Monday, August 31, 2009

In Defense of John Mackey of Whole Foods

The Obamacare plan has met much unexpected controversy at townhall meetings. Initially, the objections and concerns were part of a grass roots movement to resist a government take over of healthcare. This caught the politicians by surprise and certainly made for some interesting TV viewing. But soon the professional spinmiesters appeared on the scene to try to smooth the situation over. Then astroturfers, both for and against, as well as labor unions began to appear at the townhalls, and more control was exercised over who was allowed to attend to ensure a higher level of support for the plan. Many in the news media editorialized that a quiet, reasoned debate was called for instead of the shrill voices of dissent.

Amid this backdrop, John Mackey, the CEO of Whole Foods, penned a well reasoned op-ed for Wall Street Journal that represents a market-based alternative to Obamacare. In John Mackey's words: "While we clearly need health-care reform, the last thing our country needs is a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits and move us much closer to a government takeover of our health-care system. Instead, we should be trying to achieve reforms by moving in the opposite direction—toward less government control and more individual empowerment." I encourage everyone to read this op-ed to see the eight reforms Mackey lays out for transforming the health care system.

For his efforts to add to the quiet and reasoned debate, Mackey now finds himself embroiled in controversy. The hard-core left, eager to rush into the arms of the nanny state, are now protesting in front of stores and boycotting Whole Foods. In the past couple of days, they have starting calling for Mackey's resignation from the company. For most of them, there is only one answer to health care reform, and that is a full government takeover, and anyone who thinks otherwise has committed heresy. The problem for Mackey is that since his business caters to the PC tastes of left wing consumers, he has set his company up to potentially lose many loyal customers with statements like: "Health care is a service that we all need, but just like food and shelter it is best provided through voluntary and mutually beneficial market exchanges. A careful reading of both the Declaration of Independence and the Constitution will not reveal any intrinsic right to health care, food or shelter. That's because there isn't any. This "right" has never existed in America." This rubs against the grain of the thinking of the current administration, and undercuts the premise for Obamacare.

Many of the talking heads on TV suggest that Mackey, and CEOs in general, should keep their mouths shut when it comes to policy opinions, and concentrate on running their companies. Personally, I think that these efforts to silence critics of the health care plan are depicable, and I would like to see more CEOs expressing their individual opinions, not less. It is every citizen's right to express their opinion, and the more intelligent discussion we have on this issue the better. Mackey has presented a strong case for free-market alternatives to Obamacare and I applaud him for it, just as I would applaud any other CEO who presents a well-reasoned counter-argument in support of the plan. I have never been in a Whole Foods store, don't have one anywhere near where I live, but the next I drive by one I plan on making it a point to pull into the parking lot and buy something to show my support of a CEO courageous enough to speak up for what he believes.

What do you think about this situation?

Thursday, August 27, 2009

How to Get Rich

Who is rich? He that is content. -- Poor Richard's Almanac

On there are over 3000 books that purport to show people how to how to get rich. Most of them aren't worth the paper they are printed on. On TV there are numerous infomercials selling some course in how to get rich for hundreds of dollars. They aren't worth a darn either.

Let's face it, getting rich is simple. The formula is tried and true, and can be summarized in a few straightforward bullet items:
  • live simply
  • spend significantly less than you earn
  • save the difference
  • compound the savings at a rate significantly higher than the rate of inflation
  • let time work its magic
The details are left to each individual to work out. The difficult thing is ignoring the constant noise that tries to convince us we need the latest electronic gadget, a new car, new clothes, another credit card, the envy over what the next door neighbor just purchased, or the latest get rich quick scheme. But if the average person is disciplined, selects investments that produce decent returns without taking undue risks, wealth can be built over time and security achieved.

This advice may sound like a collection of empty platitudes or a lesson from a Sunday School teacher. But there are numerous examples of people with modest incomes being successful using this approach.

Wednesday, August 26, 2009

Kiplinger Retiree Guide

Each year Kiplinger Magazine publishes their retiree guide. Though I am 10 - 15 years away from retirement (if there will be such a thing in the future), it doesn't hurt to do a little advanced planning.

