Tag Archives: financial advisor

The Dark Side to Falling Oil Prices

My Comments: My wife and I took a few days off; visited friends and family in Tennessee and North Carolina. The lowest per gallon price we saw along the way was $2.29 in South Carolina. If you read my blog posts, you’ll know I expect for the markets to stop going up and for there to be a significant correction before long. You have also perhaps noted my enthusiasm about declining oil prices along with a cautionary note.

Here is another insight from a major thought leader on the markets. It’s a compelling argument that should make you think carefully about being long in stocks over the next six months.

December 04, 2014 / Scott Minerd / Guggenheim Partners, LLC

The slump in oil prices could stifle global growth and force some oil-dependent economies into recession.

The price of oil is the overriding economic theme at the moment. Oil prices have declined to their lowest level in more than four years and I believe they could continue to tumble. The market implications are positive in the near term, but there is a dark side to the decline in oil prices that is beginning to negatively impact a number of countries around the world and which could ultimately come home to roost in the United States.

First, the positive: falling oil prices and the subsequent decline in gasoline prices act like a tax cut, transferring cash into the pockets of consumers, leaving more money for discretionary spending. The combined benefit of declining gas prices and lower interest rates is likely to provide American consumers, and subsequently the U.S. economy, with a boost as we head into the all-important holiday shopping season.

The darker side to falling oil prices is that they signal that the global economy isn’t growing fast enough to absorb the growth in oil production. The slump in oil prices has led to a weakening in the currencies of some major oil-exporting nations. Russia, for example, has witnessed a 24 percent decline in the value of the ruble against the dollar since the beginning of November. Russia needs oil at $100 a barrel to support its economy, and many other oil-dependent economies rely on oil prices well north of current levels. Over time, as foreign currency reserves run dry, the likelihood is that we will see economic contraction and possibly recession in these countries.

A recession in countries such as Russia will have significant knock-on effects, particularly for European exporters, creating another headwind for beleaguered euro zone economies. An oil-price-induced negative feedback loop would stifle global growth and could even lead to political instability in any number of oil-dependent nations.

Beginning as early as the first quarter of 2015, investors should be wary of the potential for a setback in U.S. equities as the adverse impacts of lower growth and weaker foreign currencies begin to show through in the results of leading multinational companies.

In Europe, it doesn’t seem likely the European Central Bank is going to be able to reach the necessary consensus to begin quantitative easing through the purchasing of sovereign debt until the end of the first quarter or possibly into the second quarter, and perhaps never. ECB President Mario Draghi is running into roadblocks with the German Bundesbank over the sovereign bond-buying option, which will probably end up in the European courts. The problem is, the longer this situation drags on, the worse the situation in Europe is going to get. The clock is ticking and policymakers are running out of time.

One option the ECB still has left is to buy gold. If European inflation data comes in weaker and the European economy continues to sputter, I think we could see the ECB consider gold purchases, but if we do it will be an act of desperation. Gold may prove the ultimate hedge against a financial crisis in Europe should the ECB fail to act quickly.

When The Stock Market Performs Best During A U.S. President’s 4-Year Term

profit-loss-riskMy Comments: Many of us are climbing a wall of worry about our investments over the next 12 months. I’m not worried if your time horizon is ten years or more, but if it’s less, then I believe you have reason to be worried.

Every week I’ve posted articles that justify the wall of worry. As soon as I’ve hit the “post” button, however, along comes something that seems legitimate to make me question my reasoning. Here’s another. And it’s not the only one.

Willow Street Investments, Nov. 18, 2014

• An average investor needs to know about the interrelationship between politics, economics, and the stock market to make more informed investment decisions.
• Incumbent presidents push for votes by proposing tax reductions, increasing spending on specific government programs and/or pushing for lower interest rates as an election draws near.
• The most favorable period for investing during a presidential cycle is from October 1 of the second year of a presidential term to December 31 of the fourth year.
• Barring a severe global and economic event, all major stock market declines have occurred during the first or second years of the four-year U.S. presidential cycle.
• Barring a severe global and economic event, no major declines occurred during the third or fourth years of a presidential cycle.

