Archives For April 2011

From page 10 of Jeffrey Hirsch’s Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It* comes this quote regarding inflation:

The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) has tweaked and manipulated the Consumer Price Index (CPI) so many times over the past 30 years or so in an attempt to mask inflation that the indicator may very well not detect a true upsurge in inflation in the years ahead. No one is really sure how this new and improved version of the CPI will react in a hyperinflationary environment. We may see a 40 percent to 50 percent increase in the CPI—or we may see another 200 percent rise.

From page 119 comes this:

Since September 11, 2001, through the most recent November reading of the CPI, the inflation index is up a meager 23 percent. Having made numerous trips to the market and gas station over the past decade, it is simply unimaginable that prices are only up 23 percent. Energy costs have doubled, if not tripled. Medical costs have shyrocketed.

No kidding!

He goes on…

The price of an ounce of gold (in U.S. dollars) and the New York Futures Exhcange Commodity Research Bureau (NYFE CRB) Index are better indicators of the prices consumers actually pay for daily necessities.

Since 2001 gold is up 402 percent and the CRB is up 230 percent. Much of these moves could be in response to a weakening dollar. From its July 2001 peak to the November 2009 low, the U.S. Dollar Index (USDX) had shed nearly 40 percent of its purchasing power—another strong argument that inflation is much higher than the CPI calculated 23 percent.

His hedge for inflation is stocks. Not gold or silver. Stocks.

*Affiliate Link

Today’s WSJ contained an opinion piece by Alan Blinder trashing Paul Ryan’s Budget Plan. At the end of these opinion pieces is usually a little blurb about the author. This is what it said about Mr. Blinder:

“Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.”

I wasn’t satisfied with this so I Googled Mr. Blinder’s name and this is what I found on Wikipedia:

Blinder has served as the Deputy Assistant Director of the Congressional Budget Office (1975), on President Bill Clinton’s Council of Economic Advisors (Jan 1993 – June 1994), and as the Vice Chairman of the Board of Governors of the Federal Reserve System from June 1994 to January 1996. As Vice Chairman he cautioned against raising interest rates too quickly to slow inflation, because of the lags in earlier rises feeding through into the economy. He also warned against ignoring the short term costs in terms of unemployment that inflation-fighting could cause.

Blinder was an early advocate of a “Cash for Clunkers” program, in which the government buys some of the oldest, most-polluting vehicles and scraps them. In July 2008, he wrote an article in The New York Times advocating such a program, which was implemented by the Obama administration during the summer of 2009. Blinder asserted it could stimulate the economy, benefit the environment, and reduce income inequality. The program was both praised for exceeding expectations, and criticized for economic and environmental reasons.

In other words, Mr. Blinder is SLIGHTLY biased. Heck, even called Obama’s deficit reduction ideas a “huge improvement over the Ryan plan.”

Okay, so let’s look at what Mr. Blinder said in his piece.

Regarding Ryan’s projections for the budget as a percentage of GDP:

… follow the numbers out for decades, and the Ryan plan does turn into a lion. The CBO’s scorekeeping shows federal spending under the House Republican budget falling to just 14¾% of GDP in 2050. (It’s now 23¾%.) That sounds great—until you think about it.

For openers, the last time federal spending was that small a share of the economy was 1951—before Medicare and Medicaid, before the Departments of Health and Human Services, Housing and Urban Development, Education, Energy, Transportation, Veterans Affairs, and Homeland Security. You get the idea.

Mr. Blinder speaks as if all these departments are necessary. Ironically, it’s HUD that had a hand in the creation of the credit crisis. There’s no doubt in my mind that the government DOES need to be smaller. It’s the government’s size that is the reason we are in the mess that we are in.

I Saw This on Facebook…

April 18, 2011

I saw this on facebook this morning and thought this was kind of humorous:

“Give back…”

Question: What did they take that would require them to give back?

I never thought much about the phrase “give back,” until AFM reader, Jack, said something about it a few months ago.