In no particular order, my criteria in selecting a place to retire includes:
  1. Reasonable real estate prices.
  2. A mild climate that includes the possible of year-round outdoor activities, such as golf and hiking.
  3. Top-notch medical facilities within a 100 mile radius.
  4. Numerous cultural activities within the community, including restaurants, nightclubs, playhouses, art-galleries, a major university nearby, and colonies of artists from all disciplines.
  5. Low to no state income taxes.
  6. Low to no state estate taxes.
  7. Low to no state sales taxes.
  8. Low real estate taxes.
I'm sure my wish list will change and expand as I grow closer to retirement, and actively begin to research and visit potential locations. Some states that appear attractive to me right now include many of the usual suspects:
  1. Delaware
  2. Florida
  3. Nevada
  4. Texas (especially around Austin)
  5. Arizona (because I've always thought it would be cool to live in Sedona)
I'm not looking for places with high state taxes and lots of state provided services. I want to preserve my capital to use as best I see fit, whether it is for my own personal pleasure or to give to causes I believe in. I want to make sure my family is provided for so they can live free from financial worries. I want to do good for my community as an interested and concerned individual. Such are my simple-minded dreams. I'm sure there are other retirement destinations to research beyond my current thinking. What other places should I consider?

Social Security Cost of Living Adjustments Expected to be 0% over Next Two Years

In a surprise to America's seniors, and for the first time in three decades, the government announced that since the recession has held prices down and inflation is currently so low there will probably be no raises in Social Security payouts for the next two years. Since seniors spend a disproportionately large amount of the their income on healthcare cost (which are rising faster than inflation) this represents a real cut in their standard of living. Also, my personal, unscientific observation is that grocery store prices for the common items purchased by most families are slowly rising just as package portions are being reduced.

This should send a clear message for those still in the work force-- you need to take care of yourself and your family, and you can't count on the government. It is my personal belief that due to its financial problems, the government will have little choice but to peg future social security raises below the rate of real inflation. For those under 40, I would advise building their financial plans assuming they will receive no social security benefits. I'm not trying to be pessimistic, just realistic. Most of the government entitlement programs appear to be collapsing under their own weight, and the assumptions of the past may not apply in the future.

Monday, August 24, 2009

$9 Trillion buget deficit forecast over next 10 years

When the people find they can vote themselves money,
that will herald the end of the republic. -- Benjamin Franklin

Over the week the government announced it is raising its budget deficit forecast to $9 trillion dollars. This is a mind-boggling number. This should scare the crap out of every American citizen, regardless of their political beliefs. Federal spending has been rising at an irresponsible rate since the Clinton administration left town, and has accelerated greatly in the current administration, threatening the reserve currency status of the dollar and setting the stage for inflation and a devaluation of the currency.

No less luminary than Warren Buffett expressed his concerns in a recent New York Times editorial entitled The Greenback Effect. This is must reading for all American citizens, and the politicians would do well to heed its warnings.

Along these same lines, I found a recent YouTube video that outlines the impact to the economy of overspending by the government. While some readers may find parts of this video arcane, it illustrates the point there is a finite amount of capital in the world and the more capital the government absorbs the less is available to the private sector, which is the growth engine of the country.

Obamacare Cartoon

With the US posting record deficits and nothing but a string of deficits in sight for the next 10 years, with Social Security, Medicare, and Medicaid teetering on the verge of bankruptcy, with Fannie Mae, Freddie Mac, Amtrack and Post Office unable to operate at break even levels, a reasonable person might think a little belt tightening is in order.

But what do the tough do when the going gets tough? In the best tradition of Otter and Bluto from Animal House, they propose another massive, underfunded, poorly thought-out government entitlement program.

I found a cartoon on that spoofs some of the follies in the thinking behind the current Obamacare proposal. To supporters, only a fool could turn down this wonderful program. To skeptics, only a fool would sign up for it and cede their freedoms and personal responsibility to government bureaucrats.

