Sunday, March 31, 2013

Smart People Shouldn't Do Dumb Things ... More Good Advice for Individual Investors

Lots of people do dumb things when it comes to individual savings and investments for the long run.

That's often because of a knowledge deficiency about the particular subject involved and not due to a lack of intelligence. In fact, we're all pretty much in the same general range when it comes to basic intelligence.

Thus, people with long term financial needs (that's all of us) don't begin with the requisite knowledge to always make good decisions for the benefit of themselves and their families. As a result, they are inclined to follow the "safe and lazy" route of avoiding investing in "risky" stocks. Either that or they mistakenly pay for and then blindly follow the frequently wrongheaded and generally shortsighted "advice" of so-called commission paid investment experts, or worse yet, follow the herd instincts of similarly situated unknowing individual investors.

Five Really Dumb Money Moves You've Got to Avoid has some solid advice for individuals:


"You know the smartest things to do with your money. But what are the worst moves? What should you avoid?

Weirdly enough, they are things that a surprising number of people are still doing—even though they probably know, in their heart of hearts, how foolish they really are.

Any list is going to be incomplete. But here are five to avoid.

1 Reaching for yield

What this country needs is a good 5% certificate of deposit. Instead the collapse in interest rates, and the Federal Reserve's policy of keeping them down for as long as possible, is driving people crazy—especially people who need to generate income from their investments.

In these circumstances, people start to do really foolish things in the desperate hunt for higher interest rates. That includes taking on crazy amounts of risk, or investing in complex products they don't understand, in the hope of higher yields. The Fed is producing a bull market in scams, Ponzi schemes and associated rackets. . . .


2 Going into the poor house to send Junior to a country-club college

Over the past 40 years, the cost of tuition and fees at a private university has tripled—after accounting for inflation. The cost of a public university has quadrupled.

The cost of getting a bachelor's degree has become a scandal in this country. Students spend $160,000 on a four-year degree and the results are too often questionable.

Financial planners strongly advise parents against plundering their own retirement savings, which they are likely to need, to pay for this.

Admittedly, a degree has become a protection racket—you can't get a job without one, but there are fewer jobs for those with them. But the smart move for the budget-constrained is to get a bachelor's degree at a public university. The tuition and fees average less than $9,000 a year instead of $30,000 at a private college.

3 Owning stock in your employer

This is one of the silliest and riskiest moves any investor can make. If the company hits trouble, you get whacked twice. You can lose your job and your savings—all in one fell swoop. Ask anyone who worked for Enron…or Lehman Brothers. . . .

At companies where the 401(k) plan offers the option, workers aged 40 or over typically hold about 20% of their entire 401(k) account in the company's stock, according to EBRI data. Crazy.

4 Taking Social Security too early

If you can afford to delay taking your Social Security retirement benefit, do.

Someone earning $50,000 a year who starts claiming Social Security as soon as he or she is able, age 62, will typically collect a monthly check of about $1,000, according to the Social Security Administration. If they wait until they are 70, that amount would double.

Taking Social Security too early, or without thinking through the consequences, is one of the biggest financial blunders people can make . . . . The lure of getting money early can blind people to the big cost down the road. . . .

In any case, it doesn't take more than just a few years before the total money accrued with the higher, later benefits surpasses the total earned starting at the earlier retirement age.

But that understates the bigger issue. Social Security is insurance. For many retirees, the big risk isn't that they will run out of money before they turn 70, but after 85. According to the Centers for Disease Control, more than half of women currently age 65 will live to 85 or longer, and three out of eight men.

David Blanchett, head of retirement research for financial research firm Morningstar, says it makes sense for women, married couples and those with good health to wait longer for a bigger paycheck.

5 Buying long-term bonds

A surprising number of people still subscribe to the flawed and circular argument that bonds, including long-term government bonds, are "safe." In reality, bonds—especially long-term government bonds—are the rare example of a bubble that has been explicitly declared.

The Fed is openly printing money and using it to buy up such bonds, driving up the price and driving down the interest rates, in order to help the economy. There is no dispute about this. It's public policy.

A 30-year Treasury bond currently sports an interest rate of just 3.1%. . . .

The only reason to buy such bonds in any quantity is to gamble on a 1930s-style depression and world-wide deflation. Such bonds are a gamble, not a safe haven."

Summing Up

The more we know about how things really work, the better off we are. So let's get knowledgeable about saving, borrowing and investing for the long run. And let's do it NOW.

Perfection is very much the process of subtraction and not addition. When two teams of players with generally equal skills and talent compete, the team that makes the fewest mistakes invariably wins.

And it's the same with life in general and individual investing in particular. If we don't make lots of mistakes along the way, we'll be better positioned to capitalize on the many opportunities in life.

Thus, not getting behind the 8-ball early in life is rule #1.

And not getting behind the 8-ball as we become older is rule #2.

In other words, let's try to not do dumb things that will need to be undone. But when we do them, let's stop this insanity asap and dig ourselves out of the 'mistake' hole as quickly as possible.

Here are three rules to play by in life or any other 'game:' (1) Don't get behind; (2) But if behind, catch up asap; and (3) If ahead, work hard to get further ahead.

And that 1-2-3 route to winning consistently and over time is all about not making mistakes and correcting them when we do make them.

To repeat, perfection is the process of subtraction.

So let's try hard to avoid getting into bad habits, but then commit to working hard to rid ourselves of those that we will certainly develop from time to time.

Knowledge is the key. Continuous learning is the process. The rule of 72 works.

That's my take.

Thanks. Bob.

The LONG TERM Tide for Individual Investors Has Shifted ... Even Active Bond Managers Are Now Moving To Stocks From Bonds

We've been recommending for some time now that long term focused individual investors should not buy bonds, and if that they already own them, they should sell them and switch that portion of their investment portfolio to blue chip dividend paying stocks instead.

And it's an approach that we would suggest be followed for at least the next decade and perhaps longer, depending upon when inflation next peaks or reaches 5% or more, which isn't likely to occur for a long time.

Stated simply, solid dividend paying stocks are and will be a better and safer investment vehicle than bonds for many years to come. And bond funds do lose value as interest rates increase, contrary to popular belief.

Thus, unless we intend to keep the bond until its maturity date, we're always subject to the very real risk that interest rates will rise and the value of our bond fund investment will be less that what we paid initially. In an environment of rising interest rates, that puts the bond investor in the ongoing predicament of continuing to own a low interest rate bond or taking a loss on the principal value of that bond when selling it.

Then as interest rates keep rising over time, the situation repeats itself until interest rates peak. And that process is likely to take years this time since interest rates are at historic lows today and higher inflationary conditions are definitely in the risk picture for the foreseeable future.

Increasing inflation, rising interest rates and lower bond values go together. Thus, bond buyers beware.

Simply put, there's nothing safe about investing in bond funds these days, and the market risk of loss is real while the potential for reward is zilch.

In fact, now even bond managers are beginning to purchase stocks as well. That sounds like the the beginning of the end of long term bonds as an appropriate individual investment vehicle for the foreseeable future.

Funds Reshape Investment Mold says this:

"Hedge funds that specialize in bonds are bulking up on stocks, in the latest sign of investor concern over the health of the long bull market in debt prices.

Fund managers that have made winning bets in corporate loans, mortgage bonds and distressed debt are altering course after a flood of cash has pushed up the prices of all sorts of debt investments, raising risks and depressing expected returns.

The shift, which comes as a widely followed measure of bond performance is on pace for its first negative first quarter in seven years, represents a new source of fuel for potential stock gains. . . .

