Cleaning Up The Federal Reserve Board

The entire Federal Reserve system, that goes back almost a full century, has been corrupted by politics over the years and probably ought to be ended and reconstituted. But that will not happen because of politics.

Also, there should once more be some gold backing to our currency. This will add confidence the world-over to its use of the dollar as an international, convertible currency.

But a move is afoot to streamline it, action that makes sense. One is to remove the Fed's job to enhance full employment. This is impossible while it has to achieve its chief function of monetary management.

Also, the twelve regional bank board presidents ought to have voting power on the Federal Open Market Committee at all times. Now they rotate  their position and only the New York Fed bank president has a permanent seat on that important body.

As a result, you do not get a national consensus of banking influence in the Fed and there is often conflicting ideas on the Fed’s direction. Instead, that direction is influenced by Washington fiscal policy.(See the Earl J. Weinreb NewsHole® comments.)

Stop Beating Up on Speculators

Politicians who should know better but instead are primarily interested in harnessing votes for their next election are always using class warfare as a tool. The rich are a likely scapegoat, followed by “speculators.”

But speculators never really have a fundamental hand in pricing; the law of supply and demand does.

So-called speculators are investors who think prices will go up or down based on market conditions, and really facilitate market actions; they cannot control market exaggeration very long as other traders called arbitragers will even out those conditions.

But politicians are innately what they are, and the public continues to be misinformed by all the talk. (See the Earl J. Weinreb NewsHole® comments.)

The SEC’s Hypocrisy

The Securities & Exchange Commission is the arbiter of what constitutes fraud, though judges and juries at times will disagree.

The SEC will decide, for example, what constitutes financial no-no’s. Yet when they audit the antics of a Ponzi scheme and can find no fraud, they still have the audacity to rule on others who they claim are fraudsters.

I’ve always said that Ponzi schemes are usually easy to spot because the results being claimed by sponsor's are generally too rosy to be true.

Nevertheless, I cannot see how investors in Ponzi schemes can have their profits “clawed back” by bankruptcy trustees when their investments were given SEC periodic audit approval.

One further example; How can you possibly know that software that purports to be able to select securities for investment is acceptable, when deep research shows this type of research has basic flaws? Similar arbitrary advisories may be deemed ill-advised, as others pass the SEC arbitrary gauntlet. (See the Earl J. Weinreb NewsHole® comments.)

We Can All Become Frenchmen --If We’re Lucky?

Many politicians in this country would love to have the U.S. be more like France. Let’s face reality. however. It’s not all brie and wine over there.

Did you know France hasn’t had a budget surplus since 1978? Their debt is now over 85% of GDP and is rising steadily to Greece-like proportions, to well over 90% of GDP. Their tax burden is horrendous. In 2010 it was 42.5% of GDP and rising; one of the highest in Western society. The country now spends over 28% of its GDP on welfare and it’s planning more. 

No small wonder the debt shows up in high unemployment for Europe. It’s employment rate is under 63% compared to Germany’s 76.5% and Switzerland’s 83%.

That’s a lot for U.S. free-spenders to look forward to, with our own, ongoing trillion-dollar budget deficits. Our total worker percentage has been falling while unemployment figures appear to be falling as workers stop looking for non-existent jobs. (See the Earl J. Weinreb NewsHole® comments.)

Importance of Disciplined Strategy

 I have constantly investigated the discipline of strategy use. Discipline is much more essential than strategy usage and upsets the useless market timing plans of the overwhelming majority of investors, professionals as well as just amateurs.

Iron-clad discipline must be part of each strategy. The reason to buy a security has to be an integral part of the eventual reason to sell. That’s discipline. But it isn’t easy to maintain when you’re a Main Street investor having to contend with media noise.

That consists of the usual panoply of opinions, most of which are broker, “adviser,” or salesmen-oriented; inaccurate or biased. ( See the Earl J. Weinreb NewsHole® comments.)

