcomings

The majority of securities analysts could not operate a pushcart. Yet, they constantly critique top business executives about the way they run multi-billion dollar companies.

In addition to this prevailing fault, financial community analysts have an extremely limited time frame. While a business must look years ahead, those involved with Wall Street securities usually operate with much shorter time-goals. ( See the Earl J. Weinreb NewsHole® comments.)

Follow them too closely and you court trouble.

Volatile Securities Markets

Securities markets are generally erratic. However, when you think about it, they really ought to be calmer than they are.

Institutional investors and advisers are considered professionals. They’re the experts who account for at least 80% and, some days more, of all trades and activity. Why then should the markets behave so erratically?

These pros ought to know what they are doing, unlike the other 20% or so of the public, amateur investors who blindly follow the pros.

However, Wall Street "wizards" invariably act in a mob-like manner.

They may still make their millions, simply because they are ensconced as Wall Street inside players. ( See the Earl J Weinreb NewsHole® comments.)

Securities Experts and Analysts

Little deep investment research and thought comes from the analytical securities segment of Wall Street.

What goes for research there is primarily in the form of public company reports. These have to do with reported earnings, without any true understanding of the nature of those earnings. Furthermore, much of what earnings are announced could be the result of fanciful accounting. So all that analytical reporting may be meaningless, if not misleading.

Little is done on what is most important to the investor; the use of disciplined strategy.

Most analysts and money managers have no time for careful, insightful thought of the many, many hundreds of strategies, which, along with disciplined use, are essential.

Moreover, the investment community is incestuous, in a way which creates herd-like, impulsive instincts. This results in the inanities that has become repetitive gospel, over the years. ( See the Earl J Weinreb NewsHole® comments.)

Medicare and Social Security Ponzi Schemes

The biggest Ponzi schemes of all are being sponsored by the U.S. Government.

Prime examples: Medicare and Social Security are estimated to be short by over 110 trillion dollars. That makes them completely bankrupt, were they genuine, private insurance enterprises.

The average American has no idea how Social Security works. He or she will tell you it’s as advertised. It’s not, because there is no trust and reserve fund, though you often hear politicians mention “lock box.”.

Benefits are paid today from earnings of those still working, So, what makes this different from any other Ponzi scheme? Paying off some today with money taken from others, to whom benefits are promised tomorrow. Social Security tax funds taken in, are never really invested. They are used to pay off Social Security obligations of today.

Government has already exhausted what is supposed to be the Medicare Trust Fund. Social Security will run out of money in a couple of decades, probably much sooner, when there are not enough workers to pay off retirees.

So what does makes these programs different from other Ponzi schemes?