Crescent Capital Group, a $12 billion fund manager that primarily buys below-investment-grade loans and bonds, has boosted its investments in stocks to 10% of assets from virtually nothing last fall, said co-founder Mark Attanasio.

"We have looked for stock investments where we can get more yield" than from bonds Mr. Attanasio said. "Our clients want to see it as a sweetener.". . .

"Credit fund managers see an opportunity in the equity space, and they are going there," said Hiroshi Harada, head of research at HedgeMark Advisors LLC, a hedge-fund monitoring firm.

The Barclays U.S. Aggregate Bond Index is down 0.24% through March 26, on pace to produce a negative first-quarter return for the first time since 2006. The index is 36% invested in Treasury securities, whose yields have climbed this quarter, reflecting improving economic conditions and a more certain outlook after the fiscal-cliff resolution.

Hedge funds aren't the only investors shifting course. According to investment-research firm Morningstar Inc., 309 bond mutual funds owned stocks at the end of December, the highest number in at least a decade. . . .

After 2009, investors became cautious about the U.S. economy and faltering corporate health, and many pared stock investments and jumped into credit markets instead. Bonds are generally considered safer investments than stocks because if a company files for bankruptcy protection, bondholders stand ahead of shareholders in line to be repaid. . . .

The higher bond prices rise, the less they yield and the greater the risk of losses should markets turn. While investor demand and other factors can temporarily push bond prices above 100 cents on the dollar, those who hold the securities to maturity can expect to receive no more than their full investment back, a fact that limits the rise of bond prices. Stock prices, on the other hand, can theoretically rise without limit.

One possible trigger for a bond selloff is that with the U.S. in an economic recovery, the Federal Reserve may be preparing to raise interest rates. Rising rates hurt bonds because they damage the value of old bonds issued at lower rates."

Summing Up

For the past three decades, interest rates have fallen from initial double digit levels. And bond investors were rewarded as bonds performed well because of a long period of declining interest rates.

Now the tables have turned and interest rates are at historic lows. They have nowhere to go but up, so bonds wil perform poorly for at least the next decade or so.

Bond money is beginning to move to stocks, and the law of supply and demand dictates that this will be good for stock prices and bad for bonds.

There's nothing new here except the fact that interest rates won't be going down the next several years. Instead they'll be going up.

Let's all remember Wayne Gretzky's advice about the importance of skating to where the puck will be as it applies to interest rate movements and individual investing.

Because Gretzky's tip applies not only to playing hockey but will work as well for individual investors when deciding whether to invest in stocks or bonds for the long run.

That's my take.

Thanks. Bob.

Saturday, March 30, 2013

Thinking About Jumping Into Stocks? ... Then Think About This, Too

The stock market has been on a tear during the past ----- 100 years or so. And the past few years as well. But stock prices do not follow the path of a straight line to the sky.

Occasionally, they hit the wall and come tumbling down, Humpty Dumpty style. But then, and unlike Humpty Dumpty. they get back up, dust themselves off and resume their long term climb.

That's what history teaches, but there's something else history teaches as well.

People have a tendency to buy high and sell low. They also are unduly influenced by 'experts' and tend to trade excessively as well as at the most inopportune times. And they also pay commissions and fees to those 'experts,' even though the share price appreciation and dividends weren't in any way the result of what the 'experts' did. To the 'experts' it's unearned income and to the individual investors, it's unnecessary and avoidable expense, in other words

So for those of you who are thinking about buying into the market now, ask yourelves this: Will you panic and sell when the inevitable downdraft hits, or will you stay the course? And if the answer is that you'll be likely to sell when the fit hits the shan, don't buy.

That said, for long term oriented DIY individual investors, come on in because the water's fine. And it always will be for those investing for the long run.

Mom and Pop Run With the Bulls has this to say about the wrongheaded behavior of individuals when it comes to investing for the long term:

"The market's record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.

When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling "sucker punched," she says, they swore off stocks and put their remaining money in a bank.
Lucie White and her husband, Mark Villa, at breakfast with their children. Out of the stock market since 2008, the couple have gone back in.

This week, as the Dow Jones Industrial Average and Standard & Poor's 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.

"What really tipped our hand was to see our cash not doing anything while the S&P was going up," says Ms. White, a 39-year-old dermatologist in Houston. "We just didn't want to be left on the sidelines."

Ms. White and her husband, Mark Villa, a reconstructive surgeon, are joining other individual investors in overcoming their fears after watching stocks recover all the ground lost during the financial crisis and more.

So far this year, U.S. stock-focused mutual funds—the traditional domain of mom-and-pop investors—have taken in a net of $33.6 billion, according to Lipper. That is a small reversal compared with the $445 billion that they pulled from domestic stock mutual funds from 2007 through the end of 2012. But many on Wall Street think that trend will likely accelerate in coming months, particularly if the stock rally continues.

So far, most of the gains have been powered by big institutions and professional traders, whose buying helped push the blue-chip Dow to a gain of 11% in the first quarter of the year, which ended last Thursday. That rally, which also pushed up the S&P 500 to a record last Thursday, is the best start for the Dow since 1998. . . .

After the long bull market of the 1980s and 1990s, the first 10 years of this century have become known on Wall Street as the "lost decade." The S&P 500 finished 2009 down 24% from where it was a decade earlier, thanks to a pair of vicious bear markets.

First came the collapse of the technology stock bubble starting in March 2000, which saw the S&P 500 tumble 49% to its nadir in October 2002. Then from its peak just before the financial crisis in October 2007, the S&P 500 slid 57% to its March 2009 low.

Some market watchers point out that Main Street investors tend to embrace stocks with enthusiasm only after major rallies like this one. That exposes such investors to the risk of buying near the end of a rally—and suffering when stocks turn lower.

But in mid-March, big-time stock-market strategists at Goldman Sachs Group Inc., Morgan Stanley and other financial firms fueled further optimism by predicting an even higher surge. They cited stimulus policies from central banks around the world and the likelihood of strong profit growth as economies heal."

Summing Up

Here's the deal.

For those with a long term perspective and investing horizon, as well as the temperament to hold on during the inevitable periodic market downturns, you should own stocks for the long haul.

But for those who will be inclined to cut and run when the inevitable periodic market downturns hit, you shouldn't own stocks at all.

And for everyone deciding what to do or not to do about investing in stocks, you should review the history of share prices and stock markets over time.

The facts are indisputable. Unlike real estate, bonds, gold and other alternative investments, over time stock prices will rise at a much greater rate than inflation.

But this fact is indisputable as well. From time to time, stock prices will go down with a thud, just like Humpty Dumpty did.

But unlike Humpty Dumpty, stock prices will rise again and reach new heights which were previously unimagined.

That's what MOM based share ownership is all about --- that and protecting and enhancing the inflation adjusted purchasing power of our hard earned savings over time.

That's my take.

Thanks. Bob.

School Administrators and Student Performance ... Who Cares More About Our Kids' Legitimate Educational Achievements? ... Parents or Administrators

School vouchers are in the news lately. Teachers unions say no, and parents say yes. Government officials frequently side with the teachers unions and public school administrators.

But what does common sense say? And how do public school officials and administrators act?

What different incentives are there for parents and school officials? And who is more motivated to act in the best interests of the students?

Common sense says it's the parents and the kids. Not the government officals and public school administrators. And sometimes the administrators and complicit teachers step way over the line.