Investors in the stock market are always looking to past history to try and gain an edge for their investing strategy in the future. Frequently, gazing at stock market history in relation to political, economic and social events can provide investors with a window into the future of what may happen in the stock market. Other times, however, the weighted expectations of investors relying too much on history may alter what can be seen through the window to the future because an investors’ expectations of one scenario occurring may be altered by investors own behavior. Like the Farmer’s Almanac, that professes to be able to make long-term yearly weather forecasts for all across the U.S., stock market truisms such as “the January effect,” “Sell in May and Go Away,” and “the Santa Claus rally” are discussed one every year or so as predictive devices to aid in an investor’s investing strategy. Another stock market truism is looking at the 4-year U.S. presidential cycle and the behavior during such cycle.

Recently, we were reviewing an insightful article entitled The Four-Year U.S. Presidential Cycle and the Stock Market by Marshall Nickles and Nelson Granados. This article references a 2004 article, “Presidential Elections and Stock Market Cycles” written by Marshall Nickles. In Mr. Nickles’ earlier article, he noted that all of the major stock market declines occurred during the first or second years of the four-year U.S. presidential cycle. He also noted that no major declines occurred during the third or fourth years of a presidential cycle. In particular, from 1950 to 2004 (using the Standard and Poor’s 500 Index), the most favorable period (MFP) for investing was from October 1 of the second year of a presidential term to December 31 of the fourth year. The remaining period, from January 1 of the first year of the presidential term to September 30 of the second year, was the least favorable period (LFP) for stock market investors. The author concluded in their first article that “it appeared that politicians were anxious to exercise policies that were designed to pump up the economy just prior to a presidential election, which in turn had a positive affect on stock prices.”

In the second article by the authors they attempted to understand and explain the relationship between politics and stock market behavior. They focused on providing evidence of the relationship between economics, politics, and the four-year presidential cycle; and second, including an analysis of stock market performance during the 2008 period. They introduced a risk measurement for the stock market by arguing that the 2008 stock market crash should be considered an anomaly and concluded that the four year presidential stock market cycle is likely still intact. The goal of the article, according to the authors, was to provide evidence that risk may be reduced and returns may increase when an investor considers how economic policy influences stock market prices during the presidential election cycle.

The authors state what may seem obvious to even the most novice of stock market investors. They note that once a president takes office, they realize that to get reelected they must try to make the economy as healthy as possible four years later. Every president faces such circumstance and the authors note that “it is this consistency in the U.S. political process that also sets into motion fiscal policies that are frequently predictable and that often have a direct effect on the stock market.” In the discipline of economics, fiscal policy is defined as an increase or decrease of taxes and or government spending. The direction that fiscal policy takes can often be directly related to the state of the economy at the time a new president is elected.

The authors point out that it is not surprising to see incumbent presidents push for votes by proposing tax reductions and or increasing spending on specific government programs as an election draws near. In addition, an incumbent political party may also try to persuade the Federal Reserve to complement the administration’s efforts through monetary policy, by increasing the money supply and reducing interest rates. Such fiscal and monetary policies may be introduced as early as the end of the second year of the presidential four-year term. If the results are favorable and the economy responds positively, corporate profits will likely rise, and so will stock prices, just as the next presidential election is about to take place.

The authors also set forth the potential negative consequences of stimulating the economy by pointing out that the policies used to stimulate the economy and the stock market can also lead to inflation, which can be disconcerting to investors. If inflation occurs, a new president may be pressured to reverse the fiscal and monetary stimulus policies of the prior president, attempt to get inflation under control, and then hope to return to stimulus policies by midterm in preparation for the next election. Rising interest rates often lead to increased costs for businesses and consumers, which can slow spending and corporate profits, and pressure stock prices downward.

The articles point out and provide evidence that show the DJIA rises during the second half of the four-year presidential cycle. The authors point out the MFP within the four year presidential cycle. Such period begins on October 1 of the second year of the presidential term through December 31 of the fourth year. Such period performed significantly better than the unfavorable period, from January 1 in the first year of the presidential term through September 30 of the second year. The authors point out that the cycles of any type are not always perfectly aligned. Such alignment can be thrown off the authors point out when there are positive and negative macroeconomic events that can temporarily break a long standing the most favorable period cycle. They indicate that even with a history of positive market gains during such most favorable market periods from 1950 to 2004, the 2008 market collapse, precipitated by domestic and global economic events, was too powerful for the market to overcome. The authors conclude that while such economic 2008 market collapse was an isolated occurrence, they do not believe such event will be the only exception in the future. They believe that globalization and the Internet are at least two reasons for volatility and uncertainty in the years ahead. The authors sum up by stating, and we agree, the more the average investor knows about the interrelationship between politics, economics, and the stock market, the more informed they will be in making investment decisions.

