Our States Dire Financial Situations

Most of this country’s states are having financial trouble. Pension and other poorly undertaken contracts are making it impossible for most to balance their budgets. Tax revenues are down from past levels, while spending cuts have not kept up with demand for state services and outlays.

Yet, liberal legislators keep handing out promises and largess as if prosperity still reigned. School costs keep growing. Public service and government-worker union pressures are destructive for officials seeking budget solutions.

Unionized employees often get 70% or more of their income for 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.

Fact: It takes $1 million in capital funds at 5% to get one $50,000 annual pension per worker per year. And that 5% is not being achieved these days.

Bankruptcy to break pension contracts is not an option for states, without federal law changes (but for cities and towns.)

There will have to be some freeze in obligations or change contracts for individual solutions.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Market for Gold

The market for gold as coins and bullion has been going well on average, over the years, thanks to the weakening dollar. I have frequently commented on this because I feel gold can be speculative for most folks who have no idea about its downside.

It can fall sharply, with any attempts to balance the U. S. budget, which will have to be done if the country is to avoid becoming another Greece. And gold does not earn income or revenues upon which to establish intrinsic value.

In bad times, it’s a psychological defensive weapon in many ways, but psychology often changes.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Analysts Who Select Your Investments

Securities analysts give you investment advice. They suggest what securities to buy and sell.

Analysts constantly critique management of publicly owned companies. They claim to know what products and services companies ought to produce and what they should charge. Analysts propose when to hire and fire top executives.

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

As I have often, they haven’t the business experience to successfully run a pushcart.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Investment Strategies by Media

Whenever the financial media discusses investment strategies, it’s about a favorite of someone being interviewed or reviewed. Perhaps the strategy is 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.

My conclusions often differ with that of the media, which tend to overlook strict investment strategies and techniques. So efficient strategies get short shrift. Yet, proper strategy use increases the odds of investing success.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Ratings of Commercial Credit Agencies

The past change in the AAA rating of U.S. credit should make us consider the question of ratings on non-governments as well.

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

Critics say they did poor evaluations of credit-default swaps and subprime debt issues. And in this way contributed, to a great extent, to the 2008 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.

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

And more diligence by borrowers. That would be the ideal way to prevent serious credit rating problems from developing again.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Derivatives Are Not The Villains

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 was wrong.

However, 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 to get credit. They will then sell their bonds only at much higher interest cost.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Deep Recessions Should Always be Short

Throughout U.S, history we have had economic cycles. To even them out the Federal Reserve System was legislated  a hundred years ago.

But human-handed regulation has never really succeeded at that function.

Experience has taught us, however, that natural cycles very quickly correct themselves. And that the deeper the downturn, the sharper the economy will bounce back.

Except when government meddled in the 1930’s as it has in recent years. Along with multi-trillion dollar budget deficits that are confusing and scaring large and smaller, job-creating business owners.

The economy should be thriving again, and isn’t.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Why Corporate Bailouts?

Corporations, such as those in the automobile industry and banks in financial trouble, can always use the bankruptcy courts for an orderly means to reorganize debts.

This has unfortunately been forgotten in the past by the administration, at enormous cost to our national budget and our constitutional framework.

Bailouts were done, in effect, to salvage union contracts, which bankruptcy courts would have dissolved. Agreements which make it impossible for U.S. corporation to compete domestically or internationally without taxpayer assistance.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Media Can’t Sort Out Financial Problems

I commented recently how the financial media does a poor job of commenting on financial matters, by scapegoating big business and Wall Street, repeating populist political comments.

Another good example would be the subject of repos. The elimination of repos sales off the books of Lehman Brothers  had relatively little to do with the use of bank guarantees by the government, or eliminating mark-to-market accounting, for all bank assets. The latter, and not repos, were the villains in the financial meltdown of 2008/2009.

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 past is tossed in the same basket; AIG, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Bear Stearns, and so on. Each had its own peculiar problems and could have been rescued in its own way,  without heavy-handed government assistance.

The media has done a poor job of sorting this out for the average citizen to understand. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Poor Media Treatment of Financial Problems

The media usually has no idea whom to blame for financial problems. They usually blame big business or Wall Street, as they are the popular scapegoats.

