When Bond Market Giants Speak, Should You Listen?

Bill Gross, Jack Bogle and David Kelly


Dan Fuss

Is the "new norm" for the foreseeable future a 4% average return for bonds, and 6-8% for stocks? No one can predict the future, but some of the better minds in investing seems to think so. Do we need to readjust our expectations? Have we been spoiled by the 30 year bull run in bonds? When treasury rates are this low, it is just a matter of time before they start rising.

How To Save On Razor Blades

This technique works on my Gillette Fusion. I use a rough towel as well. Putting a razor away wet shortens its life significantly, so at a minimum thoroughly dry the blades after use.

Have We Become That Which We Cast Off?

Need a Job? I Hear the IRS is Looking for a Few Good Smiths for Healthcare Enforcement.

Morpheus: What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.

Should Small-Time Investors Dabble in Commodities?

Gold Investing


Jim Rogers on Commodities

For the average small-time investor, it's best to turn off CNBC and Fox Business News, and concentrate on increasing earning power and savings.  However, these days with so much fear and uncertainty in the economy and over the levels of government spending it's no wonder people are looking alternative investments to traditional stocks and bonds.

Commodities seems to be word on the lips of many investment gurus.  What's the case for investing in commodities?  I've attached two videos that attempt to make the case for commodity investing... a world where basic materials, food and energy are getting scarcer as populations grow, governments that are irresponsible with their currencies, run excessive deficits and borrow well beyond their means to repay, economic uncertainty and political fear.  But could this be a case of short-term performance chasing, or is there long-term value in this sector?

But how do you value a single commodity or an index of commodities?  I wish I knew.  There are no profits, cash flows or dividends, only asset appreciation or depreciation as supply and demand are balanced in the marketplace.  How do you know if gold is a bargain at $1100 an ounce?  Don't know the answer to that question either.

I do know that the price of commodities will never go to zero, because these are the raw materials used to make things humans need such food, clothing, shelter, heat, transportation, machines, etc.  I also know that as the world gets more affluent demand rises for the finished goods made from these raw materials.  But do they make a good long-term investment as some pundits indicate?  I am skeptical.  Long-term charts seem to indicate they barely keep pace with inflation, and stocks and bonds outperform.  But, as with any investment, past performance does not indicate future results.  To invest in commodities you must be a believer in resource scarcity or the currency debasement story.

What are the individual's choices in commodity investing?  Mutual funds, ETFs, ETNs and taking possession of the commodities themselves.  I'd stay away from ETNs due to counterparty risk, and, except in the case of gold and silver coins or bullion, shy away talking physical possession of commodities.  I'd concentrate my efforts on identifying mutual funds and ETFs such as:

• Pimco Commodity Real Return Fund
• PowerShares DB Commodity Index Tracking Fund (DBC)
• iShares GSCI Commodity-Indexed Trust Fund (GSG)
• iShares Gold Trust(IUA) or SPDR Gold Shares (GLD)
• iShares Silver Trust (SLV)

But be warned, the broad based commodity ETFs and funds have a spotty record at replicating the performance of the indexes.



For the well-diversified investor, I view commodities as a hedge or insurance against economic fear and uncertainty.  They tend to move counter-cyclical to other financial assets and this add to their appeal to reduce the volatility of portfolios.  In my view, stocks and bonds will outperform commodities long-term, and that is where I am placing my money. But for those who must invest in commodities, I think it would be a mistake to have more than 5-10% of a portfolio in this sector.

Who Says Everyone in Hollywood is Crazy?

A little tax revolt anyone? No way the state could lock us all up.

How a Bill Becomes Law -- 2010 Version

Laws are like sausages. It's better not to see them being made.
~ Otto von Bismarck

Sunday Verse: A Historical Breakfast

Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.
~ Groucho Marx

Those are my principles, and if you don't like them... well, I have others.
~ Groucho Marx

These two quotes by my twin brother, Groucho, kinda summarize my feelings on politics and politicians.   To commemorate the monumental events of this week as Obamacare was signed into law, I've chosen a prose poem by Russell Edson.


A Historical Breakfast

      A man is bringing a cup of coffee to his face, tilting it to his mouth. It's historical, he thinks. He scratches his head: another historical event. He really ought to rest, he's making an awful lot of history this morning.
      Oh my, now he's buttering toast, another piece of history is being made.
      He wonders why it should have fallen on him to be so historical. Others probably just don't have it, he thinks, it is, after all, a talent.
      He thinks one of his shoelaces needs tying. Oh well, another important historical event is about to take place. He just can't help it. Perhaps he's taking up too large an area of history? But he has to live, hasn't he? Toast needs buttering and he can't go around with one of his shoelaces needing to be tied, can he?
      Certainly it's true, when the 20th century gets written in full it will be mainly about him. That's the way the cookie crumbles--ah, there's a phrase that'll be quoted for centuries to come.
      Self-conscious? A little; how can one help it with all those yet-to-be-born eyes of the future watching him?
      Uh oh, he feels another historical event coming . . . Ah, there it is, a cup of coffee approaching his face at the end of his arm. If only they could catch it on film, how much it would mean to the future. Oops, spilled it all over his lap. One of those historical accidents that will influence the next thousand years; unpredictable, and really rather uncomfortable . . . But history is never easy, he thinks. . .