There is Gold and There’s Also Other Gold

Purveyors of gold investments often sell one type without discussing various other forms that you can buy. Or whether everyone ought to be buying gold, even with inflation looming. The public never gets full information, nor the pros and cons of gold ownership.

After all, gold can be in bullion or bars, or coins. And if the latter, they can be rare, or bought just for content. In either instance, they must be stored for safety, and preferably insured.

Furthermore, gold values can be had in mining shares or in the form if mutual funds or ETFs.

There is lots of confusion, and the fear of not getting it exactly right. And I haven’t even gotten to whether gold pricing today is a bubble or not. (See the Earl J. Weinreb NewsHole® comments.)

Maybe We Ought to Stop Using the Term “Capitalism”

Through the ages we have used the strengths of capitalism to help create, broaden and strengthen our society. We have appreciated its advantages without directly attributing those advantages to the actual capitalistic principles.

Capitalism, after all, is nothing more than the use of free market principles, which  all of us use in our private lives to a great extent. Many who call themselves socialists use free market ideas in their everyday actions though they would be the last to realize they do.

It’s when we gave a name to the capitalistic system that we have had a problem. Yet the strengths of capitalism have helped create, broaden and strengthen society.

 while we have developed theories about its disadvantages. Thus, the ideas that “socialism” is superior or perhaps anarchy is best.

However, repeated attempts to initiate experimental socialistic-style government have failed; meanwhile capitalism has become a vulgar expression for many of its alleged enemies.

Furthermore, the ills we attribute to capitalism are never the fault of tampering done by government planners who use cronyism and bureaucratic “regulation” and other heavy-handedness. Much of which have nothing to do with capitalism, but lots to do with socialistic experimentation. (See the Earl J. Weinreb NewsHole® comments.)

Regulation is For Bureaucrats' Welfare

Government regulation is great for bureaucrats working at well-paid government jobs, as well as for consultants and lawyers with whom they must deal. Because regulation produces so much uncertainty it breeds more of the same and becomes an entangling maze-work that's an integral part of bureaucracy.

Dodd-Frank is a perfect example because those who objected to it from its birth already knew what was in store for the American economy. Parts have to be held up and will be repealed, especially diktats with regard to derivatives. If enacted, it would bring many financial operations to a halt. Dodd-Frank’s Consumer Financial Protection Bureau, reduces the availability of credit, and has become a paperwork fiasco. The list goes on. Stay tuned. ( See the Earl J. Weinreb NewsHole® comments.)

TIPS Are Not What They Seem

TIPS are bonds issued by the federal government through a bank, broker, or the Treasury, for five, ten and twenty year maturities. Their value grows to the extent of inflation. TIPS also are bought in mutual funds and ETFs.

Investors seek inflation protection more than interest, which is relatively low right now. With little current inflation, returns are insignificant. Potential inflation makes for their investor attraction.

State and local taxes do not apply on U.S. Treasury obligations. However, additional interest paid because of inflation will be subject to federal taxes.

But why buy them? I have never considered TIPS a valid bond inflation advantage, despite the mass of what I feel is publish-by-rote-publicity that TIPS receive in the financial media.

Moreover, you can get coming inflation protection elsewhere. Even with other bond funds, yielding much higher returns. The public has to learn how to use principles of “duration” which the media is remiss in ever fully explaining, (See the Earl J Weinreb NewsHole® comments.)

When Are Stocks Really Cheap?

The financial media from time to time reports when they feel stocks are cheap or not, based on a comparison with bonds.

They're usually confused because the bonds in this comparison are always Treasurys and not corporate, which have higher yields and contain an element of risk that Treasury bonds never have. So the comparison is skewed.

Their actual comparison is made with the earnings yield on stocks and the earnings yield on Treasurys. The comparison is on a relative basis over the years. Trying to determine whether this strategy is the key to success is a problem, however, when you look at results of its past use. (See the Earl J. Weinreb NewsHole® comments.)