Wednesday, August 19, 2009

Long-term Viability of Social Security in Retirement Planning

After reading my previous post, several people asked about the wisdom and validity of assuming Social Security benefits in retirement income assumptions. They probably have a good point, given that just today Congressman Bachus expressed his concern that Social Security could be insolvent in two years and that the situation there is much worse than anyone knows. I based my previous post on the assumption that Social Security rules would remain largely unchanged into perpetuity, which is unlikely. I fully expect those who plan for their future will have their benefits reduced through mechanisms such as means testing in favor of those who do not adequately plan for their retirement. While we will all have the privilege of paying into the system, those who've accumulated even a modest degree of wealth will received reduced benefits compared to what they paid in. So my advice to anyone concerned about the future of Social Security is to plan your retirement with the assumption you will receive no benefits.

Tuesday, August 18, 2009

Portfolio Management: Begin with the End in Mind

A child thinks 20 shillings and 20 years can scarce ever be spent. -- Poor Richard's Almanac

There are many reasons why people save and invest money. What I want to cover today is investing for retirement, and, specifically, the questions of how much do I need to accumulate to retire, how much do I need to save each month to be ready for retirement, and how long before I can retire. The average person has no idea how to answer these questions, much less a plan drawn up to determine if they are on track to achieve their goals.

Start by estimating how much yearly income is needed in retirement. For those close to retirement age this number can be pretty accurate. But for younger people or someone just entering the work force, this number will be an educated guess.

Let's use a concrete example to illustrate. Joe X. is a 50 year old man with a wife and children who has been steady saver all of his life, but a saver without a plan. Upon reaching middle age, he is beginning to wonder just when he will have enough to retire in a style he wants without outliving his money.

He and his wife both work and make a combined $150K a year. In retirement, they expect their expenses to be reduced, and believe they can live comfortably on $110K year, and enable them to do much of the traveling and other activities they have sacrificed during the accumulation period of their lives.

They assume that Social Security will provide them an income of $3K per month, or $36K a year. This means their retirement savings much make up the difference of 74K a year. A rule of thumb is that their retirement savings should be 25 times greater than their expected yearly distribution. So $74,000 x 25 = $1,850,000 of savings are required. This is the target number that Joe X and his wife must achieve to live the way they desire in retirement.

As we said earlier, Joe and his wife have been extremely frugal and managed their money well. As of today, they have $550K in savings between their corporate 401Ks, IRAs and taxable investments. But how much additional do they need to save per year to retire when Joe turns 62 in 12 years? This can be calculated using a compound interest calculator such as the one found at site, or a custom spreadsheet can be used.
For this exercise, we will assume a reasonable after-tax return on investment of 8%. Running the formula with a starting investment of $550,000 and an annualized return of 8% for 12 years arrives at a savings rate of $21,000 a year to hit the target retirement amount of $1,850,000. This target savings rate should be achievable at Joe's level of income. The draw down on his principal should remain in the 4-6% range, and if historic rates of return hold true, Joe will never run out of money.

Now let's run the same example on Joe X.'s son Pete who is just graduating from college this year. Pete X. is not thinking much about retirement right now, but he is a chip off the old block and wants to emulate his old man. If a 2.5% rate of inflation is assumed, Pete X. and his future wife would need a retirement income of approximate $96.5K from Social Security and $198.5K from savings to retire in the same style as his father at age 62. Using the rule of 25, Pete X. needs to accumulate $4,962,500 to meet his retirement goals.

Based on his current age of 22, Pete will have a 40 year work career. If we run the numbers through the Compound Interest Calculator, Pete will have to save $17,750 dollars a year at an after-tax return of 8% to hit his target. This amount will be difficult to save in his initial years of employment, but will become easier to exceed in later years as inflation and promotions at work increase his income. And if Pete is lucky enough to achieve a rate of return above 8%, without taking undue risk, or is able to save more money, he will be able to retire sooner than 62.

Hopefully, these examples will provide a framework for others to put together their own personal retirement plans. Rather than just retiring at some arbitrary date in the future and hoping for the best, it is essential to put together a plan to retire that brings the piece of mind you'll be able to do the things you've always dreamed of without the fear of not having saved enough.

