Thursday, December 31, 2015

Annuities 101 ... The More We Know About How Things Really Work, The Better Our Decisions Will Be

Occasionally I am asked about annuities.

I always answer that there is no free lunch (despite what the sales people or politicians may say), and that knowledge is the prerequisite to power when making individual financial choices.

So with that as background, Annuities in retirement: a true guarantee? is informative as well as appropriately subtitled --- 'Before plunking down money, know the fees and risks:'

"After the economic downturn in 2008, the annuity industry started to gain attention from investors looking for a way to secure investment returns during retirement. New income riders and guarantees were enticing to people who had just witnessed a sharp decline in their portfolios, and annuity companies offered a safety net for fearful consumers.

Although this may have seemed like an attractive option at the time, expenses associated with annuities can sometimes take away from a retiree’s earning potential . . . .

Annuities can be a valuable wealth accumulation tool if used properly, but it’s important for investors to do the proper research before jumping into them with their hard-earned investment dollars.

Annuities 101

There are two basic types of annuities: immediate and deferred.

With an immediate annuity, you begin to receive payments very shortly after the initial investment. For example, you might consider purchasing an immediate annuity if you determine that you want an additional income stream when you retire.

With a deferred annuity, you invest for a period until you decide to start taking withdrawals. A deferred annuity accumulates money for an indefinite amount of time, unlike the immediate annuity which pays out right away. Deferred annuities can be converted into immediate annuities if, and when, the owners decide to begin collecting payments.

Within these two categories, annuities can also be fixed or variable, depending on whether the payout is a set sum (fixed) or tied to the performance of the investments within the contract (variable).

Despite the additional income benefits that annuities offer, investors should always evaluate the associated risks before purchasing one for their investment portfolio.

The downside of annuities

Many investors are unaware of the potential fees that come with purchasing an annuity. The high expenses are often not worth the return. Here’s a rundown of the various annuity fees.

Commissions: Most annuities are sold by insurance brokers or other salespeople who collect a commission as high as 7% from the products they sell. . . .

Surrender charges: Many annuity contracts contain steep surrender charges for pulling money out during the first several years after you buy them. The surrender charge typically costs about 7% of your account value if you leave after one year and then declines by one percentage point every year until it gets to zero.

High internal fees: If you invest in a variable annuity, you’ll encounter a certain amount of annual expenses built into the contract. You will have an annual insurance charge that can be 1% or more.

Annual investment management fees will add 0.5 to 2% and fees for various insurance riders can add 0.5 to 1.75% or more. Add them up, and you could be paying 2 to 3% a year, if not more. That can take a big bite out of your retirement nest egg, and in some cases, even cancel out some of the benefits of an annuity.

Regular investment account vs. annuity

If we were to compare the return of a regular investment account which charges an average of 1.5% a year to an annuity contract which charges 2.5% a year, the difference can be staggering.

Let’s assume we have two identical IRA rollover accounts with an initial value of $1 million. Since we don’t have to worry about taxes until we start taking money out of the IRA, let’s see what higher internal costs can mean over 20 years.

We’ll assume both portfolios are invested the same way, earning the same rate of return (7%, for our example). At the end of 20 years, that additional 1% cost would yield a final value of $2.7 million versus $3.3 million — a whopping $600,000 in internal expenses that would have been paid inside of the annuity. (Calculation assumes growth rate of 7% over 20 years with a 1% variable of internal expenses.) {MY NOTE: Making that referenced annual variable investment expense 0.5% instead of 2.5% would yield a final value of $3,900,000, or $1,200,000 more than the example. Costs matter!}

If you decide to pay extra for a guaranteed benefit, or an income rider, this is a perfectly acceptable expense. The problem is many people don’t understand the cost that comes along with that peace of mind.

When considering an annuity, it’s important to know your options and understand why you may or may not be the right candidate.

How to know if you’re a fit

Annuities can be appealing to investors because they offer the ability to build tax-deferred savings on investments that would be taxable if left in a personal investment account. . . . You don’t have to be an investment professional to understand that tax-deferred money will grow faster than money that is subject to being taxed every year.

If you’re only looking for tax deferrals, however, you don’t need an annuity within an existing retirement account.

An IRA is already tax-deferred, so holding an annuity in an IRA is redundant. If you’re looking for a particular insurance benefit (income rider, death protection, etc.), you may want to keep the annuity, but you should still be aware that the additional expenses could potentially eat away at your investment return.

Annuities have many income riders or benefits available to consumers, and they are often a good fit for anyone who wishes to include a guaranteed income stream in his or her household budget. This model tends to work well for cautious investors, and if you’re willing to give up control of your investments, it might be right for your lifestyle.

But if you decide to keep your investment portfolio and establish a monthly distribution to be paid directly to your bank account, the returns are likely to be much higher than an annuity. Managing your portfolio allows you to choose from the entire world of investment possibilities that can be allocated and diversified in whatever way you see fit. You can still have total control over the investments, create your own income stream and even change the amount of income you get from month to month and year to year.

