State Governments Budget Deficits

State governments have severe budget problems; unlike the federal government, states cannot print money, so they have to make ends meet in some way.

Yet, their politicians have the same bad habits; continuing to spend too much and not correcting the basic problems.

One major example: Expensive public employee pensions, especially when not properly funded, if funded at all.

States’ tax revenues are lower which make financial burdens even more onerous. Taxes cannot be easily raised. It is becoming more difficult to keep looking for this source of easy revenue.

States will simply have to cut back on much of what they’re now offering, and begin tightening belts. They will simply have to restructure public union salaries, fringe and retirement contracts.

This includes resisting federal mandates that force state spending by edict from Washington. ( See the Earl J Weinreb NewsHole® comments.)

Investment Banker Earnings From Poor Advice

What business pays well for those who give poor initial advice and are asked to tidy up their mess? Investment banking advisory.

Investment bankers can make money either way their advice works out, with acquisitions and divestments. After all, if the advice for the marriage was so good, why the need for the corporate divorce?

And in any economy. Just one example: On the AIG breakup, nearly $1 Billion for IPOs or underwritings, and consulting for breaking up AIG eventually is a lot of money in any economy. Managing so-called toxic assets and handling other financial meltdown arrangements are huge sources of capital under any financial conditions. ( See the Earl J Weinreb NewsHole® comments.)

Dodd-Frank and Super Regulatory Agencies

Strict federal government regulations have never worked as advertised. There are too many agencies working with conflicting objectives.

Under the Dodd-Frank regulatory fiasco, with the Treasury and the Federal Reserve in charge of all the banks and other financial companies and institutions, we have an addition to the meddling fiasco.

SEC duties are also expanding to where their whole administration has to be revamped. They did a poor job well before their duties were broadened.

Transparency with less heavy-handed regulation always works better. However, that is a matter of political talk more than practice. Transparency is what politicians mention only in their promises. ( See the Earl J Weinreb NewsHole® comments.)

Japan’s Enormous Deficit

Japan has been pump-priming its economy for decades. Yet, it’s failing to stimulate its economic stagflation.

They have been able to do this because they are not as dependent as the U.S. on foreign countries to buy and keep owning their debt. The U.S. bond market depends to a much greater extent on other countries holding U.S. Treasury bonds.

The U. S. dollar has historically been more of a reserve instrument than the Japanese yen. Still, prices in Japan are high, and consumer and business conditions are dismal.

Japan will not be getting away with deficit spending too much longer. Reality will catch up with them as it will with the U.S. in time. ( See the Earl J Weinreb NewsHole® comments.)

The Chinese and U.S. Debt

Do the Chinese believe in capitalism more than does the Obama administration?

The Chinese Communist government must constantly remind the U.S. of its too big budget deficit. The Chinese are troubled because they own well over $800 billion (and growing) in U.S.Treasury debt. They see what’s becoming a poor investment. They realize that this cheapens the value of the bonds they own.

The Chinese manage their budgets along more capitalistic lines. compared to the Obama administration. ( See the Earl J Weinreb NewsHole® comments.)

Corporate Bonds are Better

Media advice are foolish to suggest that ordinary investors buy individual corporate bonds. It makes far more sense to use a low-cost mutual fund or exchange traded fund (ETF) instead.

For a number of reasons:

You would have to purchase at least thirty to fifty different bonds to get diversification in the event of possible future defaults.

Secondly, you could never buy bonds as cheaply as a fund does. And a low cost fund’s fees would be far cheaper in the long run than your efforts.

Buy your bond funds by their duration. The duration period you choose ought to be about the same or less as your intended holding horizon. (If you are not aware of the term, duration, learn about it before you take any advice on bonds.

The dividends paid by the fund or ETF should be automatically reinvested. Periodic interest reinvestments would be very impractical with direct bond purchases. ( See the Earl J Weinreb NewsHole® comments.)

Federal Deposit Insurance Corporation Takeovers of Banks

The Federal Deposit Insurance Corporation, or FDIC, which insures bank deposits, has the authority to take over failing banks and has done so.

It also makes it possible for private investors to invest in weak banks and thus solve financial problems as they occur at insured institutions.

Why not permit private sources to resolve banking problems instead of relying on the intervention of the government with takeovers. The latter ploy has not worked well, despite the rationale that only such bailouts are the solution to get us out of financial meltdowns.

Government solutions come with a steep price. Permanent government meddling and horrendous debt.

Not relying on the FDIC more than we did was a terrible administrative mistake. ( See the Earl J Weinreb NewsHole® comments.)

Timing Securities Markets

Research consistently shows data that market timing does not work. Timers may make their money because of their inside positions, which entail profit, but these are factors other than market timing.

