Misusing John Maynard Keynes

U.S. Democrat party followers have had a long association with John Maynard Keynes. Since Franklin Roosevelt and the New Deal in the 1930s, this economist’ s teachings have been their guide to this day.

But they do not always read Keynes correctly. Today’s Democrats refer to him to suit their political purposes.

They feel that you fight recessions by government spending money, to create jobs, by encouraging demand.

Experience shows otherwise, Mass spending does not produce jobs. But it does produce deficits.

At the same time it produces no incentives for business to expand job formation. Business expansion requires lower tax rates, not higher rates that over-spending eventually causes, that stifles business, Especially affecting smaller firms that account for the bulk of U.S. jobs.

The media never fully get into detail and depth when it touches on the thinking of John Maynard Keynes. To disclose what Keynes really suggested only over a short term, and not cherry-picking from his theory. ( See the Earl J Weinreb NewsHole® comments.)

China Investment Risks

Investing in Chinese corporations can be risky when government can run things pretty much its own one-party way.

But also, their basic economic statistics are not accurate. For example, new housing is an important statistic in China. But the official housing index, the National Bureau of Statistics, is much different and much lower, than the China Real Estate Index System.

And the difference far surpasses rises in Chinese wages, This poses the likelihood of boom-like problems. Moreover, this is an important difference because it affects the steel, cement and other basic aspects of housing construction information that analysts require.

So, investing in China poses information as well as political dangers of a controlled economic system. ( See the Earl J Weinreb NewsHole® comments.)

The Dodd-Frank Wall Street Reformt and Consumer Protection Act

I feel that consumer protection is best accomplished by education. The subject is too complicated for bureaucrats because no one set of financial ideas and rules can accommodate every individual’s situation.

Once the government gets into the act, it attempts simplifications that cannot be done, apart from insisting on the use of easier-to-read information or set law.

To create a process for the masses, the bureaucrats dumb down the process where they hurt choice and outcome for too many individuals.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is a perfect example of what makes sense only to a bureaucrat. But in my observations, it may not make sense to individuals. Folks make dumb financial errors all the time. Correcting them by fiat can be foolish by using regulation alone. ( See the Earl J Weinreb NewsHole® comments.)

Income Tax Hits to “Winners”

Few folks know much about tax consequences of much of the financially-oriented news they see or hear.

Prize money won in a TV contest by a lucky contestant is taxable as income.

And that free vacation trip or new car gift is probably going to be taxed at the retail value, not at the discount you could have gotten, had you bought it directly.

So, the contestants may be getting non-cash items for cash amounts they may not even possess.

Also be aware: That foreclosed mortgages and any reductions in credit card loans and other loan forgiveness, result in an income tax bite. Amounts saved are considered income. ( See the Earl J Weinreb NewsHole® comments.)

The Independent Research Settlement Failure

The need for independent, rather than broker or investment banker securities research, arose because of both real and imagined problems about the work of in-house securities analysts.

A 2003 settlement imposed by then New York State Attorney General, Eliot Spitzer, provided for so-called independent securities evaluation. It was supposed to be a buffer to what was being offered by those also underwriting securities. It thus forced them to spend $460 million to finance “independent” research, on behalf of non-institutional clients.

Such securities research was little used. Yes, some independence was achieved, but few investors used that source of information.

However, it was a political success at the time the settlement was made. ( See the Earl J Weinreb NewsHole® comments.)

Why Bother With Securities Analysts?

It’s extremely difficult to know what is going on in any public business. Even insiders in a corporation don’t know how outside events will affect their business. So why should investors bother to buy individual securities after a so-called analysis?

Furthermore, starting a couple of years ago, about one quarter of securities research departments announced they were dropping coverage of small-cap stocks, while about one sixth no longer covered mid-cap stocks. A large percentage of large cap stocks are no longer reviewed because less analysts were employed.

This backs up my position that it does not pay for an investor to evaluate securities. Whether they are professionally analyzed or not.

An investor’s best bet is to use low-cost mutual funds or ETFs, matched to indexes. ( See the Earl J Weinreb NewsHole® comments.)