The trade-off for all this flexibility is that none of it comes with a guarantee."

Summing Up

Risk is. And that's an inescapable fact of life.

Accordingly, managing risk is all about making informed tradeoffs.

And that definitely applies to a decision to purchase annuities or stick with individual investing.

In the example above, the annuity buyer would elect to trade $600,000 for the security of an annuity. In fact, the trade would be $1,200,000 if the person paid an adviser 0.5% annually instead of the referenced 1.5%. And that $1,2000 difference would be even greater if over time a well managed portfolio exceeded the assumed 7% annual rate of return.}

When it comes to buying anything (including college, cars, credit card purchases and homes), knowing the costs and tradeoffs is a necessary prerequisite to reaching appropriately informed decisions.

Accordingly, when evaluating the pros and cons of purchasing an annuity, the rule of Caveat emptor, aka Let the Buyer Beware, should be front and center.

That's my take.

Thanks. Bob.

10 Rules For the Ride of Your Life

In an interview that took place shortly after he was he was drafted by the NBA's Sacramento Kings, former University of Kentucky player, Willie Cauley Stein, was asked about his time at Kentucky under coach John Calipari.  He said all the things we've become accustomed to hearing, "he made me a man", "he taught me the value of hard work", etc.  But then he said something unexpected.  He mentioned that perhaps the most impactful thing his coach had done was give him a book to read called The Energy Bus, by Jon Gordon.  Having now read it myself, I can certainly understand why the book made such an impression on him.  It delivers a powerful message inside an entertaining narrative.

At the risk of playing spoiler to anyone who might decide to pick the book up after seeing this, I offer up the the 10 rules that "Joy" the bus driver lays out for her newest passenger, George:


1. You’re the Driver of the Bus. 

2. Desire, Vision and Focus move your bus in the right direction. 

3. Fuel your Ride with Positive Energy. 

4. Invite People on Your Bus and Share your Vision for the Road Ahead. 

5. Don’t Waste Your Energy on those who don’t get on your Bus. 

6. Post a Sign that says “No Energy Vampires Allowed” on your Bus. 

7. Enthusiasm attracts more Passengers and Energizes them during the Ride. 

8. Love your Passengers. 

9. Drive with Purpose. 

10.Have Fun and Enjoy the Ride. 

The rules themselves are straightforward enough, but the book, which is a very quick read, provides the context in a format that makes the message go down very easily.  I think it's a great book with which to ring in the new year and I'm sure anyone who takes the short amount of time necessary to read it will agree.


Wednesday, December 30, 2015

Investing for Retirement and Why Target Date Funds Don't Make Sense ... Myth vs Reality ... Bonds Aren't Safe and Sound Investments for 401(k), IRA and Pension Fund Savers and Investors

Bonds are widely believed to be safe and solid investments by the vast majority of savers and investors, both individual and institutional. Meanwhile, stocks are thought to be the far riskier choice.

But that's wrong today, and will be for the foreseeable future as well. Thus, individual and institutional investors alike should be guided accordingly.

That there's safety and wisdom investing in bonds represents the commonly and incorrectly held view by the vast majority of today's individual investors in 401(k) and IRA plans. It's also the view of most public sector pension fund trustees responsible for selecting and retaining pension fund managers.

But it's the wrong view. The plain and inescapable fact facing today's investors is that interest rates either will rise appreciably from current levels --- or they won't. That presents a lose-lose situation for investors because if long term interest rates do rise, the value of the bonds owned will fall. And if they stay the same or don't rise significantly, the interest rate paid to investors in those bonds will remain very low.

Let's look at an illustrative example. If a portfolio is invested 50/50 in stocks and bonds, the blended return of necessity will determine the total annualized rate of return. So if bonds return only 1% and stocks return 8%, the blended rate of return will be 4.5%.

But even that unexpectedly low return is before the 'expert' adviser takes his cut, which we'll guesstimate will be a low one half of 1% per year. Thus, the investor will receive 4% annually in such a situation and not the generally assumed 8% or higher rate of return.

Unfortunately, this scenario is what's facing today's investors, both individual and institutional. And if the pension fund sponsor or individual 401(k) or IRA investor is funding based on an assumed annual investment return of 8%, an actual 4%  rate of return will make an already underfunded situation even uglier and more unaffordable. In that regard, please see my previous post today titled 'Pension Promises Made and Kept in the Public Sector ... Made by Whom and Kept at Whose Expense?'

And if individuals are participating in target date fund investing in their 401(k) or IRA plans, then they will be equally at risk of suffering a huge shortfall in funds come retirement time.

Funds That Sought to Cut Risk With Bonds Are Having to Think Again is subtitled 'Target-date funds seek to avoid losses for investors nearing retirement; as rates rise, bonds aren't such a safe haven:'

"All-in-one mutual funds for people nearing retirement face tough decisions on how much risk—and which risks—to take in search of decent returns.