Ex-Schools Chief in Atlanta Is Indicted in Testing Scandal is instructive about what recently motivated and incentivized the actions of public school officials in Atlanta:

"During his 35 years as a Georgia state investigator, Richard Hyde has persuaded all sorts of criminals — corrupt judges, drug dealers, money launderers, racketeers — to turn state’s evidence, but until Jackie Parks, he had never tried to flip an elementary school teacher.       
It worked.
In the fall of 2010, Ms. Parks, a third-grade teacher at Venetian Hills Elementary School in southwest Atlanta, agreed to become Witness No. 1 for Mr. Hyde, in what would develop into the most widespread public school cheating scandal in memory.
Ms. Parks admitted to Mr. Hyde that she was one of seven teachers — nicknamed “the chosen” — who sat in a locked windowless room every afternoon during the week of state testing, raising students’ scores by erasing wrong answers and making them right. She then agreed to wear a hidden electronic wire to school, and for weeks she secretly recorded the conversations of her fellow teachers for Mr. Hyde.
In the two and a half years since, the state’s investigation reached from Ms. Parks’s third-grade classroom all the way to the district superintendent at the time, Beverly L. Hall, who was one of 35 Atlanta educators indicted Friday by a Fulton County grand jury.
Dr. Hall, who retired in 2011, was charged with racketeering, theft, influencing witnesses, conspiracy and making false statements. Prosecutors recommended a $7.5 million bond for her; she could face up to 45 years in prison.
During the decade she led the district of 52,000 children, many of them poor and African-American, Atlanta students often outperformed wealthier suburban districts on state tests.
Those test scores brought her fame — in 2009, the American Association of School Administrators named her superintendent of the year and Arne Duncan, the secretary of education, hosted her at the White House.
And fortune — she earned more than $500,000 in performance bonuses while superintendent....
"It is not just an Atlanta problem. Cheating has grown at school districts around the country as standardized testing has become a primary means of evaluating teachers, principals and schools. . . . In Ohio, state officials are investigating whether several urban districts intentionally listed low-performing students as having withdrawn even though they were still in school. . . .       
And Ex-Head of Atlanta Schools Indicted in Cheating Probe adds this:

"The former superintendent of one of the nation's largest urban public-school systems and 34 teachers and staff were indicted Friday by a state grand jury here on multiple charges related to one of the largest school cheating scandals in U.S. history.

The charges against Beverly L. Hall and others who worked in the Atlanta Public School system during her administration include racketeering, influencing witnesses, making false statements and writings and theft by taking.

Those indicted include top school officials in the administration of Ms. Hall.

The cheating, according to the report, involved practices such as teachers erasing incorrect answers on the standardized tests. Investigators, who focused largely on the 2009 round of state tests, alleged the administrators were guilty of impeding the probe, tampering with tests and intimidating teachers. Some of the implicated teachers, according to the report, prompted students to fix answers during tests, while others fixed answers themselves after the tests. Others obtained advance copies of the tests and answer keys. . . .

The indictment comes about five months after the superintendent of El Paso Independent School District was sentenced to 3.5 years in prison on fraud charges, in part, for his role in a conspiracy to fraudulently manipulate test scores. It also follows allegations of cheating in other cities, including Philadelphia, Baltimore and Washington, D.C."

Summing Up

Let's give parents and students control over where the kids attend school and how well they perform.

Teachers and administrators should be there to help the process but not to monopolize what happens in the education of our nation's future leaders.

Education is too important to be left to the government knows best gang and its system of perverse incentives.

By now that's 'perfectly obvious,' even if the teachers unions and government bureaucrats choose to ignore it.

That's my take.

Thanks. Bob.


Energy Subsidies, Government Financing and Common Sense

Edward R. Murrow once famously said that "The obscure we see eventually. The completely obvious, it seems, takes longer."

Or for another counterintuitive fact of life, how about the truism that common sense isn't very common?

When it comes to energy policies and reducing the wasteful consumption of oil and gas, and especially gasoline, the completely obvious solution of raising taxes and reducing consumption is avoided like the plague by politicians everywhere. By keeping prices down, they subsidize consumption instead of conserving energy. (NOTE: It's like government policies which encourage excessive debt by allowing interest on mortgage loans and property taxes to be deducted from our taxes, but that's another story.}

But politicians don't raise the prices through heavier taxation because people don't like to pay higher prices for energy (and becuase of intense lobbying by special interests as well, as is also the case with builders, lenders and real estate brokers for home related tax deductions).

But meanwhile the deficits and debts of various nations, including ours, continue to grow and the economies continue to struggle. {NOTE: And in the case of home ownership, millions of people are underwater on their government encouraged and guaranteed tax favored loans.}

So let's consider the merits of a good but undoubtedly unpopular idea contained in IMF paper Suggests U.S. should adopt a $1.33-a-gallon gas tax:

"The International Monetary Fund (has made public a) research paper arguing for fewer energy subsidies, in the sort of paper only economists shielded from the political process can offer. . . .

Who can argue against fewer subsidies? Well, many people, once they see the alternatives. The IMF for instance, on page 44, cites studies showing the U.S. should introduce a “corrective” tax of . . . about $1.33 a gallon – or one-third of what consumers now pay for a gallon of gas. And Americans already pay roughly 50 cents a gallon in taxes to federal and state governments, according to the Web site GasPriceWatch.

Good luck with trying to raise gas prices by another 33%. These fees are about as popular with the public as a skunk at a picnic. As recently as Saturday, the Senate voted 58-to-41 against an amendment that suggested an unspecified carbon tax of unspecified nature.

And some details from the IMF proposal are presented in IMF Cites Hidden Price of Energy Subsidies:

"Problem one: Governments from the U.S. to Egypt to Japan are running big, unsustainable budget deficits.

Problem two: Global governments are finding it tough to agree on an efficient, fair way to head off climate change.

Fact one: Those governments spend hundreds of billions of dollars a year subsidizing energy.

Fact two: Curtailing those subsidies would help solve problems one and two.

So why do so many governments still subsidize energy so much? Because their populations are hooked on them and don't grasp their downsides.

Vested interests also defend them because they are seen, incorrectly, as helping the poor primarily.
The International Monetary Fund, in a comprehensive critique of the subsidies released Wednesday, wants to change that. Energy subsidies, it says, aggravate budget deficits, crowd-out public spending on health and education, discourage private investment in energy, encourage excessive energy consumption, artificially promote capital-intensive industries, accelerate the depletion of natural resources and exacerbate climate change.

Other than that, there is nothing wrong with them.

The most obvious way that governments subsidize energy is by charging households and businesses less than it costs to produce and distribute gasoline, cooking fuel and electricity. Taxpayers, one way or another, now or later, pick up the tab.

The IMF says these subsidies added up to $481 billion in 2011. Globally, this amounts to 2% of government revenues, but about 22% of revenues in the Middle East and North Africa.

Some authoritarian governments (think Mubarak's Egypt when he was in power) buy off the population by making fuel and bread cheap. Some oil-rich governments (gasoline costs around 45 cents a gallon in Saudi Arabia) keep fuel prices low to keep the population from demanding a share of oil profits.

That may seem harmless, but it isn't. In too many poor countries, governments spend more subsidizing energy than they do on education or health. Globally, holding down energy prices increases consumption of fossil fuels. . . .

This underpricing of energy amounts to about $1.41 trillion a year, the IMF estimates, mostly in big countries that consume lots of energy.

"The question is whether a country should choose to let someone buy something for $1 when the total cost—both of producing it and the costs imposed on society—are $1.25," says David Lipton, the IMF's No 2.

He thinks not. . . .

One reason is that keeping energy prices down is defended as primarily helping the poor. But the IMF says that in low- and middle-income countries, the richest fifth of households garner six times the energy subsidies as the poorest fifth.