Our conclusion

We believe that the authors provide powerful evidence and a detailed discussion of how politics influence the stock market. As the authors point out, what they label as a most favorable periods and least favorable periods typically hold true within each president’s four year term barring exceptions where stimulus activities cannot overcome severe global and economic negative circumstances. So what does the upcoming last year of President Obama’s presidency hold for the stock market? It is true that President Obama cannot run for a third term as president as he is barred from doing so (and whether the public wants him or not). So, President Obama is not worried about getting reelected. It is also likely true that, President Obama would like a fellow Democrat to be elected as President. So, it is likely his fiscal policies will likely continue to boost the economy and the stock market.

If one follows the data presented by the authors of the above articles, 2015 will be a good year for the stock market unless a severe global or economic event occurs. And what about the much discussed interest rate increases that may start to occur in 2015?  Well, such interest rate increases, however moderate they may be, will have a lagging effect on the market that would most likely occur in 2016 after the presidential election has occurred. If the overall market indexes gain next year, do not expect the markets to go straight up but experience volatility along the way. It is during such volatility on the downside that investors should consider establishing new positions.

Let Them Eat iPads: Why Wage Suppression Is Key To The Market Puzzle

My Comments: This one is for those of you who are nerds and interested in economics and finance. If not, then hopefully you’ll check in tomorrow. But…

Have you been puzzled? I have, but apparently Darwin is alive and well. Only this time it has nothing to do with bugs in the Amazon jungle but the world economy. As for iPads, that’s another puzzle.

Those of us who profess to know something about investing money, along with economics and finance, have long been wondering if there is anything different about the markets this time around. This overview is long, but helpful.

Debt can be seen as a percentage of the US economy. It hit its peak at the end of WWII, and then trended down. In the early 80’s, under Reagan and Bush, it started upward again. It’s clearly not a function of a sluggish economy or imminent doom.

Yes, it needs to be controlled. But it has settled somewhat as the economy has grown over the past few years. The problem is that few of us are enjoying this growth, and that’s a concern.

Nov. 18, 2014 / an anonymous author at Mercenary Trader

• Wages may be the key to everything. The Fed has kept rates near zero to bring a return of positive inflation and positive wage growth to the US economy.
• But rising wages imply a normalization of interest rates. That, in turn, means the forced unwinding of all the gross excesses built up over the years.
• Those differentials then make the dollar yet stronger, with brutal impact on multinational outlooks. Small caps, meanwhile, still enjoy historically rich valuations and will be hit with wage pressure too.

Many sacred cows have been slaughtered these past few years. Beliefs held as obvious, incontrovertible even, were crushed to dust.

Take, for example, the notion that the United States was due to implode under the weight of accumulated debts. In a recent issue of the Strategic Intelligence Report, we completely dismantled this false notion, which fails to consider the asset side of the US balance sheet.

(For a very quick eye-opener, consider this piece from the Institute for Energy Research, “Federal Assets Above and Below Ground.” It is hard for Uncle Sam to be broke when his asset-based net worth, let alone his annual cash flows via the power to tax, runs to the hundreds of trillions.)

To be clear, we are no fans of prolonged market meddling from central banks. Such is not “money printing” – that phrase is so grossly misused it should be banished – but has significant negative impacts as explored here.

With that said, there is a powerful takeaway from the recent stretch of years. Markets – both financial markets and economic systems on the whole – do not care about the poor. And by that we mean they really, really don’t care.

The functional attitude is “Let them eat cake,” as Marie Antoinette supposedly said. Except in the real world it is “Let them eat iPads” – and there are no subsequent uprisings or beheadings.

In other words: It is wholly possible for a free market economic system to survive, and even thrive, as those on the lower rungs of the economic totem pole see their personal prospects threatened, flattened, or even flat-out crushed. Nobody cares about the poor, not really. Not on Wall Street and not in Washington. The Federal Reserve indeed wants to help the middle class, but they can only do so by helping the rich first (and then hoping for the best).

The iPad and iPhone are instructive examples of this – and as of this writing we are still long Apple (NASDAQ:AAPL). These devices add significant value and productive GDP to the economy, but only via those who can shell out serious bucks for an expensive piece of technology. This is all well and good in practical terms. Those who spend help the system to mend. Those with empty pockets on the bottom rungs (and increasingly the struggling middle rungs) can be safely ignored.

