Wednesday, July 31, 2013

Stocks Peaked? ... Not Hardly

The U.S. economy is weak. The rest of the world's economies are weak, too.

That said, the U.S. and most other economies have bottomed, and with the prominent exception of China, things are improving, albeit at a very slow pace. That will be evident as our own GDP report to be issued later this morning for second quarter economic growth is likely to be ~1% or perhaps even less.

Yet our problems are essentially self-inflicted, so we can solve them when we summon the will to tackle them in a straightforward manner. We'll do just that, as We the People always do, but only after we first are able to convince our feckless political "leadership" that it's the politically correct and right thing to do. That could take some time, but it will be done. It's the American way.

Meanwhile, in anticipation of better days to come and due to Federal Reserve induced low interest rates making fixed income investments an unwise choice for investors, stocks have been on a tear the past few years. This year has been especially strong.

Does that mean those who didn't get in on the market's strong move the past few years, or haven't switched from bonds or cash into stocks as of yet, have missed the opportunity for further substantial appreciation in stock prices? Not hardly.

In fact, based on history, we've a long way to go until another secular market top arrives. At least that's my assessment of the current situation.

Streak of stock highs isn't as scary as you think has the historical summary and the reason for optimism about the future for long term investors:

"With every new stock-index high comes this old fear: You’ll be proved a sucker if you decide to buy stocks now.

The feeling is understandable, but a look at past performance suggests the fact the market is on a record run shouldn’t be a major factor in deciding whether to move into stocks at these levels, strategists said.

Sam Stovall, chief equity strategist at S&P Capital IQ, criticized financial media for making it sound as if the S&P’s successive streak of record closes alone indicate the bull market is likely to end in the very near future.

“I don’t know why they say that, other than to instill fear and thereby ensure that investors stay tuned. History, on the other hand, shows that new highs are typical in a maturing bull market,” Stovall said in a note.

He notes: “How else would the S&P 500 trade at 1,692 (as of 7/19/13) versus 13.55 at the start of the bull market in June 1949, unless it frequently traded in uncharted, new-high territory?”. . .

“So history would indicate, but not guarantee, that this bull market has many more new-highs to record before finally running out of steam,” he wrote."

Summing Up

Short term, who knows what the price level of stocks will be?  Not I, that's for sure.

Long term, however, everybody knows or at least should know. Higher. Much higher.

From 13 in 1949 to nearly 1700 today is an astronomical move.

There's reason for optimism about the future direction and level of stock prices. I plan to keep riding the waves, both up and down, but mostly up.

That's my take.

Thanks. Bob.

Tuesday, July 30, 2013

Individual Investors Have It Half Right

People are selling bonds. That's the good news.

They're keeping their money in cash and not investing it in stocks. That's the bad news.

Bond Investors Turn to Cash is subtitled 'Investors are cashing out of bonds but remain hesitant to plunge into stocks:'


"Investors are cashing out of bonds but remain hesitant to plunge into stocks, preferring instead to buy money-market mutual funds despite their low returns. The surprise move highlights persistent investor anxiety with equities even as stock indexes reach new highs.

Investors withdrew an estimated $43 billion from taxable bond mutual funds last month, the largest-ever monthly outflow, according to the Investment Company Institute. The debt-market swoon was fueled by worries that the Federal Reserve was softening its commitment to keeping interest rates low. Rising interest rates mean lower bond prices.

Many observers expected to see those flows turn to funds tracking U.S. stocks. But in a twist, the main beneficiary of the rush out of bonds has been money-market funds, which are cash-like investments that appeal to safety-minded investors.

Assets in these portfolios increased for the fourth week in a row in the week ended July 17, rising $8.5 billion to $2.6 trillion, ICI data show. That left money-market funds, which pay barely more than simply holding dollars, with the most cash since early April.

The shift highlights the uncertain investing outlook at a time of near record-low interest rates and tepid economic growth, along with the risk aversion that has sent money into bond funds following the stock-market plunge of 2008.

"I suspect that most bond money isn't ready to accept the fact that they are better off in equities," said Julius Ridgway, investment adviser at Medley Brown, an investment-advisory firm in Jackson, Miss.

Mr. Ridgway said that his clients still talk about sharp losses suffered in stocks in the throes of the financial crisis.

"Bond investors are much less tolerant of the potential for negative returns, and there's still the memory of a 30% decline [in stocks] in a year," he said.

To be sure, many investors expect to see the funds head into the stock market eventually, as those with large cash holdings seek out better returns. These people say the move to cash is merely a pause before investors help push the Dow Jones Industrial Average further into record territory.

An estimated $6.3 billion came out of U.S. stock mutual funds in June. But as markets stabilized this month, investors moved $7 billion back into U.S. stock mutual funds in the first two weeks of July, according to the ICI.

"I still think it's coming," said Robert Doll, chief equity strategist and portfolio manager at Nuveen Asset Management, which oversees $126 billion. "Investors need to see a sustained period of bonds going down as stocks rise."

But to others, the holding pattern in cash suggests a continued reluctance to commit to stocks that are trading at lofty prices. And should the U.S. bond market continue to stabilize following the Fed policy-induced swoon of last month, investors again may feel more comfortable with bonds.

"People are still a little gun shy," said Judy McDonald Moses, portfolio manager at financial advisory firm Evercore Wealth Management. "We think there will be some rotation into equities, but it could be that the bond money sits on the sideline in cash," she said.

At Fidelity Investments, which has 14 million client brokerage accounts, the amount of new money directed into cash and money-market funds in June nearly doubled from the month earlier.

Where that cash goes from here could guide the trajectory of both markets. Since the financial crisis, investors have plowed money into bond funds and pulled out of U.S. stock funds. Some $947 billion made its way into bond funds from the start of 2008 through the end of last year, compared with an outflow of $548 billion for U.S. stocks funds, according to ICI data. . . .

And already there are signs that the exodus from bond funds is slowing. In the week ended July 2, taxable bond funds shed $5.2 billion and the following week, $5.7 billion headed out the door. But for the week ended July 17, outflows totaled just $1 billion.

Still, others in the market say it is only a matter of time before investors who need to grow their portfolios shift more money to stocks from bonds.

"It could be a potentially huge deal for the equity market mainly because you've had such a long-lasting bull market in bonds," said Jason DeSena Trennert, managing partner and chief investment strategist at Strategas Research Partners. "The stock market can go a lot higher before this is all over.""

Summing Up

Near term, nobody knows whether stocks will rise or fall. Thus, people only concerned with the short term shouldn't buy stocks.

But unless stocks are overvalued, which they aren't today, long term investors should be current buyers and long term owners.

That's because stocks are headed higher over time. So are cash dividends paid on those stocks.

Bonds are headed lower over time, and interest rates are at historic lows today.

Bonds, cash and money market funds won't keep up with inflation over time.

Why wait? For those who haven't yet done so, it's time to adopt a DIY buy and hold stocks approach to long term investing.

That's my take.

Thanks. Bob.

Monday, July 29, 2013

Detroit Now ... Who's Next?

Today, Detroit. Tomorrow, Hometown, USA is subtitled 'How Detroit's bankruptcy filing will have national repercussions.' It's a compelling albeit somewhat unsettling read:

"Back when I was a rookie reporter at the Detroit Free Press nearly 30 years ago, the big debate the staff had over lunches was which would go bankrupt first: the big automakers or the city. And which experience would be worse.

You could make arguments for each possibility, but most of the staffers thought there was no way either event would ever actually happen. They insisted that the early signs of trouble were an anomaly or something that could be reversed before it became a calamity.

Having just earned my degree in economics, I thought back then that both were possible — many years in the future — and that bankruptcies for the Big Three would be bad for the city, but that a bankruptcy for the city would be bad for the entire country.