When the stock market tumbled in 2008, “target date” funds for people planning to retire in 2010 sustained heavy losses. Since then, sponsors of these funds, which specify a likely retirement year in their names and are widely offered in 401(k) retirement plans, have generally lightened up on stock exposure for investors approaching retirement.

But as fund managers have raised allocations to bonds, these portfolios have grown more exposed to the negative impact on bond prices of rising interest rates—a concern now that the Federal Reserve has embarked on what is expected to be a series of U.S. interest-rate increases.

“People have been lulled into a false sense of security with fixed income because it has performed so well for so long,” says Jimmy Veneruso, a vice president at investment consulting firm Callan Associates Inc. “But there is a lot of risk in the bond side of these portfolios.”

Investment losses can be particularly devastating in the years shortly before and after people retire, because they may have little time to recover before they start pulling money out of their accounts to live on.

Target-date funds for investors in or near retirement are more exposed to bonds than they have been in years. On average, such portfolios hold 42% of their assets in stocks, down from 50% in 2007, according to investment researcher Morningstar Inc. As these portfolios have reduced their stock-market exposure, they have raised their allocations to bonds from 38% to 47%, on average, Morningstar says.

Much of that bond exposure is in funds that track or compare themselves with the Barclays U.S. Aggregate bond index of U.S. investment-grade bonds. Since 2008, that index has tilted more heavily toward bonds with longer maturities, raising its sensitivity to interest-rate movements and its exposure to losses when interest rates rise, says Mr. Veneruso.

As interest rates rise, investors flock to new bonds with higher yields, causing the prices of existing bonds to fall. Bonds with longer maturities generally lose the most because investors are locked in to their lower rates for longer.

According to a measure known as “duration”—which gauges the approximate change in the price of a bond or bond fund after a move in interest rates—the bond portions of target-date funds for people in or near retirement are likely to lose 4.8% for every one-percentage-point increase in interest rates, said Jeff Holt, an analyst who follows target-date funds at Morningstar. In 2008, the figure for comparable funds was 4.4%, Mr. Holt says.

For people in or near retirement, bond losses inside target-date funds may be hard to tolerate unless stocks rise by more than enough to compensate. “Investors who are in or near retirement need stability from their bonds,” says Jeff Coons, president of Manning & Napier Advisors LLC, a Fairport, N.Y., firm that manages target-date funds. “Rising interest rates create headwinds of negative returns for a very large portion of target-date portfolios, which is going to create real challenges for these participants in achieving their goals.”

To minimize the potential impact of rising interest rates, many target-date funds have reduced the durations of their bond portfolios for older investors. In doing that, some fund companies have sacrificed some current income, while others have introduced or accentuated other risks.

American Funds 2015 Target Date Retirement Fund now holds 9% of its assets in the Intermediate Bond Fund of America. That fund, with a duration that indicates a loss of just 2.8% for every one-percentage-point increase in rates, is far less exposed to rising interest rates than the company’s Bond Fund of America, with a duration that indicates a 5.25% loss.

“For those close to retirement, we are using bond funds with shorter durations to more closely manage risk,” says Wesley Phoa, portfolio manager at Capital Group, which oversees the American Funds.

The downside: The yield on the intermediate fund is lower—0.68% as of Nov. 30, compared with 1.51% for the longer-duration fund."

Summing Up

For both individual and institutional investors seeking adequate long term returns on their savings and investments, bonds represent a very risky way to invest in the developing low but slowly rising interest rate environment.

Blue chip dividend paying stocks are by far the better choice.

And I've been beating this drum that stocks are safer and better investments than bonds for the past several years.

So today I'm just trying to sound the alarm --- once again.

In other words, the conventional wisdom about bonds being safe and profitable long term investments is wrong, as usual.

Thanks. Bob.

Pension Promises Made and Kept in the Public Sector ... Made by Whom and Kept at Whose Expense?

Government employees make promises to other government employees, and future taxpayers are expected, if not required, to pay to keep those promises.

Of course, the government employees making those promises purport to represent those future taxpayers, so in essence the future taxpayers are the ones making those promises. Or are they?

And what happens when the purported beneficiaries of those promises are necessarily shortchanged as a result of the unaffordable and previously undisclosed cost involved in keeping those promises far into the future?

And what happens when public sector union leaders then insist that some government employees, aka union members, are in fact 'more equal' than the non-union citizens, aka taxpayers and the school kids?

Those questions are being asked all across America regarding future taxpayers keeping the promises made by past government officials with respect to paying for public sector teachers' and other employees' pensions at the expense of fully meeting other government priorities and obligations. Yes, the rubber is meeting the road today in many states and municipalities as the cost of promises made in the past now are proving themselves to be unaffordable in the here and now.

States' Pension Woes Split Democrats and Union Allies has this to say about the developing crisis in choosing between raising taxes to fund public sector retirement benefits or not raising taxes and choosing instead to meet the needs of current education and other government priorities:

"A $1 trillion U.S. pension gap is dividing two longtime allies: Democrats and unions.