~ Russell Edson

Some Bumper Stickers I'd like to See

Equality

HT: http://www.marginalrevolution.com

This is the latest fad around college campuses to indoctrinate our children (just kidding).  Note that some are a little more equal than others (socialist humor).  Guess the big dude is not feeling empowered by this whole scene judging from his body language (capitalist humor).  :-)

3 Reasons Healthcare Reform Won't Cut Deficit

There is much debate on the blogsphere about the merits of Obamacare or lack thereof. Past history has shown new entitlement programs cost anywhere from 1.5 to 10 times original estimates. My own gut feeling is 2 - 4 times projections. Do you think this major new entitlement program will be budget neutral as the CBO projects?

Visualizing the National Debt

The true burden of government is the spending level.

         ~ Milton Friedman

Click on the image to enlarge. This data is as of July 2009. The situation has only gotten worse. This graphic does not include the 100 trillion dollars plus in unfunded liabilities. No wonder the gold bugs are going wild. It's almost impossible to turn on the TV or radio without hearing a sales pitch for the yellow metal.

Real World Impact of the Health Care Control Legislation

Last night I received an email from the company I work for addressing the ironically named Patient Protection and Affordable Care Act.  I'm not going to quote the letter in its entirety, but here are a few excepts.

The legislation requires all Americans to have health insurance and provide for assistance to low-income individuals to help them afford coverage. The legislation begins to set up a competitive marketplace to provide more options. However, due to the varying effective dates included in the legislation, we expect that xxxxxxxx’s costs will increase in the short-term. These cost increases are primarily driven by two provisions.

The first is a provision that affects the Medicare Part D subsidy for prescription drug coverage. Because xxxxxxx offers retiree prescription drug coverage today, the government provides a 28 percent subsidy to help offset the financial burden of offering that coverage. The subsidy was intended to help employers continue to offer prescription drug coverage for retirees so that these retirees would not have to use the Government Medicare Part D program. However, changes affecting the Part D subsidy will make it less valuable to employers, like xxxxxxx, and as a result, may have significant implications for both retirees and employers.

Additionally, there is a provision that taxes high-value health plans expected to begin in 2018. Many of the plans that xxxxxxx offers to employees and retirees are projected to have costs above the thresholds in the legislation and will be subject to the 40 percent excise tax.

My layman's reading of this is email is: get ready to pay more for less.  There's no question I have good health care benefits today, but I pay a fair amount out of pocket for each doctor visit or procedure.  I'm certain my out of pocket expenses to continue to increase each year with or without Obamacare.  I think many Americans with health care provided by their employers will have a similar experience.

Better minds than mine have speculated (see Martin Feldstein's article in the Washington Post) that the rational behavior for individuals (and companies) is to drop their current health insurance, pay the penalties, and wait to purchase insurance when they get sick.  This type of behavior would have a devastating impact to the financial assumptions behind the program.  In Feldstein's own words:

Consider: 27 million people are covered by health insurance purchased directly, i.e. outside employer-based plans. The average cost of an insurance policy with family coverage in 2009 is $13,375. A married couple with a median family income of $75,000 who choose not to insure would be subject to a fine of 2.5 percent of that $75,000, or $1,875. So the family would save a net $11,500 by not insuring. If a serious illness occurs--a chronic condition or a condition that requires surgery--they could then buy insurance. Since fewer than one family in four has annual health-care costs that exceed $10,000, the decision to drop coverage looks like a good bet. For a lower-income family, the fine is smaller, and the incentive to be uninsured is even greater.

The story is similar for single people. The average cost of an individual policy is $4,800. An individual with earnings of $50,000 would face a fine of $1,250 and would therefore save $3,550 by not insuring.

In short, for those who are now privately insured through employers or by direct purchase, there would be substantial incentives to become uninsured until they become sick. The resulting rise in the cost to insurance companies as the insured population becomes sicker would raise the average premium, strengthening that incentive.

Only time will tell whether Feldstein's predictions will come true.

Another interesting take on Obamacare is written by his second cousin, Dr. Milton R. Wolf, entitled Questions for your representative.

US Government Pays Higher Interest Rates than Some Corporations as AAA Rating is Put at Risk

Alright, I swore to myself I wouldn't write anything today about the so-called "healthcare" bill. I'll try hard to keep my word since so many others are blogging about it and I've about overdosed on it over the past few weeks.

