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.