Sadly, what was once little more than a theory is now a reality, but what’s worse is that so many people — like my old colleagues — don’t recognize what the city’s financial woes mean on a national level.

Detroit owes roughly $20 billion to over 100,000 creditors, but the big creditors people will be watching are the city’s public-sector labor unions, which fear that a bankruptcy judge might let the city reduce or cancel pensions and retiree health benefits. . . .

That’s why the Detroit bankruptcy filing serves as a warning beacon for everyone expecting a pension and other benefits when they retire, a signal that it’s dangerous to entrust your financial future to others, assuming they are going to keep their promises.

How much precedent Detroit will set for other communities remains to be seen, but clearly everyone is watching to see what’ll be allowed. Other communities on the brink will see how the Motor City comes through the experience financially and decide if they want to mark a similar course on the map, even if it is as a last resort. . . .

The Pew Center for the States estimates that public pension plans nationwide were underfunded by $1.4 trillion in 2010. While the stock market has reached record highs — narrowing the gap somewhat — since then, the undeniable problem is that most state and local government pension funds don’t have enough money to live up to the promises they have made. . . .

Even if the Detroit situation is resolved without setting some benchmark for other troubled municipalities to use and follow, the nation’s pension shortfalls aren’t going away; this story is going to play out again and again, and while it will be corporations, cities and towns in the headlines, it will be the nameless, faceless individuals who are the real story.

That’s not a story anyone wants playing out in their own home.

Now, back to the bankruptcy filings of the big automakers for a moment. They were big stories for Detroit, but they actually showed the underlying values of the businesses; allowed a break and a chance to restructure, they were able to improve their fortunes and move forward. Talk to auto-industry analysts and some of them are more bullish on the prospects of the domestic manufacturers than they have been in decades.

The problem for the city of Detroit, by comparison, is that there is no reason to believe it comes through a bankruptcy with greatly improved prospects. The court process will be more a respite than a solution; the city will still have the same high unemployment, dwindling work force and Rust Belt economics, with the same delinquent tax revenue collections and other conditions that make it hard to see any ability to improve the long-term numbers without reducing pensions or eliminating benefits. . . .

Even during those conversations at the Free Press in the 1980s, colleagues who had seen the city and the automakers take care of generations of workers wondered if my worries about future bankruptcy meant that workers should not trust their pensions.

“Oh, they will get pension payments,” I said, “but maybe not of the size they expect, so the more they save now — rather than living as if they’re set and taken care of because that’s what the company or union says — the more secure they will be.”

That advice holds for anyone with a pension today: Take full responsibility for your future savings, or supplement the benefits you are earning now, just in case.

Anything less than that, and you have underfunded your future.

Companies and communities can get away with underfunding their futures, to some extent.... .

Individuals don’t have the same luxury.

If you don’t save enough — and if your pension benefits are cut because of the recklessness of your past employers — no one is going to bail you out. That’s what investors need to think about every time they hear about how Detroit’s bankruptcy is proceeding; trouble is going to show up, even if it takes a few decades to hit your home. Instead of crossing your fingers and hoping that you won’t be effected, make a plan."
Summing Up

As always, hope is not a good strategy.

Neither is looking the other way and acting as if all your potential or real problems will solve themselves.

Nor is dependence on the government, including a belief that the politicians can create money without first tapping the citizenry for the funds.

Thus, self-reliance is the best form of insurance for individuals.

Next best is having the confidence that our fellow man will do the right thing and help us when we need help.

That's not the government knows best gang of self-serving elitists. And it never will be.

That's my take.

Thanks. Bob.

Sunday, July 28, 2013

The 99% Rule ... How to Save the Middle Class ... Stop Taxing So Much of Their Earnings

President Obama keeps saying he wants to save the middle class. As do we all. So why not stop confiscating so much of their money in the form of taxes?

Why not let the middle class, however the President chooses to define middle class, keep more of what is earned by that middle class rather than having the government take it to pay government bureaucrats and administrators, and then by spending what's left of what is taken on "stimulating" the economy through government redistribution programs and government selected "investment" projects?

In other words, instead of taking more money from the middle class by taxing more of middle class earnings, just have the government refrain from taking it away in the first place. Life could be so simple if only the real objective of government was to better serve We the People. But it's not.

Accordingly, that's not the way government does things. It wants all the power it can get over people's lives, and that starts with confiscating more of the money we earn by raising the percentage of those earnings taxed. It's never enough.

Obama Says Income Gap Is Fraying U.S. Social Fabric says this in pertinent part:

"In a week when he tried to focus attention on the struggles of the middle class, President Obama said . . . “If the economy is growing, everybody feels invested,” President Obama said in an interview last week in Galesburg, Ill. “Everybody feels as if we’re rolling in the same direction.”                           

Upward mobility, Mr. Obama said, . . . “was part and parcel of who we were as Americans.”       
“And that’s what’s been eroding over the last 20, 30 years, well before the financial crisis,” he added.

“If we don’t do anything, then growth will be slower than it should be. Unemployment will not go down as fast as it should. Income inequality will continue to rise,” he said. “That’s not a future that we should accept.”. . . 
Without a shift in Washington to encourage growth over “damaging” austerity, he added, not only would the middle class shrink, but in turn, contentious issues like trade, climate change and immigration could become harder to address. . . .     
“I will seize any opportunity I can find to work with Congress to strengthen the middle class, improve their prospects, improve their security,” Mr. Obama said. But he added, “I’m not just going to sit back if the only message from some of these folks is no on everything, and sit around and twiddle my thumbs for the next 1,200 days.”. . .       
The priority, he said, should be spending for infrastructure, education, clean energy, science, research and other domestic initiatives of the sort he twice campaigned on.       
“I want to make sure that all of us in Washington are investing as much time, as much energy, as much debate on how we grow the economy and grow the middle class as we’ve spent over the last two to three years arguing about how we reduce the deficits,” Mr. Obama said. He called for a shift “away from what I think has been a damaging framework in Washington.”. . . 
The president’s latest campaign for his agenda began as national polls last week showed a dip in his public support. The declines were even greater for Congress and Republicans in particular, in their already record-low ratings.       
Mr. Obama said he would push ahead with a series of speeches that lay out his agenda ahead of the fights this fall with Congress. “If once a week I’m not talking about jobs, the economy, and the middle class,” he said, “then all matter of distraction fills the void.”"

So here's my idea about how to help save the middle class, create more jobs, grow the economy and thereby help save the rest of us Americans that you don't choose to define as middle class Americans, Mr. President. It's a simple one that could easily be explained in one simple speech to all Americans, including your political opponents.

Instead of more government spending  and government "investment" by the government knows best gang of elitists, how about just cutting income tax rates dramatically on the middle class, however you and the rest of the politicians may choose to define middle class and by however much you may choose to reduce their tax rates on earnings?

That would "stimulate" the economy and provide jobs and growth. It would also replace the dumb and already thoroughly discredited idea of government spending as the road to salvation and economic growth. In other words, just let the middle class keep more of the money earned by cutting taxes. Now.

And if that were to happen, maybe we could then begin to have a serious conversation and resolution about what to do over the longer term with respect to entitlements, including Social Security, Medicare, Medicaid and ObamaCare. And corporate taxes, too.

Reducing middle class tax rates would leave people with more money to spend, which in turn would provide needed jobs, growth and increased tax dollars, thus leading to a better budget result in the form of reduced fiscal deficits.

Especially if we then have the guts and god sense to tackle government waste now and entitlement programs later after the economy gets rolling again.

The only problem with this simple and workable approach to middle class salvation, jobs and solid economic growth is that such a common sense approach doesn't fit the Obama administration's playbook. That playbook has the government playing the leading role and not the middle class or anyone else. And that's a losing game plan, as the evidence of the past several years has made abundantly clear to anyone willing to face the cold hard facts.