Left-leaning politicians from Rhode Island to California are increasingly supporting more aggressive overhauls of government pension benefits despite opposition from labor officials, traditionally one of the Democratic Party’s biggest policy and electoral supporters.

The erosion of Democratic backing for conventional retirement benefits prized by teachers, firefighters and police officers is a sign of how strained government budgets are as obligations for 24 million public workers and retirees continue to mount.

The latest clash is unfolding in Pennsylvania, where Democratic Gov. Tom Wolf has been seeking to end a six-month budget impasse with a Republican-controlled Legislature by agreeing to approve retirement cuts for new state hires and current workers. The Keystone State has $50 billion in unfunded pension obligations, one of the deepest retirement holes in the country. . . .

A spokesman for Mr. Wolf said the governor understands that some people would be upset with the pension cuts, but his priority has been boosting education spending. . . .

The amount states and local governments are paying each year to fund retirement systems has risen to 4% of annual spending, up from 2.3% in 2002, according to U.S. Census data. Meanwhile, large retirement systems now have just three-quarters of the assets they need to fund future obligations, according to consultant Milliman Inc., leaving a gap of $1 trillion.

Democrats rarely tried to roll back pensions before 2008, according to politicians and pension officials. But as deficits surged because of deep investment losses in the wake of the financial crisis and chronic underfunding of retirement plans, Democrats said they had little choice but to revamp benefits, leading to conflicts with what has usually been a large and loyal bloc of voters....

Pennsylvania’s pension problems date at least to the early part of the last decade, when unions won a boost in benefits that was followed by stretches of economic weakness and poor investment returns. The plans also suffered from chronic underfunding. State lawmakers increased retirement ages and changed funding formulas in 2010, but the gap widened.

The state is projected to spend $2.4 billion out of its general fund on pensions this year, up 43% from $1.7 billion last year, according to a December report by the state’s independent fiscal office. The cost is forecast to hit $3.5 billion, or more than 10% of the state’s roughly $31 billion budget, by 2020. . . .

There are already signs that some Democrats who take a harder line on pensions can survive politically. Pension-cutting Democrats can still come off as more friend than foe to union officials, because Republicans often target deeper benefit cuts.

Former Rhode Island Treasurer Gina Raimondo won election as governor in 2014 after battling with unions on a pension overhaul.

Ms. Raimondo ultimately reached a settlement with workers this year that locked in $4 billion in savings. The cuts included shifting some current workers and new hires onto plans that include a 401(k)-style account, plus reducing the cost-of-living adjustments for retirees.

“There’s still a core group that’s angry, and in many ways I understand why they’re angry,” Ms. Raimondo said. “I tell them, ‘Don’t be mad at me. Be mad at people who made promises that were unaffordable.’ ”"

Summing Up

Making choices is an essential part of economics as well as governing.

When making choices is deferred far into the future, the present non-choosers are often able to make promises without having a clear path to keeping those promises.

Politicians make present promises about future benefits in the here and now.

Later the next batch of politicians will be called upon to decide on the then and there priorities.

One dollar spent on retirement for government employees can't be spent on educating kids.

Either more dollars must be raised through additional taxation or the promised benefits must be curtailed.

It's really that simple.

That's my take.

Thanks. Bob.

Monday, December 28, 2015

Middle Class as Defined by Hillary and the Vote Getting Dems

Keenan posted earlier today about Hillary-isms.

So I thought it appropriate to describe what she and the rest of the Dems mean when they talk about not raising taxes on the middle class.

My guess is that their definition is vastly different than yours or mine, or that of anybody else, for that matter, who's interested in plainly and accurately communicating the meaning of the words chosen.

Politics sucks.

$250,000 a Year Is Not Middle Class has the story:

"HILLARY CLINTON has vowed not to raise taxes on the middle class.

It’s a pledge that has worked well for others on the campaign trail before her, a resonant assurance to voters who saw themselves as middle class or aspired to be. But it’s a bad promise.

Mrs. Clinton is using a definition of middle class that has long been popular among Democratic policy makers, from her husband to Barack Obama when he was a candidate: any household that makes $250,000 or less a year. Yet this definition is completely out of touch with reality....

The most recent Census Bureau data showed that median household income — what people in the exact middle of the American spectrum earn — is $53,657.

Those families who make $250,000 a year, on the other hand, belong to an elite group: Americans who earn enough to be in the highest 5 percent of the income distribution....

This doesn’t matter just because the math is so off. In an era of deepening income inequality, those people in the top 5 percent who are being classified as middle class are pulling further away from the rest of us. Americans at the bottom or in the middle have experienced five years of falling or stagnating income; those in the top 5 percent have generally seen their incomes increase. Between 1967 and 2014, median household income went up by $9,400 while those 5 percenters are now making $88,800 more, all adjusted for inflation. . . .

But under Mrs. Clinton’s pledge, some of the well off won’t be called on to help out, and are in fact lumped in for receiving a boost."