Do You Need An Adviser to Learn Finance?

You may already know that advisers are too expensive for you. That when they take 1 1/2% of your assets as a fee each year and you earn 5% on those assets, that’s too big a cut of your earnings each and every year.

What do you do? You feel you know too little about investing.

Don’t underestimate your ability. It’s easy to learn basic investing methods as I have outlined them over and over, particularly in these blogs. There are basic, simple rules and low-cost investment vehicles you can choose. ( See the Earl J Weinreb NewsHole® comments.)

Unnecessary SEC Reports

The Securities and Exchange Commission requires sending what is complicated literature that small investors do not read and cannot understand. It is unwarranted.

I am referring to costly prospectuses, financial notices and material which ought to be filed, but which should be made available only for those who really are interested in reading them.

All the general public requires are outlines of important information, forwarded in a manner the average investor can easily understand. ( See the Earl J Weinreb NewsHole® comments.)

Credit Agency Competition

Many question the power of the credit rating agencies since the sub-prime crisis when the mortgage bond AAA status proved erroneous, and recently, when U.S. bonds lost AAA ratings from Standard & Poor’s.

The federal government gives the raters a monopoly and then criticizes their work. Some solutions make little sense, Such as making rating agencies liable for any errors in judgment. Which is great for lawyers and is bound to get those companies out of the business.

Actually, banks and large investment companies already do their own investigations of credit risks they deal with.

What about more competition as a solution? Allowing any company with qualified analysts to practice would help. Right now, the government has permitted only a few to operate in this area. ( See the Earl J Weinreb NewsHole® comments.)

Mutual Fund Fee Regulation

The government has from time to time questioned fees charged by mutual funds Should the U.S. advise how high fees ought to be?

Investors themselves ought to know how to compare funds’ expenses and why to choose those with the lowest expenses. The funds give this information.

Management of mutual funds often has little to do with success. Lower-cost funds which follow market indexes often perform better than managed funds. The overall success factor for choosing the right fund is low cost.

However, that should not be government’s function. Politics have a nasty habit of interfering with choice, and politicians are not the wisest advisers. ( See the Earl J Weinreb NewsHole® comments.)

Picking an Adviser

I do not recommend advisers because of their cost, that greatly detracts from investment performance over the years.

Example: When advisers take 1 1/2% of your assets as a fee and you earn 5% on those assets each year, figure the enormous cost yourself. On each $100,000 you have, your earn $5,000 and you pay your adviser $1,500. That’s a big cut of your earnings each and every year.

But if you insist you must have an adviser because you listen to what the media foolishly advise, check out and verify that adviser’s past performance. And check for any federal and state citations and list of current clients and referrals. (See the Earl J Weinreb NewsHole® comments.)

The Federal Reserve and Humphrey-Hawkins

I recently commented on the Federal Reserve. Some more facts.

Independent-minded economists have always come to the Fed’s defense, in its attempt to keep the Federal Reserve as free from politics as possible.

The recent Dodd-Frank Act has made the Fed less independent of the executive branch of government.

Despite the logic for the Fed’s independence, Congress itself always has wanted to impose some influence. It has to an extent. Since 1978 the Fed has had to enforce the Full Employment and Balanced Growth Act, known as Humphrey-Hawkins. That conflicts with the Fed’s stated currency/inflation activity.

The Humphrey-Hawkins Full Employment Act enforcement creates an inflating bias, and not one of dollar stability; so there is always a conflict of interest. ( See the Earl J Weinreb NewsHole® comments.)

How Independent is the Federal Reserve?

How truly independent is the Federal Reserve system?

There always has been anger from many sides against the Federal Reserve. The idea of a quasi-government agency, the head of which is appointed by the president, independent of real congressional influence, has been suspect.

The role of the twelve regional Fed banks has also been questioned. They are overseen by private-sector boards of directors, composed mainly of commercial bankers. That never pleases the Left.

The proposed financial regulation law has, in effect. tilted the influence on the Fed in many ways, giving the executive branch of government much more power that it ever had.