So being a good damn-the-rich Democrat and not a good leader truly interested in making things better for the middle class and the rest of Americans, President Obama will continue to keep up the rhetoric and  continue to pretend to "feel our pain." In other words, he'll keep on talking the talk and not walking the walk.

Meanwhile, the U.S. economy will continue to "go slower" than it should as government spending keeps on growing.

And the middle class will continue to suffer. All 99% of us.

That's my take.

Thanks. Bob.

Saturday, July 27, 2013

ObamaCare and SwedenCare... A Preview of What's Coming to America? ... Let's Hope Not

ObamaCare is patterned after becoming Europe's version of advanced socialized health care in lieu of a market based system based on free choice and individual responsibility. The idea is that government will make our health care system more accessible, less expensive and better managed.

In short, the era of free lunches for one and all, courtesy of the government knows best gang of elitists, and paid for by the greedy fat cats and money hungry insurance companies, has finally arrived. We the People are in for big trouble.

Although I hope I'm wrong, my considered opinion is that it will make an already very bad situation even worse. Much worse, in fact.

So it's worth taking a few minutes to see what's coming to America. Sweden is a bastion of socialism and government knows best governance, so let's look there.

The Truth About SwedenCare contains much valuable information and present a scary future for Americans as we embark upon further government control of our already twice-as-expensive-as-most-other-countries'-health care systems.

"As a Swede currently living in the United States, with actual experience of Swedencare, I must reply to the delusions propagated by professor Robert H. Frank in his June 15 article in the New York Times, titled “What Sweden Can Teach Us About Obamacare.”. . .

The reality is that Swedish healthcare is the perfect illustration of the tragedy of central planning. It is expensive and — even worse — it kills innocent people.

Free universal healthcare came about in the 50s as part of the Social Democratic project to create the “People’s Home” (Folkhemmet). This grand effort also included free education on all levels, modern housing for the poor, mandatory government pension plans and more. Let us grant benefit of the doubt and assume that some of its proponents had good intentions; as so often, these intentions paved the road to a hellish destination.

It has taken awhile, but it is now becoming obvious even to the man on the street that every aspect of this project has been a disaster. . . .

There is nothing economically mysterious about health care — it is just another service. Like any other it can be plentifully provided on a free market at affordable prices and constantly improving quality. But like everything else, it breaks down when the central planners get their hands on it, which they now have. To claim that the problems are due to a “market failure” in health care is like saying that there was a market failure in Soviet bread production.

Let us look at what happened when health care was provided for free by the Swedish government (i.e., taxpayers). Note that the same economic principles and incentives apply to any service that the government decides to take over and provide for free. The same principles will apply to Obamacare, with some slight variations.

First it was understood in Sweden that free healthcare was only for the poor. It would not affect those who were happy with their existing provider. But when government suddenly offers a free alternative, many will leave their private practitioner in favor of the free goods. The public system will have to be expanded, while the private doctors will lose patients. The private doctors are then forced to either take employment within the public system or leave the profession. The result is one single public healthcare monolith. Can one find economies of scale within its operations, as professor Frank claims? Maybe. But if they exist, they will be dwarfed by the costs and inefficiencies of the bureaucracy that inevitably grows to manage the system.

These results are clearly visible in Sweden. There are very few private practices left. Of the few that are left, most are part of the national insurance system. A huge bureaucracy has been erected to take on all the necessary central planning of public and pseudo-private healthcare. . . .

The advantage of a free market system . . . is that supply and demand meet to form prices. These prices are signals to the practitioners and tell them what their patients need and value most. If there were a sudden surge in demand for open-heart surgery, the price of that service would, ceteris paribus, rise. The practitioners would be motivated by the rising price to move into fields where they can make higher profits. More doctors would move to provide open-heart surgery, the capacity for open-heart surgery would increase, the increased demand satisfied and the price would drop again. Some people protest and think that it is immoral for doctors to maximize profit and live well on other people’s medical problems. But why is it any more immoral than farmers profiting from peoples’ hunger?

Thus, free-market systems systematically allocate capacity (“supply”) and reallocate it quickly to satisfy patients’ needs (“demand”). Due to competition it has the added advantage of always striving for lower prices and higher quality. This principle is as true for medical services as it is for cell phones or gardening services.

The bureaucracy of a public healthcare system cannot use market prices to allocate resources. It must use some other means. First it will try to plan according to estimated demand. It will try to guess the number of bone fractures, open-heart surgeries and kidney transplants in the coming year. The estimates will invariably be wrong, causing shortages in some places and overcapacity in others — at the same — which translates into human suffering and economic waste.

Without the profit motive, there is no incentive to adapt to reality, to utilize expensive equipment to the optimum capacity, to improve the level of service, or treat patients with dignity. All change will have to be pushed down from the planners above by decree. . . .

It was recently revealed in one of the major newspapers that doctors were told to prioritize patients based on their value as future taxpayers. Old people naturally have a low future-taxpayer-value, so they naturally became low priority in the machine and less likely to receive proper treatment. In a private healthcare system you can make your own priorities, you can for example sell your house and spend the proceeds on becoming well. In a socialized system somebody else sets the priorities. . . .

Eventually you end up with a broken system such as the Swedish one, where service is “free,” but not accessible.

For non-emergency cases in Sweden, you must go to the public “Healthcare Central.” This is always the starting point for anything from the common flu to brain tumors. You must go to your assigned Central, according to your healthcare district. Admission is by appointment only. Usually they have a 30-minute window every morning, when you call to claim one of the budgeted slots. Make sure to call early or they run out. Rarely will you get an appointment for the same day. You will be assigned a general practitioner, probably one you have never met before; . . .and very likely one who hates his job. If you have a serious condition, you will be started on a path of referrals to experts. This process can take months. . . . This is an unavoidable characteristic of central planning, analogous to Soviet bread lines, which nobody refers to as a “feature.”

This healthcare “bread line” is where people die. It happens regularly that by the time a patient gets to see an expert, his condition has progressed beyond remedy. It also happens frequently that referrals get lost. Bureaucracies create listless employees, who don’t care, who refuse to go the extra mile, and who are never responsible for failures. . . .

The emergency room is a different experience altogether. Unless you are suffocating or are hemorrhaging profusely, you should expect to wait 5-7 hours to see a doctor. You can only hope for this “high” level of service if you arrive on a workday and during office hours. After hours, or on weekends, it is worse. Doctors are mostly busy filling out forms for the central health care authorities, scribbling codes in little boxes to report services rendered, instead of seeing patients. . . .

Due to a lack of profit motive, free services not only become bad but also very expensive. . . . the average earner pays about 70 percent tax of his income to the government, including the invisible big chunk withheld from his paycheck. Because free systems become more expensive with time and it is impossible to compensate by constantly raising taxes, every year more conditions are classified as non-life-threatening, and are therefore no longer covered.

In the final stage of a central planning failure, the planners simply give up. . . .

The market for private healthcare in Sweden is small. Few people can afford it since they already pay 70 percent tax for all of their “free” stuff. The politicians have private health care, though, naturally paid for by taxpayers. Apparently they are such special people that the healthcare systems they have designed for others are not good enough for them.

When I moved to the U.S., our family health insurance took three months to kick in. One of my family members broke a leg in this period. We found a “five-minute clinic” half an hour away, had the leg X-rayed, straightened and casted, with no waiting time — all for $200 cash. That kind of service is non-existent in Sweden. It is an example of how a market, not yet totally destroyed by the state, can create affordable and high quality services.

The reason American insurance-based healthcare is so expensive is that it is heavily regulated and legally connected to the equally-regulated insurance industry. Both are well protected from competition by regulation. Obamacare will make them even more expensive, bureaucratic, and inaccessible. The way to fix U.S. healthcare is by excising the central planners and regulators from it, not by implanting droves more of them.