It has been recently shown how members of Congress have legally been able to do this. But inside trading is illegal for the public.

Poor timing applies to assets other than securities. Just one example of the futility of market timing: Some of the largest investment bankers and commercial banks invested very heavily in commercial real estate at their highs. Property values then fell in value in 2008. The bankers then sold at lows to private equity firms and hedge funds at bargain prices. The latter profited.

The reason? It is not only that the banks need the cash. The smart traders there tend to make money because of their inside positions, not because of their assumed timing instincts. ( See the Earl J Weinreb NewsHole® comments.)

Test Politicians on Economics Part 2

Further to my previous comments on politicians in office.

Politicians on the job often exaggerate as when they campaign for office.

But words can have consequences, particularly because of psychological effects on the public.

Politicians can profess free market economics but they cannot have policies that create socialism. It might appeal to groups that helped get them elected, but it will have created immense damage while in office.

Socialism has never worked where tried. Except in the classrooms of colleges. ( See the Earl J Weinreb NewsHole® comments.)

Test Politicians on Economics

Politicians never have to take a test to see if they understand basic economics.

Many are economic illiterates. They may get words from some staffer who is literate on the subject. But when comments on business are extemporaneous, the gaffs are more evident.

It would help if more politicians came with business and entrepreneurial experience. They would not generally lean leftward. Being lawyers, as many are, is a particular problem, especially if that background involved fighting business and industry. ( See the Earl J Weinreb NewsHole® comments.)

Financial Media Gurus

There are a number of reasons why I don’t place too much trust in opinions of most financial media gurus.

Very often they copy others; their ideas and facts may well be stale and overused. As well as biased, which can be attributed to their slants that may owe to contrived commercial implications of the advice.

Remember, pundits have gone to the same schools and colleges and gotten the same education, including the same business courses, with similar resultant MBAs. It can be an incestuous field.

Moreover, much of their suggestions come from sales efforts to sell particular products or services. This provides an illusion of punditry.

Examples include gold or commodity purchases as cure-alls for future inflation.

One-sided views of any investment strategy takes on an aura of truth if repeated often enough.

Also, media pundits tend to look over each other’s shoulders, so they do not stand out too much if they are wrong, or so they do not offend their editors.

Then there is the use of public relations release placements, because they are easier than original writing. In-depth articles often are practically written for many reporters and analysts. ( See the Earl J Weinreb NewsHole® comments.)

SEC and Dodd-Frank Proxy Provision

Under the Dodd-Frank Financial Regulation Bill, the SEC gave corporate and mutual fund shareholders more to say in boardrooms, more access to proxies for nominations of board members.

Lots of theoretical platitudes, but little that shareholders were really interested in. Nothing bottom-line that shareholders were actually able to learn about or act upon, or even profit from in the real world.

Great for populist politicians who pass laws, and for plaintiff lawyers to wax rich on.

Fortunately, a federal court thought the provision unreasonable and since September the SEC has cancelled its mission. ( See the Earl J Weinreb NewsHole® comments.)

Insurance to Pay Estate Taxes

Federal estate taxes are often paid by life insurance proceeds; folks have always bought life coverage lo pay the tab.

Life insurance companies have been among the proponents of the tax in Washington.

Other than for paying off estate taxes, some life salesmen are pushing big amounts of whole life coverage where the insured borrows against cash value that accrues tax free. Sounds good, provided you can borrow at a rate below what you earn at the insurance company.

Very iffy with regard to observing tax regulations: This is a matter for you and your CPA. ( See the Earl J Weinreb NewsHole® comments.)

Financial Media Creation of ‘Noise’

I have criticized many media pundits who create the gurus who expound much of the doubtful investment strategies the public gets. And how such advice should be avoided.

I have often mentioned the pros and cons of investment strategy and why discipline is important in keeping to that strategy.

To discipline this goal, you have to learn how to eliminate media noise from your life. To do so, minimize the amount of investment comments you read or listen to, and take them all with a grain of salt.

Always keep your basics in mind when you hear guru chatter. ( See the Earl J Weinreb NewsHole® comments.)

Dodd-Frank Regulation of Derivatives

There is a major question whether the Dodd-Frank financial regulation was needed to regulate the use of derivatives by mutual funds, exchange-traded funds and pension plans.

It may cut some risks. But there is no doubt the regulation will definitely add to investor costs and diminish performance.

Of course, this is a solution to something that had never before been a factor that resulted in any previous financial meltdown or problem.

Still, Congress in its wisdom saw fit to fill up 2300 pages of superfluous verbiage.

You can be absolutely certain, all the Dodd-Frank Financial Regulation Bill will ever do is create so much uncertainty, it will detract from American business, investment and consumer interests and jobs, while only benefiting the income of trial lawyers. ( See the Earl J Weinreb NewsHole® comments.)