You Can Compete With Big Companies

Ordinarily, it’s hard to compete in business with big companies. But you can with niche products and services that the big companies will not bother with. Operations too small to bother, may be just right for a business that may suit you and your start-up budget.

Sometimes, the products or services produced by a big company are found to be too small to produce meaningful earnings. They may then be spun off or sold or dropped entirely. Or the entire idea aborted early on. So, if you are an aspiring entrepreneur there are plenty of niche items or services you can investigate. (See Earl J Weinreb NewsHole® comments.)

Stay Away From Exotic Investments

Exotic investments are created primarily by Wall Street inside players to produce business for themselves, not make up an ideal investment for customers.

One example is a re-furbished fad of the past, selling packages made up of small-loans that borrowers find it hard to get from conventional sources. Investors go for this merely to gain a couple or more percentage points of earnings.

This appeals to unsophisticated investors who take on risk they should never have. (See the Earl J Weinreb NewsHole® comments.)

Independent Financial Authors

Many authors of how-to financial books are tied into Wall Street in some way. If they are not procuring their own advisory accounts, they are selling them for others. Some investment product. From only one point of view when there are pros and cons to every investment strategy I’ve ever investigated.

These authors could be offering the reader investment suggestion or brokerage services, whatever sells, once they get known through the book they have authored. They rarely cite actual independent research they have done or the reputable work of those without an axe to grind.

It’s fine to be a financial author with financial theories. Where’s the real research? (See the Earl J Weinreb NewsHole® comments.)

Market Timing's Steep Odds

I always discuss the foolishness of attempting to time buying and selling securities. Occasionally, investors can luck out in such efforts. But this success can only be accidental; most timers never get out at the highs they claim, nor back into the market in time.

They get media play, but check independent research and you find the market timers are generally not the success they purport to be. ( See the Earl J. Weinreb NewsHole® comments.)

Strict Government Regulation Of Financial Institutions Still is Not Working Well

Despite all the economy’s strangling legislation the government’s attempts at making the financial system more secure from a meltdown, similar to that of 2008-2009, has been a complete disaster. Nothing has been accomplished in seeing that large banks and insurance companies will not fail, that major hedge funds will not cause a domino avalanche of catastrophe. In fact, the too-big-to fail banks have gotten much larger.All we have received is a more stifling economy.

The Dodd-Frank Act and its Financial Stability Oversight Council is left with such tools as forcing banks to increase capital. An impractical effort, as I have repeatedly pointed out, based on past poor experience. (See Earl J Weinreb NewsHole® comments.)

Media Guru Market Direction Strategists

I’m amused by media gurus who are paid millions each year by their financial institutions to prognosticate market direction, and the media who love to pick up and hype the chatter.

Does it really matter to the average investor, for example, if stocks “are in” for the near future, while bonds “are out”? The gurus are not too accurate anyway.

It does for traders but never for investors who know the poor odds they have when trading stocks or bonds and know the principles of duration when holding bonds.(See the Earl J Weinreb NewsHole® comments.)

Raise Tax Rates and Reduce Tax Revenue

It’s there for all to see; those who want to raise taxes and those who don’t. Yet, we have the ongoing political debate. The numbers themselves do not lie; politicians do.

Fact: Lower the tax rates and revenues will generally increase. Look at what has happened whenever this has occurred in the U.S. for the past 40 or so years while the political debate has raged.

Fact: Politicians use the higher tax debate to implement class warfare. There’s an element of envy where lower income folks want those who have higher income pay a higher rate, and politicians on the left take advantage of the envy. (See Earl J Weinreb NewsHole® comments.)

Poor- Odds Currency Trading

Despite the steep odds against success, many average retail traders persist in conducting personal currency trades. At one foreign currency trading broker, over 70% of customer accounts were found to be unprofitable over a twelve month period, ending in early 2012.

