Choices and Consequences

An excellent analysis of the real choices and their concomitant costs facing the U.S. on budgetary matters. The article ends with a quote basically saying it appears no one will want to make these choices ...until they are forced . The bond vigilantes can appear at any time and they will essentially make the choices for us.

Choices Choices

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Losing Control

Social Security (one part of the 3 part sinkhole we are facing) may run deficits starting THIS year, not 4 or 5 years from now as many had projected. Moreover, SS will be totally broke in 2037 according to the analysis. This boils down to control- we still have control over how to deal with (or not deal with ) these problems. Fairly soon that control will reside in others hands.

Muddled Debt Math

I keep thinking about the ways folks understand numbers and the basic math behind them. The interest on the federal debt in 2010 totaled $413 billion! None of the proposals being floated presently (even the most aggressive by our own Sen Demint)come anywhere close to that figure. During the last 3 months alone the interest has been $197billion. Remember, the costs are at historically low interest levels. If the rates rise to "normal " levels, the interest charges rise exponentially. To actually "cut" spending enough to reduce the deficit you likely need more than a half TRILLION a year reduction in spending. Not sure anyone has that in mind.

Muni Bonds...then and now

Once upon a time we recommended individual tax free municipal bonds to clients. We gradually ceased doing so for several reasons. First, as this article points out, it is nearly impossible to obtain any reasonably accurate or timely financial statements from most of these entities. On top of that, the tendency over the past decade or more to "insure" bonds so that everything has the highest rating (even though the insurance has now mostly disappeared ). Finally, the lack of transparency on commissions/mark-ups make for a difficult trading environment tilted in favor of the brokers.

Crony "Capitalists"

This is a good article discussing the crony "capitalists" rummaging through our economy . I put "capitalists" in quotes because they destroy instead of create capital. It becomes difficult to determine where government ends and big business begins.

Health and Wealth

Health and Wealth are closely related. The language used in each area is somewhat unique and both areas suffer from the immediacy/pill popper syndrome. That is, we want a pill to ease the pain not a strategy to change longer term behavior. The key to each is having a trusted physician/advisor . Well, several studies that have come out since the passage of the Healthcare law estimate a physician shortage of up to 130,000 by 2025. This is a problem that can't be solved overnight given the 8-10 year schooling/training period for physicians. Big, big trouble ahead if we don't act quickly to reverse the trend.

Underwater Residential Real Estate

One of the confounding narratives many folks cling to today is that real estate somehow transcends the universal laws of economics (or maybe even physics for that matter). Despite glimmers of light in certain markets, overall somewhere between 1 in 5 and 1 in 4 houses with mortgages are worth less than those mortgages. I was surprised to learn that around 50 million homes in the U.S. are subject to a mortgage. If home prices continue downward (as appears likely in many/most locales), these ratios change exponentially to the downside. We could well be looking at 1 in 3 or 1 in 2 underwater. Not good.

Financial Self Defense

We have linked a resource to the right of this posting aimed at educating financial services consumers on what NOT to do. The headlines almost every day have a story about someone who has made the mistake of using a salesperson rather than an advisor. In essence, if they spend most of the time with you pitching specific products or investments (the how instead of the what), then you have a salesperson , not an advisor.

How Jobs are Actually Created

An excellent article on the messy manner in which jobs are created and the difference between large and small businesses. The author has a great line midway in the piece "net new jobs are created only by entrepreneurs who start businesses that earn profits". That is correct indeed. No profits equals no jobs.

Savers and Spenders

An interesting article on the debt ceiling , As we see with clients , savers are always savers (regardless of income levels) and spenders always find a way to spend all they have and some more. Our attitude seems to mimic the pre-conversion St. Augustine roughly paraphrased "Lord make me Holy but just not yet". We have to start now.

Dodd Frank Law

A good piece, if a bit long, on the consequenses, some intended and many not of the Dodd Frank law. Already we have seen credit disappear among lower income consumers pushing them to loan sharks. Banks have raised monthly fees, etc. and the real time bomb that resides in Fannie and Freddie continues merrily along.

Market is "Efficient Enough"

Saw this 6 minute clip with Professor Burton Malkiel which is excellent. He has just released the 10th edition of his book Random Walk which largely refutes the notion that investors can out select with consistency. About 5 minutes into the clip he says the markets are "efficient enough" to make them unbeatable. That is spot on and swipes at those who say the markets are not perfectly efficient. They don't have to be.

Debt Picture

a great graphic showing federal debt and the steeply sloped trend line . The article provides good perspective from the other side of the pond. It won't be solved by even large cuts to "discretionary" spending but rather the big three : SS/Medicare/Medicaid will have to be structurally changed in order to reverse the trend.

State Budget Woes

While much focus is on the federal budget, most state budgets are ,if it is possible, in worse condition. This is a great article on the budget gimmicks employed by states to mask over the depth of the problems. I have been following the author, Steven Malanga , for awhile and he is sound in his understanding of state finances. 2011 truly looks like one where we will witness states as "laboratories of democracy" with differing approaches to solving a common dilemma.

Rent Seeking

This term may not be familiar to many but this is a serious and potentially destructive force at work in our economy. This article on the new White House economic advisor describes the activity. In essence, for a couple decades or more we have had a revolving door between government and big banks. Far from being benign, it creates a moral hazard. It extracts money (rents) from the economy via out sized payments to former/future government officials without any corresponding increase in productivity/wealth creation. It amounts to exploitation of the political system for income (rents) . The term rent seeking traces back to Adam Smith as he described components of income : wages; profits; and rents. This is something of a shadow economic system that no one really talks about.

Thomas Sowell on Housing Crisis

Professor Sowell describes with clarity why the continuing government interventions into housing likely make the problem worse. We continually hear about the large number of homeowners "underwater" on their mortgages (current value is less than the mortgage). Unless someone needs to sell the current value is not relevant. Much like a 30 year old saying they have "lost money" in their 401-k (value less than cumulative contributions). Unless they plan to retire next week the current value matters little. Mortgage rates may rise and prices fall further still before the housing crisis ends.