Sunday, August 9, 2009

Statistics, Government Style

There are lies, damn lies - and statistics. – Mark Twain

On Friday the stock market rallied over 100 points on the news from the Department of Labor that the unemployment declined one tenth of a percent from 9.5% to 9.4%. The economy only shed 247K jobs in July, half the pace of previous months. The discerning might ask, if the economy actually shed jobs, how is it possible the unemployment rate declined instead of rose? Therein lies the paradox of statistics.

I’ll be the first to admit, I do not normally understand Government statistics, all the twists and turns, contortions, and adjustments to arrive at the answer they want. In this case, however, to get the .1% uptick the statisticians shrank the denominator twice as much as the numerator. In terms laymen can understand, the numbers of people counted in the civilian labor force as seeking work shrank by 422K. The assumption is that these 422K people became too discouraged to even bother looking for work anymore so they were dropped from the counts into the pool of people no longer in the labor force. My gut feeling is that the true unemployment rate in the country right now is somewhere in the 13-15% range.

I will agree, the fact that the economy shedding jobs at only half the pace of previous months is better news than expected, but one month does not a trend make. The politicians might like the feel-good message that unemployment shrank that coincides with their declarations that the stimulus has broken the back of the recession, but they just seem to be manipulating numbers to arrive at the desired outcome. Until I see a positive number (i.e., actual job growth, not a deceleration in shrinkage), only then will I believe the recession is starting to end.

Friday, August 7, 2009

Milton Friedman on Greed

I normally wouldn't put two posts back to back on the same person, but this little gem I ran across was just too juicy to resist.

Thursday, August 6, 2009

Milton Friedman on Healthcare

Any society that would give up a little liberty to gain a little security will deserve neither and lose both.
-- Benjamin Franklin

As the debate rages in Washington over the wisdom and cost of Obamacare, I was surfing the net and ran across an interview with Nobel Laureate Milton Friedman in Imprimus Magazine from July 2006 that are pertinent to the discussions of today. His advocacy of free market solutions should come as no surprise to anyone familiar with his economic philosophy.

LA: Is there an area here in the United States in which we have not been as aggressive as we should in promoting property rights and free markets?

MF: Yes, in the field of medical care. We have a socialist-communist system of distributing medical care. Instead of letting people hire their own physicians and pay them, no one pays his or her own medical bills. Instead, there's a third party payment system. It is a communist system and it has a communist result. Despite this, we've had numerous miracles in medical science. From the discovery of penicillin, to new surgical techniques, to MRIs and CAT scans, the last 30 or 40 years have been a period of miraculous change in medical science. On the other hand, we've seen costs skyrocket. Nobody is happy: physicians don't like it, patients don't like it. Why? Because none of them are responsible for themselves. You no longer have a situation in which a patient chooses a physician, receives a service, gets charged, and pays for it. There is no direct relation between the patient and the physician. The physician is an employee of an insurance company or an employee of the government. Today, a third party pays the bills. As a result, no one who visits the doctor asks what the charge is going to be—somebody else is going to take care of that. The end result is third party payment and, worst of all, third party treatment.

LA: Following the recent expansion in prescription drug benefits and Medicare, what hope is there for a return to the free market in medical care?

MF: It does seem that markets are on the defensive, but there is hope. The expansion of drug benefits was accompanied by the introduction of health savings accounts—HSAs. That's the one hopeful sign in the medical area, because it's a step in the direction of making people responsible for themselves and for their own care. No one spends somebody else's money as carefully as he spends his own.

I agree with Mr. Friedman; until we reestablish the direct economic relationship between doctor and patient healthcare costs will continue to rise. Divorcing the patient from the cost of the treatment as is done with private health insurance or government health insurance just drives up the demand for a finite resource and thereby the cost of healthcare. How many people today go to their doctor or the emergency room when they get the sniffles or just feel a litle run down? Too many. And without the deterrent of cash out of pocket to regulate the frivolous from the serious, the demand and costs for healthcare will keep rising.