One of the risk factors is the 50 to 1 leverage factor. That means, $20,000 in cash can expose a $1 million risk. The temptation is great and the thrills are immense, but I can’t see the logic for an average investor. (See the Earl J Weinreb NewsHole® comments.)

The Financial Growth Future We Truly Face

From the end of World War II to 2007, the U.S. averaged financial growth of about 3.2% a year’ That means it would double about every 22 years.

This time it’s different. The real current GDP is running under 2% a year. But to keep America’s growth on its historical path and maintain a viable middle class, we need growth of well over 4% a year average GDP, significantly more to wipe out the huge budget deficit.The latter debt will actually dampen GDP prospects. (See the Earl J Weinreb NewsHole® comments.)

From the end of World War II to 2007, the U.S. averaged financial growth of about 3.2% a year’ That means it would double sbout every 22 years.
This time it’s different. The real current GDP is running under 2% a year. But to keep America’s growth on its historical path and maintain a viable middle class, we need gowth of well over 4% a year average GDP.significantly more to wipe out the huge budget deficit.The latter debt will actually dampen GDP prospects. (See the Earl J Weinreb NewsHole® comments.)

The Financial Media’s Idea of Risk-Reward

The financial media’s idea of risk-reward is generally nebulous and may be made more complex with such mention of technical terms as the Sharpe ratio, which I have referred to on a number of past occasions in books and commentaries.

But the idea that taking risk will add to income, is of little comfort to most average investors. What it does is imbue them with false hope that just taking risk will add up positively for them over the longer-term. This is a misreading of the Sharpe and other research and what I have done over decades in evaluating over 1,500 commonly used investment strategies.

It also adds the danger of actually decreasing the odds that hey will be successful. (See the Earl J Weinreb NewsHole® comments.)

Using Trading Strategies

The purpose of my investigations of literally over a thousand independent studies of strategies and investing techniques has helped me delve into ways to simplify investment techniques and permit a more successful approach to trading and investing.

Not all the panaceas that you usually read and hear about are as they are reported by the media.

I have found from experience that the average investor, as opposed to pros, does well by avoiding trading extremes. That’s possible by sticking to a disciplined, favorite strategy and then forgetting daily market prices. You don’t need constant financial news, unless your investment strategy calls for it. Relatively few strategies do. ( See the Earl J. Weinreb NewsHole® comments.)

How Smart Are The Financial Experts?

The Dodd-Frank Act a couple of years ago doubled down on regulations that affect the American economy, particularly the banks. With the latter, the regulators hope that banks do not fail and cause a domino effect, dragging down the entire financial structure as well.

The regulators’ idea of the soundness of a bank vary often from that of the individual banks themselves. Banks add to their basic capital in various ways but when the official tests are made by government the results generally fall short of bureaucratic recommendations.

Yet, the whole exercise is useless. Banks got into lots of trouble in 2008-2009 for reasons other than basic capital to back-up loans. I have written in the past about the silly notion of imposing mark-to-market accounting, for example, in illiquid markets. (See the Earl J Weinreb NewsHole® comments.)

How to Streamline and Improve Your 401(k)

It’s important to remember some basic principles about your 401(k) that apply to all your investments.

Invest in the lowest cost, diversified investments offered. Try to opt for indexed funds and avoid heavy advisory fees. A program that provides lots of free or cheap stock trades is doing you no favors; it’s merely throwing temptations in your path for undisciplined trading that will guarantee you losses or diminished returns over the longer-term.

And be sure the managed cost of your 401(k) account is low. Those also will mount up. (See the Earl J Weinreb NewsHole® comments.)

An Overlooked Deep Recession

To those of you who bewail how tough the 2008-2009 meltdown has made recovery prospects, look at past financial recessions and their recoveries.

Fact: The sharper the recession, the sharper the recovery. Despite the excuses if poor economic policies help thwart the subsequent recoveries.

Example: In 1920-1921, the economy or GDP fell almost 24%, wholesale prices over 40% and the Consumer Price Index over 8%. Unemployment went to about 14% from 2%. However, the Treasury balanced the budget, the Fed tightened up, in direct opposition to current U.S. Policy.