Oh, and if people want to “give back” they can do so. No one is stopping them from donating to charity or even sending extra money to the IRS.

From this morning’s WSJ: The 30-Cent Tax Premium.

Arthur Laffer claims that all the compliance and work that goes into paying our federal income tax, adds 30-cents to each dollar paid in taxes. He calls it a compliance markup.

His solution (which sounds like what I have been advocating):

A tax reform to a simple flat-rate tax with no deductions would significantly reduce the current complexity inherent in our progressive tax system, which is full of loopholes, exemptions and special interest carve-outs. Based on the estimates from our new study, if a static, revenue-neutral flat-tax reform were to reduce the tax complexity in half, the long-term growth in our economy would increase by around one-half of 1% per year.

Here is what Laffer says we could expect if we had a simpler tax code:

…consider a family that made $40,000 in the year 2000. If their income grew by 3.2% per year, the average long-term GDP growth rate, their income by 2010 would be $53,110. Now imagine that the growth in the family’s income was not 3.2% but 3.72% (the impact from halving the costs of our current complex tax system). Under this higher growth scenario, the family’s annual income would have been $55,568 in 2010.

Finally, I thought this sentence was interesting:

Without diminishing in any way the professionalism of tax attorneys, accountants and financial planners, all of these efforts produce nothing other than, well, tax compliance.

I have often wondered if the tax prep industry has lobbied for the status quo, knowing that any simplification of the tax code would mean reduced revenues to them. Afterall, it is interesting that that tax code only seems to get more complicated as the years progress.

I found the transcript for Obama’s deficit speech. You can read it here.

Interesting snippets:

…after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program—but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts—tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

…by the time I took office, we once again found ourselves deeply in debt and unprepared for a Baby Boom retirement that is now starting to take place. When I took office, our projected deficit was more than $1 trillion. On top of that, we faced a terrible financial crisis and a recession that, like most recessions, led us to temporarily borrow even more. In this case, we took a series of emergency steps that saved millions of jobs, kept credit flowing, and provided working families extra money in their pockets. It was the right thing to do, but these steps were expensive, and added to our deficits in the short term.

Short term? Seriously?

Oh, and then there’s this little tidbit:

There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires.

Let me be clear: TAX CUTS ARE NOT SPENDING! President Obama acts as if the government owns it all and we the taxpayers are lucky to get anything. Maybe he doesn’t think that way but his equating tax cuts leads me to think otherwise.

The Wall Street Journal had this to say about Obama’s plan to tax those with higher incomes in their Review & Outlook column yesterday:

Under the Obama tax plan, the Bush rates would be repealed for the top brackets. Yet the “cost” of extending all the Bush rates in 2011 over 10 years was about $3.7 trillion. Some $3 trillion of that was for everything but the top brackets—and Mr. Obama says he wants to extend those rates forever. According to Internal Revenue Service data, the entire taxable income of everyone earning over $100,000 in 2008 was about $1.582 trillion. Even if all these Americans—most of whom are far from wealthy—were taxed at 100%, it wouldn’t cover Mr. Obama’s deficit for this year.

Not surprisingly, I wasn’t impressed with Obama’s speech in the least. What about you?

The following is a guest post by my friend, Richard Rosso, a certified financial planner in Houston.

Out of the Mouth of Babes (It’s Not Just Cupcakes)
Richard M. Rosso, MS, CFP®, CIMA®

“Kids say the darndest things,” Tammy Wynette.

It’s a sincere honor to teach the future generations about money. Those under thirteen tend to be an overly-excited group known to blurt out whatever is on their minds often at the surprise of any adults in the room. I always make sure to have plenty of treats for everyone at the end. Since it was later in the day, the fourth grade class that made the journey to the office recently was especially ravenous, however I wasn’t going to change the routine—we learn at the beginning, ravage the cakes at the end. And this batch of cupcakes was especially fresh and frosty. But it didn’t matter: I wasn’t going to deviate from the plan I’ve used for years.