I have seen (and lived in) the future of American health care, and it does not work."

Summing Up

ObamaCare is an accident waiting to happen.

Sadly, the wait won't last much longer.

That's my take.

Thanks. Bob.

Thursday, July 25, 2013

A Camel Nicknamed ObamaCare ... A Catastrophe and a Disaster in the Making? ... Sure Looks That Way to Me

Government elitists are in control of America these days. Government gone wild is coming to a town near you in the form of national health care or the completely misnamed Affordable Care Act, aka ObamaCare.

So let's take a few minutes and review the Affordable Care Act as a whole and what I believe its catastrophic consequences will be for the American public, including freedom of choice, personal responsibility and the American pocketbook as well.

In effect, it's just another step down the road to national health care, following Medicare and Medicaid, which followed Social Security and its old age and Disability "insurance" provisions.

But ObamaCare is beginning to look like a camel, which I've been told is what a horse would look like if put together by a committee. A big government OPM spending committee at that.  The government knows best gang run amok, if you will. Or in plain and simple language, a potential disaster in the making.

ObamaCare is unpopular and it hasn't even begun.

Even big labor unions, the longstanding friends and allies of Democratic politicians, hate it. And for good reason, too.

Most other people don't like the new law either.

And young folks are being encouraged, if not coerced, to pay far too much to subsidize the oldsters in order to make the Affordable Care Act truly "affordable." Talk about fairness. What's fair about that? Nothing at all.

So with that in mind, let's review what two Republican governors have to say about ObamaCare.

Jindal and Walker: Unworkable ObamaCare is an editorial by two prominent Republican governors and is subtitled 'Opaque rules, big delays and rising costs: The chaos is mounting:'

"Remember when President Obama famously promised that if you like your health-care plan, you'll be able to keep your health-care plan? It was a brilliantly crafted political sound bite. Turns out, the statement is untrue.

Aside from that small detail, the slightly larger problem is that the Obama administration doesn't have a health-care plan. Yes, the White House has a law with thousands of pages, but the closer we get to Oct. 1, the day government-mandated health-insurance exchanges are supposed to open, the more we see that the administration doesn't have a legitimate plan to successfully implement the law.

Unworkable. That word best describes ObamaCare. Government agencies in states across the country, whether red or blue, have spent countless hours and incalculable dollars trying to keep the ObamaCare train on its track, but the wreck is coming. And it is the American people who are going to pay the price.
Fifty-five working days before the launch of the ObamaCare health-insurance exchanges on Oct. 1, the administration published a 600-page final rule that employers, individuals and states are expected to follow in determining eligibility for millions of Americans. Rather than lending clarity to a troubled project, the guidelines only further complicated it.

If the experience of those working with the ObamaCare implementation at the state level had been taken into account, progress might have been possible, but the administration has treated states with mistrust. Perhaps that's because we can see that the federal government is repeating mistakes of the past and we know that outcomes rarely reflect what Washington has promised.

Adding to this mounting problem, the guidance that President Obama has offered to date has been inconsistent, arbitrary and frustrating—contributing further to the grave uncertainty that surrounds this law. But not everything about it is uncertain: In February, the nonpartisan Congressional Budget Office reported that seven million Americans will lose their employer-based health insurance as a result of ObamaCare.

On July 12, three of the country's largest unions sent a letter to Democratic leaders in Congress stating that ObamaCare would shatter not only hard-earned health benefits, but also destroy the 40-hour workweek that is the backbone of the American middle class. ObamaCare defines full-time employment as 30 hours per week. No wonder these unions are alarmed: They are widely credited with helping to get the votes to pass this unworkable law.

The administration, recognizing that ObamaCare is a ticking bomb, earlier this month announced that it would delay until 2015 the requirement that businesses offer health-care insurance to their employees or pay a fine. Yet the administration didn't also grant relief to individuals.

Think about that for a moment: The Obama team, for now, has spared employers but not employees.

The day of reckoning for businesses is put off, but not for everyday citizens. Many Americans may wonder: On what authority does the administration arbitrarily decide which aspects of a law not to enforce and which ones to keep?

As governors, we have been expressing concern about the unworkability of ObamaCare since its passage in 2010. We have seen the trouble the law poses for our own state economies. The most recent evidence: The government now says that it will not verify the eligibility of individuals who apply for subsidized insurance on the health-care exchanges.

Governors have firsthand experience with implementing public-assistance programs. We know how important it is to care for our most vulnerable citizens and to ensure that people are healthy and able to work. We also know that a one-size-fits-all approach like ObamaCare simply doesn't work. It only creates new problems and inequalities. That's why if you look at all 50 states, you'll see 50 unique ways of handling Medicaid.

Health-care premiums are going up. Many businesses have stopped hiring, to avoid reaching the limit of 50 full-time employees where they are required to offer health benefits. Those businesses that are hiring often take on part-time workers to stay under the full-time cap. Older individuals seeking work are finding that companies are reluctant to take a chance on their potential health-care costs.

These are just a few of the problems resulting from a program that wasn't thought through before it was rushed into law. No wonder we hear that the Obama attack machine is gearing up to blame everyone but the law itself for the chaos that lies ahead.

This law was a bad idea from the start, and the American public never supported it. The Obama team, taking advantage of an unusual two-year window when Democrats controlled all branches of government, foisted upon the country a liberal hodgepodge of unworkable notions that will wreak havoc on American health care. Delaying implementation of ObamaCare, not just the employer mandate, is a reasonable idea. But an even better one would be a complete repeal.

Mr. Jindal is the governor of Louisiana. Mr. Walker is the governor of Wisconsin."

Summing Up

This ObamaCare fiasco in the making is nearing the stage of reality.

The overwhelming problem is that there is so much wrong with the misnamed Affordable Care Act that it's virtually impossible to get and stay on top of things.

Think how hard it must be for those charged with implementing its mandates in a reasonable and equitable manner.

Then recall that the "impartial and objective" IRS is the government agency charged with managing the new law in a reasonable and equitable manner. Dream on.

It's simply an impossible assignment and a hopeless task.

Maybe it's going to prove itself to be the best example of all as to why We the People shouldn't trust or depend on government to do things for us that we can do in a more affordable and efficient manner for ourselves. Pretty much everything, in other words.

At least that's the way it looks to me.

Thanks. Bob.

Freedom and Equality ... Saving Detroit and the Middle Class ... Self Help and DIY Is the Way for Future Retirement funding

President Obama announced a couple of years ago that government action had saved Detroit.

Yesterday at Knox College in Galesburg, Illinois he proclaimed that he intended to have government take steps which would save the middle class. Just like he saved Detroit? If so, it's time for the middle class to face the facts.

There is no tooth fairy, just as there is no wealth creating government, and government elitists can't save the middle class. That's up to each of us and it's called self reliance.

For example, what we and French have long had in common are a belief in freedom and equality. However, since the two Revolutions in the late 18th century, they have decided to emphasize equality and we have always emphasized freedom. Security versus opportunity. We're the most prosperous nation in the word today. They're a welfare state basket case. As a result, our middle class does extremely well compared to theirs.

The facts are simple. Equal opportunities don't result in equal outcomes. Not unless the government rules instead of free people doing their own thing in a free society.

In other words, today our politics doesn't only suck. It stinks, too.

But let's talk about entitlements, since the President chose not to discuss that elephant in the room yesterday, just as he chose not to mention Detroit and its salvation. He just prattled on about inequality and what government would and should do to fix our economic issues. Hasn't government done enough already? Seriously.


People are afraid of investing on their own. They shouldn't be.

Instead they should be afraid of what happens when government does it for them. Government does a lousy job.