Summing Up 

Middle class is whatever the vote seeking politician says it is, I guess.

And Hillary is definitely a politician fighting for every vote she can get.

In her view, what difference does it make? Words mean whatever she says they mean.

That's my take.

Thanks. Bob.

Donald Trump Isn't The Only One Saying Crazy Things: A Hillary-ism Memory Jogger

The media is fixated on the ridiculous (and there have been many) things Donald Trump has said since announcing his candidacy for president.  Knowing that every word a presidential candidate has ever said is subject to scrutiny, I find it odd (not really) that none of the ridiculous things Mrs. Clinton has said over the years seem to engender the same kind of outrage that is directed at Trump. It is with that in mind that I offer up some of her greatest hits below.  Enjoy, if you can.

"Don’t let anybody tell you that it’s corporations and businesses that create jobs.”  - per this video

"No. We just can't trust the American people to make those types of choices ... Government has to make those choices for people." - answering questions about nationalized healthcare

"There are rich people everywhere. And yet they do not contribute to the growth of their own countries.....They don't invest in public schools, in public hospitals, in other kinds of development internally." - made during a Clinton Global Initiative speech

“She heard the plane hit. She heard it. She did.”  - speaking to a Today show host about her daughter being in the World Trade Center jogging when one of the planes hit.

"I'm not going to put my lot in with economists." --after being asked by George Stephanopoulos about economists' claims that her gas tax holiday proposal would not bring down gas prices

"I remember landing under sniper fire. There was supposed to be some kind of a greeting ceremony at the airport, but instead we just ran with our heads down to get into the vehicles to get to our base." --on visiting Bosnia in 1996, contradicting other accounts that said there was no threat of gunfire. Clinton later said she "misspoke"

"On a couple of occasions in the last weeks, I just said some things that I knew not to be the case." --on misspeaking about her Bosnia visit

"I just want to add, I did not say that it should be done, but I certainly recognize why Gov. Spitzer is trying to do it. And we have failed." --responding in a Democratic debate to New York Gov. Elliot Spitzer's plan to give drivers' licenses to illegal immigrants. Moments earlier, Clinton had said, "They are driving on our roads. The possibility of them having an accident that harms themselves or others is just a matter of the odds."

"Aww don't feel noways tired. I've come too faarrr from where I started frum." --adopting a Southern drawl while speaking at a church

“Many of you are well enough off that the tax cuts may have helped you. We're saying that for America to get back on track, we're probably going to cut that short and not give it to you. We're going to take things away from you on behalf of the common good.” - stated during a national forum

"I have to confess that it's crossed my mind that you could not be a Republican and a Christian."

"We have a lot of kids who don't know what works means. They think work is a four-letter word."

"I'm not going to have some reporters pawing through our papers. We are the president."

"He ran a gas station down in St. Louis... No, Mahatma Gandhi was a great leader of the 20th century." --introducing a quote by Mahatma Gandhi

"Who is going to find out? These women are trash. Nobody's going to believe them." --on Bill Clinton's bimbo eruptions

"If I didn't kick his ass every day, he wouldn't be worth anything." --on Bill Clinton

"I have to admit that a good deal of what my husband and I have learned (about Islam) has come from my daughter. (As) some of you who are our friends know, she took a course last year in Islamic history." - on Islam

"We came out of the White House not only dead-broke, but in debt. We had no money when we got there and we struggled to piece together the resources for mortgages, for houses, for Chelsea's education. It was not easy."  - on being poor

“I can’t worry about every undercapitalized business” — testifying before Congress on the effects of Nationalized Health Care.

"We are at a stage in history in which remolding society is one of the great challenges facing all of us in the West." -- Hillary Clinton per Barbara Olson's Hell to Pay: The Unfolding Story of Hillary Rodham Clinton

Oh, here's one more good one.  Just this past week, the presumptive Democratic nominee, who has all but vowed to strip the profit motive out of the drug industry, announced that she has a plan to cure Alzheimer's by 2025.  It's lucky for her that by then she probably won't remember making either promise.


Sunday, December 27, 2015

Poor and Uninformed Negative Life Choices by America's Undereducated Youngsters and 'Fraud in the Inducement,' aka Government 'Help'

K-12 schools are 'free.' They prepare our youngsters for adulthood and for many of these same youngsters, success in college. At least that's the story being told.

But these same schools don't bother to 'school' our youngsters properly about such mundane matters as competing in a global work environment, personal finance, or engaging in excessive borrowing and personal indebtedness at an early age -- such as government funded student loans for attending college whether prepared or not, as an example.

Accordingly, all too often the trusting student leaves high school unprepared for college academically and equally unprepared to make good decisions about the borrowing and indebtedness to be undertaken to finance that education. See As Graduation Rates Rise, Experts Fear Diplomas Come Up Short.  Due to government 'assistance,' American education all too often ends up being a really bad deal, bordering on fraudulent, for the kids, their families and society.