But one headline I did notice over the weekend is that a number of publically traded companies’ bonds are now trading at lower yields than US Treasury bonds, signaling that the market thinks they are more credit worthy than the government, even though the government can print money whenever they feel like it. With trillion dollar plus deficits forecast as far as the eye can see, it’s not much of a surprise. The only market place discipline the government has is the level of demand for its bonds when it floats new debt. The less credit-worthy the country, the higher the risk, and the higher the interest rate.

Who are these lucky companies? You could probably guess most of them since they are stalwarts with a rock-solid reputation. Berkshire Hathaway, Proctor & Gamble, Johnson & Johnson, Lowe’s, Abbott Labs, and the Royal Bank of Canada. There’s little question in my mind that the flood of treasuries hitting market will keep pushing yields up. The healthcare bill will only make the situation worse.

In my own portfolio, I’m underweighting Treasuries and placing my faith in corporate American, the discipline of the marketplace and that corporate officers will practice more self-restraint and better financial judgment than our elected officials.

Sunday Verse: To The Thawing Wind

After the back to back February blizzards in the Mid-Atlantic and Northeast, I thought this would be an appropriate seasonal poem:

To The Thawing Wind

Come with rain. O loud Southwester!
Bring the singer, bring the nester;
Give the buried flower a dream;
make the settled snowbank steam;
Find the brown beneath the white;
But whate'er you do tonight,
bath my window, make it flow,
Melt it as the ice will go;
Melt the glass and leave the sticks
Like a hermit's crucifix;
Burst into my narrow stall;
Swing the picture on the wall;
Run the rattling pages o'er;
Scatter poems on the floor;
Turn the poet out of door.

~ Robert Frost, A Boy's Will, 1913

Remember When?

Remember when Woolworths was still in business, had a lunch counter, and served meals at a decent working man's price?  I do, just barely.

HT: http://iowntheworld.com/blog/

$5 would buy the entire left side of the menu. Think bout todays prices for the same items. This is why you shouldn't hide money under the mattress or in low risk, low return bank accounts. This is why your money needs to grow with the economy, pick up the price inflation built into stock returns. This is why you need to invest in stocks and bond, and not just stick with "safe" bank accounts and money market funds.

Economics & Ethics in One Lesson

HT: http://gregmankiw.blogspot.com/

Classic Socialism Jokes

In celebration of the planned weekend festivities in Washington, D.C., I thought it was a good time to dust off some classic socialism jokes.....

~

What is the difference between capitalism and socialism?

In capitalism, man exploits man. In socialism, it's the other way around.

~

What would happen if a socialist republic were established in the middle of the Sahara desert?

Within three years, it would have to import sand.

~

Are there any countries where it is not possible to build socialism?

Yes, countries like Luxembourg are far to small for such a big mess.

~

What is a sardine?

A whale after ten years of socialism.

~

The Seven Wonders of Socialism

1. Everybody is employed.

2. Although everybody is employed, nobody works

3. Although nobody works, everybody fulfills the plan.

4. Although everybody fulfills the plan, there are no goods.

5. Although there are no goods, everybody has everything.

6. Although everybody has everything, everybody steals.

7. Although everybody steals, nothing is ever missing.

~

Three stages in the competition between socialism and capitalism.

Stage number 1: Catch up and overtake

Stage number 2: Keep the pace

Stage number 3: Stay on the track

~

What's the difference between capitalist hell and socialist hell.

In capitalist hell, the damned must lie on a bed of nails while a steam roller drives over them. In socialist hell, it is exactly the same, except sometimes there are no nails, sometimes the steam roller is broken and sometimes the driver is too drunk to work.

~

    An economics professor at Texas Tech said he had failed very few students but had, once, failed an entire class. That class had insisted that socialism worked and that no one would be poor and no one would be rich, a great equalizer. The professor then said, "Ok, we will have an experiment in this class on socialism."

     "All grades will be averaged and everyone would receive the same grade meaning, obviously, no one will receive an A." They all agreed to this. After the first test the grades were averaged and everyone got a C. The students who studied hard were upset and the students who studied little were happy.

But, as the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too, so they studied little. The second test average was a D! No one was happy. When the 3rd test rolled around the average was an F.

     The scores never increased as bickering, blame and name calling all resulted in hard feelings and no one would study for the benefit of anyone else. To their great dismay the professor failed them all. Then he sent all of them this note: "A socialistic government will also ultimately fail - because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed."

~

    Donald Trump's daughter, Ivanka, was about to finish her first year of college. Like so many others her age, she considered herself to be very liberal, and among other liberal ideals she was very much in favor of higher taxes to support more government programs -- what her dad dismissed as "redistribution of wealth."