And guaranteed pensions are rapidly becoming a thing of the past as 401(k) plans replace them. This has already become the norm in the private sector and soon will be, or at least should be, in the public sector as well.

But how hard is it to take charge of our own investing portfolios? Not hard at all.

Squeezing the Most Out of 401(k)'s, for Now has the summary:

Squeezing the Most Out of 401(k)’s, for Now

"We hear a lot of discussion around the idea of reform. Reform the government. Reform the banks. Reform education. Reform health care. In fact, it’s hard to think of a system we’re 100 percent happy with.       

So it’s no surprise to see many headlines and stories recently about the “failed” 401(k) experiment and how we need a different system to finance and manage retirement. It’s also easy to see why John C. Bogle, founder and retired chief executive of the Vanguard Group, described 401(k)’s as “a thrift plan that we’ve tried to redesign into a retirement plan.” The average amount in 401(k)’s doesn’t bode well for people looking to retire in their 60s and live 20-plus years. There are clearly some issues with the current system.       
Let’s say we accept the premise that the system needs to change, that we as a society need to adopt a better way, a different way to help people finance their retirement. Let’s say further that we agree that maybe saving for retirement is better addressed as a collective, societal issue rather than an individual one. If we believe that, then we should pursue reform and advocate change to our elected officials.
But at the same time, we have to accept the reality we live in now. Even if we believe that the retirement system is broken, it is the only system we have, and we all know that it isn’t changing anytime soon.
It’s when we reach this point that I see a potential disconnect, maybe even a moral hazard. If we focus exclusively on the problem, in this instance the 401(k) system, it can be incredibly easy to abdicate personal responsibility. However, no matter how bad the system, we’re only hurting ourselves if we separate personal responsibility from reform.
We need to accept the fact that working for reform and taking personal responsibility are not mutually exclusive.
Even though we may wish it were different, the 401(k) is the option most of us have to plan for retirement. As part of the reform process, you owe it to yourself to get the most you can from the current system. Simply saying the system is broken doesn’t absolve you from making the best possible financial decisions you can.
We have a personal responsibility to understand the current system and make the best of it even as we’re trying to reform it. That means doing things like actually participating in your 401(k), making sure you take advantage of any match your employer might offer, selecting investments inside your plan that match your goals, maxing out contributions and not borrowing money from your 401(k).
Obviously, these five things won’t fix the broader problem we have as a society of being woefully unprepared for retirement. We have a system that needs fixing so it can serve a wider group of people, and we should all be advocating for those changes. But don’t let your frustration blind you to the things you can do right now in the system we have.
It reminds me a bit of this idea that we’re all waiting around for the day when scientists announce that they’ve found a pill that lets us eat anything, never exercise and live forever. What if they made the announcement tomorrow but said the pill wouldn’t be available for five years?
Would you stop eating healthy and exercising? Doubtful, because even though they may not be your favorite things to do, they’re still the only things you have at the moment to keep you healthy between now and five years from now.
That’s how it is with 401(k)’s. Hopefully something better will come along, but in the meantime, work with the tools you have to get you from here to there."
Summing Up 
Let's get real. Government officials have no money nor expertise to do for us that which we can do for ourselves.
In fact, an individually directed MOM approach always trumps bureaucratized OPM management run by government.
The market works wonders for those who invest and stay invested over long periods of time.
It's the low cost way to maximize long term returns and provide for a financially secure retirement for 'middle class' oldsters.
But first we have to accept the responsibility for achieving our own financial retirement goals. Once we do that, the rest is easy.
That's the real and only path to 'middle class' salvation. And to provide economic opportunities for our kids and grandkids, too.

Somebody needs to tell that to President Obama and the rest of the government elitists.

Just like somebody needs to tell him that he was wrong when he said that Detroit was saved.
Thanks. Bob.

Wednesday, July 24, 2013

It's Not Just Detroit ... Public Sector Unions Oppose the Will and Best Interests of Citizens and Taxpayers in San Jose, Too

Cities are going broke across America. Detroit is only one such example of things to come.

The rights of retirees, public employees, bondholders and citizens and taxpayers are all in play.

In simple language, there is not enough money to pay for all the promises that have been made by city officials to union represented employees and retirees, thereby jeopardizing the services to citizens and taxpayers, unless dramatic increases in taxpayer supplied funds, aka unaffordably higher taxes, are "donated" to the public sector's feeding trough by those already overburdened citizens and taxpayers. Lots of pain ahead for all concerned, and that's everybody involved.

Bondholders are sorry they've loaned money to those cities under the mistaken assumption that their loan would be repaid on time and with interest. Accordingly, these existing and prospective creditors won't be anxious to provide more funds at anywhere close to current interest rates or repayment terms, and perhaps not at all. In the end, that's probably a good thing, given the recklessness of city government officials and their public sector union counterparts and political allies over the years.

And these government officials should all be fired for caving in to the demands of public sector union leadership over time. Of course, many of these government officials who caved also were recipients of the exact same benefits given to their fellow public "servants," courtesy of their fellow citizens and holding-the-bag-taxpayers. It's a pure and simple case of conflict of interests, with nobody looking out for the interests of the broader citizenry and taxpayer base.

Not a pretty sight, that's for sure.

San Jose and Unions Set for Court Battle Over Pensions has the gruesome details of what's happening in California's third largest city:

"California's third-largest city, San Jose, and its employee unions (are facing off) in court over public pension reforms in a case that has major implications for other local authorities in the state trying to rein in the costs of retirement benefits.

The lawsuit brought against the measure, led by San Jose's police union, shows how difficult it is for local governments to break benefit promises to current and past employees even when other public services are being cut to pay for them.       
San Jose's pension overhaul in San Jose was promoted by Democratic Mayor Chuck Reed and approved by nearly 70 percent of voters in 2012 but city unions argue the move violates the rights of its members and is in breach of the California state constitution. They want the court to block the measure from going into effect and to maintain the current pension plan.
"If the unions prevail it will give local leaders elsewhere reason to pause. If Mayor Reed prevails, they may get even more ambitious in finding new ways to reduce pension outlays," said Larry Gerston, a political science professor at San Jose State University.
In recent decades, municipalities across the country have provided their workers with higher retirement benefits, both pensions and health coverage, often in lieu of pay increases. But this has often created a future burden for budgets, made worse in some cases by skipping payments into pension funds.
Two other California cities, Stockton and San Bernardino, last year filed for bankruptcy due to deep financial problems that include spiking pension costs.
Detroit's decision to file for bankruptcy . . . was also partly related to the cost of pension and other post-retirement benefits for city employees.
San Jose's pension reform, which has not yet been adopted because of the lawsuit, does not reduce benefits already earned by employees, but would require them to either pay higher contributions to maintain current benefits or receive lower benefits.
It also requires new city employees to split pension contributions evenly with the city. San Jose, which has two pension funds, currently pays $8 toward pension benefits for every $3 contributed by its employees, according to Dave Low, a spokesman for the mayor.
Reed made tackling San Jose's pension spending, which rose to $245 million last year from $73 million in 2001, a priority. San Jose has had to slash other spending to help cover the costs and balance its budgets.
San Jose, Silicon Valley's biggest city, is starting to see its revenue pick up as its economy and real estate market strengthen, but Reed says city services could be back on the chopping block without the projected savings from the pension reform.
Savings from the measure will help balance San Jose's books in future years and restore services cut over the past decade in response to budget shortfalls, said Low.
Unions for public employees don't see it that way.
"The mayor's initiative was flawed from the get-go because it pulls the rug out from employees who have worked hard, played by the rules and expected the city to keep its promise," said Steven Maviglio, a spokesman for Californians for Retirement Security, a coalition representing more than 1 million public employees.
"The foundation of California's public pension system for nearly a century is that pensions are a legally protected promise," Maviglio added. . . .  
Public sector unions in California say the law shields their pension benefits from changes as they are the property of employees tied to their compensation.       
San Jose's public pensions are generous in comparison to others in California, which are already well above the country's average.
The average San Jose police officer and firefighter who retired in the past decade, and worked for 26 years, gets an annual pension of $100,000, while the average civilian city employee who retired in the past decade, and worked for 20 years, has an annual pension of $45,000, according to proponents of the city's pension reform measure."
Summing Up
Government and union officials have duped the unwitting taxpayers over many years.
Now that the taxpayers have awakened and are unwilling to continue to throw the party for public sector employees at the expense of public services, the unions are trying to enlist the support of the California courts.
We'll stay tuned to what could be another precedent setting case.
My own take is that the unions are skating on thinner and thinner ice, but we'll see what the court says.
Thanks. Bob.