Recent actions show a bias toward administration easy money policies that foster inflation that the fed is supposed to help counter. ( See the Earl J Weinreb NewsHole® comments.)

Financial Media Whoppers

The media exaggerate today with high-tech distribution of news, as they did when they sold only newspapers in what we still refer to as the days of “yellow journalism.”

That’s not just when it comes to politics. It includes members of the financial fraternity.

One example: When Bernard Madoff said he made off with $65 billion and was subsequently convicted of fraud, his case pointed out a problem in the financial media, as it does elsewhere.

Investigators believe the total sum involved was actually closer to $17 Billion. The sensationalist media continues to pick up the $65 billion number because it suits their exaggeration needs. ( See the Earl J Weinreb NewsHole® comments.)

Managed Mutual Funds

This adds to my previous comments on managed mutual funds.

I have always commented that indexed mutual funds or exchange traded funds (ETFs), are better than managed funds. They usually outperform them, and at lower cost.

Moreover, I always say the lower the fund cost, the more return an investor will get over the years.

This question also will come up when a managed mutual fund you may have gets merged into another. These mergers are usually done for either or both of two reasons. To get economy of scale. Or to hide losing records.

In most instances, index funds or exchange traded funds are always a better choice. So, don’t attempt to trade managed funds on relatively short term performance.

Besides, their internal managements generally change constantly. (See the Earl J Weinreb NewsHole® comments.)

When to Sell Your Mutual Fund

When do you sell a mutual fund?

I never recommend managed funds for a variety of reasons, including high cost and their too-often inability to emulate indexes. Moreover, managements change and you never know who really is operating your assets.

What if the fund is not doing well? That does not mean an automatic sale. Market conditions may be the cause and not management inability.

The major consideration should be fund cost because that is the only factor you can truly control. All other factors are well beyond your possible knowledge. Cost is a huge factor in fund success. ( See the Earl J Weinreb NewsHole® comments.)

How Accurate Are Credit Rating Agencies

Credit rating agencies are generally accurate but the divisions that rated sub-prime mortgages were certainly not up to par at the major agencies.

One way to solve the lack of any problems we may have had with credit ratings in the past, is to allow competition among such services.

Why not allow any company who feels qualified to register as a ratings analyst? Today, a small handful has a government monopoly.

If a company can show the Securities and Exchange Commission that it has qualified analysts and capability to evaluate bonds and other securities, why not have a license?

Another problem: Do credit rating companies have First Amendment free speech immunity? Courts have ruled they have but plaintiff lawyers are always on the prowl. ( See the Earl J Weinreb NewsHole® comments.)

The Credit-Default Swaps or CDS Market

Credit-default swaps got a bad reputation for a faulty political-scapegoating reason during the 2008 financial debacle. Yet, they are still being used, because they serve a useful, legitimate purpose.

The problem with credit-default swaps is that the market is little understood. It provides a form of insurance that bonds will pay off, particularly when the bonds are being issued by governments whose credits are very shaky

Without them, countries on the brink of bankruptcy such as Greece and Portugal, Spain and Italy, would have problems selling their bonds at any price. ( See the Earl J Weinreb NewsHole® comments.)

Bonds and the Duration Principle

Further comments on how professionals in the financial industry constantly get the bond market wrong.

Take high yield corporate bonds, called “junk” for an unfortunate reason having to do with lower ratings. The fact they have lower ratings is compensated by higher yields. If you buy them in a fully diversified, low-cost mutual fund or ETF, and you reinvest dividends, you have factored in much risk.

If the default rates of the holdings were to rise to an unusual high from lower level, the higher yields more than make up for the risk. Yet, all the media will discuss is the risk of default and not the built-in compensation.

I have previously commented how the media hardly discuss how you can avoid that loss, along with any inflation hit, with proper use of bond duration.

This is possible with low-cost mutual funds and use of dividend reinvestment. The media, instead, offer superfluous discussions about such instruments as TIPS which are expensive and not really needed. ( See the Earl J Weinreb NewsHole® comments.)

Professional and Media Errors With Corporate Bonds

The professionals in the financial industry constantly get the bond market wrong. Remember: I’m referring to professionals, not amateurs.