This is not a moral observation. It is simply an observed aspect of harsh reality. In fact the lack of morality in respect to capitalist systems is often an essential point. When we recently argued for the robust nature of US recovery, one of the objections received was that “50 million Americans are on food stamps.” The number may actually be higher than that. But does it matter from a pure functioning-of-the-system perspective? Perhaps not at all.

Consider the feudal system that dominated the Middle Ages. A system of “Lords, Knights and Serfs” dominated for centuries. Why could it not dominate again? Many years ago, we pointed out a growing phenomenon of “Digital Feudalism.” In 21st century Digital Feudalism, the “Lords” are holders and wielders of capital. The “Knights” are white collar knowledge workers (who in turn have a shot at becoming Lords themselves). And the “Serfs” are everyone else.

If you understand that markets do not care about the poor – and that free market economic systems can function well while ruthlessly suppressing the bottom half, or even the bottom two thirds, of the economic stratum – then you are closer to understanding why activity of the past few years has generated an overall picture of economic success for the United States (if not for other countries).

The Federal Reserve set out to save Blue-Chip Banks (NYSEARCA:KBE) first and foremost, which exist at the center of the system, by quarantining toxic assets (taking them onto its own balance sheet). The Fed then sought to create a “wealth effect” – as openly admitted by Bernanke and Yellen – via ZIRP (zero interest rate monetary policy) and the blatant encouragement of asset appreciation and financial engineering.

This was maddening from a moral perspective, leading to phrases like “socialism for the rich.” The non-rich, meanwhile, who did not participate in paper asset appreciation – for lack of anything but spare change in their retirement accounts – saw the return on their interest-bearing savings accounts asymptote above zero, even as wages stagnated and labor hours were cut.

The hard, brutal, Darwinian fact here – as based on empirical evidence – is that saving an economy by stimulating the assets and prospects of the wealthiest asset holders, which includes top-end corporations, is a strategy that to a real degree actually works. Consider the spending patterns of the top 30% of the US class pyramid, for example, as contrasted against the bottom 70%. Wal-Mart (NYSE:WMT) and payday loans aside, who do you think keeps the retail sector humming? The top 30% do.

Active market participants, who wish to actually make a profit from investing and trading, do not have the luxury of coloring their decisions with emotional sentiments. It may be unpalatable, sickening even, to consider the possibility that the free market system on the whole is geared toward elevating the haves rather than the have-nots, often at direct expense of the have-nots.

But if such is true, well, then what’s true is true. Darwinism in nature, at its most stark and brutal, also is a morally unpalatable phenomenon. That has no bearing on the reality of things.

What, you may ask, does this have to do with markets and trading? Well, it may turn out that wage suppression is the key – the hidden solution piece – to fully unlocking the market puzzle.

Via the lead article in this week’s links, Gavyn Davies of the FT makes a fascinating observation, by way of a paper from Morgan Stanley. The basic line of reasoning runs like this:
• Real wage growth has grossly lagged productivity growth.
• Wage growth has been suppressed via globalization, technology, and other means.
• Suppressed wage growth leads to outsized corporate profits.
• But also to sluggish economies via lack of spending from workers.
• And thus to perpetually low interest rates in a deflation-prone, low-inflation world.
• With perpetually low rates fueling the financial engineering cycle.
• Plus perpetually higher profits and expanded multiples on those profits.

That is a brilliantly elegant argument chain, is it not?

The working masses can’t keep their wages up. As a result, corporations have fatter profits. As a further result we get sluggish, molasses-like recoveries… which cause central banks to keep interest rates low… which in turn feeds the financial engineering cycle as wealthy companies borrow cheaply and spend the money on share-pumping schemes (which yield-chasing investors, spurred by near-zero rates, happily snap up).

And then, because these companies are primarily spending on buybacks and dividend payouts, future productive economic growth is stymied (which suppresses the long-run jobs outlook). The upper echelons win again through greater leverage applied to paper assets, showing up as higher multiples here and now. The economic masses are once again left out in the cold – no accumulated paper assets to speak of, no fair rate of return on their interest-bearing savings account (on what little they have saved), and no wage growth in their pockets.

Long-term globalization trends only cement this phenomenon further. When jobs can be outsourced or automated, the deflationary impact on wages is multiplied. Corporations win because they mainly cater to the top thirty percent (bottom seventy percent more or less who cares)… and suppressed wages keep profit margins high as productivity increases… and low interest rates in perpetuity via lack of inflationary pressures seal the self-reinforcing deal.