The healthcare plans being considered now in Congress are clearly step 1 on the road to a single payer, government controled healthcare system, where the individual will cede to the government the responsibility for healthcare. Many view this proposal as a kind of freedom from the fear of catastrophic loss, but it is really serfdom in disquise, the abdication of freedom and responsibility to uncaring bureaucrats who want more and more control over the citizens.

I'm certainly not saying the current system is ideal or doesn't have much room for improvement. But that improvement won't come from turning the nation's healthcare system over to the same people who can't run Amtrak, the Post Office, Medicare, Medicaid, Social Security, etc. There are better and cheaper ways to reduce costs and protect against catastrophe.

How to Stream Bloomberg TV on Linux or Watch Fox Business News

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Wednesday, August 5, 2009

The Middle Class Tax Hike Coming to a Neighborhood Near You

A government big enough to give you everything you want is a government big enough to take from you everything you have.
-- Gerald Ford

On some of the talking head shows over the weekend, several Obama administration economists floated the idea of a middle class tax hike. After a sharp negative reaction, this idea was immediately denied by the politicians in the administration. But to me this is the inevitable conclusion to all the spending that is going on in Washington these days and the economists were simply being rational. The rich in this country simply don’t have enough money to shrink these deficits and sooner or later the politicians are going to come after the cash cow of the middle class. But Obama is no dummy and doesn’t want to end up like Bush 41 breaking his vow of no new taxes for those making less than $250K. That would be political suicide.

Yet, on the other hand, the Obama deficits are unsustainable and will eventually undermine the economy and the dollar if something is not done. The ChiComs will not continue to loan dollars to the US indefinitely if we don’t get our fiscal house in order. And cranking up the printing presses will leave too few dollars chasing too many goods and give the US a good dose of inflation.

That’s why I think middle class tax hikes are inevitable. But they won’t be done in a straightforward fashion. They will be done in a roundabout way to leave the President enough room for plausible deniability. Cap and Trade and Health Care Reform come to mind as two golden opportunities to hike middle class taxes without appearing to do so. In addition to these items, there will be other fees and taxes levied in circumspect ways so people don’t actually see the impact on their tax returns.

To address the deficit, middle class tax hikes and a dose of inflation are almost a foregone conclusion because there just aren’t enough rich people to soak to pay for years and years of the government living beyond its means.

Monday, August 3, 2009

Dr. Feelgood: My Take on the Cash for Clunkers Program

While the news media is celebrating the “success” of the Cash for Clunkers program and leading the cheer for additional funding, and it is hard not to argue that this buying spree is good for the car companies and on the surface a good deal for the car buyers, a deeper look at the program is required. I find it to be another shining example of short term gain for long term pain, the kind of stuff that politicians of all parties specialize in.

What on earth am I talking about, you ask? Your representatives in the government have decided that it is a good idea to borrow money in your name and against your future earnings to gift your neighbor as much 25% of the price of a new car and help the car companies companies, at least momentarily, rise from the ashes of the current recession. Whether you call it another bailout for the car companies or a subtle redistribution of wealth, the impact is the same: the government increases the national debt; purchasers are encourage to take on more personal debt; and car companies get a temporary lift in sales and postpone the painful, but necessary, decisions to streamline their businesses. All at a time when both the government and the citizens need to deleverage their balance sheets. In addition, viable, productive assets that are paid for are being taken off of the road in exchange for more debt. Isn't this the kind of artificial stimulus that got us into economic trouble in the first place? Where does it all stop and why are the auto dealers and manufacturers more deserving than home-builders, appliance companies furniture companies, technology companies, etc.?

The Senate may seem like they are waffling on extending the plan at the moment, but don't kid yourself: they will approve it, even if economic good sense says it should be rejected. This is actually one of the few stimulus programs that Congress has enacted that seems to be having the desired result of stimulating at least part of the economy. Think of how much money the taxpayers could have saved if the original stimulus bill had been better focused on actually stimulating something other than government.

Personally, I have no plans to buy any cars right now since mine are paid for and are still productive assets with many miles in front of them. I refuse to take on any new debt. I think the Cash for Clunkers program achieved its purpose of temporary political gain, but this bubble will pop like all bubbles pop and auto sales will fall back to levels dictated by market demand.