'Fraud in the inducement' is a legal term which occurs when one party is induced (student and family) by another (government and educator) to enter into a bargain through deceit or trickery and therefore act contrary to that trusting buyer's best interests. In such a situation, the uninformed buyer is fraudulently induced to make the purchase by the much better informed seller who is misrepresenting the value of the offering.

And that's precisely what government does in collaboration with educational institutions when it causes and enables unprepared and uninformed individuals to take out unnecessary and expensive student loans to attend unnecessarily expensive colleges. It's all perfectly legal, of course, when our government is the inducer, but it's still fraud in the inducement. At least that's my view.

So we should avoid making ill informed and life changing unnecessary expenditures as individuals, and we shouldn't be fraudulently induced by our government to take on burdensome and costly debt without receiving appropriate value in return for the time and money expended. But the trusting and uninformed student often is so induced, and the negative effects will be huge for both individual borrowers and society as a whole. Because just as the housing pricing bubble burst due to government loan guarantees stimulating ever greater demand by trusting borrowers and higher prices for sellers, a similar student loan bubble is in clear sight right now. It won't end well.

Individual choices made freely, assuming they are lawful, are an inherent part of living in a free society. But when government induces young and uniformed individuals to make poor choices, these good people can end up in big financial holes which will cause them undue hardship and big problems for the rest of their lives.

Student loans, credit card loans, car loans and home loans are just a few examples of how poor current decisions will limit future opportunities to make better choices.

Nearly 95% of Young Renters Want to Buy, But Many Say They Can't Afford It says this about the voluntary choices we make when young and their effects on later choices we're unable to make:
Nearly 95% of renters 34 years old or younger want to own a home in the future and overall, 83% of renters said they have a desire to own, according to NAR’s new quarterly survey of renter and owner households.
Nearly all young renters want to own a home, even if many are also pessimistic that economic conditions will allow them to, finds a new survey by the National Association of Realtors.

Nearly 95% of renters 34 years old or younger want to own a home in the future and overall 83% of renters said they have a desire to own, according to NAR’s new quarterly survey of renter and owner households. . . .

More than half of renters said they haven’t yet bought a home because they couldn’t afford one, while just 19% said they prefer the flexibility of renting. . . .

An earlier survey by NAR of people who recently purchased a home found that the share of first-time buyers fell to its lowest level in almost three decades. . . .

Sharon Voss, president of the Orlando Regional Realtor Association, said a shortage of inventory and intense competition from investors have locked first-time buyers out of the sub-$200,000 market in her area. Orlando’s median home price has increased 17% since the beginning of the year, while the inventory of single-family homes below $200,000 dropped 23%.

In one case, she said, it took a buyer eight months to find a suitable home for sale in a lower price tier. In another case, she said, she saw a home that had been listed for just an hour and rushed over with the buyers and made an offer right then.

“The lack of inventory for the millennials right now, it hurts,” Ms. Voss said. “There just isn’t anything going on the market.”"

Summing Up

Government 'help' usually harms the purported intended beneficiaries.

It's as simple as 1-2-3 --- (1) a government funded (~$150,000) K-12 'free' public education which underprepares graduates for the competitive global job market, trade school or college, (2) government provided guaranteed student loans for attending college or trade school, and (3) government guaranteed no/low money down loans for buying homes represent three examples of the far reaching and unintended life changing consequences for too many of those 'helped' by government making things 'easy and free.'

And while receiving all that 'education,' a lack of instruction, training and knowledge concerning the basics of personal finance will result in too many youngsters embarking at an early age of unnecessary indebtedness and poor financial choices which will last a lifetime.

It's not fair, it is fraud, but it's all perfectly legal. And it's a tried and true certain vote getter, job protector and wealth creator for the political class.

At least that's my take.

Thanks. Bob.

Saturday, December 26, 2015

It's Not About Fairness, It's About Knowing the Rules

The following bit of dialogue from a Dennis the Menace movie reinforces the title of this post:

(Note, Dennis has just broken Mr. Wilson’s window with a rock and slingshot and his parents are being brought up to speed while Dennis sits nearby pretending innocence.  After Mr. Wilson finished his rant and closed the door, the conversation began.)


Dennis’ Mother:  Dennis, how could you?

Dennis:  How could I what?

Dennis’ Mother:  Don’t you play innocent you man.  You know what you did.

Dennis:  What mom?

Dennis’ Mother:  Do you have a sling shot?

Dennis:  I’m not sure.

Dennis’ Father (interjecting):  Give me the the slingshot!

(Dennis sheepishly and silently hands over the slingshot)

Dennis Father:  Now go upstairs to your room and stand in the corner.

Dennis (still sitting):  Aw, man.

Dennis Father:  Just go, young man!

Dennis (standing but not yet moving towards the stairs):  How long to I have to stay there.

Dennis’ Father (pausing to think before handing down the mandate):  Until you're sorry!

Dennis:  Oh, good.  I’m sorry now.


Dennis just wanted to know the rules, so he would understand how to play the game, or, if you want to take a more sinister view of Dennis' intentions, he wanted to know the rules so he could take advantage of them.