Tuesday, July 23, 2013

Public Funds ... From Whence Do They Come?

It's time for a tell-it-like-it-is truth telling session.

In finance there are sources and uses of funds. The funds come from somewhere and they are used elsewhere. It's not a chicken and egg situation, because without sources of funds there can be no uses of funds. In other words, the supply of funds is what matters most, because without the source first coughing up the money, there's no money for the government to use.

With public monies, taxpayers are always the "eventual" source (lenders are interim sources) and government elitists determine how those funds are used. The more supplied to government, the less retained for investment in future economic growth by individuals and companies. It's just that simple.

Thus, government funds are supplied by taxpayers and creditors. If creditors provide sources, they require interest payments and debt repayment as well. Otherwise they don't provide funds.

On the other hand, taxpayers provide funds in order to receive services from public officials. That said, the taxpayers keep providing even if the services stop coming.

Take public sector pensions and retiree health care benefits, for instance. Services aren't being provided but taxpayers still pay. At least that's the playbook long followed by government officials and union leaders. As more of the "source" money is paid to retirees, there's less available for providing current services and the payment to current government employees. Unless taxes are raised further, that is.

So now all hell is breaking loose in Detroit and this hell raising state of affairs will soon be coming to many other cities and states as well.

After Detroit, Who's Next is subtitled 'Creditors and unions are learning a painful, but useful, lesson:'

"Detroit emergency manager Kevyn Orr has outraged unions and investors by seeking to subordinate the city's debts to the welfare of its residents via bankruptcy. But what probably disturbs the creditors even more is that his plan could set a precedent for other municipalities that are going broke.
For years Detroit has been gutting services and sucking taxpayers dry to finance retirement and debt obligations. Nearly 70% of parks have been closed since 2008, and four in 10 street lights don't work. The city has cut its police force by 40% in a decade. Response times are five times longer than the national average, and it has one of the highest violent crime rates in the country.

Meanwhile, Detroit residents pay the highest property and income taxes in the state. Last year its business tax doubled. About 40% of revenues go toward retirement benefits and debt, much of which was issued in the last 10 years to finance pension contributions. Payments on $1.6 billion of pension-related certificates of participation consume nearly every dollar of property tax revenue.

Investors jumped at the high yields on Detroit's debt because they expected the city to borrow and raise taxes to the hilt to avoid default. If Motown risked defaulting, creditors bet that the state or federal government would swoop in like Superman and save the city in the nick of time.

But no state bailout was forthcoming, and rightly so. Governor Rick Snyder appointed Mr. Orr to revive the moribund city, and he refused to take another pound of flesh from Detroit taxpayers. Instead, he plans to use bankruptcy to cut retirement benefits, slash capital-market debt and reinvest $1.25 billion in public services.

Unions that have propagated the conceit that pensions are inviolable are stunned to discover that they may have been wrong. Meanwhile, investors appear astonished that there's no such thing as a risk-free return, which they should have learned from Greece and Argentina. One question to ask now is if Detroit isn't too big to fail, is any city?

While few municipalities are as economically depressed or dilapidated as Detroit, many have borrowed heavily, raised taxes and hollowed out services to pay retirement and debt obligations. Some like Detroit may soon decide that clipping bondholders and pensioners is a better option than to keep whacking taxpayers.

Take Oakland, which is Detroit's doppelganger on the West Coast. The run-down Bay Area city, which has the highest crime rate in California, recently laid off more than 100 police to fund retirement benefits and pension-obligation bonds. Murders and robberies shot up by nearly 25% last year. To avert steeper cuts, the city borrowed an additional $210 million to finance pensions.

Philadelphia and Chicago have been less scrupulous about financing pensions and are now having to make balloon payments to prevent their retirement funds from going broke. Philadelphia is spending about 20% of its budget on pensions to make up for years of short-changing the system. In 1999, it issued $1.3 billion in bonds to invest in the pension fund, but it has paid more in interest than it has earned on its pension investments.

The city has recently raised sales, property and business taxes. The city council is now discussing using revenues from a one-percentage-point sales tax hike in 2009 intended for schools to finance pensions. Its sale tax rate is now 8%, the limit under state law.

Chicago is also fast approaching a day of reckoning. Chicago Public Schools last week announced 2,100 layoffs, which Mayor Rahm Emanuel blamed on a $400 million spike in pension payments. "The pension crisis is no longer around the corner," he said. "It has arrived at our schools."

Moody's downgraded the city's general-obligation bonds last week due in large part to rising retirement and debt service costs, which comprise about a third of its operating budget. Chicago plans to dump 30,000 retirees on Medicare and the ObamaCare exchanges in 2017. Yet all savings will go toward pension payments, which will triple in 2015. The mayor has warned that the bill could force a 150% spike in property taxes.

Smaller cities may present an even greater default risk because they have lower borrowing limits, and retirement costs tend to consume a larger share of their operating budgets. Take the Detroit suburb of Hamtramck, which is spending more than one out of every five dollars on pensions. Gov. Snyder this year appointed an emergency manager to help stave off bankruptcy. Trouble is, emergency managers can't force a restructuring of debts or retirement benefits. Hamtramck was under the control of an emergency manager from 2000 to 2007, which didn't resolve its deep-seated fiscal problems.

One of the benefits of bankruptcy is that it allows debtors to shed liabilities that impede growth and investment. That benefit must be weighed against the cost of being frozen out of bond markets, which might be a good thing if it prevents more borrowing to finance unsustainable costs.
In Detroit, unions and creditors helped to perpetuate a borrow-tax-spend cycle at the expense of city residents. Bankruptcy shows the party is over, as it may also soon be for many other cities."
Summing Up
Creditors will be reluctant to loan money to deadbeat cities if there is no government, aka taxpayer, bailout coming.
And the federal government has no money of its own, so it will either have to further tap U.S. taxpayers or require loans to bail out cities like Detroit and countless others, should it make the political decision to do so.
The time is drawing nigh when taxpayers will be the IMMEDIATE sole source of municipal funds (unless interest rates dramatically increase to offset the increased repayment risk) as current and prospective lenders decide to stay away from the no-win fray.
My bet is that taxpayers won't keep providing blank checks to cities and their public sector unions.
That means painful times ahead for lots of places and lots of people. Very painful indeed.

The fat lady has sung.
Thanks. Bob.

Monday, July 22, 2013

"Safely" Investing in Bonds and Funding Public Pensions ... Be Careful What You Wish For ... A Primer on Bonds

We "know" bonds are safe investments. What we don't know is that what we do "know is actually untrue today, as is much other conventional wisdom.

The plain fact is that bonds are not safe investments. In fact, they will do more harm than good to your investment "health" for years to come.

Here's how the simple story of simple math unfolds. Interest rates are low. Over time they will increase. As they do, bonds will become worth less. Their total return won't even offset future inflation. That's just the way the math of bond investing works.

Thirty years ago buying thirty year maturity bonds was a good investment decision. Today anything longer than thirty days is likely to be a bad investment choice.

