"The number one problem in today's generation and economy is the lack of financial literacy." - Alan Greenspan
"We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and become financially literate." - Robert Kiyosaki
I find it very amusing that the first quote was from one of the all time economic monkeys Alan Greenspan. He will however be outdone by the 800 pound Gorilla that is Ben Bernanke but that will be left to history to tablet. These two so called financial experts are driving the economy to the brink of failure and so how is it possible for the average Joe to understand the financial landscape? Well I do not plan to answer that question today (other than to advise you to keep reading my blog) but what I do want to bring to the forefront is that getting to grips with financial literacy is critical to your future.
In the good old days (and I mean old as it was even before my time) people would go to work and stay put for decades. The result of this loyalty was that a defined benefit pension plan was provided. A defined benefit pension plan is one where the company shoulders the responsibility of ensuring that your retirement proceeds do not run out prior to your life. They pay a set amount to you every month and often linked this to a measure of inflation so that once you leave the company you are set. Over time these have been eliminated and in fact many were cut completely during bankruptcy proceedings, so if you are still on one of these I advise you to plan for the worst as I would imagine that this will be cut at some point in the very near future.
At present the only places that these antiquated systems can be found are governments and educational facilities. These places continue to offer these perks in order to attract talent and because they are able to fund the obligations with other people's money - namely yours and mine! The problem with these plans is that life expectancy is increasing at a rapid clip and these plans are going to sink governments the world over so it is just a matter of time before all of these plans have to change. Once again I am not going to delve any deeper into this topic but suffice it to say that for the majority of us we will retire with no benefit other than our savings and the reminder may find that their retirement plans are suddenly thrown into turmoil at a time when they can least afford it.
Our savings is the modern retirement plan, termed the defined contribution plan. In these plans you contribute to your retirement and if you are lucky your company adds to that amount. When you retire, whatever the balance in that plan plus your other assets outside of the plan less any debt is what you have to live on for the remainder of your life. Some people rely on another government program, social security, but this is also a form of defined benefit that will also have to be trimmed in the very near future if the solvency of the United States is to be taken seriously so I do not expect much from this either.
So as the burden of retirement falls squarely on your shoulders if you are not financially literate then you are in trouble. Now for this blog financial literacy does not mean that you need to understand every trading option or new derivative technique developed yesterday by some MIT hotshot, what it means is that you have to have the wherewithal to be able to make investment decisions that will define your retirement.
In most cases you will rely on the input from a financial planner or some other form of financial expert but they can only take you to the water trough. The decision to drink will always be left up to you as you are the only person that can truly evaluate whether the investment being presented fits within your risk tolerance and meets your retirement objectives. Furthermore, while some financial experts know a lot about finance I can assure you that they do not know everything. Take me for an example, I have traded pretty much everything over 30 years and have studied all kinds of markets and private equity my entire life but I am no expert in tax or annuities to name a few areas of weakness. What I do know however is how to determine when to make changes to my portfolio and evaluate what is presented so that I can ensure it works for me and this is the skill that you need to develop.
Studies have shown that the elderly and females have the lowest levels of financial literacy but this is not to say that high net worth males get off as financially literate. I have met many a high net worth individual who believes that they understand finance when in truth they are just too afraid to admit that they have no clue. Often times these people pile all their eggs into one basket (as this is the only one that they understand) and when it works they believe that they are now set however they are only one bump in the road away from ruin. Rather take the honest route and begin to work on your weakness than dig a hole in the sand and stick your head in it as I for one do not like the view that would present and neither should you.
With so much on the line and in such a rough investment environment as the one in which we now live it is critical to do your homework. Find a number of trusted advisers that have your best interest in mind but always remember that the final decision is yours and yours alone. Turning your financial future over to someone with the thought that they will look after it like you will is not an option and will more than likely result in financial despair right at the time you need to rely on your finances most.