With that as background, see below a few comments from some of our esteemed leaders on the topic of rules: 

Hillary Clinton:  "The maneuvers powerful corporations are using to game the system and leave everyday taxpayers holding the bag are just offensive. Inversions by Pfizer and other companies, plus related loopholes, will cost American taxpayers more than $80 billion in revenue over the next 10 years. That's money we should be investing here at home."

Barack Obama:  “Spending cuts must be balanced with more reforms to our tax code. The wealthiest individuals and the biggest corporations shouldn’t be able to take advantage of loopholes and deductions that aren’t available to most Americans.”

Elizabeth Warren:  "Powerful corporations, rich people, have figured out that if you can bend the government to help you just a little bit, it’s a tremendous payoff."  

Bernie Sanders:  “I think it is clear to anyone who has taken a look at this situation that the rules regarding our international financial system today are rigged in favor of the wealthy and the powerful at the expense of everyone else. ‘


Unlike the politicians mentioned above, Dennis didn't make any rules.  He asked what they were so he would know how to play the game.  That didn't make him evil, or greedy, or unpatriotic.  It made him more able to use the rules to optimize his circumstances.  It made him smart.  

Who else but a politician would argue against an individual or a corporation being smart?  Dennis wouldn't.  I would't.  Would you?


Wednesday, December 23, 2015

Merry Christmas

The following Wall Street Journal editorial has appeared annually since 1949 and is one of my all time favorites. I hope you will enjoy reading it as much as I do each year.

In Hoc Anno Domini has this to say about the celebration and meaning of Christmas:

"When Saul of Tarsus set out on his journey to Damascus the whole of the known world lay in bondage. There was one state, and it was Rome. There was one master for it all, and he was Tiberius Caesar.

Everywhere there was civil order, for the arm of the Roman law was long. Everywhere there was stability, in government and in society, for the centurions saw that it was so.

But everywhere there was something else, too. There was oppression—for those who were not the friends of Tiberius Caesar. There was the tax gatherer to take the grain from the fields and the flax from the spindle to feed the legions or to fill the hungry treasury from which divine Caesar gave largess to the people. There was the impressor to find recruits for the circuses. There were executioners to quiet those whom the Emperor proscribed. What was a man for but to serve Caesar?

There was the persecution of men who dared think differently, who heard strange voices or read strange manuscripts. There was enslavement of men whose tribes came not from Rome, disdain for those who did not have the familiar visage. And most of all, there was everywhere a contempt for human life. What, to the strong, was one man more or less in a crowded world?

Then, of a sudden, there was a light in the world, and a man from Galilee saying, Render unto Caesar the things which are Caesar’s and unto God the things that are God’s.

And the voice from Galilee, which would defy Caesar, offered a new Kingdom in which each man could walk upright and bow to none but his God. Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me. And he sent this gospel of the Kingdom of Man into the uttermost ends of the earth.

So the light came into the world and the men who lived in darkness were afraid, and they tried to lower a curtain so that man would still believe salvation lay with the leaders.

But it came to pass for a while in divers places that the truth did set man free, although the men of darkness were offended and they tried to put out the light. The voice said, Haste ye. Walk while you have the light, lest darkness come upon you, for he that walketh in darkness knoweth not whither he goeth.

Along the road to Damascus the light shone brightly. But afterward Paul of Tarsus, too, was sore afraid. He feared that other Caesars, other prophets, might one day persuade men that man was nothing save a servant unto them, that men might yield up their birthright from God for pottage and walk no more in freedom.

Then might it come to pass that darkness would settle again over the lands and there would be a burning of books and men would think only of what they should eat and what they should wear, and would give heed only to new Caesars and to false prophets. Then might it come to pass that men would not look upward to see even a winter’s star in the East, and once more, there would be no light at all in the darkness.

And so Paul, the apostle of the Son of Man, spoke to his brethren, the Galatians, the words he would have us remember afterward in each of the years of his Lord:

Stand fast therefore in the liberty wherewith Christ has made us free and be not entangled again with the yoke of bondage."

Summing Up

Our Founding Fathers heard and heeded that sage advice.

As a result, the Declaration of Independence says this in pertinent part --- "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."

So as we celebrate Christmas, let's each pause and reflect on the simple truth that being a free American is indeed a wonderful thing.

Merry Christmas.

Thanks. Bob.

President-To-Be Hillary Will Have the Strong Backing of Teachers Unions, the Young and Minorities ... Why Politics Sucks

Hillary Clinton is my pick as the odds-on and heavy (pun intended) favorite to win the Presidency in 2016.

It's been fifteen years since we've had a Clinton in the White House, and we've never had an ex-president as first husband. For that matter, neither have we ever had a woman serve as our president. Thus, history will be made --- again.

And whether Hillary opposes Trump, Cruz, Christie, Rubio or Bush won't matter to the vast majority of our young and minority voters, They, along with the teachers unions, will be helping her win.