What this has to do with public pension funding is simple. If the average fund assumes an investment return of 7%-8% annually and if the average portfolio is 40% or more invested in bonds, and the if the average bond returns 0%-3% at best over the next several years, there is no way the typical blended portfolio mix in total will earn 7%-8%. That is, unless stocks return 12%-14% annually on average, which they won't.

As an example, Illinois claims to have a $100 billion underfunding problem with public sector pensions. Truth be told, it's probably closer to $200 billion or higher. Other plans have the same problem.

That all means taxpayers are in even greater jeopardy than commonly believed throughout America. In turn that's not good news for economic growth as higher taxes beget slower growth and higher unemployment. It's a vicious circle.

For why public pension funding is an issue that will be with us for a long time, please read on. It's not a pretty picture.

If You're a Bond Investor, Beware of the Seesaw has the story:


"THE Securities and Exchange Commission issues frequent bulletins about what it calls “investment frauds and scams” — a frightening taxonomy of plots and stratagems aimed at separating investors from their money.
The agency’s alerts range from warnings of Madoff-style Ponzi schemes to “pump and dump” operations intended to temporarily inflate a stock price. They also include cautionary notes about polite offers of assistance from predators posing as government regulators.
Lately, though, the S.E.C. has been giving a warning of a different sort. Bearing the general title “Interest Rate Risk,” this latest bulletin is a cry for understanding. It’s about bonds, and for most people, the subject is confounding.       
The problem isn’t a new scam but a lack of knowledge about how bonds work, which can be dangerous in a time of rising interest rates. In its bulletin, the agency points out that investors need to understand that when rates rise, bond prices generally fall. This inverse relationship is a fact of life in the bond market. Like gravity in the physical world, it’s constant, powerful and important.
But outside trading floors, business schools, banks and brokerage firms, bond dynamics are fairly obscure, surveys find. That’s troubling in a time like this, said Lori Schock, director of the agency’s Office of Investor Education and Advocacy. “We’re not predicting what’s going to happen to interest rates or when,” she said, “but we do know that rates can’t go much lower. And we know that they can go a lot higher.”
If interest rates do go higher, most people don’t understand how that will affect bonds. A 2012 financial literacy survey by the Finra Investor Education Foundation asked this question: “If interest rates rise, what will typically happen to bond prices?” Prices will fall, but only 28 percent of adult Americans in the survey answered correctly. Finra ran the same survey in 2009 and got the same results.
The Finra survey found that financial literacy levels were generally very low. On its Web site, it offers a five-question quiz, with questions drawn from the survey — none requiring computations, just an understanding of basic concepts. Only 14 percent get them all right, it says. (The average number of correct answers is between 2 and 3.)
As far as bonds go, Ms. Schock said, one way to visualize the relationship of interest rates and prices is to think of what she calls “a teeter-totter.” She’s from Indiana. In Queens, where I come from, we call it a seesaw. Whatever you call it in your playground, imagine interest rates sitting on one side of a plank and bond prices clinging to the other. When one side rises, the other falls.

That’s just the way seesaws work, and it may be enough explanation. But suppose you want to go a little deeper: Why do interest rates and bond prices move like this?
Here’s one way to understand it: When you buy a fixed-rate bond, you are making a loan. In return, you get your money back, plus interest. When market interest rates rise, the bond drops in value. That’s because, under current conditions, anyone making the same loan will expect more interest than you’ve gotten. If you want to trade the old bond for a new one, the old one will have less value. And when something sold in the marketplace has less value, its price usually falls.
There are exceptions to every rule, of course. If the bond’s interest rate isn’t fixed, and instead readjusts as market rates change, the seesaw analogy doesn’t hold. And the prices of different kinds of bonds shift differently. But the seesaw captures the basic idea.
It’s important right now because interest rates have risen since the spring, and, therefore, prices have fallen. If you don’t understand the relationship between prices and rates (often called yields) you could hurt yourself “by reaching for yield, buying bonds that you think are going to pay you more interest, only to see rates go up further, so the value of your bonds will fall,” Ms. Schock said.
Many people are in danger of getting hurt this way. “We’re concerned that many people might mistakenly think that there’s safety in investing in bonds,” she said, “when there’s actually a fairly good chance of running into trouble with interest rate risk now.”
EVEN Treasury bonds are affected by interest rate risk, although the federal government backs these bonds and will pay all the principal and interest if you hold them to maturity. Such high-quality bonds are safe in many ways, especially in comparison with other assets.
Bond prices are generally less volatile than stock prices, and a major bond market decline is likely to be much less severe than a major fall in the stock market. Bonds can provide steady income and — whether held individually or in a mutual fund — can play an important role in a diversified portfolio, buffering against stock fluctuations.
But when market rates rise, you’ll run into a pricing problem if you need to sell a bond — or if you hold Treasuries in a mutual fund, where they are priced daily. All things equal, your mutual fund will fall in value as yields rise.
Interest rates on Treasuries — and a range of other bonds — have already risen sharply, and a broad consensus of market analysts says they are likely to rise further in the years ahead. . . .
If you hold your bonds until maturity — or keep them as a buffer — you may tolerate such swings.
But it’s better if you understand what’s going on. Remember the seesaw: When yields rise, prices fall."
Summing Up 
What the above article fails to mention is inflation and the declining value of money over time.
That's perhaps the biggest reason of all to avoid bonds for the next few decades.
So if you want to know how likely it is that the public sector pension funds will earn their assumed rates of return over time, my answer is NO. But don't take my word for it.

Form your own opinion. A good place to start is to know how much of the total public sector's portfolio is invested in bonds.
In all probability, We the People won't like the answer.
A steep hill just got steeper than it seemed to be. More like trillions of dollars steeper, in fact.

That said, the truth will set us free, and getting a better reality is always a good way to begin the process of problem solution.
That's my take.
Thanks. Bob.

Sunday, July 21, 2013

Public Sector Pensions Are Blank Checks Negotiated by Unions and Signed by Government Officials on Behalf of Unwitting Taxpayers ... Trick Question ... How Much Underfunded are Public Sector Pensions?

A blank check, feigned precision and other phrases come to mind when reflecting on the nature of our public sector underfunded liabilities for retirees. It's a blank check because nobody knows with any degree of certainty how much the promised benefits will cost the taxpayers.

IT ALL DEPENDS is the only correct answer to how high is up in the area of guaranteed pension promises. All we do know with certainty is the name of the supposed guarantor.  The only one on the hook as the guarantor, even though he didn't volunteer to take the bait and reel himself in, is the TAXPAYER.

The shameful facts are that government and union officials have committed taxpayers to trillions of dollars in obligations to make future payments without the knowledge of those taxpayers or even the identity of those future taxpayers as to what fulfilling those promises will cost. Feigned precision is the closest thing we have to a known number, but we do know it's an astronomical and unaffordable sum.

We hear a lot these days about the underfunded nature of public sector pensions. In Illinois, for example, the number is approximately $100 billion. That's a nice round number but is it credible?

And what about the other cities and states, or the federal government, for that matter? How deep is the hole?

Well, nobody knows and the answer is unknowable.

And the reason nobody in government or public sector union leadership has been genuinely concerned in the past is that it hasn't made any difference. The taxpayers are on the hook for any shortfalls, or so the conspiring elitists in government and public sector union leadership thought.

The real answer is a "known unknown" as it depends on how much is  contributed, how much those contributions earn over time, how long people work before taking benefits and how long those same people live after beginning to receive those benefits. And in case that's not enough "known unknowns" to ponder, there's also the matter of automatic cost of living adjustments in many plans.

So the cost to taxpayers will be bigger than a bread basket. That's for sure. But how much bigger, nobody knows.

That's how shameful the situation is and we have government officials and union leaders to thank for this entirely confusing and miserable state of affairs.