Alleged Financial Experts

I have a problem with the financial media’s persistence of the use of contests to see who can pick stock winners over relatively short periods of time.

There is no expertise required for this, just luck; for at least two major reasons:

First: Picking securities to measure performance over an arbitrary period, without having to designate how long you would hold your securities, does not indicate predictive power, as the contest is supposed to prove.

Secondly: The contest never gives you true ground rules, one of which is always risk. In a contest the assumption is that you throw caution to the winds and pick the riskiest for the maximum returns. This is not a real investment goal.

I have often mentioned my study of the cons as well as pros of now about 1,600 strategies used by investors. My work is unique because it never recommends any particular strategy, unlike other suggestions you get. The truth is, each has its good and bad points.

Strategies must be tailored to individual preferences and needs. What tips the odds for each investor is the discipline employed in the use of strategy. Every investor has built into the purpose for the purchase of a security, the reason to sell it. Discipline guides that sale.

That is what tips the odds favorably. ( See the Earl J Weinreb NewsHole® comments.)

The Man-Made Recession

America has always had self-corrective economic cycles, but now we have more regulators than ever before, and they are doing their damage, as never before.

We could have avoided the severity of the current deep recession.

1) By avoiding the massive bailout by regulators offering the illusion of doing something. Probably, all that was needed was a federal agency guarantee of all bank assets, in return for a fee charged to the banks.

2) By avoiding “mark-to-market” accounting of mortgage assets, which had no market appraisal, and which wiped out assets of major banks almost overnight, aided by short selling that such “mark-to-market” accounting enticed.

3) By having a government agency buy up, at bankruptcy, empty tract homes, in over-speculative states such as Nevada, Florida and California.

The government has repeated the same errors made by Herbert Hoover and Franklin Roosevelt during the Great Depression. In the process we have accomplished little for the economy but have constructed a form of state capitalism, a nasty type of socialism.

The Dodd-Frank Act, in further attempting to get us out of this mess, is a continuing disaster. ( See the Earl J Weinreb NewsHole® comments.)

Dodd-Frank Regulation Mischief

The Dodd-Frank Financial Regulation Bill has an adverse impact on the economy.

Just one example: The SEC now has authority to impose a “fiduciary duty” standard on brokers, the same it applies to investment advisers. Brokers now will have to give advice in the client’s “best interest.” Whatever that vague phrase means. In the past brokers only had to provide ”suitable” investments.

It remains to be seen how far Dodd-Frank will be enforced by the SEC.

The Dodd-Frank Financial Regulation Bill will create so much uncertainty, it will detract from American business, investment and consumer interests, while only benefiting trial lawyers. ( See the Earl J Weinreb NewsHole® comments.)

Extended Unemployment Benefit Negatives

Effects of extended unemployment benefits have been studied; I have referred to the statistics before.

Left-leaning politicians, seeking votes from the unemployed, use such benefits as a ploy. Those who want jobs are thereby being hoodwinked, and go along with the extended benefit band-aid.

Statistics show the effects of the psychology involved. The program invites incentives not to work, Because extending benefits and re-extending them creates what is called a “reservation” wage. People who ordinarily get relatively lower-scale income tend not to look for work until the unemployment wage runs out.

Moreover, the funds used by government generally come from additional taxes on the employed and industry, or from additional budget deficits.( See the Earl J Weinreb NewsHole® comments.)

Is Deflation a Real Threat?

Great recessions and depressions always bring on the threat of deflation. Once they cause collapse they are hard to revive. Japan of the past two decades is a good example.

However, what is the bigger threat? That of deflation, or constant stimulus injections of failed Keynesian principles, which the Federal Reserve is resorting to now?

That is setting the stage for another future financial bust of epic proportions.

Especially in the light of the ultra-trillion dollar budget deficits brought on by ObamaCare, to go with energy and other environmental planning.

Many economists worry more over the fight about immediate deflation. History tells us that deflation is a shorter-term problem. Only a minority of economists look at the deflationary possibility. ( See the Earl J Weinreb NewsHole® comments.)

Dubious Financial Gurus

The media have no problem in finding and profiling financial gurus. They never have to work hard at it because their reports are often public relations placements.

As for gurus, there are so many would-be experts, you are bound to find “experts.” You merely dispense with the many more losers.

One classic example: There are at least 100,000 individuals in the U.S. giving financial advice. If you had any 100,000 folks flipping coins by groups of two, heads or tails, someone in each group would win the toss, going on to the next round. With only a 50/50 chance of winning each round, each winner would go onto the next contest.

After 18 or 19 head or tail flips you will find a genius who had won the toss every time. He or she will then probably write a book about the expertise. With a 50/50 chance to fail to guess the toss the next flip.