They make up well over 80% of the market so they should know better. And the media are usually also in error, when reporting about them.

At the first sign of economic problems, there is talk about corporate defaults and the effect on the bond market. How bond prices are bound to fall because of the risk of possible defaults. And with that talk, the bond market weakens and prices do fall.

But remember: The possibility of default is very quickly factored into bond prices. And the lower the price, the higher the yield, as a direct relationship.

Furthermore, the media hardly ever discuss how you can avoid loss, along with any inflation hit, with proper use of bond duration. ( See the Earl J. Weinreb NewsHole® comments.)

Financial Trade Taxes

Periodically, liberal politicians and powerful unions try to tax financial transactions whenever they can and thus discourage what they call “excess speculation.” The estimated tax revenue this would bring the government is just under $200 billion over about five or six years.

A similar move is thought of in Britain and Europe from time to time, amidst their left-thinking politicians.

The consequences of such taxes on economies is the problem. Securities trading is integral to economics. Such taxes would therefore be indirectly felt by everyone.

All this hides the fact that speculation in a capitalistic society does not cause problems. It merely reflects pricing, something politicians of the left never comprehend. Capitalism’s presence may appear to help boost rising prices, but works the other way just as easily, when prices fall. ( See the Earl J. Weinreb NewsHole® comments.)

Financial Liberalism a Secular Religion?

Experience and common sense has always proven that liberal or left-oriented financial thinkers have almost always been wrong. Their actions usually have unintended consequences that are damaging in the long term, even to their own interests, and to their political constituents.

They are ingrained in liberal minds and no further education will dissuade that thinking. Sometimes they may be merely a political device for getting votes when running for office, or organizing workers on behalf of unions.

For many it has become a secular religion. ( See the Earl J. Weinreb NewsHole® comments.)

Turn Down Financial Media Noise

One of the problems with constant TV chatter is looping stock market reports. Salesmen selling financial ads make matters worse.

One of my investment rules is to avoid what I call media noise. Once you have an investment strategy in place, and you are set in that strategy, why let incessant media chatter and nonsense dissuade you from your original goals?

It becomes almost impossible to be disciplined when you have both ad salesmen and an avalanche of “experts” of all stripes and objectives throwing investing ideas at you all the time. ( See the Earl J. Weinreb NewsHole® comments.)

Market-Makers, Advisers and Brokers

Here is some Finance 101. The subject came up during the public show trial staged last year by the Democrat Congress featuring the executives of Goldman Sachs. It showed the general ignorance of many members of Congress and the inability of most of the media to educate the public.

When a financial company creates a form of security and places it up for sale, it is technically a market-maker, not an adviser and, therefore, has no fiduciary responsibility. Neither is it a broker, unless it sells the security.

Up to recent SEC admonitions, brokers have had no fiduciary responsibility. They do have to sell what is deemed ”suitable” for the customer. Therefore, a broker cannot sell risky securities, for example, to widows and orphans without their express knowledge. They can sell suitable risks to highly sophisticated investors.

Goldman Sachs, under the Congressional spotlight, were market- makers. They were also dealing with seasoned institutions who knew risks and frequently sold short, in the hope markets would fall; often with both positions at the same time, as a hedge.

Advisers, on the other hand, generally give advice and suggestions only. They are not market-makers, nor are they brokers.

Something for politicians to learn. ( See the Earl J. Weinreb NewsHole® comments.)

Investment Banker True Interests

Why do many investment bankers who have been in the financial community for years, have entered ranks of chefs, gardeners, nutritionists, and other endeavors other than financial, in later years?

They often show their true interests when terminated or when they have accumulated sufficient funds. Perhaps they were not interested in finance after all. They wind up doing work outside finance.

You would think they knew enough about finance to have it in their bones to write, talk or teach about investments. To remain with finance in some way.

But seemingly they do not. Finance to many is a job that pays more than it ought to, to many who are ill-prepared for the job, other than the right school and connections.

And it shows frequently in Wall Street’s insider efforts. ( See the Earl J. Weinreb NewsHole® comments.)