"When subsidies are given by maintaining low prices, the amount of the subsidy you get depends on how much energy you use," says Mr. Lipton. "If you are poor and you don't have a car and you don't have an air conditioner, you don't use much energy and you don't get much subsidy. If you have three cars and five air conditioners, you get a lot.""

Summing Up

We tax tobacco heavily to raise government revenue as well as to discourage its use. Same with alcohol.

Why not take a similar approach with gasoline and energy use? Let's make it more expensive to consume. {NOTE: And we can provide income tax credits or vouchers to those who need financial assistance in order to help them with the added costs.}

In addition, we can and should offset the energy taxes by reducing income taxes in an amount equal to the estimated revenue which will result from the increased energy taxes.

That combination of higher energy taxation and lower income taxation would reduce wasteful energy consumption and stimulate other consumer purchases, both of which would be good for economic growth, jobs and overall tax revenues.

And finally, allowing Keystone and other energy related initiatives to get off the ground would further add to the world's energy supplies, thereby increasing the likelihood of lower energy prices despite the increased taxes on consumption.

At least that's my non-political take on things.

Oh, and by the way, I'm not in any way motivated by what political favors or legislation the 'special interests' may want or in getting access to their money for my political campaign either.

Because as General William Tecumseh Sherman said about a possible candidacy in the 1884 presidential election, "I will not accept if nominated and will not serve if elected."

So in Shermanesque fashion, let's all just insist that our 'public servants' do what's best for, although perhaps not immediately popular with, all of We the People.

Thanks. Bob.

Friday, March 29, 2013

Media Supports Keystone Pipeline ... Chicago Tribune Tells President to Stop "Dawdling" and Approve Construction

More and more public pressure and wide media support for the movement toward U.S. energy independence keep mounting while President Obama remains silent on the subject. This presidential silence can't go on much longer.

And if we didn't know that presidential politics isn't really about doing the right thing for all Americans, we'd be surprised at Mr. Obama's failure to have taken action already.

But then, we'd also be surprised about closing the White House to We the People, aka the owners, and school kids, aka also the owners, during their spring breaks. And we'd be surprised about the Obama aministration threatening to delay flights all over the country due to the harmful effects of "sequestration."

Of course, we'd also be surprised about the president refusing to accept the authority to make common sense choices about sequestration when deciding what to keep doing and what to stop doing as a result of a minimal amount of government spending being curtailed.

We'd be surprised, if not for politics. But we know that politics sucks so what's there to be surprised about?

Still, politicians of all stripes take polls and are guided by their findings. And since the media definitely has a considerable impact on public opinion, it's good to the Chicago Tribune taking the president to task for failing to approve the Keystone XL Pipeline project. That will help.

Chicago Tribune: Stop 'dawdling,' approve Keystone says this:

"An editorial in Friday’s Chicago Tribune called on President Barack Obama to approve the controversial Keystone XL pipeline, saying the decision is “an easy one” and “long overdue.”‘

Even if the oil flowing through Keystone would be exported, the U.S. would still benefit from the pipeline construction and refinery jobs created, the Tribune said. “Allow America to draw on its bounty,” the newspaper said.

That was the latest Trib editorial in support of Keystone. Liberal media watchdog Media Matters concluded last year that editorials supporting Keystone outnumbered those opposing it, and The Washington Post, USA Today, and The Wall Street Journal have also supported it. The New York Times, however, came out against it most recently in a March 10 editorial."

Summing Up

Amen to that.

Thanks. Bob.

Wisconsin Republicans Opposed to Free Choice and Parental Control in the Education of Their Children

There has much in the news lately about the growing popularity of school vouchers.

These vouchers in effect put the control of which schools kids will attend in the hands of parents and students and beyond the control of teachers unions and government bureaucrats.

In simple language, vouchers enable the people who are most interested in the education of their children -- their parents -- to decide with their children which schools their children will attend.

Who can be against that? Well, the self serving leadership of the teachers unions in combination with self serving politicians often join forces to prevent the use of vouchers and therefore keep the parents and students from choosing where and how the kids will be educated.

Unfortunately and mistakenly, far too many people believe that the political opposition to school vouchers and parental choice lies strictly within the Democratic Party. That's because the Democrats have long been a strong ally and supporter of labor unions, and the unions have in turn supported the Democrats at election time.

So when it comes to vouchers, too many of We the People wrongly believe that the Republicans are always on the side of vouchers, parental control and freedom of choice. If only that were so, but it's not always the case.

Republicans Against Vouchers is subtitled 'GOP legislators join unions to oppose reform in Wisconsin' and tells it like it is in Wisconsin today:

"School vouchers are usually opposed by teachers unions and their Democratic allies, but a dirty little secret is that some suburban Republicans oppose them too. The latter is the case in Wisconsin, where GOP Governor Scott Walker's plan to get more kids out of failing schools is facing opposition from short-sighted members of his own party.

The Badger State's 22-year-old voucher program currently covers Milwaukee and Racine. But in his budget for fiscal 2014-15, Mr. Walker wants to expand it to nine of the state's worst school districts and increase funding by 9%. Under the proposed formula, students in districts that have at least two schools that get a D or F on their 2011-2012 performance report cards could use a voucher at a private school.

The plan would cover 500 new students in the first year, 1,000 in the second, and thereafter as many as qualified under the formula, which extends the voucher to students in failing schools whose families make 300% of the poverty level. The new areas include Beloit, Green Bay, Kenosha, Waukesha and Fond du Lac, and more than 40,000 children who currently attend lousy public schools would be eligible.

That should please Neenah Republican and Wisconsin Senate President Mike Ellis, who last year called Green Bay's Preble High School a "sewer." But Mr. Ellis has instead promised to block Mr. Walker's proposal, saying that the Governor had not respected the input of eight or 10 Republicans who didn't want more vouchers in the budget. "This is phase one of a wide-open school voucher program for the state," Mr. Ellis moans.

But what would be wrong with that? According to the School Choice Demonstration Project, 94% of students who have received vouchers in Milwaukee graduate from high school, compared to 75% from the Milwaukee public schools. They're also more likely to go to college.

While Wisconsin schools score better than most, in 2010 the National Assessment of Educational Progress found that Wisconsin's black fourth grade students had the worst reading scores in the country. By eighth grade, black students did worse on English tests than students for whom English was a second language.

Unions are rolling out the usual canard that vouchers steal funds from public schools, though research shows that competition from charter schools and vouchers often causes traditional public schools to improve. The state money would follow the student, but the $6,442 voucher is far less than the $13,269 it currently costs to educate a child in traditional public schools. Voucher funding has been relatively unchanged for a decade, so Mr. Walker's proposal would be a moderate expansion.

One reason school reform has been so politically difficult is that too many suburban parents think the problem is confined to inner-city schools when their own schools fail to educate thousands. Republicans too often play to this conceit, especially when it means they can win union support. Mr. Walker has put the GOP on the right side of the reform debate, and his party should get behind him."

Summing Up

Vouchers, free choice, cost savings and improved educational outcomes should be a top priority for all Americans. That the teachers unions have found an ally in Republican Wisconsin Senate President Ellis demonstrates once again why politics sucks and why the problem is not confined to any specific political party. It's everywhere.

It's ridiculous to oppose vouchers and choice simply because attending a suburban school may result in a better educational outcome than attending an inner city school will. That's simply extremely shortsighted, ignorant and wrongheaded reasoning!