Wednesday, June 26, 2013
Friday, June 21, 2013
How Quickly Things Change
"My other piece of advice, Copperfield,' said Mr. Micawber, 'you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and - and in short you are forever floored. As I am!" - An excerpt from Charles Dickens' David Copperfield
It seems like an eternity ago that the bulls were pushing the markets to record highs. Three days later and everyone is wondering if this is the beginning of the end. All of this over the most recent federal reserve comments that they would begin to reel in their massive quantitative easing program. Note that they did not say that they would stop and also note that they did not say that they would slow down today, all they said was that it would be appropriate to moderate the pace of asset purchases later this year if incoming data supported the Fed's projections for continued improvement in the economy. Bernanke also said, that it was possible the program could come to an end by the middle of 2014 if substantial improvement in the labor market (viewed as a 7.0% unemployment rate, surprising how quickly this number has moved higher) has been achieved. Should the data show poor economic prospects then the Fed will continue to print.
So let's see, if the economy is weak then they will continue to support and market's can go back to new highs. If the data is good, then they will remove their support and the market tanks! I could not make that up if I tried. If that makes no sense to you then at least you are thinking rationally.
Taking a look at the market reaction it is clear that it needs the support to operate. Yields on the 10-year note spiked to just below 2.5% taking the builders down with its rise. The housing market is still tentative and this small rate increase was enough to spook the market and demolish building stocks. Think about that, rates move to 2.5% and this move took building stocks down 12% in three days! If you want another analogy I received some research the other day that showed that in 2006 when the Japanese central bank tapered their quantitative easing program and rates in Japan moved from 1.5% to 2.5% their market fell over 20%. If rates here reach anywhere near to 3.00% I would imagine that the same thing would be felt here.
It will be very interesting to see what the Federal Reserve does now as it is clear that their support is what is keeping the market buoyant. Already a statement has come from has come from the St. Louis Fed President James Bullard saying that the committee's authorization allowing the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The question is when is the appropriate time? As the markets are so tethered to the Fed any reduction in their support will result in a nosedive no matter when it is announced. If they truly think that they can time it so that the market is perfectly priced based on economic outlook and that they can slip out of the back door without the market noticing then they are smoking something really strong that is certainly considered illegal in California.
As I have mentioned before and I will mention it again, the market is being manipulated by the Federal Reserve, they have a history of thinking that their policies are helping when all they are doing is creating a larger problem, increasing debt levels has never resulted in economic prosperity and they will never have the ability to exit the market without there being carnage. You have seen some of it this week and while I am not ready to call the recent highs a top, it certainly smells like one. Best stick with the advice of Mr. Micawber.
It seems like an eternity ago that the bulls were pushing the markets to record highs. Three days later and everyone is wondering if this is the beginning of the end. All of this over the most recent federal reserve comments that they would begin to reel in their massive quantitative easing program. Note that they did not say that they would stop and also note that they did not say that they would slow down today, all they said was that it would be appropriate to moderate the pace of asset purchases later this year if incoming data supported the Fed's projections for continued improvement in the economy. Bernanke also said, that it was possible the program could come to an end by the middle of 2014 if substantial improvement in the labor market (viewed as a 7.0% unemployment rate, surprising how quickly this number has moved higher) has been achieved. Should the data show poor economic prospects then the Fed will continue to print.
So let's see, if the economy is weak then they will continue to support and market's can go back to new highs. If the data is good, then they will remove their support and the market tanks! I could not make that up if I tried. If that makes no sense to you then at least you are thinking rationally.
Taking a look at the market reaction it is clear that it needs the support to operate. Yields on the 10-year note spiked to just below 2.5% taking the builders down with its rise. The housing market is still tentative and this small rate increase was enough to spook the market and demolish building stocks. Think about that, rates move to 2.5% and this move took building stocks down 12% in three days! If you want another analogy I received some research the other day that showed that in 2006 when the Japanese central bank tapered their quantitative easing program and rates in Japan moved from 1.5% to 2.5% their market fell over 20%. If rates here reach anywhere near to 3.00% I would imagine that the same thing would be felt here.
It will be very interesting to see what the Federal Reserve does now as it is clear that their support is what is keeping the market buoyant. Already a statement has come from has come from the St. Louis Fed President James Bullard saying that the committee's authorization allowing the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The question is when is the appropriate time? As the markets are so tethered to the Fed any reduction in their support will result in a nosedive no matter when it is announced. If they truly think that they can time it so that the market is perfectly priced based on economic outlook and that they can slip out of the back door without the market noticing then they are smoking something really strong that is certainly considered illegal in California.