The same with the genius 100,000 or so giving securities advice. ( See the Earl J Weinreb NewsHole® comments.)

Financial Media Opinions

The financial media always offers its opinions on securities. How do you know they are probably wrong?

Whenever you are told to buy a specific investment without you having to consider your personal risk conditions, your age, family situation, and finances, as they relate to that advice.

I don’t care how smart or how much of a guru he or she purports, or is considered by the masses to be. That advice is tainted. ( See the Earl J Weinreb NewsHole® comments.)

Repos and Bank Securities Analysts

Repos are supposed to be very short term loans, even over-night. To get troublesome assets off the books they were treated as sales, and then taken right back, as loans, after the accounts were noted as sales.

We hear, for example, how they may have contributed to the financial problems at Lehman Brothers and Citi Bank. We find out everything from media reportage after the problem occurred.

Much of the bookkeeping details that would have tipped off repo use would have been helpful if picked up in time by bank securities analysts.

Why didn’t bank analysts at least have asked banks how repos were being reported?

Federal regulators certainly failed to do so. ( See the Earl J Weinreb NewsHole® comments.)

Trading in Currency

Currency trading is speculative and requires special information and attention. It’s not for the average investor. Yet many non-pro, small investors are fascinated and getting involved because of the profit potential. A potential because of the highly leveraged aspect of forms of commodity-type and option trading.

However, you often get similar benefits of currency trading and currency diversification by types of overseas equity investment, but without the extreme risks. ( See the Earl J Weinreb NewsHole® comments.)

CBOE Market Volatility Index or VIX

The CBOE Market Volatility Index or VIX represents a strategy indicator for some traders.

When it shows a high, it means volatility that permits heavy trading. Lower VIX can also mean activity doldrums with ensuing lesser trading.

Lower VIX readings provide further possibilities to some observers in the financial community of a recession. This happened in 2008. This observation brings up the question of poor market psychology again. ( See the Earl J Weinreb NewsHole® comments.)

The Social Security Trust Fund Scam

Social Security trust funds don’t exist. The money for payments will be exhausted, by the latest, 2037; probably much, much sooner.

The Social Security trust fund is a figment of a government politician’s imagination that the dutiful media repeat over and over again.

Money taken from present-day workers goes into general funds, in effect, to pay for current Social Security outlays.

It’s a Ponzi scheme, despite pious denials. It’s not comparable to a reserve-investment or a private insurance company program. The same private, “big-business” plans that politicians love to demonize to suit their populist purposes. ( See the Earl J Weinreb NewsHole® comments.)

The Death Tax Scam

The American Family Business Foundation wants repeal of the death tax on estates; Professors Christophe Chamley and Ken Judd have done studies on the subject.

Not only does the federal estate tax produce little revenue, it causes economic mischief by forcing families to sell businesses and farms to meet the imposts.

The big pro-tax lobbyists include life insurance companies, because policies are used to help pay the burden. Not everyone is insurable and insurance can be expensive.

That’s not all the damage; research also shows that the rich may overspend in haste to avoid taxes, instead of using the funds more wisely. ( See the Earl J Weinreb NewsHole® comments.)

Computerized Securities Strategy

The financial media comes up with ideas that computerizes strategies of when to buy and sell individual (not conventional packaged) securities.

But this is never new, just repetitious. There have been computer whizzes all the time, who have attempted this strategy. That’s because it represents a challenge.

Of course they are too amateurish to know that others had been through the quest before, using faster and faster computers.

As fast as technology has become, market psychology and corporate idiosyncrasies hinder their practical success.

As I have studied the pros and cons of close to 1,600 market strategies, including the computer approach, I can see no long-term panacea with this approach. ( See the Earl J Weinreb NewsHole® comments.)

Mutual Fund 12b-1 Fees

The12b-1 mutual fund fees are charged for “distribution and/or services” and are so permitted by the SEC.

Funds with 12b-1 fees still call themselves “no fee” or “no load.” That adds to investor confusion.

Fees are allowed up to 0.25%. That is no small amount when compared to what you can pay as total fund charges these days.

The relatively high charge is not necessary. There are no actual benefits. The fee is usual when a fund is sold through brokers. You need not buy funds that way. Go directly to the source. ( See the Earl J Weinreb NewsHole® comments.)

The Dodd-Frank Bill

Among its over 2300 pages in the Dodd-Frank Act are some disastrous legislation on derivatives, which our government bureaucrats are not still familiar.

The tentacles of this monstrous legislation will require American industry to come up with cash and/or credit that will siphon capital, from its other business operations, it cannot afford.

This is a stupid, unnecessary rush into the unknown, using a massive bill named for legislators who had much to do with the fomenting of the problems underlying the recession. ( See the Earl J Weinreb NewsHole® comments.)