The competition for jobs and economic growth is worldwide and is not limited to the state of Wisconsin's boundaries. Is the head of the Republican party too dumb to see that? Or is is that he's just a politician and not concerned about the major issues facing Americans?

Let's start a real race to the top. If suburban schools catch up with their international counterparts, then the inner city schools will have an even bigger hurdle to climb to reach equality. But isn't that the only genuine way to achieve excellence in education?

Our kids can compete successfully with anybody in the world, but first we have to give them the chance to do so. All of them.

Of course, parents are and always will be more concerned about the well being and opportunities being given to their children than teachers unions and government bureaucrats will be. Accordingly, let's empower them so they can make the right choices, which they will, if only given the facts and an opportunity to do so.

But in the meantime, standing in the way of presenting the parents and their children with the necessary facts and opportunities are far too many obstructionist American politicians and their union allies. And that's a very big hurdle for the rest of us to overcome.

But parents will make the required effort to jump that hurdle when it comes to doing what's right for our children and our country, too. And taxpayers and society will thereby benefit as well.

Because in the end, the self serving politicians and the self serving union leaders are no match for We the People.

That's my take.

Thanks. Bob.

PERSONAL PRIORITIES ... Housing, Stocks, Pensions, 401(k)s and Retirement Planning and Preparation

Yogi Berra said that when we come to a fork in the road, we should take it. And Robert Frost in "The Road Not Taken" advises that our choices make all the difference in the world.

And so it is with the choice to borrow and buy a house of our "dreams" early in adulthood or to save and invest in our future financial security.

Actually, the decision need not be an 'either or' choice. We can choose to walk and chew gum at the same time ---- buy a house while we save and invest for the future. And we can do both of these things as long as we think before we act, save before we buy, and at the outset prioritize as financial Job #1 the habit of saving and investing for our future financial security.

But if we only pick one path to follow when we first come to that fork in the road, let's choose to first go down the path leading to a lifetime of saving and investing. In that case, we'll refrain from buying that first house until we've saved enough money for a reasonable down payment, and then make the wise choice not to spend too much, aka borrow too much, when we do buy our first home.

Living within our means is a good habit to start early. So is saving and investing for the future.

So where are we today? Well, that pretty much depends on our age today, the priorities we established in the past related to housing, saving and investing decisions, and when we made those decisions.

Although it clearly wasn't our intention to do so, too many of us inadvertently and mistakenly chose to live the solitary financial life of a 'housing speculator' and not assume the dual role of (1) prudent home owner and (2) saver and investor.

Here's what happened over time.

Although the average American's wealth has changed substantially as the housing market and stock market have been turned upside down in recent years, when we add to the mix the recent switch from pension plans to 401(k)s, it becomes difficult and even a bit confusing to track exactly what's happened.

However, Declining Wealth Brings a Rising Retirement Risk provides some solid information about our individual financial well being in relation to the equity in our homes, as well as the effect of the ongoing transition from pension to 401(k) plan investing:

"In a recent post, I examined aggregate national wealth from the Federal Reserve Board’s flow of funds statistics. They show that while national wealth is now approximately back to its precrisis level, the composition of it has changed. Much more is now held in the form of such financial assets as stocks and much less in nonfinancial forms such as housing. This is important, economically and distributionally, because the wealthy are much more likely to be invested in stocks and bonds, while the middle class has more of its wealth in home equity. . . .

On March 21, the Census Bureau published data on median household wealth – the median is the exact middle of the distribution of wealth. It shows that between 2000 and 2005, median wealth increased significantly, to $106,585 from $81,821. It then fell to $68,828 in 2011. Thus, although . . . aggregate national wealth has largely been restored, the median family’s wealth is still considerably below its peak and needs to rise considerably just to get back to where it was in 2000.

The reason, of course, is that the housing market continues to lag. As Figure 1 illustrates, virtually all of the change in wealth since 2000 has been accounted for by the rise and fall of home equity, which closely tracks the price of homes. . . .
Median net worth of households, in 2011 dollars. Median net worth is the sum of the market value of assets owned by every member of the household minus liabilities owed by household members; the Case-Shiller Home Price Index is a measure of home values that tracks home prices in 20 metropolitan regions.
On the other hand, households have grown less dependent on housing wealth over time. In 1984, 41 percent of wealth was held in the form of home equity. By 2000, that percentage had fallen to 30 percent; in 2011 it was 25 percent.

A key reason for this change has been the switch from defined-benefit to defined-contribution pension plans. In the former, workers are promised a specific income at retirement, which the employer provides. The employer bears all the risk of market fluctuations.

Under a defined contribution scheme, such as a 401(k) plan, the worker and the employer jointly contribute to a tax-deductible and tax-deferred account from which the worker will finance retirement. Thus, to a certain extent, the growth of pension wealth is more apparent than real.

The worker always, in effect, owned the assets from which his pension was paid; he just never saw them or benefited when the stock market increased, nor did he suffer when the market fell. With a 401(k) account, the worker knows the present value of his retirement saving at the close of the market every day.

There are several big problems in this shift to defined-contribution pension plans. One is that workers don’t take advantage of them or fail to contribute the maximum contribution they are permitted to make. Another is that they fail to invest in stocks and instead put their money into certificates of deposit or other investments that tend to underperform stocks in the long run. Workers may also be unwise in choosing investment advisers and end up paying a lot in unnecessary fees that can be very costly to returns. . . .

Now the first generation of workers who have virtually all their pension saving in defined-contribution plans is nearing retirement, and the news isn’t good. According to a March 19 report from the Employee Benefit Research Institute, only about half of workers nearing retirement have confidence that they have enough money saved for an adequate retirement.

Not surprisingly, retirement saving has taken a back seat to more pressing concerns – coping with unemployment, maintaining standards of living during an era of slow wage growth, putting children through increasingly expensive colleges and so on. People may also have simply underestimated how much money they needed to save in the first place. . . .

According to a March 15 study from the Urban Institute, young people today have considerably less wealth than their parents did at the same stage of life.

Factors include young people buying homes at a market peak and hence suffering disproportionately from the decline in home prices; they also put less money down, making it more likely that they have negative home equity. Younger workers have also tended to marry at a lower rate, have lower incomes than their parents, pay much higher costs for health insurance, and are more likely to graduate with college debts.

What’s really depressing about these studies is the lack of solutions and the likelihood that the problem will only get worse."

Summing Up

The collapse of housing prices in recent years has caused a multitude of problems for Americans trying to save for retirement.

Now the effect of the transition of retirement plans from pensions to 401(k)s is having a similar negative impact.

Both housing and retirement planning are in need of a total rethink by We the People. We can't continue down the financially speculative path we've been on for far too long now.

No matter what we believed when we were younger, buying a house with borrowed money and then planning to sit back and watch its value grow quickly is not a ticket to guaranteed wealth. It's speculative behavior.

And becoming 'financially literate' about how 401(k) plans work must become an essential part of every responsible individual's retirement planning efforts.

The 'good old days' of making lots of money off homes and retiring with a guaranteed pension for life are gone forever. In fact, they were always more illusion than reality.

So let's all wise up about the new rules that apply to home ownership and personal retirement planning and preparation. And let's pass that wisdom on to those who will follow us.

We can at least do that.

That's my take.

Thanks. Bob.

Thursday, March 28, 2013

Stock Market Had a "Good Year" This Quarter

The stock market started off with a bang this first quarter of 2013. Now what?

Well, before we take the money and run, let's remember that the long term is what matters most, and long term the market's direction is up.