As I have mentioned before and I will mention it again, the market is being manipulated by the Federal Reserve, they have a history of thinking that their policies are helping when all they are doing is creating a larger problem, increasing debt levels has never resulted in economic prosperity and they will never have the ability to exit the market without there being carnage. You have seen some of it this week and while I am not ready to call the recent highs a top, it certainly smells like one. Best stick with the advice of Mr. Micawber.
Friday, June 14, 2013
Tax OR Print
"Did you ever notice that when you put the words "The" and "IRS" together, it spells "THEIRS?" ~Author Unknown
"I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money." ~Arthur Godfrey
"Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?" ~Peg Bracken
It is a well known fact that governments around the world are printing money in various forms and that the increase in the liability associated with this stimulus is a major cause for concern. The reason for the printing is two fold; stimulate the economy and finance the massive government deficits. If governments balanced their budgets then a large portion of the money printing would not be required. Further still, there is a good probability that these austere governments would be rewarded with AAA credit rating and a burgeoning economy. Due to the complex nature of including this side of the equation today's blog will look at the funding side of the equation. Besides it appears slowing spending is a moot point as austerity (particularly in the US, Britain and Japan) is not going to happen any time soon, if ever.
So turning my attention to the income side of the equation governments have two options; print money or raise taxes until they balance the budget. Each has its pitfalls and benefits so let's look at these in turn. When considering the printing option the first thing to assess is does the government have the economic strength to support printing? The ability to print is obviously available to every country, all you need is paper and a printing press, but the economic strength is not. Take as an example Zimbabwe or Germany in the 30's, neither of these countries had the economic strength to print money but they had the ability to print and they did. The result was massive inflation and a currency that cratered causing massive unemployment and a crippled economy.
Currently the US, Britain and Japan have the economic strength to print but at some point when the debt level exceeds that economic strength, more printing results in the same parabolic nose dive. The question is when is the tipping point reached and the answer is that nobody knows. Studies have been done showing that at levels of debt above 100% of GDP there is a drag on the economy (termed crowding out), but Japan's debt is north of 200% and climbing and still investors believe in their ability to manage the debt.
So how do investors monitor this ability to manage the debt? It is dependent on their confidence in the economic benefit of the stimulus. If the money being printed is used in a responsible manner and in a way that leads to economic growth then in reality you could keep printing way beyond 200% of GDP. Think of it as a growth stock. You are prepared to pay far more for a company that is growing quickly versus one that is stagnant for the simple reason that the outlook is favorable and earnings will catch up to the valuation. In the same way investors will continue to loan money to governments that show the ability to use that money with good effect.
If on the other hand the money is wasted then watch out below as the result will be a weak currency, high interest rates and massive inflation. In all honesty it is looking more and more like Japan has run out of time as while investors have bought into the "new" strategy it does not appear that there is the subsequent improvement in the economy. Remember that investors will require the benefit to be felt in a fairly short period of time before their faith will wane creating the pain described above. Once again back to the growth stock analysis. A high flying stock with a high price to earnings ratio will lose value quickly if it misses earnings as not only is the outlook mired but the earnings ratio will shrink to a more "normal" level, a double hit to the stock price.
So if money printing has a finite life governments will have to turn to taxation. Taxation shifts the burden of the deficit from bond investors to local earners. The decision right now is clear, do not tax the earners as the level of pain that will be inflicted onto them is so great that when elections come around the incumbents will be booted. The benefit to this strategy though is that while there is short term pain it is expected to be relatively short and in the long run far less painful. The reason for the shorter duration and lower long term pain is that if for example the tax rate was raised say to 75% it would not take long for earners to force the government to become more frugal. While this could take a few years, government spending would be brought very quickly under control or a new government would be elected that would bring spending under control. Furthermore a balanced budget would attract investment and strengthen the currency and economy which would result in a reduction in the rate of tax. The downside is that raising taxes at the present time is not only political suicide but would drive the economy into a recession and this is something that no politician or central banker wants to consider.