Detroit Gap Reveals Industry Dispute on Pension Math provides a good overview of the difficulty with quantifying the issue. While the real answer is that 'IT ALL DEPENDS ON WHAT HAPPENS IN THE FUTURE', let's see why that's the case:

"Until mid-June, there was one ray of hope in Detroit’s gathering storm: For all the city’s problems, its pension fund was in pretty good shape. If the city went under, its thousands of retired clerks, police officers, bus drivers and other workers would still be safe.

Then came bad news. Seemingly out of nowhere, a $3.5 billion hole appeared in Detroit’s pension system, courtesy of calculations by a firm hired by the city’s emergency manager.


Retirees were shaken. Pension trustees said it must be a trick. The holders of some of Detroit’s bonds realized in shock that if the city filed for bankruptcy — as it finally did on Thursday — their claims would have even more competition for whatever small pot of money is available.

But Detroit’s pension revelation is nothing new to many people who run pension plans for a living, the math-and-statistics whizzes known as actuaries. For several years, little noticed in the rest of the world, their staid profession has been fighting over how to calculate the value, in today’s dollars, of pensions that will be paid in the future.

It may sound arcane, but the stakes for the country run into the trillions of dollars. Depending on which side ultimately wins the argument, every state, city, county and school district may find out that, like Detroit, it has promised more to its retirees than it ever intended or disclosed. That does not mean all those places will declare bankruptcy, but many have more than likely promised their workers more than they can reasonably expect to deliver.

The problem has nothing to do with the usual padding and pay-to-play scandals that can plague pension funds. Rather, it is the possibility that a fundamental error has for decades been ingrained into actuarial standards of practice so that certain calculations are always done incorrectly. . . .

Since the 1990s, the error has been making pensions look cheaper than they truly are, so if a city really has gone beyond its means, no one can see it.

“When the taxpayers find out, they’re going to be absolutely furious,” said Jeremy Gold, an actuary and economist who for years has called on his profession to correct what he calls “the biases embedded in present actuarial principles.” . . .

When a lender calculates the value of a mortgage, or a trader sets the price of a bond, each looks at the payments scheduled in the future and translates them into today’s dollars, using a commonplace calculation called discounting. By extension, it might seem that an actuary calculating a city’s pension obligations would look at the scheduled future payments to retirees and discount them to today’s dollars.

But that is not what happens. To calculate a city’s pension liabilities, an actuary instead projects all the contributions the city will probably have to make to the pension fund over time. Many assumptions go into this projection, including an assumption that returns on the investments made by the pension fund will cover most of the plan’s costs. The greater the average annual investment returns, the less the city will presumably have to contribute. Pension plan trustees set the rate of return, usually between 7 percent and 8 percent.

In addition, actuaries “smooth” the numbers, to keep big swings in the financial markets from making the pension contributions gyrate year to year. These methods, actuarial watchdogs say, build a strong bias into the numbers. Not only can they make unsustainable pension plans look fine, they say, but they distort the all-important instructions actuaries give their clients every year on how much money to set aside to pay all benefits in the future.

If the critics are right about that, it means even the cities that diligently follow their actuaries’ instructions, contributing the required amounts each year, are falling behind, and they don’t even know it.

These critics advocate discounting pension liabilities based on a low-risk rate of return, akin to one for a very safe bond. . . .

Year after year there has been consistent resistance from the trustees of public pensions, the actuarial firms that advise them and the unions that represent public workers. The unions suspect hidden agendas, like cutting their benefits. The actuaries say they comply fully with all actuarial standards of practice and pronouncements of the Governmental Accounting Standards Board. When state and local governments go looking for a new pension actuary, they sometimes post ads saying that candidates who favor new ways of calculating liabilities need not apply.

Much of the theoretical argument for retaining current methods is based on the belief that states and cities, unlike companies, cannot go out of business. That means public pension systems have an infinite investment horizon and can pull out of down markets if given enough time.

As Detroit has shown, that time can run out."

Summing Up

The fat lady is singing in Detroit and all across America as well.

And while the song she's singing about public sector pension unaffordability and duping the taxpayers is indeed a sad one, it's one we all need to hear.

Only then can We the People intelligently decide what needs to be done in the future.

And decide we must for the sake of all Americans, including future generations.

That's my take.

Thanks. Bob.

Saturday, July 20, 2013

After Detroit ... Next Comes Chicago and All of Illinois? ... Then Who and What? ... That is the Question

Detroit is bust.

What about Chicago? And Illinois as a whole?

After all, pension obligations are pension obligations. And cities are cities. And irresponsible Santa Claus type governments in many locations across America acting in concert with public sector union officials are producing the same results as they have in Detroit. Take the city of Chicago and the state of Illinois as a whole, for example.

Moody's Cuts Chicago Credit Rating, Citing Pension Problems has the details:

"While everyone was focusing Detroit’s bankruptcy filing late Thursday, Motown wasn’t the only Midwestern city facing muni-market woes, as Moody’s cut Chicago’s general obligation bond rating by three notches to A3 from Aa3. From Moody’s:

The downgrade of the GO rating reflects Chicago’s very large and growing pension liabilities and accelerating budget pressures associated with those liabilities. The city’s budgetary flexibility is already burdened by high fixed costs, including unrelenting public safety demands and significant debt service payments. The current administration has made efforts to reduce costs and achieve operational efficiencies, but the magnitude of the city’s pension obligations has precluded any meaningful financial improvements.

These credit challenges are balanced against key credit strengths that support the A3 rating, particularly Chicago’s long-standing role as the center of one of the most diverse economies in the nation and its broad legal authority to generate revenues from a large property tax base and a larger sales tax base.

The negative outlook is based on the dramatic spike in annual pension payments scheduled to take effect in the 2015 budget year (payable in 2016) under state law, which will place material strain on the city’s operating budget. The outlook incorporates the likelihood of continued growth in unfunded liabilities in the city’s four pension plans given currently suppressed contributions from the city.

What Chicago is facing at the city level is magnified at the state level too, as Illinois is plagued by its own unfunded pension liability. More from Moody’s:
The outlook also reflects the State of Illinois’ (A3/negative) constitutional protection of pension benefits. Given this framework, in order for the city to realize any significant alleviation in pension costs, the Illinois General Assembly would need to enact pension reform legislation that ultimately withstands inevitable litigation."

Summing Up

Governments gone wild eventually become governments gone broke. And "eventually" is here right now for Detroit. But it's not just government gone wild in Detroit. Chicago and the state of Illinois are close on Detroit's heels.

And what's happened with out-of-control and underfunded public sector pensions and health care benefits in Detroit and Chicago is also happening in lots of places across America.

To further complicate matters, it appears that a clear and unambiguous state of denial is prevalent among both government and public sector union leadership.

Perhaps they think We the People are dumb enough to believe the story they're telling. And if We the People are in fact buying their story that they didn't create the mess, then we're all in deep doo-doo.

The shameful state of affairs is clearly the result of granting public sector pensions and retiree health care benefits that weren't and aren't affordable. It's a simple case of government and union leadership screwing the taxpayers, but what else is new?

So although most taxpayers never saw the debacle coming, it's arrived.

To repeat, what government and public sector union officials have done is shameful, as they in effect have said by their actions over the years, "The taxpayers be damned."

But now the noose is tightening around the necks of all concerned and there's no place left to hide.

And We the People as citizens and taxpayers are beginning to realize that what the politicians and union leaders have done is not only shameful but it's frightening, too.

And We the People are also coming to the realization that as a result, future generations of Americans are being screwed.

Here's the good news. Things are finally coming to a head, and that's a good thing.

Because if something can't go on forever, it won't.

Sunshine is a great disinfectant.

That's my take.

Thanks. Bob.