    She was deeply ashamed that her father was a rather staunch conservative, and a rich one at that -- a feeling she openly expressed. Based on the lectures that she had participated in, and the occasional chat with a professor, she felt that her father had for years harbored an evil, selfish desire to keep what he thought should be his, rather than benefit society.

One day she was challenging her father on his opposition to higher taxes on the rich and the need for more government programs. "You don't need to spend money on these expensive furnishings in this huge house when there are people who need to earn more than minimum wage and better food!" she lectured.

    To her shock and amazement, all The Donald said in reply was "Welcome to socialism."

    That's it? she thought to herself -- no argument? But before she could even think of a follow-up, he actually changed the subject! "How are you doing with your studies?" Trump asked her.

    Taken aback, she answered rather haughtily that she had a 4.0 GPA, and let him know that it was tough to maintain, insisting that she was taking a very difficult course load and was constantly studying, which left her no time to go out and party like other people she knew. She didn't even have time for a boyfriend, and didn't really have many college friends because she spent all her time studying.

Her father listened and then asked, "How is your friend Audrey doing?"

    She replied, "Audrey is barely getting by. All she takes are easy classes, she never studies, and she barely has a 2.0 GPA. She is so popular on campus; college for her is a blast. She's always invited to all the parties, and lots of times she doesn't even show up for classes because she's too hung over."

    The Donald was closing in now. He asked Ivanka, "Why don't you go to the Dean's office and ask him to deduct a 1.0 off your GPA and give it to your friend who only has a 2.0. That way you will both have a 3.0 GPA and certainly that would be a fair and equal distribution of GPA."

Ivanka, visibly shocked by her father's suggestion, angrily fired back, "That's a crazy idea, how would that be fair!? I've worked really hard for my grades! I've invested a lot of time, and a lot of hard work! Audrey has done next to nothing toward her degree. She played while I worked my tail off!"

    Then Donald slowly smiled, winked and said gently, "Welcome to capitalism."

~

Capitalism, Socialism, and Communism have a meeting for tea at noon. Capitalism and Communism arrive on time, but Socialism is nowhere to be found. Finally he arrives, out of breath and apologetic. "I'm sorry," says Socialism, "I was standing in line for sausage." Capitalism says - "What's a line?" And Communism says - "What's a sausage?"

~

Economic justice:

• America is capitalist and greedy — yet half of the population is subsidized.
• Half of the population is subsidized — yet they think they are victims.
• They think they are victims — yet their representatives run the government.
• Their representatives run the government — yet the poor keep getting poorer.
• The poor keep getting poorer — yet they have things that people in other countries only dream about.
• They have things that people in other countries only dream about — yet they want America to be more like those other countries.   

~

Life Expectancy in Retirement

Source: The Economist.

Citizens all over the world now spend about twice as many years in retirement as they did a generation ago. This is all well and good, except on the whole they have failed to save enough to support themselves in retirement and expect government to provide them with income and healthcare. See my previous posts on Social Security and Debtor Nations.  Is anyone surprised world governments are facing serious fiscal problems?  Or that in the US politicians are proposing even more entitlement programs to fix the fiscal mess the current set of entitlement programs have caused?  Wasn't Einstein's definition of insanity: doing the same thing over and over again and expecting different results?

Unusual Candor from Washington: Rep. Tom Perriello (D-VA)

"If You Don't Tie Our Hands, We Will Keep Stealing."

Contrast this attitude with my earlier post on Davy Crockett.

If Federal Employees Don't Pay Taxes Why Should You

OK, the answer is obvious--- because you are an honest, law abiding citizen and don't want to get hit with a large fine by the IRS or thrown in jail for tax evasion. So why do 3% of all federal employees--- who have the most stable employment in the country, perks well above the private sector, and average salaries exceeding the private sector---- feel that they don't have to pay taxes like the other citizens? I don't know the answer, but 100,000 civilian federal employees owe the IRS $962 million in back taxes. If you include retirees and military service members, the numbers go from nearly 100,000 up to 276,000 current or former workers who owe $3 billion in taxes. Should the government fire these employees who won't cough-up what they owe Uncle Sam? What do you think?  There are a handful of Congressmen who believe this should happen.

And what do you think of the disparity between the growth of federal and private wages and benefits?  This doesn't sound like shared sacrifice to me.  If health insurance company profits of 3.3% are unacceptable to our politicians, shouldn't the gap in compensation between Federal Civilian employees and Private Industry be intolerable to taxpayers?

It's Started: Walgreens in Washington State Stops Accepting New Medicaid Patients

Wage and price controls never work. Just ask the Nixon and Ford administrations. They create shortages and scarcity. Washington State now provides another lesson for the central planners in government to ignore. The Seattle Times reports that Walgreens and Bartell Drugs chains are no longer accepting new Medicaid patients for prescriptions because “the state Medicaid program is reimbursing Walgreens below its cost to break even on nearly 95 percent of brand-name medications dispensed to Medicaid patents.”  It continues: “Washington was reimbursing pharmacies 86 percent of a drug's average wholesale price until July, when it began paying them just 84 percent.”