So while it continues to function (I was going to say work but it never has, never will and is not working right now) we are stuck financing the deficit by printing money but the risks are huge as once investors lose their patience and shun the investment there will be no way out other than serious pain. Is that tipping point coming soon or never? If you believe the bulls then it is never coming but in all reality when was the last time that a group of politicians steered us in the right direction, so putting your faith in them seems destined for failure.
"I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money." ~Arthur Godfrey
"Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?" ~Peg Bracken
It is a well known fact that governments around the world are printing money in various forms and that the increase in the liability associated with this stimulus is a major cause for concern. The reason for the printing is two fold; stimulate the economy and finance the massive government deficits. If governments balanced their budgets then a large portion of the money printing would not be required. Further still, there is a good probability that these austere governments would be rewarded with AAA credit rating and a burgeoning economy. Due to the complex nature of including this side of the equation today's blog will look at the funding side of the equation. Besides it appears slowing spending is a moot point as austerity (particularly in the US, Britain and Japan) is not going to happen any time soon, if ever.
So turning my attention to the income side of the equation governments have two options; print money or raise taxes until they balance the budget. Each has its pitfalls and benefits so let's look at these in turn. When considering the printing option the first thing to assess is does the government have the economic strength to support printing? The ability to print is obviously available to every country, all you need is paper and a printing press, but the economic strength is not. Take as an example Zimbabwe or Germany in the 30's, neither of these countries had the economic strength to print money but they had the ability to print and they did. The result was massive inflation and a currency that cratered causing massive unemployment and a crippled economy.
Currently the US, Britain and Japan have the economic strength to print but at some point when the debt level exceeds that economic strength, more printing results in the same parabolic nose dive. The question is when is the tipping point reached and the answer is that nobody knows. Studies have been done showing that at levels of debt above 100% of GDP there is a drag on the economy (termed crowding out), but Japan's debt is north of 200% and climbing and still investors believe in their ability to manage the debt.
So how do investors monitor this ability to manage the debt? It is dependent on their confidence in the economic benefit of the stimulus. If the money being printed is used in a responsible manner and in a way that leads to economic growth then in reality you could keep printing way beyond 200% of GDP. Think of it as a growth stock. You are prepared to pay far more for a company that is growing quickly versus one that is stagnant for the simple reason that the outlook is favorable and earnings will catch up to the valuation. In the same way investors will continue to loan money to governments that show the ability to use that money with good effect.
If on the other hand the money is wasted then watch out below as the result will be a weak currency, high interest rates and massive inflation. In all honesty it is looking more and more like Japan has run out of time as while investors have bought into the "new" strategy it does not appear that there is the subsequent improvement in the economy. Remember that investors will require the benefit to be felt in a fairly short period of time before their faith will wane creating the pain described above. Once again back to the growth stock analysis. A high flying stock with a high price to earnings ratio will lose value quickly if it misses earnings as not only is the outlook mired but the earnings ratio will shrink to a more "normal" level, a double hit to the stock price.
So if money printing has a finite life governments will have to turn to taxation. Taxation shifts the burden of the deficit from bond investors to local earners. The decision right now is clear, do not tax the earners as the level of pain that will be inflicted onto them is so great that when elections come around the incumbents will be booted. The benefit to this strategy though is that while there is short term pain it is expected to be relatively short and in the long run far less painful. The reason for the shorter duration and lower long term pain is that if for example the tax rate was raised say to 75% it would not take long for earners to force the government to become more frugal. While this could take a few years, government spending would be brought very quickly under control or a new government would be elected that would bring spending under control. Furthermore a balanced budget would attract investment and strengthen the currency and economy which would result in a reduction in the rate of tax. The downside is that raising taxes at the present time is not only political suicide but would drive the economy into a recession and this is something that no politician or central banker wants to consider.
So while it continues to function (I was going to say work but it never has, never will and is not working right now) we are stuck financing the deficit by printing money but the risks are huge as once investors lose their patience and shun the investment there will be no way out other than serious pain. Is that tipping point coming soon or never? If you believe the bulls then it is never coming but in all reality when was the last time that a group of politicians steered us in the right direction, so putting your faith in them seems destined for failure.