The SEC’s True Regulatory Function

The SEC’s regulatory function is protecting those who are not fully aware of conventional investment information or knowledge.

Investors in hedge funds ordinarily are not the usual mutual fund investors. It’s strange, therefore, why SEC watchdogs have taken time to look into such questions as “side-pocket” arrangements” that hedge funds made with their more sophisticated investors. Using them, funds may, for instance, limit the ability for hedge investors to prematurely cash in their stakes.

Or for that matter, regulate them as tightly as they are under the Dodd-Frank Act.

Hedge funds are not mutual funds. That is why some investors choose to use them. Hedge fund managers do not want to tip their investing hand as new SEC regulations require, unless the hedge funds are “family-owned." I have commented on this before. ( See the Earl J. Weinreb NewsHole® comments.)

So-Called U.S. Budget Cuts

What if you don’t need a new car but you pass a new car showroom and look at some new models?

You look at one for $100,000 that suddenly catches your fancy, and you decide, why not, I’ll buy it.

But you get a pang of conscience when you look at the payments so you buy another car in the showroom for only $20,000.

Do you go home to explain your purchase to your spouse and boast; don’t worry, you just cut the household budget by $80,000 by spending $20,000 instead of $100,000, all of which you cannot afford?

Well, that’s how liberal politicians boast about cutting their budgets.Their attempt is to cut the INCREASED spending they can’t afford

Note: Federal budgets are automatically increased by current law every year. (See the Earl J. Weinreb NewsHole® comments.)

The Current Result of Government Bailouts

Bailouts have invariably been failures; why do some liberals still consider them as solutions?

The 2008 financial disaster was a bailout attempt through a whole assortment of action:

The takeover of banks. The takeover of Fannie Mae and Freddie Mac. The takeover of AIG.The Troubled Asset Relief Program (TARP) to buy bad mortgages from banks. The Public-Private Investment Program to buy the same troubled assets. And the takeover of GM and Chrysler.

We had perfectly good operating car companies in the US to pick up business and relocate jobs. Still, the Obama administration had to bail out General Motors and Chrysler. That helped their powerful union but did little else for the economy. Ford and others in the industry operating in the U.S. were able to carry on without bailout help.

The government pumped out money. Federal Reserve funds were priced down to practically nothing in the banking system.

All this outlay cost trillions upon trillions and with little success to show for it, compared to what would have happened if the politicians and their experts sat on their hands. ( See the Earl J. Weinreb NewsHole® comments.)

Separately Managed Accounts or SMAs

Wall Street advisers, with their usual marketing diligence, have been doing relatively well, marketing yet another way to make money.

Assets held in investor’s name. Separately Managed Accounts or SMAs.

I repeat my past comments about SMAs: They’re expensive. About $600 billion are being handled this way. They represent the same advisory problem, of high cost for a service available from mutual funds and ETFs, when you are a relatively modest investor. ( See the Earl J. Weinreb NewsHole® comments.)

Providing Private Home Mortgages Is Risky For Amateurs

Because it is getting difficult to get a decent return on savings these days, ordinary folks are making some extraordinary risky decisions, when attempting to increase returns on investments.

One example: It’s absolutely stupid for a layman to give private mortgages to homeowners when banks have already turned them down.

If banking or lending is not your trade or business, but merely a side hobby that appears to offer a return better than conventional investments, forget about that enticement. The relatively few extra dollars will never be worth the risk. ( See the Earl J. Weinreb NewsHole® comments.)

Small Cap Stocks and Index Funds

It is often said that mutual funds that invest in smaller companies can do better than index funds which specialize in similar, so-called smaller cap stocks. At times they have not done badly, when trying to outperform the indexes of larger companies.

But there is a fallacy here. Few managers can truly evaluate smaller companies, even less than they can evaluate larger companies. Smaller companies are more erratic than those larger, and their corporate fortunes are more difficult to anticipate.

Smaller public companies may do better than larger companies for shorter periods but are more susceptible to business hazards and cycles. ( See the Earl J. Weinreb NewsHole® comments.)