The economy came roaring back. (See the Earl J Weinreb NewsHole® comments.)

The Ignorant Use of Treasury I Bonds

Treasury I bonds offer fixed return plus inflation adjustment. Their maturities are for 5, 10 and 30 years. However, despite all the hullabaloo about them, you can buy only $5,000 a year per social security number.

Inflation adjustments are made twice a year for interest rate changes in the Urban Consumer Price Index The interest accrues until the bond is redeemed. But taxes are imputed by Uncle Sam on a current basis, not when the bonds mature.Therefore, I Bonds should be better held in tax-deferred accounts; inflation adjustments are also taxed.

I say the use of Treasury I Bonds is ignorant because conventional bonds offer inflation protection PROVIDED you employ duration principles. The media, however, does a poor job of reporting duration education. (See the Earl J Weinreb NewsHole® comments.)

Use Advisers For Low Earning Investments??

I have always pointed out disadvantages of the expensive use of financial advisers. When they take 1% to 1 1⁄2% of assets on investments, for advice on investments that yield 3%, you’ve started investing at a major disadvantage.

Example: For every $100,000 managed, your fee of 1 1/2% works out to $1,500 but you have earned 3% or $3,000. That fee is 50% of your income.(See the Earl J.Weinreb NewsHole® commentaries.)

Holding Junk Bonds or Treasury Bonds

Junk bonds give an advantage in interest return over U.S. Treasury bonds. The government issue is the best grade available and the corporate variety is of lower rating.

The spread of return between the two makes up for the risk; the difference varies all the time; it may be as low as 2% or 3% points at times or as high as 20% points as it was in mid-2008.

The spread depends on the outlook for the economy, the predicted default rate for the lower-grade issues, which is built into the pricing, and other economic conditions.

The question? Is the risk worth taking? Many times it is. When you examine the extra return and factor in returns AFTER diversifying the risk. You diversify with low-cost mutual funds, particularly when you use smart duration principles.(See the Earl J. Weinreb News hole(r) Commentaries.)

Stock Returns

Stocks have returned about 7% above the rate of inflation for the past two hundred years. And in twenty year periods, they have outperformed bonds about 90% of the time. Yet, that figure is misleading.

These statistics conceal important facts. Someone who had invested at the market peak in 1929 would have had to wait until 1998 to reach a return of 10% on their money. (That would include dividends.) This is an after-inflation yearly return of 7%. Actual returns will differ greatly, depending on the time you actually begin investing in the market.

An S & P 500 investor from 1929 through 1949 received an after-inflation return of about 4.5%. An S & P 500 investor starting in 1932, and holding on until 1951, received an after-inflation annual return of about 10.8%. That works out to over 6% more per year. (See the Earl J Weinreb NewsHole® comments.)

How Specific is the Dow Index?

We discuss the Dow stock index and compare it from year to year as if it were a firm standard of measurement.It’s not. For many reasons. Here are two:

The securities that make up the indices change from time to time; some companies are eliminated, others are added.

Secondly, the use of relative terms of the Dow high and lows also don’t include inflationary influences; the value of the dollar used to determine value has changed. (See the Earl J Weinreb NewsHole® comments.)

Alternate IRA Investment Options

Be careful of what you put into an IRA account. For many reasons other than what returns you may get and the usual risk factors you must observe.

Folks hear about alternate types of unusual investments they can make, by reading the financial pages and ads and hearing new ideas from radio and TV and from friends and others. Such as buying gold as bullion or coins, or investing in timber or farmland, or even cattle; the latter in the form of limited partnerships or trusts.

But careful arrangements have to be made for annual asset value appraisals when investing in illiquid programs, as annual IRA distributions will eventually be required and income taxes expected to be paid. The lack of liquidity and report accuracy can become a major problem. (See the Earl J Weinreb NewsHole® comments.)