Out of the mouth of babes comes lessons and behaviors we’ve clearly forgotten. As adults we are relentlessly bombarded with the noise of daily living and sometimes we just don’t see things clearly based on our own biases. Children are overwhelmed with stimulus too, however they don’t have as entrenched a filter and they’re willing to see things as they are and happy to share an opinion. There are wise words coming from the mouths of babes if you only listen. Here are a few simple rules:

1). Do Homework before you Take Action – Many of the kids believe that before you make an important purchase, you do your homework. Now, their homework may not be as sophisticated as an adult’s, however investors tend to forget, especially when the markets are more erratic, that emotions can overwhelm the desire to dig into facts. We take action first out of fear or panic and deal with the repercussions later. The kids always seem surprised how many adults will buy and sell investments based exclusively on what they see or hear on television and radio. Mind you, these young students think it’s perfectly ok to purchase a breakfast cereal based on media, however acquiring an investment or “something that can go down,” (their words not mine) requires more time and effort.

During market extremes it’s timely to take your portfolio’s pulse (and yours) to determine whether you’re comfortable with your asset allocation plan-the division of assets into stocks, fixed income, cash and other investments. If your portfolio is gyrating more than the market up or down and you’re uncomfortable, homework is required to narrow down the investments causing the turmoil. From there, it’s time to decide (based on the homework not heartburn), to take one of three roads as you evaluate financial holdings: Stay the course, buy more, or sell the investments causing distress. Again, base these decisions on your tolerance for risk and then maintain that risk profile through good and bad cycles.

2). Buy Low – I know this sounds flippant or simplistic-for the mature crowd, buying low is easier said than done. The children believe they should try their best after research, to buy low into investments or at least they hope to accomplish this on a consistent basis. We teach the kids patience when they want a new video game, it’s time we teach ourselves some patience and let asset prices come to us.

3). Buy what you Understand – Another easy one, in theory anyway. The kids feel strongly about buying what they know or understand. Occasionally, we make a portfolio allocation too complicated by purchasing investments we don’t fully grasp. There are a plethora of vehicles on the marketplace that are based on currency movement, bet against the markets or particular industries, and promise appetizing returns when the market is directionless. What is the impact to the overall portfolio? If the addition appears overly complicated and you can’t explain it to a listening party, you may be better off passing on it. A complicated strategy is not necessarily a better one. Your investment plan needs to be realistic, actionable and comfortable based on your personalized goals and aspirations.

4). A Sell Discipline, what’s that? – Children seem to embrace the idea of selling investments and moving on. For some of us grownups, this can be a challenge. We tend to be resistant to rebalancing or we allow one investment to swallow up a major portion of the portfolio, resulting in more risk. If you don’t have a discipline around buying and selling assets to restore your portfolio to an original target allocation, then ultimately you’re not controlling risk. Rebalancing requires a contrarian nature whereby you’re shaving down what’s done the best and adding dollars to those asset classes currently out of favor.

A concentrated position means that a stock, industry or sector makes up a disproportionate share of your total portfolio, usually 20% or more. The end results is more volatility in the portfolio as the key driver of returns, good or bad, depends on the performance of a large holding. Investors are sometimes reluctant to trim concentrated positions due to the tax implications of a large capital gain or an anchoring to a past price to minimize a loss. It’s important to maintain perspective on the risk as first priority.

5). Wait Patiently for Cupcakes at the End – Investing takes patience and a willingness to be disciplined. There must be goals established and when those goals are met, the sweet reward is certain to follow. It was tough for the kids to focus on the lesson at hand with treats waiting; the children eventually learn that shortcuts to the baked goods don’t exist especially through my lessons! It’s similar with investing. We too, as adults, want our dessert first or seek to get rich quick based on shortcuts. Ostensibly, when the market are not cooperating, back-to-basic strategies like saving more, decreasing debt or extending the time needed to reach a financial goal are usually the best.

What will you learn from the children today? Keep an open mind and you might be surprised.

Working on Taxes Today…

April 13, 2011

I’ll be doing our taxes today. I’ve put it off long enough.

This will be fun.