America is indeed rich. The richest country in the history of the world in fact. It just so happens the distribution of those assets is incredibly Darwinian. And yet there are no clear arguments as to why this state of affairs has to change (except one as we shall soon touch on).

Are the American masses – the lower seventy percent – going to rise up and facilitate economic revolution because of wage stagnation? No, that is wishful thinking in the extreme. As someone tweeted regarding the 2014 mid-term elections: “That wasn’t an election, it was a Game of Thrones finale” – a pun on the sea of Republican red that washed over the United States. The dominating corporate welfare state is under no threat from the serfs.

Digital Feudalism is a binary prospect. For the top thirty percent, the future is wonderful and bright. It is an amazing time to be alive. For the bottom seventy percent, however, one is reminded of the bleakest line from Orwell’s 1984: “If you want a picture of the future, imagine a boot stamping on a human face – forever.”
Except the story is not that cut and dry – because it is not clear that wage suppression lasts forever.

There is, in fact, evidence that wage pressures in the United States could be returning… and are now in the process of returning. Supply and demand pressures may be finally shifting the picture. And that would change everything.

Wage growth has been flat-to-sideways these past few years. It is one of the reasons the US recovery has felt utterly disappointing to the masses (even as paper assets soared). It is also one of the reasons inflation pressures have been all but non-existent. You need wage pressures to really get an inflation cycle going. (In the high inflation environment of the 1970s, unions had massive negotiating power and regular wage-boosts were built into employment contracts.)

Here is where the argument gets quite bearish for elevated paper assets, and thus for all equities (including US equities)…

The entire market is now leveraged to outlier levels of corporate profits. This corporate profits to GDP chart tells the story. And as Bajinath Ramraika and Prashant Trivedi point out, there is ample evidence that elevated corporate profit margins are simply not sustainable. Closing tax loopholes will have a notable impact. Rising debt service costs will have yet further impact.

And the return of wage growth pressures is what makes it all happen.

Wages may be the key to everything, or so we argue here. The Federal Reserve has to keep rates at near-zero levels to try and bring a return of positive inflation and positive wage growth to the US economy. To the degree that the Federal Reserve succeeds in getting wages to rise, they have managed success in their mandate.

But rising wages, if we see them, further implies a normalization of interest rates. And that, in turn, means the forced unwinding of all the gross excesses built up over the years, by way of market distortion and multiple expansion in a near-zero interest rate world, where a combination of financial engineering and profit-boosting wage suppression took equity valuations far above non-manipulated sustainable levels.

The World Is Marching Back From Globalisation

question-markMy Comments: Those of you who know me well do not consider me a pessimist. But this is Monday. And while I can feel optimistic about the chances for a return to good times from Florida football, the rest of the news is essentially gloom and despair. I’d much rather bring you something uplifting and motivating. But as a very tiny piece of a very big wheel, I’m powerless to do more than share this with you, hoping one of you will lift me off the floor.

My life has been shaped by how the world changed for the better following World War II. Notwithstanding the conflicts in Korea, Viet Nam and the middle east, it felt like there was a steady progression across the planet in terms of rising standards of living, health, and happiness. My family today is a reflection of that.

According to this author, the crash of 2008 has stopped that flow. The maniacs in Iraq are not fundamental to this reversal, though it will help us all if they are simply put down, like one would do with a deranged dog. I expect civilization will survive and once again move in the direction I spoke of a minute ago, but for now, and perhaps for the rest of my life, there are likely to be more questions than there are answers.

As we move toward the elections in 2016, we need to find leaders who don’t need to blow smoke and promote their own egos at our expense.

By Philip Stephens September 4, 2014

There is a mood abroad that says history will record that sanctions against Russia marked the start of an epochal retreat from globalisation. I heard a high-ranking German official broach the thought the other day at the German Marshall Fund’s Stockholm China Forum. It was an interesting point, but it missed a bigger one. The sanctions are more symptom than cause. The rollback began long before Vladimir Putin, Russia’s president, began his war against Ukraine.

The case for calling a halt to business as usual with Moscow is self-evident to anyone who considers that international security demands nations do not invade their neighbours. The valid criticism of the west is that it has been too slow to react. At every step, the Russian president has ruthlessly exploited US hesitation and European divisions.

He will do so until Nato restores deterrence to the core of European security. Mr Putin’s irredentism demands tough diplomacy stiffened by hard power. He will stop when he understands that aggression will invite unacceptable retaliation. To make deterrence credible, the alliance must put boots on the ground on its eastern flank. The Baltics have replaced Berlin as the litmus test of western resolve.