Friday, June 7, 2013
Don't Fight The Fed
"Never underestimate how wrong the consensus crowd can be." - Wall Street Adage
There is an old saying on Wall Street that you should never fight the Federal Reserve. They are just too powerful and have too many tricks to bet against. For this reason as the Federal Reserve wants the stock market to rip higher it will so you might as well jump on the bandwagon and run with the bulls. Having lived this for decades it was very interesting to me to read and article published by John Hussman showing that the largest financial melt downs occur when the Fed is tinkering with the market and trying to manipulate prices.
It turns out that during these times stock prices have had a maximum of a 55% draw down while the worst draw down during non accommodative Fed policies was only 33%. Hussman goes on to explain that the turn down occurs when the Federal Reserve accommodative policies can no longer provide benefit in the form of lowering interest rates further. It turns out that while the Federal Reserve is lowering rates that the market performs at an average rate of return of 13.5% versus 8.8% when monetary policy is not favorable. So there is a benefit but the problem is that the benefit disappears quickly once the effect of the stimulus wears off.
The next thing to mention on this is that while the stock market has appreciated dramatically over the past number of years only 10% of the citizens of the United States have benefited. Taking a look at the total worth of the United States it has finally exceeded the previous high. This is due largely to the stock market move but while the net worth is higher in total the majority of the citizens have a net worth that is less than 70% of what is was prior to the Great Recession. This means that the wealthy have made a boatload while the less privileged continue to struggle.
With this in mind it is clear that while the wealthy have benefited the Federal Reserve policies are flawed. Furthermore the benefit seen in the unemployment numbers recently are skewed as while it was reported that 165,000 new jobs were created, 228,000 of them were part time, meaning that full time workers lost 63,000 jobs! That is not success and this is starting to show up in the poor numbers being published by the tech and retail companies. Meanwhile the banks are making more money than they know what to do with as they are being given the golden hand shake by the Fed.
These are numbers to follow closely as it certainly appears that the power of the Fed to manipulate interest rates is waning and with it the market appears to be teetering on the edge of a significant pullback. As with today though there will be a push to save the one metric that is working so I would not be surprised to see a follow through rally coming next week but do not get too over zealous as another Wall Street adage says; "What the wise do in the beginning, the fools do in the end."
There is an old saying on Wall Street that you should never fight the Federal Reserve. They are just too powerful and have too many tricks to bet against. For this reason as the Federal Reserve wants the stock market to rip higher it will so you might as well jump on the bandwagon and run with the bulls. Having lived this for decades it was very interesting to me to read and article published by John Hussman showing that the largest financial melt downs occur when the Fed is tinkering with the market and trying to manipulate prices.
It turns out that during these times stock prices have had a maximum of a 55% draw down while the worst draw down during non accommodative Fed policies was only 33%. Hussman goes on to explain that the turn down occurs when the Federal Reserve accommodative policies can no longer provide benefit in the form of lowering interest rates further. It turns out that while the Federal Reserve is lowering rates that the market performs at an average rate of return of 13.5% versus 8.8% when monetary policy is not favorable. So there is a benefit but the problem is that the benefit disappears quickly once the effect of the stimulus wears off.
The next thing to mention on this is that while the stock market has appreciated dramatically over the past number of years only 10% of the citizens of the United States have benefited. Taking a look at the total worth of the United States it has finally exceeded the previous high. This is due largely to the stock market move but while the net worth is higher in total the majority of the citizens have a net worth that is less than 70% of what is was prior to the Great Recession. This means that the wealthy have made a boatload while the less privileged continue to struggle.
With this in mind it is clear that while the wealthy have benefited the Federal Reserve policies are flawed. Furthermore the benefit seen in the unemployment numbers recently are skewed as while it was reported that 165,000 new jobs were created, 228,000 of them were part time, meaning that full time workers lost 63,000 jobs! That is not success and this is starting to show up in the poor numbers being published by the tech and retail companies. Meanwhile the banks are making more money than they know what to do with as they are being given the golden hand shake by the Fed.
These are numbers to follow closely as it certainly appears that the power of the Fed to manipulate interest rates is waning and with it the market appears to be teetering on the edge of a significant pullback. As with today though there will be a push to save the one metric that is working so I would not be surprised to see a follow through rally coming next week but do not get too over zealous as another Wall Street adage says; "What the wise do in the beginning, the fools do in the end."
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