Intrade Odds for Obamacare Passing

"The average member of Congress – House and Senate – is first and foremost only a self-serving inconvenience-minimizer who doesn't have a lot of principle they stand on in the first place. It doesn't take much to move a jellied spine, so they'll probably get their votes."

~Dick Armey speaking to the National Press Club yesterday, where he predicted that Congress will pass health care reform.

My predictions: a bill will be put on the President's desk by Monday either by vote or through the Slaughter rule, and signed early next week. This will trigger a Constitutional challenge by many of the States and certain advocacy groups. The case will make it to the Supreme Court, which will nullify the law if pass through the Slaughter rule, or if passed by vote the court will nullify many of its major provisions.

If the law survives these challenges intact, the US Government will lose its AAA credit rating, a number of the weaker states will teeter on the verge of bankruptcy due to the unfunded mandates, and taxes will be raised not only on wage earners of all levels either through increases in the federal income tax, the state income tax, other fees, and increases in payroll deductions, but also on investors through wealth taxes or applying payroll tax type of deductions to passive incomes such as capital gains and dividends.

Like most government programs, Obamacare will do the opposite of what is advertised: it will fail to provide any savings, will increase the costs of healthcare for all Americans, will require more legislative fixes and tweaking, and will create a thriving black market in health care services as consumers gravitate toward more cost effective and less bureaucratic solutions.

Daniel Solin: The Smartest Investment Book You'll Ever Read

HT: Robert Wasilewski

Daniel Solin presenting his book  The Smartest Investment Book You'll Ever Read at Google headquarters in 2007.  A long video on index investing, but worth the watch.  His message is straightforward.  Asset allocation across three funds---Vanguard Total Stock Market, Vanguard FTSE All-World ex-US Index, and Vanguard Total Bond Market--- will place you in the top 5% for long-term performance.  Not exactly a strategy that will get anyone the cover of Money Magazine, but cheap and simple is good.

Moodys Puts the US, UK and Germany on Credit Watch

Moodys, still smarting from its dismal ratings performance during the 2008-2009 financial crisis, has put the US, UK and Germany on notice that they are in danger of loosing their AAA credit rating if they don't restrain their borrow and spend policies.  So who are some of the world's biggest offenders?  The below list shows the world's biggest debtor nations as a % of GDP as of the 3rd quarter 2009.

Country	External Debt % of GDP	Gross External Debt	2009 GDP (est)
United States	95.9%	$13.67 trillion	$14.25 trillion
Australia	108.8%	$891.26 billion	$819 billion
Hungary	124.2%	S$231.33 billion	$186.3 billion
Italy	154.6%	$2.71 trillion	$1.76 trillion
Greece	175.3%	$594.60 billion	$339.2 billion
Spain	184.7%	$2.53 trillion	$1.37 trillion
Germany	189.4%	$5.33 trillion	$2.81 trillion
Finland	205.7%	$376.8 billion	$183.1 billion
Norway	208.9%	$577.80 billion	$276.5 billion
Hong Kong	218.8%	$659.27 billion	$301.3 billion
Portugal	231.5%	$538.1 billion	$232.4 billion
France	247.2%	$5.22 trillion	$2.11 trillion
Austria	268.9%	$869.13 billion	$323.2 billion
Sweden	275%	$916.42 billion	$333.2 billion
Denmark	315.2%	$627.6 billion	$199.1 billion
Belgium	345.6%	$1.32 trillion	$381.4 billion
Switzerland	390%	$1.23 trillion	$316.1 billion
Netherlands	395.6%	$2.58 trillion	$652 billion
United Kingdom	427.6%	$9.26 trillion	$2.17 trillion
Ireland	1,352%	$2.39 trillion	$177.3 billion

Most of the countries outside the EU control their own currencies and can print money to cover their debts, and their citizens will have to live with the consequences. But it is hard not to conclude there is a looming world government debt crisis looming similar to what we are seeing in Greece today. Conventional wisdom is that government bonds are the safest investments in the world because they have the ability to tax and print money. But I'd feeling safer buying the debt of companies like Berkshire Hathaway, Exxon, Coke, Pepsi, Nestle, Microsoft, Cisco, or Proctor and Gamble who have strong market positions and financial discipline rather than governments who have left their finances deteriorate to these sorry states. What do you think?