Some, particularly though not exclusively in the rising world, have seen sanctions through a different prism. By punishing Russia economically, the US and Europe are undermining the open international system. Economics, this cast of mind says, must be held apart from the vicissitudes of political quarrels. Why should new powers sign up to a level international playing field if the US and Europe scatter it with rocks in pursuit of narrow interests?

These critics are right to say an integrated global economy needs a co-operative political architecture. Sanctions against Ukraine, though, fit a bigger picture of the unravelling of globalisation since the financial crash of 2008. They testify to a profound reversal in US attitudes. Washington’s steady retreat from global engagement reaches beyond Barack Obama’s ordinance that the US stop doing “stupid stuff”.

The architect of the present era of globalisation is no longer willing to be its guarantor. The US does not see a vital national interest in upholding an order that redistributes power to rivals. Much as they might cavil at this, China, India and the rest are unwilling to step up as guardians of multilateralism. Without a champion, globalisation cannot but fall into disrepair.

Not so long ago, finance and the internet were at once the most powerful channels, and visible symbols, of the interconnected world. Footloose capital and digital communications had no respect for national borders. Financial innovation (and downright chicanery) recycled the huge surpluses of the rising world to penurious homebuyers in Middle America and dodgy speculators on the Costa del Sol. The masters of the banking universe spun their roulette wheels in the name of something called the Washington consensus.

Then came the crash. Finance has been renationalised. Banks have retreated in the face of new regulatory controls. European financial integration has gone into reverse. Global capital flows are still only about half their pre-crisis peak.

As for the digitalised world, the idea that everyone, everywhere should have access to the same information has fallen foul of authoritarian politics and concerns about privacy. China, Russia, Turkey and others have thrown roadblocks across the digital highway to stifle dissent. Europeans want to protect themselves from US intelligence agencies and the monopoly capitalism of the digital giants. The web is heading for Balkanisation.

The open trading system is fragmenting. The collapse of the Doha round spoke to the demise of global free-trade agreements. The advanced economies are looking instead to regional coalitions and deals – the Trans-Pacific Partnership and the Transatlantic Trade and Investment Pact. The emerging economies are building south-south relationships. Frustrated by a failure to rebalance the International Monetary Fund, the Brics nations are setting up their own financial institutions.

Domestic politics, north and south, reinforces these trends. If western leaders have grown wary of globalisation, many of their electorates have turned positively hostile. Globalisation was sold in the US and Europe as an exercise in enlightened self-interest – everyone would be a winner in a world that pulled down national frontiers. It scarcely seems like that to the squeezed middle classes, as the top 1 per cent scoop up the gains of economic integration.

Much as the south has prospered within the old rules – China’s admission to the World Trade Organisation has been the biggest geopolitical event so far of the present century – yet the new powers show scant enthusiasm for multilateralism. The old order is widely seen as an instrument of US hegemony. India scuppered the latest attempt to reinvigorate the WTO.

Globalisation needs an enforcer – a hegemon, a concert of powers or global governance arrangements sufficient to make sure the rules are fairly applied. Without a political architecture that locates national interests in mutual endeavours, the economic framework is destined to fracture and fragment.

Narrow nationalisms elbow aside global commitments. Sanctions are part of this story, but Russia’s contempt for the international order is a bigger one. Sad to say, we learnt in 1914 that economic interdependence is a feeble bulwark against great power rivalry.

The Myths of Buying Term and Investing the Difference

life insuranceMy Comments: Life insurance is a financial tool used to solve certain financial problems and offset the risk presented when someone dies and economic pain is the result. That’s a cold way to talk about the death of a loved one, but from an objective point of view, that’s how it must be seen.

Because we hold life so dear, emotion tends to cloud the process that leads to and influences decisions about life insurance. Emotion is the primary reason most of us don’t invest our money very well; hope is not a valid investment strategy. Nor is it a reason to buy or not buy life insurance.

I’m going to assume most of you know the difference between a term policy and a permanent policy. The first is for a specific number of years and the second is designed to last until you die. The best time to buy a life insurance policy is about three months before you die. My next question of you is “when would you like me to come by and take your application?”

I own life insurance today. Or at least members of my family own a life insurance policy on my life. And just as all of us are biologically unique, my reasons for having and paying for a non-term policy are unique to me.

Along the way I’ve owned a number of different term policies, policies that actuarially were unlikely to be there if and when I died. Virtually everyone who owns a term life policy survives the terms of the initial contract. Which is why they are relatively cheap. Insurance companies love it when you send them money for years and never file a claim.