S&P 500, Dow close quarter at record highs is subtitled 'In first quarter, S&P 500 gains 10%, Dow rises 11.3%:'

"U.S. stocks rose on Thursday, with the S&P 500 and the Dow industrials finishing at record highs, as investors looked to get into equities as the first quarter came to a close. . . .

After climbing to a high of 1,570.28, the S&P 500 added 6.34 points, or 0.4%, at 1,569.19. . . .

The Dow Jones Industrial Average rose 52.38 points, or 0.4%, to 14,578.54. The blue-chip index, which first took out its 2007 record high on March 5, rose 11.3% gain in the first quarter.

The Nasdaq Composite added 11 points, or 0.3%, to 3,267.52, leaving it up 8.2% for the quarter. . . .

Wells Fargo Advisors on Thursday raised its year-end 2013 target range for the S&P 500 to 1,575-1,625 from 1,525-1,575, which it set last fall.

Wells Fargo cited a broadening of growth into more segments of the economy and expectations that this year will see improving growth from both the industrial and housing markets.

“The period of initial surprise over European sovereign debt issues, the noise of the election year and the period of panic over the fiscal cliff have moved into the past,” Wells Fargo analysts wrote in a note. “We have moved out of a period of deep uncertainty into a period of more moderate uncertainty,” they said.

U.S. markets are closed Friday."

Summing Up

To repeat, the market had a good year in the first quarter.

While it's inevitable that at some point we'll see a 'correction' in share prices, the longer term looks good to me. In fact, I'm guessing that by year end we will be substantially higher than today's close.

In any event, several years from now it's a good bet that prices will be at least 50% higher than today's. And that dividends wil have increased materially as well.

Besides, there's no better place to invest than stocks. Cash is trash, and bonds will perform even worse than cash over the next few years.

We'll have more to say on all this down the road.

Thanks. Bob.

The Power Is Shifting In Education ... From Teachers Unions and Government Bureaucrats to Parents, Students and Taxpayers

We the People are finally getting the message about our system of government run public education, including its high costs, low quality and lack of accountability to the parents and students, aka the system's customers.

We're also getting the message about what really matters to the teachers unions as well.

And suffice it to say that the cost to taxpayers and the quality of the education that our kids receive hasn't been the top priority of the teachers unions. Accordingly, my guess is that these same unions will be doing themselves more harm than good by protesting loudly and publicly about the 'austerity' and 'choice' measures being adopted by school districts across America.

The opposite of what teachers unions call 'austerity' measures will be dramatic tax increases, and that's not exactly what citizens are in favor of these days. Neither are elected government officials, unless the tax increases would apply only to the wealthy "1%," which isn't the case with the local property taxes that are primarily used to fund public schools.

So the decision about the future of education will be for the taxpayers to choose --- (1) whether to pay more and more in taxes in order to keep the status quo system of paying the teachers under the present non-merit based system, funding their guaranteed pensions, keeping the countless underperformiing schools open in urban areas and continuing to accept not what we expect but what we've been getting all along for our huge expenditure of education dollars, or (2) make a radical change to the status quo and put parents and students in control while saving taxpayers money and improving the quality of education at the same time.

So as it comes down to a contest between teachers unions and the government knows best gang of bureaucrats on one side, and the parents and students on the other side, my money is on the parents and students. And I'm betting that the politicians will be smart enough to follow the logic of choosing the above #2 path forward as well. The surest path to their reelection is always to follow the will of the people.

With Vouchers, States Shift Aid for Schools to Families describes what's happening in America today:

"A growing number of lawmakers across the country are taking steps to redefine public education, shifting the debate from the classroom to the pocketbook. Instead of simply financing a traditional system of neighborhood schools, legislators and some governors are headed toward funneling public money directly to families, who would be free to choose the kind of schooling they believe is best for their children, be it public, charter, private, religious, online or at home.

On Tuesday, after a legal fight, the Indiana Supreme Court upheld the state’s voucher program as constitutional. This month, Gov. Robert Bentley of Alabama signed tax-credit legislation so that families can take their children out of failing public schools and enroll them in private schools, or at least in better-performing public schools.
In Arizona, which already has a tax-credit scholarship program, the Legislature has broadened eligibility for education savings accounts. And in New Jersey, Gov. Chris Christie, in an effort to circumvent a Legislature that has repeatedly defeated voucher bills, has inserted $2 million into his budget so low-income children can obtain private school vouchers. . . . 
Currently, 17 states offer 33 programs that allow parents to use taxpayer money to send their children to private schools, according to the American Federation for Children, a nonprofit advocate for school vouchers and tax-credit scholarship programs that give individuals or corporations tax reductions if they donate to state-run scholarship funds.
To qualify, students generally must fit into certain categories, based on factors that include income and disability status. Georgia students do not need to meet any specific criteria to receive tax-credit scholarships. And under the income criteria set for Indiana’s voucher program, nearly two-thirds of the state’s families qualify.
The Arizona Legislature last May expanded the eligibility criteria for education savings accounts, which are private bank accounts into which the state deposits public money for certain students to use for private school tuition, books, tutoring and other educational services.
Open only to special-needs students at first, the program has been expanded to include children in failing schools, those whose parents are in active military duty and those who are being adopted. One in five public school students — roughly 220,000 children — will be eligible in the coming school year. . . . 
In 2002, the Supreme Court ruled that school vouchers did not violate the Constitution’s separation of church and state, even though many families use the public money to send their children to religious schools. Many states, however, still have constitutional clauses prohibiting the financing of religious institutions with public money, which is why some of the programs face legal challenges. Voucher opponents also have filed suits based on state constitutional guarantees of public education.
"Beyond Indiana, the Supreme Court in Louisiana heard an appeal this month by a group of parents who are currently using vouchers and the Black Alliance for Educational Options, an advocacy group, after a lower court upheld a challenge to the state’s voucher program. They argued that children enrolled in failing public schools had the right to a high-quality education.

“What we’re dealing with is what public monopolies always give us, which is low quality at a very high price,” said Richard Komer, a lawyer with the Institute for Justice, a libertarian public-interest law firm that represents the pro-voucher groups in Indiana and Louisiana. “The idea is to try and break that cycle, because what we’ve been doing in public education since the beginning of time is rewarding failure.”

Critics say schools that accept vouchers or tax credit scholarships often filter out students with special needs, and that families already sending their children to private school use the public programs to subsidize their tuition. It is also not clear that students who attend private schools using vouchers get better educations, as many do not have to take the annual standardized tests that public school students do. Research tracking students in voucher programs has also not shown clear improvements in performance.
“At the same exact time as accountability and transparency seem to be the total watchword for how are we spending these dollars in an austerity-ridden environment,” said Randi Weingarten, president of the American Federation of Teachers, “there’s absolutely no accountability with vouchers.”
Mr. Komer at the Institute for Justice called for a shift of focus. “We happen to take the view that parents know best,” he said, “and are the best accountability measure to make sure that things are done properly for their kids.”
In Arizona — which, over the past five years, cut more of its K-12 budget than any other state, according to the Center on Budget and Policy Priorities, a policy research group based in Washington — charter schools are ubiquitous and school districts have open borders, so children are free to go to school wherever they want.
“It will be the end of schools that don’t perform, and that’s a blessing,” said Darcy A. Olsen, president of the Goldwater Institute, which designed the program and led a robust lobbying campaign to pass it in the Legislature. “We’re not doing anyone any favors by keeping schools afloat that don’t teach children how to read.”      
Summing Up
There is only one question that needs to be asked and answered about the desirability of school vouchers for parents and students, and it is indeed a very simple one.
Are parents and students or government officials more capable of deciding where the children of those parents should attend school?
To me it's a no brainer.
Thanks. Bob.