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

Leftist, populist politician demagogy will usually be picked up because it’s handy and it’s what many in the media have learned in school.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Be Wary of Wall Street’s Insurance Company Analysis

Insurance companies make annual filings with their various home-state insurance departments. Very few, if any, current analysts can understand these intricate documents. Therefore, they are not capable insurance analysts.

I rarely have found anyone on the Street giving advice on insurance company securities who has taken the trouble to truly learn how to understand the policies the companies write, and the reserves behind them.

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. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Preventing the Residential Housing Meltdown

The government could have done the following at the first signs of financial distress in the real estate market of 2008/2009.

This is not hindsight. I had suggestions in my blog at the time.

The way was to have government 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 on their over-zealous behavior.

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 the U.S. has expended.

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

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.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Background is Important in Blog Comments

In the event any viewers need an update about the background  that goes into my comments. A blogger about Wall Street ought to intimately know his subject:

                           

I have been a senior Wall Street analyst, a top public company officer and director and independent business operator, as well as a past freelancer for such publications as Barrons®, Trusts & Estates®, the Financial Analyst®, and a number of business and retirement journals.

I am the only researcher to have studied and then further documented and individually investigated over 1,600 strategies used on Wall Street. And I have looked at their pros and cons and other characteristics as they apply to professional and average investor use.

What works best is the disciplined use of strategy with original purchase, not seat-of-the-pants decisions in midstream. In addition, I was a senior investment analyst for a major Wall Street firm. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Risk in Bank Securities Trading

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

There have already been regulatory restraint on the activity, much of which now have been fobbed off by banks to other entities. However, there is no real lessening of risk as a result.

It is difficult to delineate trading by banks for accounts and for themselves, as Mr, Volker knows from his experience.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Failing to Understand the Psychology of Regulations

Debacles happen 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 that most regulators and politicians fail to understand psychology that drives the way people affect everyday economics.

I have been asked. What would you do if you could, in practical terms, to get out of a recession?

Cut taxes permanently and watch how that creates jobs and spending because of the psychological uplift. Clear doubts for business and the consumer and natural instincts will resolve recessions before they fester into depressions.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.

Financial Meltdowns Are Often Man-Made

I have frequently commented on aspects of the 2008/2009 financial meltdown, and how the severity of this Great Recession could have been prevented, had there been a “hands-off” attitude by government. Instead, we got heavy-handed, ultra-expensive, administration attempts.

Those of you who have seen my  info will have insight on much of the situation.

I bring this up once more because the Federal Reserve’s easy money policy.

The Fed has allowed itself to become a tool of administration fiscal policy and shows little independent monetary policy for its intended purpose. It helps guarantee future financial upheaval for this country unless an effort is made politically to change matters. We cannot depend on the Fed.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Fed Financial Reform?

The government has given more power to the Federal Reserve but the agency has had excessive power up to now.

The assumed 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. The Dodd-Frank legislation has merely made it more impossible for big banks to fail. That spells out more senseless bailouts.

Want more information? (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Government Regulating of Banks

You can rely on a dependency difficult to get rid of when you accept government aid. The result becomes worse than an addiction. Even when you want to repay the debt.

For some of the larger banks who accepted funds from the U.S. the result was impractical and actually stupid.

Apart from the fact the bank management is controlled within a government straitjacket (which is a characteristic of a fascistic and not a capitalistic free government),  banks who accepted aid were restricted in how they pay bonuses and compensation to top executives.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Failure of Mathematical Financial Models

 

You probably have seen my comments on this subject many times in the past. They’re the result of my observing the successes, failures and foibles that I have noted on Wall Street.

One has to do with the study of failures of the many mathematical models that have been devised to reduce risk. 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 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.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Government Regulators Make Mistakes

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

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

Many supervisors and regulators within the system have different functions, with varying answers, from their observations. A human element governs what they feel must be accomplished.

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

Remember what I have said in the past about how better predictability futures markets anticipate events, as opposed to that of a small group of experts. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Post Office Should Teach a Lesson

The U.S. Postal Service loses well over $7 billion a year, over $240 billion estimated over the next ten years. A report from the Government Accountability Office says the Post Office's business model is not sustainable.