The thoughts behind this post come from a well known insurance company with whom I’ve had a professional relationship for many years. If anyone is interested, you can send me an email and I’ll forward to you the 10 page .pdf file they sent me with the above title.

However, the myths are not expressed numerically. Which is unfortunate.

There are those whose opinions I respect who say you should only purchase term insurance, no matter how old you are. The idea is to pay a smaller price, and then make sure you invest the difference. By the time you actually die, you will have amassed more than enough cash to offset the fact that you no longer have any life insurance.

Mathematically, this is probably true. Only I’m familiar with a phrase that says “life is what happens when you are making other plans.” To me this means that for most of us, as life throws us curve balls, our ability and discipline tends to wane over time. The net result is that when it comes time for us to die, our pile of cash is limited, there is no longer any life insurance in force, and there is economic pain for our family members.

Some of the dilemma results from our way of life which tends to demand answers NOW! Not six months from now, not 30 years from now, but NOW! And I have to remind myself that I have no idea what I’m having for lunch today, much less when the grim reaper will show up and take me from the building.

For most of us, paying attention almost daily to what anything costs leaves us habitually inclined to favor solutions that cost less. And term insurance definitely costs less. If you read paragraph 4 above once more, you’ll understand why. So that’s what we buy. Mind you, if you do unexpectedly pass away and beat the odds, tax free money will flow to whomever you have named as beneficiaries. That we know it might happen is why we are interested in considering our options in the first place.

Over time, our reasons for thinking we want life insurance also changes. When we are young and perhaps have children at home, one of our greatest assets is our ability to earn money. If that goes away, where will the money come from? So we buy life insurance.

As we age and our children are grown and hopefully self-sufficient adults, that need for life insurance goes away. But in the past decade, virtually all of us have been sent a curve ball in the form of what is thought of as the “great recession”. Few of us have as much money today as we would have had if the economic crisis of 2008-2009 had not happened. There is no guarantee a similar event won’t happen again in the next couple of decades.

There are things I can talk about to mitigate those kinds of events, but this is not the place for it. What is appropriate is to identify the various economic risks most of us face as we age and move into the third stage of our life. This is when we stop working for money and money has to start working for us. Economic risks are still there, and it’s in our best interest to understand what they are and decide how relevant they are.

We have to consider the economic burden imposed on our families if we, or our spouse if we have one, has health issues that result in what is known as Long Term Care. The odds are very high that you will be subject to that unpleasant reality. If your pile of cash is not significant, will there be enough money left on the table to keep you from being warehoused until you die? If all of it is spent on you, and you have a surviving spouse, is there enough to take care of that expense? Life insurance is one way to make it possible.

But when you are in your 40’s or 50’s, who among us is thinking that far ahead? Virtually none of us. So we simply buy term and protect ourselves in the near term, hoping our pile of cash will grow large enough. I’m now talking with several ‘seniors’ who are asking me for life insurance quotes to see how much it’s going to cost to manage this problem, in case they don’t die early.

There are also new products on the market that are life insurance products that have riders that enable the insured to access the death benefit before they die to help pay for any long term care that becomes necessary. If you don’t need the care, then the family gets all the money. But if you do need long term care, the riders leverage the amount available so that if push comes to shove, there’s more money available than just the death benefit. These can be lifesavers, to mix a metaphor.

Perhaps this has been helpful. Let me know. Thanks.

The Euro Is In Greater Peril Today Than At The Height Of The Crisis

My Comments: Here in the US we tend to think of Europe as a mis-directed older sibling, someone who can’t quite make it, by our standards. We forget that most of our laws and even the language we speak came from Europe. And those foundations were forged in a melting pot as violent and as culturally diverse as the chaos we see today in the Middle East. Talk about tribal warfare!

The European Union is an effort to eventually federalize the countries of Europe that emerged and existed following World War II. A common currency was thought to be a mechanism that echoed what we have here in the US among all 50 states. It’s in our best interest as a global peacemaker and economic engine of the future that we help Europe evolve and thrive.

Wolfgang Münchau / November 9, 2014 / The Financial Times

The eurozone has no mechanism to defend itself against a drawn-out depression.

If there is one thing European policy makers agree on, it is that the survival of the euro is no longer in doubt. The economy is not doing great, but at least the crisis is over.