A Government Which Is Spending $3 While Collecting Only $2 Can't Continue Doing That Forever

The government knows best big spending gang has a big problem on its hands. Of course, that means that We the People have one, too.

And that's due to one very simple reason. There is no government money. There is only money taken from We the People which is used by the government to fund whatever it chooses to fund.

And the government knows best gang has a long list of projects to fund OPM style: such as military and defense spending, funding teachers pensions, paying the salaries of government employees and contractors, food stamps, Pell grants, student loans, K-12 education funding, Social Security payments, Medicare payments, Medicaid payments, interest on government debt, unemployment compensation, post office subsidies, Solyndra type "investments," and on and on and on.

And the really big problem now concerns how the priorities are to be established for future government spending. We're spending $3 but only taking in $2. Something's gotta give. But what? That's the question needing an answer.

To keep it simple, we'll separate the government's spending extravaganza into four distinct buckets: (1) defense; (2) entitlements and automatic mandatory spending; (3) interest on government debt; and (4) all other, aka discretionary spending.

The #1 defense spending and the #2 automatic entitlements spending issues are protected sacred cows of the Republicans and the Democrats, respectively.  And #3, the required interest payments on government debt, are obligatory as well. That only leaves the government knows best gang to wrestle with #4, or the last bucket of discretionary, or all other kinds of government spending.

But their problem is one of simple math.

Simply stated, if we're spending $3 while bringing in $2 in receipts, we need to reduce our spending by $1 in order to bring the budget into balance. {NOTE: Either that or raise revenues by $1, of course, but that's another story for another time.}

Accordingly, it would make sense to reduce each of the three buckets somewhat to raise the needed $1. But if we decide not to touch buckets #1 (defense) and (#2 entitlements), and we can't touch #3 (interest on debt), that leaves only bucket #4 (discretionary spending).

Hence, to bring the budget into balance under those conditions where #1, #2 and #3 are untouchables, we would probably have to eliminate #4 entirely.

Of course, that's not going to happen, but that's the problem that's been created by our feckless politicians -- a truly insoluble one unless and until something gives in a big way.

Liberals Find Themselves in Spending Trap has the details behind the dilemma:

"The Washington budget dynamic now settling in ought to be a liberal's nightmare.

The budget action . . . which locked in for the rest of the year the spending levels set in the much-ballyhooed sequester, establishes a pretty simple pattern: Squeeze money out of the military, but also squeeze money out of all varieties of domestic social programs the federal government runs, including those that protect the environment, help feed poor children and give rent assistance to needy families.

Meanwhile, the even bigger entitlement programs that really drive the deficit—Medicare, Social Security and Medicaid—are left nearly untouched.

One way to think about this pattern is that it leaves wealthy retirees living in gated golf-course communities with benefits that are unscathed, while Head Start programs for kids, or research by scientists in university laboratories, for that matter, take a hit.

That notion ought to give shivers to those who like programs in which the government does something other than just write checks. Yet the emergence of this pattern also is, in many ways, the fault of those on the left, who have long resisted every effort to rein in the growth of the entitlement spending that is now crowding out the other programs they love.

The logical evolution of this cycle is that Washington ultimately would become nothing but a machine that funds the military and dispenses money to government beneficiaries—and pays investors who are owed interest payments on the national debt. That would represent, among other things, a giant transfer of wealth from younger Americans to older Americans.

And guess what? This trend has been taking shape for years, and the sequester has only thrown it into sharper relief. It's becoming a budgetary fact of life, and it will become more pronounced.

According to data from the Congressional Budget Office, the money spent on nonmilitary discretionary programs—all those domestic programs for which Congress has to approve funding each year—declined to 4% of the nation's gross domestic product last year from 5.2% in 1980.

Meanwhile, the money spent on mandatory programs—those in which the government makes payments automatically—grew to 14.4% of GDP last year from 10.7% in 1980. . . .

Thus, the automatic, across-the-board spending cuts in the sequestration, mindless and distorted as they may be, are simply casting a light on the future of government spending patterns unless something changes.

Still, (Democratic House Representative Chris Van Hollen of Maryland) says that over time it will be particularly important to find ways to slow the growth in costs of Medicare to ease the squeeze on other programs. He acknowledges, though, that the two parties have vastly different ideas on how to find those Medicare savings.

Mr. Van Hollen argues that Democrats have done more to hold down Medicare costs than is usually acknowledged. But they do it mostly by squeezing payments to health providers, while Republicans want to do it by finding ways to squeeze beneficiaries to change their behavior.

The disconnect is significant. Still, one way or the other, the only way to preserve other government programs is to agree on a plan to change the arc of entitlement spending. Liberals, more than most, ought to want that."

Summing Up

We can't responsibly cut defense spending by nearly enough to make a substantial difference in our efforts to bring fiscal sanity to Washington, so we'll skip that one. So what do we do?

Do we keep 'helping' the oldsters by keeping entitlements as they are and stop helping the young and the poor, or do we help the young and the poor to the exclusion of helping oldsters?

Or do we raise taxes across the board by a total of 50% to get from $2 to $3?

Or do we unleash the private sector and not raise taxes, while agreeing to properly address the issue of entitlements spending over time?

The simple fact is that we are getting older as a society and there's nothing we can do about the aging of the baby boomers who are now retiring in record numbers.

To me the answer is obvious. We need to address #1, #2 and #4 as a whole as well as individually. Otherwise #3, interest on the government's debt, will grow out of control.

I hope the answer is equally obvious to others as well.

The progressive liberal agenda of raising taxes on the rich and reducing defense spending, while leaving everything else alone, simply won't work to solve our problems.

It won't even make a serious dent in them. The math doesn't work.

That's my take.

Thanks. Bob.

America is Still the Land of Opportunity

We hear a great deal about income inequality in America and how the middle class is in danger of being left behind.

We hear it, but that doesn't make it true. America is very much the land of opportunity.

For some interesting facts abut all this, let's look at what economist Thomas Sowell has to say in Notable & Quotable:

"Those "social scientists," journalists and others who are committed to the theory that social barriers keep people down often cite statistics showing that the top income brackets receive a disproportionate and growing share of the country's income.

But the very opposite conclusion arises in studies that follow actual flesh-and-blood individuals over time, most of whom move up across the various income brackets with the passing years. Most working Americans who were initially in the bottom 20 percent of income-earners, rise out of that bottom 20 percent. More of them end up in the top 20 percent than remain in the bottom 20 percent.

People who were initially in the bottom 20 percent in income have had the highest rate of increase in their incomes, while those who were initially in the top 20 percent have had the lowest. This is the direct opposite of the pattern found when following income brackets over time, rather than following individual people.

Most of the media publicize what is happening to the statistical brackets— especially that "top one percent"—rather than what is happening to individual people.

We should be concerned with the economic fate of flesh-and-blood human beings, not waxing indignant over the fate of abstract statistical brackets. Unless, of course, we are hustling for an expansion of the welfare state."

Summing Up

Based on both personal experience and observation, what Thomas Sowell says rings very true to me.

We do indeed live in a wonderful country with opportunities for all to 'grab the brass ring.'

At least that's what I've found to be the case.

As Robert Browning said about the need to reach for more than we can see or get our hands on at any particular point in time, "Ah, but a man's reach should exceed his grasp --- or what's a heaven for?"

So if that's the case, and it most certainly is, why then do so many political 'progressives' want to deny Americans an equal opportunity to 'fail forward' by pursuing our dreams? Why do they act as if they know what's best for us? And why do so many of us listen to them?