Then it will be payback time for the teachers unions, and pay them back she will. And what about the rewards for the young and minorities who will overwhelmingly vote to bring about her presidency? Well, that's another story. They'll get the shaft.

And that's precisely why politics sucks.

An Unsung Hero of Black Education says this about the man who made Sears the largest and most successful retailer of the twentieth century:

"Businessman and philanthropist Julius Rosenwald helped build thousands of quality elementary schools in the segregated South. 


Undated photo of Julius Rosenwald with students from a Rosenwald school.

“Rosenwald,” a documentary film about the early 20th-century philanthropist Julius Rosenwald, disappeared from theaters much too quickly after being released in August. . . .

The Chicago-based Rosenwald, a son of German-Jewish immigrants, made his fortune in the early 1900s running Sears, Roebuck & Company when it was the nation’s largest retailer. The film’s main focus, however, is Rosenwald’s largely unsung philanthropic collaboration with Booker T. Washington, the former slave and black educator best known for his self-help philosophy and for training black teachers in the post-Civil War South. After Reconstruction ended, white backlash resulted in scarce funding for black public education in southern states, where nearly 90% of the black population lived. Washington therefore sought assistance from northern philanthropists like Rosenwald, who graciously obliged.

In 1911, Rosenwald agreed to help Washington build a handful of elementary schools in rural Alabama . . . . Within six years, the Julius Rosenwald Fund had been created and more than 600 Rosenwald schools constructed across the South. This initiative increased both the quantity and quality of black education. The buildings had modern lighting and sanitation. Classrooms had adequate supplies of books and desks and blackboards. The teachers were better trained and better paid.

Washington died in 1915 and Rosenwald in 1932, but the education program continued at the latter’s request, ending in 1948. By that time, some 5,300 Rosenwald schools had been built and more than a third of black children in the rural South had attended one. Some of these students, including Rep. John Lewis of Georgia and the late poet Maya Angelou, are interviewed in “Rosenwald,” along with scholars and civil rights leaders. . . .

A 2011 paper published by the Dallas Federal Reserve describes how this Rosenwald-Washington alliance narrowed the learning gap. “Within a generation, the racial gap in the South declined to well under a year and was comparable in size to the racial gap in the North,” write authors Daniel Aaronson and Bhashkar Mazumder. “Our main finding is that rural black students with access to Rosenwald schools completed over a full year more education than rural black students with no access to Rosenwald schools.”

Despite the schools’ popularity among the black poor, many elites frowned on the model. Rosenwald and Washington were criticized for building separate black schools that accommodated Jim Crow instead of pushing politically for the integration of white institutions. In reality, Rosenwald and Washington did both. Throughout his career, Washington funded legal challenges to racial discrimination. And Rosenwald financed a third of the litigation costs in Brown v. Board of Education, the 1954 Supreme Court case that declared public-school segregation unconstitutional. But the larger point is that both men realized that poor blacks at the time needed good teachers and quality schools, not white classmates.

Sadly, it’s a lesson that remains unlearned by many opponents of school reform today. The Obama administration has attacked school-voucher programs that upset the “racial balance” in public schools. Apparently, whether a classroom is diverse is more important than whether anyone is learning. Presidential hopeful Hillary Clinton has distanced herself lately from teacher evaluations that include student test scores. She has also walked back support for the charter-school model that her husband embraced when he was president.

President Obama and Mrs. Clinton reject these reforms out of deference to teachers unions, not because they’re ineffective or unpopular. The evidence is overwhelming that school choice helps low-income minorities the most. Still, Democrats have difficulty getting elected without support from groups like the National Education Association and the American Federation of Teachers, which are able to provide millions of campaign dollars and armies of volunteers to knock on doors and man phone banks on Election Day. In Rosenwald’s day, poor black students were second-class citizens under the law. Today, they’re just treated that way by politicians and interest groups with other priorities."

Summing Up 

President Obama's and President-to-be Hillary Clinton's opposition to vouchers, equal academic opportunity and school choice for all young Americans is just one more example of why politics sucks.

Ex-President Bill Clinton and soon-to-be ex-President Barack Obama will be doing everything possible to perpetuate the anti-school choice status quo while helping elect Hillary to the U.S. presidency in 2016. And to further enhance Hillary's already strong chances for a victory, young and minority voters will receive special attention and focus from both Clintons and Obama during the upcoming campaign.

My bet is that Hillary will emerge as the winner, regardless of who is chosen to be her Republican opponent. Throughout the campaign, President-to-be Hillary will pander to the teachers and other public sector union leaders by taking an anti-voucher and anti-free school choice position, even though that stance will be contrary to both the short and long term best interests of their targeted young and minority voters.

Nevertheless, these targeted young and minority voters will vote overwhelmingly to elect Hillary and thereby guarantee that the lack of a quality educational opportunity will do great harm to them and their kids for the rest of their lives.

Isn't life interesting?

And doesn't politics suck?

That's my take.

Thanks. Bob.