                           

Demand for conventional mail has been falling. First-class mail volume has declined about 20 percent since its peak in 2001. Even though the post office has cut staff and branches, it isn’t enough. While the post office is supposed to pay for itself, it has been covering its losses by borrowing from the Treasury. But it’s at its borrowing limit with the U.S. Treasury, plus unfunded pension and retiree health obligations and liabilities tops $90 billion.

                           

Wages and benefits account for 80 percent of Post Office expenses, exceeding those of other highly paid federal workers. To compound problems, about 85 percent of its postal employees are covered by union contracts which force the use of more full-time employees than are necessary; and restrict flexibility, outsourcing and layoffs.

                           

The Post Office pays more for employees health and life-insurance than most other government agencies.

                           

A lesson of what to eventually expect from all government-sponsored programs. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Investing in Bank Stocks

Bank analysts are never privy to inside banking operations. Example: complicated derivative portfolio information, or “repo” positions. In fact, they know little of the plain-vanilla type. And if they were privy, 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 sinks towards insolvency.

Rumors are often circulated 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.

There was a time when bank stocks were bought on the basis of book value, which can now be suspect, and dividends, which these days have been curtailed by governmental regulation.

Then the question arises of how secure is each bank’s capital, in our fragile economy?

Another reason why I believe in index funds. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Being a Smarter Financial Services Consumer

You can easily be a smarter financial services consumer without government assistance.

Always 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.

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

And learn how compound interest tables can be your magic instructors.

Anything the government gives you is actually your money, either in the form of direct or hidden taxes, or worthless currency down the road.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Investing in Life insurance?

The Non-Term, Whole Life form of life insurance combines life protection and savings at a fixed return. It’s an expensive form.

Sales pitches about tax deferred benefits behind whole life insurance can be misleading. Other secure investment options are available.

Whole life is not a true investment vehicle, despite any 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 earn far better returns. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Consumer Finance Suggestions by Uncle Sam?

The Administration feels a new behavioral concept can provide the consumer with what is best when shopping for complex financial products.

Especially when looking for 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 consumers, to take 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 will then get what the government thinks is good for you.

You can be certain that the threat of a lawsuit from an enterprising lawyer would drive away any other product from a financial institution. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Life Insurance Can Be Shopped

I have commented on life insurance in the past; term insurance is the cheapest form of protection per premium dollar, as it contains no savings function.

As for the cheapest protection you can get, policies today can be quickly-acquired, over the internet or by phone. No physicals are often required for plans up to certain dollar limits.

How do you get the best protection for your money?

Even though screening is currently computerized, bigger=dollar plans with no mandatory medical screening may be more expensive. If you’re healthy, why not pay less with more scrutiny for your coverage?

Shop around. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Investing in Bonds During Inflation?

The “experts” automatically tell you to avoid bonds when there’s a threat of inflation.

They  never get into the whole story, owing to ignorance or indifference.

Paradoxically, inflation could be an opportunity for potential purchases of low-cost bond mutual funds, or ETFs, 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. The message is an eye-opener.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Actual Investment Earnings

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

Prospective averages are wrong. Indexes on which they are based are skewed. In years past, companies that failed may not have been included in statistics that are now used; therefore past results are overly positive.

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

Thus, whenever you hear securities will bring you average returns, think again about what that number really is. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Public Pension Planning For Disaster

The assumed rate of return on pension funds of almost 60% of unionized American public workers is at 8.0%. This is currently almost impossible to get within any investment portfolio. 

Still the fund managers undertake fiduciary responsibility in the face of budget deficits. Moreover, future economic growth is unlikely, so the assumed return figure is even more unattainable.

Yet, the fantasy and façade continue; the public employee budget fiasco goes on. In fact, almost 20% of such public pensions blindly plan on average annual earnings well over 8% per year.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Attempting to Evaluate the Securities Market

Investing in the securities market is never simple. But you can simplify the process somewhat by specifying your aims. 

Financial media reports and suggestions often fail to make this point.

Are your goals short term or not? Are you takIng a proper consideration of age? What are your feelings about risks?

Consider the economy. We have been in more than an ordinary recession. It still may not bounce back for several years.

Inflation probably will become heavy within a couple of years. Economic stagnation and high inflation could easily stifle corporate profits. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)