I would challenge that consensus. European policy makers tend to judge danger in terms of the number of late-night meetings in the Justus Lipsius building in Brussels. There are definitely fewer of those. But that is a bad metric.

I do not have the foggiest idea what the probability of a break-up of the euro was during the crisis. But I am certain that the probability is higher today. Two years ago forecasters were hoping for strong economic recovery. Now we know it did not happen, nor is it about to happen. Two years ago, the eurozone was unprepared for a financial crisis, but at least policy makers responded by creating mechanisms to deal with the acute threat.

Today the eurozone has no mechanism to defend itself against a drawn-out depression. And, unlike two years ago, policy makers have no appetite to create such a mechanism.

As so often in life, the true threat may not come from where you expect – the bond markets. The main protagonists today are not international investors, but insurrectional electorates more likely to vote for a new generation of leaders and more willing to support regional independence movements.

In France, Marine Le Pen, the leader of the National Front, could expect to win a straight run-off with President François Hollande. Beppe Grillo, the leader of the Five Star Movement in Italy, is the only credible alternative to Matteo Renzi, the incumbent prime minister. Both Ms Le Pen and Mr Grillo want their countries to leave the eurozone. In Greece, Alexis Tsipras and his Syriza party lead the polls. So does Podemos in Spain, with its formidable young leader Pablo Iglesias.

The question for voters in the crisis-hit countries is at which point does it become rational to leave the eurozone? They might conclude that it is not the case now; they might oppose a break-up for political reasons. Their judgment is prone to shift over time. I doubt it is becoming more favourable as the economy sinks deeper into depression.

Unlike two years ago, we now have a clearer idea about the long-term policy response. Austerity is here to stay. Fiscal policy will continue to contract as member states fulfil their obligations under new European fiscal rules. Germany’s “stimulus programme”, announced last week, is as good as it gets: 0.1 per cent of gross domestic product in extra spending, not starting until 2016. Enjoy!

What about monetary policy? Mario Draghi said he expected the balance sheet of the European Central Bank to increase by about €1tn. The president of the ECB did not set this number as a formal target, but as an expectation – whatever that means. The most optimistic interpretation is that this implies a small programme of quantitative easing (purchases of government debt). A more pessimistic view is that nothing will happen and that the ECB will miss the €1tn just as it keeps on missing its inflation target. My expectation is that the ECB will meet the number – and that it will not make much difference.

And what about structural reforms? We should not overestimate their effect. Germany’s much-praised welfare and labour reforms made it more competitive against other eurozone countries. But they did not increase domestic demand. Applied to the eurozone as a whole, their effect would be even smaller as not everybody can become simultaneously more competitive against one another.

Two months ago Mr Draghi suggested the eurozone fire in three directions simultaneously – looser monetary policies, an increase in public sector investments and structural reforms. I called this the economic equivalent of carpet-bombing. The response looks more like an economic equivalent of the Charge of the Light Brigade.

These serial disappointments do not tell us conclusively that the eurozone will fail. But they tell us that secular stagnation is very probable. For me, that constitutes the true metric of failure.

Guess Who’s Back? The Middle Class

My Comments: There is lots of handwringing about last Tuesdays election results. And lots of people looking for someone to blame if it didn’t meet hopes and expectations.

One of my long time concerns has been the growing inbalance between the haves and the have-nots. Statistically it’s very real with the middle class that evolved and grew after WW2 now faltering and fading. That has huge implications for all of us and the quality of our lives going forward.

This article has been on my post-it-someday list since this past summer. It suggests the middle class is making a comeback. What is so perverse for me about the election results is that while I understand why the “haves” are naturally Republican, I find it difficult to understand why so many of the “have-nots” vote Republican. They are the ones most likely to fall down the economic rabbit hole and yet they seem happy to do so.

posted by Jeffrey Dow Jones July 31,2014 in Cognitive Concord

This has been a very important week for economic data. I know everybody saw yesterday’s GDP report coming, but it’s great news nonetheless. It was a blowout, a 4% real increase in the second quarter.

There is no negative way to spin this one. Even personal consumption expenditures rose at a 2.5% rate. Housing bounced back in a big way, with a 7% increase in residential investment. The consumer is alive and well, and given the fact that inventories, durable goods, and other investment all shot much higher, the business world is betting he’ll stay healthy for a while longer.

What’s interesting is what happens when we marry that data to what we saw in the July consumer confidence report. Consumer confidence surged to yet another post-crisis high and is now officially back in the range that, before 2008, we would have called “normal”.