Cashin' in Uncle Sam's IOUs

Parkersburg, WVa.  Remember that name.  It's where Al Gore's infamous Social Security lockbox from the 2000 Presidential election resides. Or rather the binder that contains the Social Security Trust Fund.  You see, there is no Social Security Trust Fund.  There is just a bunch of IOUs in the form of Treasury Bonds from the government to the Trust Fund.  $2.5 Trillion in IOUs from Uncle Sam.  The financial geniuses in Washington have already spent your retirement and my retirement.  Now it's time to start cashin' in those IOUs.

For the first time since the 1980s, when government last "fixed" Social Security, the system will spend more this year in benefits than it collects in revenues.  The government will now have to borrow more, much of it from abroad, to start paying back those IOUs.  This shortfall will probably not affect current benefits, but it is a wake-up that the system is in trouble once again and unsustainable over the long haul.   I'll stop short of calling Social Security a Ponzi scheme, but the demographics of the country have changed to the point there are not enough workers to fund the retirees without taxes being raised substantially.

People in their 40s and 50s will more than likely get something out of their Social Security "investment."  But anyone younger than forty should plan for retirement without Social Security.  Social safety nets are breaking down all over the world.  Lavish entitlement programs are bringing governments close to bankruptcy and are unsustainable in the long run.  The US is not immune to this disease and seems hell-bent on jumping in with both feet.  The only thing investors can truly count on is themselves and the money they've set aside for their future.

The $3,000,000,000,000 Tax Hike

On a day when Moody's just barely reaffirmed the AAA credit rating of the US, let's take a look at what the future might hold.  The Heritage Foundation recently released its analysis of the estimated US government budget over the next 10 years.  Some highlights of its findings are:

• Government spending will permanently expand by 3% of GDP over 2007 levels 
• Taxes on all Americans will be raised by $3 trillion dollars over the next decade
• 42 cents of each dollar spent in 2010 will be borrowed
• $1.6 trillion deficit in 2010--$143 billion higher than the recession-driven 2009 deficit
• Would leave permanent deficits that top $1 trillion as late as 2020
• Would dump an additional $74,000 per household of debt into the laps of our children and grandchildren
• Would double the publicly held national debt to over $18 trillion

These numbers should grab your attention.  But what does this mean to investors?

1. Keep expenses low to maximize investor return.  The investor's job is not to make investment companies rich as they can pay multi-million dollar bonuses.
2. Tax efficient investing is more important now than ever.
3. This level of Government spending and borrowing will likely suck the life out of the private sector creating a slow growth domestic economy, so international diversification is essential. 
4. The thirty year bull market in bonds is likely over so prepare for interest rates to rise back to their historical averages.  Lock in today's low mortgage rates with a fixed rate loan.  Shorten up the duration of your bonds to preserve capital.
5. In taxable accounts, allocate a percentage of your fixed income investments to muni bonds, but don't overweight problem states like CA, IL, FL, NV, and NY.
6. The dollar will likely continue its long-term decline against other currencies so consider a small position in foreign bonds as a hedge.  For those who believe in the inflation story, a hedge position in commodities might be appropriate.

In other words, if you are practicing an appropriate asset allocation stay the course.  You will be fine. But those in high turnover funds that generate large distributions should be prepared to fork over a larger percentage of their returns to the government.  As Sir John Templeton said: For all long-term investors there is only one goal---maximum total return after taxes.

The Economic Costs of Cash for Clunkers

The Wall Street Journal has consistently lambasted the Cash for Clunkers program the politicians love to crow about. Edmunds.com reports that each new car sold cost the taxpayers approximately $24,000 apiece, a pretty hefty price. In addition, Edmunds estimates that of the 690,000 cars sold the Cash for Clunkers program shifted 125,000 vehicles worth of future demand into the 4th quarter of 2009, and that the remainder of the cars would have been purchased anyway. The WSJ estimates the annual gas savings of the higher mileage cars to be roughly $350M for the "investment" of $3B. What is much harder to estimate is the economic costs of destroying all the productive vehicles that were traded in and the impact to the used car market.

After my oldest son totaled one of our old vehicles, I got some first hand knowledge on used vehicle prices. Cash for Clunkers dramatically reduced the inventory of used vehicles available for sale.  The Manheim Used Vehicle Index shows the steep rise in used car prices.  While part of the explanation for the rise is the stabilization of the economy over the past year, the other major factor is the reduction of supply.  Anecdotally, the used car dealer told me he was paying $1500--$2000 more for the same types of cars he was buying one to two years ago, and ad walked away from a number of actions with no vehicles because the retail marketplace wouldn't bear that prices he'd have to charge to make a profit.

At a macro level Cash for Clunkers was a redistribution of wealth from the US taxpayer to the car companies and the few citizens who purchased an auto under this program.   For those now in the market for a used car, the unintended side effect was to increase prices for some of the very people who can least afford it.

Koala in the bushfires of Australia

Amazing image from the brush fires in Australia from Pixdaus.