Why can't we just decide what to do for ourselves and then 'just do it?' Isn't that still the American way? Don't we still live in the land of opportunity?

That's my take.

Thanks. Bob.

What Gets Measured Gets Done ... Saving, Borrowing and Investing

That which we measure is that which usually gets done. That's because by going to the effort to measure how well we're doing something, we thereby demonstrate its ongoing importance to us.

And if we bother to measure it, we also have an excellent chance of improving the performance and related outcomes of that which we take the time to measure on a regular basis.

And then if we throw in a 'reward' factor to incentivize ourselves to improve upon whatever it is that we're measuring, we really have a virtuous feedback loop improvement factor working for us.

And that's exactly what we need to do to establish and develop the habit of continuous and rapid improvement on the things that matter to us --- such as saving and investing properly and responsibily over the long term. So let's review the basics of saving, borrowing and investing in relation to measuring our performance. To me it's first and foremost a 'net savings' issue.

Since we can't measure everything involving saving and investing, what should we choose? What's most important to our future success?

How much we're spending or saving, or by how much the value of the assets are growing over time? Or perhaps how much debt we're incurring?

My own preference would be a combination of 'total savings less total debt,' or 'total debt less total savings,' as the case may be.

In other words, if we owe zero and save $1, we have plus $1. But if we borrow $100 and save $1, we have minus $99.

Keeping a cumulative running score in that way will always give us a good view of where we stand financially.

Keeping score may also help us to refrain from borrowing excessively to attend college or to purchase a new home. And it may help persuade us to quickly begin a lifetime habit of periodic and increasing savings.

Tracking Your Finances, One Number at a Time says this about the importance of focus when measuring performance: 
I think it’s true that if I want to improve my performance in something, I need to measure and track it. As Thomas Monson, an author and president of the Church of Jesus Christ of Latter-day Saints, said: has said: “When performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates.”. . .

For some people, the simple act of stepping on a scale first thing in the morning and recording what it says helps manage weight.

This seems like a simple thing. In fact, when it comes to improving our financial situation, it feels as if it’s too simple. So we don’t do it. I wonder if something super simple, like tracking a single number, consistently and for a long time, may be the subtle nudge we need to improve our finances.

Most of the people I talk to, regardless of income or net worth, have no budget or financial plan. So it’s pretty clear that anything that we can do consistently will be better than the nothing we’re currently doing.

So the question I have is: How simple can we make this process and still see improvement?

What if we just tracked one number consistently, over a long period of time?

Which number would be both easy and beneficial?

The default answer is usually spending, but the idea of tracking spending makes people think of budgeting, and budgeting has a marketing problem — very few people like to do it. . . .

But maybe what you spend each day is the wrong number to focus on.

What about tracking a different number like the value of your savings, investments and retirement account? Once a week, you add up the balances and write down that number. Measure it over time. Just one piece of paper with a simple line graph.

Would that lead to change?

I like this idea because it’s what many of us are focused on: having enough money saved to meet some future goal like sending your children to college or retirement. It seems to me that by just focusing on that one number, a lot of the noise goes away.

Another idea would be even simpler. Track the amount you are able to able to save each week or month. That’s a number that gets rid of the short-term variation that comes from the market and focuses clearly on something that we have control over — how much we save. In theory, if you focus on that one number, you will find ways to improve it. That could mean you will find ways to spend less, earn more, or both. Because you want to see that number go up."

Summing Up

What's important is that we establish the habit of monitoring our performance, and then make a habit of trying to improve upon that performance.

For that reason, I like the savings number. Without savings, nothing else happens.

And with savings, putting those savings to work over time in an S&P 500 index fund requires no further effort. From time to time we can check on the change in the index for a given period, then apply that percentage change to the beginning of the period amount saved, and we'll know where we stand. But the key to success over the long haul is sthe amount we're able to save.

The market will do the rest of the work for us.

Then if we increase the amount saved on a regular basis, the cumulative growth in our 'savings' account will prepare us for financial comfort in our oldster years. It's really that simple.

But watch the debt, too.

At least that's my recommendation.

Thanks. Bob.

Wednesday, March 27, 2013

Debt, Deficits and "Normal" Interest Rates

Interest rates are at historic lows, largely as a result of Federal Reserve policies which are attempting to help the nation's economy to recover and normalize over time.

But while the Fed's intentions are good, the consequences of their current actions, both short and longer term, may not end up being so good. We need to clean up our financial act in order for our nation's financial and economic growth story to have a happy ending.

In the here and now, one analyst believes that gasoline prices are dramatically higher today than they would be if normal interest rates prevailed. See Fed's Unintended Consequences Are Hitting Everyday Life which says the following about oil prices and current Fed policy:

"By (the analyst's) math, the cost of (Federal Reserve policy), at least as it pertains to crude oil, is pushing up the price by about 50%, instead of the $65 a barrel level where he thinks current supply and demand metrics imply that it really should be. But since the Fed is actively (and justifiably) putting more dollars into the economy, he says that has resulted in "more dollars chasing that fuel," which of course leads to higher prices."

That's bad enough, but we don't even have to guess about what will happen when interest rates eventually rise to 'normal' levels, which they undoubtedly will in the next few years. The government's Congressional Budget Office has already done the math for us.

If Interest Rates Rise, Larger Deficit Follows has the details for us:

"Big borrowers are very sensitive to interest rates. The federal government is a big borrower. Even at today’s super-low interest rates, Washington spends a lot of money on interest — more than 6% of all federal spending last year.

And it will spend more on interest as rates move back toward normal, as they surely will someday. The Congressional Budget Office expects rates on three-month Treasury bills (now close to zero) to be at 4% in 2023 and rates on 10-year Treasury notes (now around 1.9%) to at 5.2% in 2023. If current budget policies persist, more than 14% of federal spending will go to pay the interest tab.

What if rates go higher than that? In response to a query from a member of Congress, CBO has done some calculations.

If interest rates rise to the averages seen between 1991 and 2000 — that is, 4.9% on the 3-month Treasury bill and 6.7% on the 10-year Treasury note in 2023 — then the deficit would be $274 billion bigger in that year than it would otherwise be — and $1.44 trillion bigger over 10 years. . . .

Of course, interest rates depend on inflation and on the strength of the economy and on Federal Reserve policy, all of which would have big effects on the budget.

But the point is clear: A government that borrows a lot will spend a lot more on interest when rates return to normal. And because about half of all U.S. government debt is now held overseas, that means a lot of that interest would be paid for foreigners, particularly the Chinese and Japanese."

Summing Up

The world's current financial situation as well as its near term outlook for economic growth are indeed bleak.

Cyprus is broke. Spain and Italy aren't far behind. Greece and Iceland went broke earlier. France, England and many other European countries are heavily in debt as well.

In the U.S., we're living on more and more borrowed money, and the Federal Reserve is actively practicing 'financial repression' by keeping unusually low interest rates. That can't continue indefinitely, and depending on what we do about solving our nation's economic problems the next few years, it could end either happily or as a financial disaster.

While I don't expect the result to be financial disaster, as a nation we simply can't ignore reality much longer. Accordingly, it's absolutely essential that we take the necessary time and available opportunity to clean up our act NOW with respect to our budget deficits and growing national debt while we're still able to do so.

Because when (not if) interest rates do rise, that increased interest expense will apply to whatever debts we have at the time as well as the current debts.

And the interest costs that amount to 6% of federal spending this year could easily amount to 14% or higher ten years from now. That's something we can't afford.

That's my take.

Thanks. Bob.