How Much is Enough

Some wisdom from Eric Schurenberg. How much is enough-- a key question each investor should ask themselves in putting together their financial plan and determining how much risk to take in their portfolio.

Burton Malkiel: How to Invest

I do not own Malkiel's new book, but his advice is well worth heading, and makes a lot of sense to me. For investors who were diversified, this was not a lost decade, but a decade of moderate positive compounding. In addition to the average bond market compounded returns over the decade of 5 - 7% per year, the diversified investor could have reaped the following total returns:

Domestic	Return	International	Return
Large Cap	-9.1%	Large Cap	12.4%
Large Cap Value	27.6%	Large Cap Value	41.4%
Small-Cap	41.2%	Small-Cap	52.3%
Small Cap Value	121.3%	Small Cap Value	198.6%
Real Estate	175.6%	Emerging Markets Large Cap	154.3%
		Emerging Markets Small Cap	176.7%
		Emerging Markets Value	212.7%

Hardly what I'd call a "lost decade." But this does not mean, go run out and put all your money in emerging markets as you chase last years performance. It means follow an asset allocation strategy that spreads your investment across all these classes so that if one class doesn't perform well the performance of other classes can keep your portfolio on an upward trajectory.

Robert Hagstrom: How to Beat the Market

I don't have much faith in market prognosticators. Years ago I did buy Hagstrom's book The Warren Buffett Way, and was quite taken with Hagstrom's analysis of each of Bufett's major investing decision.  The argument was compelling that a rational investor in control of their emotions could substantially beat the market by selecting a small number of companies with superior long-term business that possessed wide motes or barriers to entry.  However, this was much easier said than done.  I invested a nominal amount in the Legg Mason Focus Fund run by Hagstrom.  Don't try to track down this fund, because it doesn't exist anymore.  Beating the market is much more difficult in practice than theory.  Unless you are a budding Warren Buffett, you're probably better off practicing an asset allocation strategy across multiple asset classes than trying to pick a handful of winning stocks.

Worldwide Ubiquity of Fast Food/Convenience Culture

Is America's revenge on the rest of the world to make them fat? All kidding aside, American fast food is growing like wildfire all around the world.  An interesting article in Business Magazine highlights the invasion of the fast food companies in the Middle East.

Learning from Sweden's Free Market Renaissance

Sweden was a rich nation between 1870 and 1970 when government was very small, but then began to stagnate as welfare state policies were implemented in the 1970s and 1980s. The Center for Freedom and Prosperity Foundation explains how Sweden is rolling back the welfare state in an attempt to undo the economic damage of these policies. The highlight of the video is the "peeing in your pants" analogy.

Lessons I Learned from Financial Armageddon

Today marks the one year anniversary of the market lows experienced during the global financial meltdown.  That day the S&P 500 closed at 676.  Today it stands at 1140.  I would less than honest if I didn't admit I felt like the world was ending, and that everything I'd worked so hard for was going to vanish into thin air.  At the bottom, I literally felt like throwing up every time I looked at my portfolio.  But I resisted the urge to sell in panic like so many of my friends.  I'd been investing since before the market crash of 1987 and knew instinctively the long term trend for equities as a whole is up.  Investing is an act of faith that tomorrow will be better than today, but that faith is always tested by bear markets.  I didn't sell anything, but stuck to my asset allocation model, keep my discipline.  And this made all the difference.

I think all long-term investors should keep a historical perspective on the markets.  They should especially go back and review those periods in history where turmoil takes hold and the markets veer irrationally out of control.  Looking back over the past year, reinforced some lessons that bear repeating:

1. People aren't as risk tolerant as they think.  Design your portfolio so you can emotionally withstand the inevitable down periods without panicing.
2. Performance chasing, just like envy, is an emotion that is alive and well in the investment community.  It is the hype that Wall Street is built on.
3. Common sense goes down the drain when it comes to investing. Who wouldn't jump at paying $1 dollar for a hamburger that previously cost $2?  But how many run away from buying the S&P 500 at 670 when they were buying with both fists at 1200.  Or has Warren Buffett recently said, and I paraphrase, "When it's raining money, bring a bucket instead of a thimble."
4. Seers and forecasters have no special insight and are wrong most of the time.  Yet people will pay a lot of money for expert advice (magazines, newsletters, investment accounts).  Like a stopped clock, they will be right every now and then, and they will be anointed gurus.  Hope lives eternal.
5. What we learned previously is easily forgotten when the greed cycle kicks back in.

My own reaction to this most recent financial Armageddon was to tough it out and place my faith in the long-term upward trend of economic growth and human improvement.  My shortcoming during the crisis was not keeping a level head and buying more at the low points.  May I have a more wisdom during the next crisis to seize that golden opportunity.

Is it Time to Move to Open Source Software?

After years of frustration with Microsoft Windows dealing with issues from declining performance to virus and adware, to purchasing expensive software such as Microsoft Office I made the decision to save myself money and headaches by switching to Linux.

I was under no illusions.  Linux is not for the faint of heart.  It requires some computer savvy, and the willingness to seek out answers and experiment without the fear of failure.  It also helps that I earn my living in the computer field and have a better than average knowledge of both Windows and Unix.  My idea of a fun Saturday is tearing down and rebuilding old computers.

I deleted Windows from all my computers and chose to install the Ubuntu distribution.  I much prefer the Debian based distributions to others such as Red Hat, Suse or Mandriva.  That is a personal prejudice of mine, just as I prefer Gnome as my window manager over KDE.  It is all a matter of taste.

What did I get for all of my troubles?  Other than a few technical challenges that I was able to overcome with all the help posted on the web, I now had a rock solid operating system that didn't cost me a penny with the following features:

1. Open Office, the open source equivalent of MS-Office.
2. A world class image editor, the GIMP, which I use to create web images and design book covers.
3. A vector drawing tool, Inkscape, which I use to design scalable graphics and book covers.
4. Format print quality books using LATEX.
5. Rip CDs and DVDs.
6. Load music onto my iPod.  The latest and greatest iPod models are not always support right away.
7. Record live radio into my own library of podcasts.
8. IM with any of the major IM systems.
9. Watch and record TV shows using MythTV.
10. Browse the web using Firefox, Google Chrome or Opera.
11. Make calls using Skype.
12. Sync files across all my PCs using Dropbox (love that program).
13. Manage money using GNUCash.
14. Manage eBooks using calibre.
15. Too many multimedia options to list.
16. Programming and web design tools such as Eclipse.
17. CD/DVD burning.
18. Virtual Box to run other OS's in a virtual machine.

 There is no major feature I can think of that I've had to go without.  My main annoyance is the lack of support for some propitiatory Microsoft formats streaming over the Internet.

For the average person, I  recommend the Linux Mint distribution which comes configured with full multimedia support out of the box.  I'm not crazy about the default look and feel of Linux Mint, but that can be changed easily enough through the Gnome Look website.

If you have an old PC laying around ready for the junkyard, give Linux a try.  You'll be pleasantly surprised and save yourself a few bucks.

Why I Don't Buy Personal Finance Books Anymore

The writers of personal finance books may not like the title of this article.  But don't get me wrong, in the past I've bought plenty of books on personal finance and investing, even a couple of get rich quick schemes.  However, I've reached my limit and won't be buying anymore.

Why?  Because they all seem to be variations on the same theme, and I don't need to have 100 different authors put their unique spin on the same ideas.  My bookshelves aren't that big.

At the 10,000 foot level you can sum up the collective wisdom as follows:

1. Spend less than you earn.  Be frugal.
2. Build up an emergency fund equal to 3 - 6 months of your salary. 
3. Education never ceases, and is the key to increasing earning power (i.e., invest in yourself).
4. Limit the number and use of credit cards.  Ideally, become self-financing.
5. Pay off high interest rate loans first.
6. Don't over-complicate your investment strategy.  Keep it simple and diversified.
7. Compounding is the eight wonder of the world.
8. Cost matter in everything, especially where they compound year after year-- like mutual fund fees-- so seek out the low cost providers.
9. Integrity matters in everything, so seek out those companies with an unblemished record of honesty.
10. Stick with index funds.  Don't put your faith in star managers.
11. Determine the proper asset allocation for your risk tolerance.  Then stick to it.
12. Invest and rebalance regularly.
13. Don't fall for get rich quick schemes.  If it was such a great idea, they'd be doing it themselves instead of wasting time selling you their system.  They are marketing companies, not investment companies.
14. Pay off your debts so you can live like nobody else.  

That's my synopsis.  I'm sure many can come up with other ideas of what to add to this list. The point is that money management and investing is simple at the conceptual level, but much harder to put into practice because it requires discipline, the deferral of immediate gratification and a lot of good old fashion values.

What I've learned about investing is contained in a handful of books, the others are just rehashings of similar ideas.  I would recommend Common Sense on Mutual Funds by John Bogle and The Four Pillars of Investing by William Bernstein.  Everything I need to know about investing is contained in these two books, which is why I don't need to buy the latest and greatest, and can invest the money I saved.  In addition, I find numerous articles on the internet that are worthwhile, but like everything on the internet you have to sift through the garbage to find the gems.  

Quote of the Day: Ralph Wanger

“For professional investors like myself, a sense of humor is essential. We are very aware that we are competing not only against the market averages but also against one another. It’s an intense rivalry. We are each claiming, ‘The stocks in my fund today will perform better than what you own in your fund.’ That implies we think we can predict the future, which is the occupation of charlatans. If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you.”

~ Ralph Wanger, former manager of the Liberty Acorn Fund