Tag Archives: gainesville florida

Europe’s Dream is Dying in Greece

My Comments: Society evolves, just like animals and plants. But it takes time, and we are conditioned to want it NOW, not over the next millenia. If there is enough collective will, the European Union (EU) will survive by evolving to accomodate Greek society. The players themselves are going to have to find the right pieces, fit them together, and hope it all works out.

It’s in our best interest for the EU to survive and thrive. They are a huge market for whatever it is we produce, be it ideas or technology, or war machines. In human terms, the years since the early 20th century that saw massive conflicts between evolving states is way behind us. But the vestiges of tribal and clan loyalties take time to disappear. We can only hope they find a way to make it work.

Gideon Rachman June 29, 2015

The shuttered banks of Greece represent a profound failure for the EU. The current crisis is not just a reflection of the failings of the modern Greek state, it is also about the failure of a European dream of unity, peace and prosperity.

Over the past 30 years Europe has embraced its own version of the “end of history”. It became known as the European Union. The idea was that European nations could consign the tragedies of war, fascism and occupation to the past. By joining the EU, they could jointly embrace a better future based on democracy, the rule of law and the repudiation of nationalism.

As Lord Patten, a former EU commissioner, once boasted, the success of the union ensured that Europeans now spent their time “arguing about fish quotas or budgets, rather than murdering one another”. When the Greek colonels were overthrown in 1974, Greece became the pioneer of a new model for Europe — in which the restoration of democracy at a national level was secured by a simultaneous application to join the European Economic Community (as it then was).

Greece became the 10th member of the European club in 1981. Its early membership of an EU that now numbers 28 countries is a rebuke to those who now claim it has always been a peripheral member.

The model first established in Greece — democratic consolidation, secured by European integration — was rolled out across the continent over the next three decades. Spain and Portugal, which had also cast off authoritarian regimes in the 1970s, joined the EEC in 1986. After the fall of the Berlin Wall, almost all the countries of the former Soviet bloc followed the Greek model of linking democratic change at home to a successful application to join the EU.

For the EU itself, Greek-style enlargement became its most powerful tool for spreading stability and democracy across the continent. As one Polish politician put it to me shortly before his country joined the EU: “Imagine there is a big river running through Europe. On one side is Moscow. On the other side is Brussels. We know which side of the river we need to be on.” That powerful idea — that the EU represented good government and secure democracy — has continued to resonate in modern Europe. It is why Ukrainian demonstrators were waving the EU flag when they overthrew the corrupt government of Viktor Yanukovich in 2014.

The danger now is that, just as Greece was once a trailblazer in linking a democratic transition to the European project, so it may become an emblem of a new and dangerous process: the disintegration of the EU. The current crisis could easily lead to the country leaving the euro and eventually the union itself. That would undermine the fundamental EU proposition: that joining the European club is the best guarantee of future prosperity and stability.

Even if an angry and impoverished Greece ultimately remains inside the tent, the link between the EU and prosperity will have been ruptured. For the horrible truth is dawning that it is not just that the EU has failed to deliver on its promises of prosperity and unity. By locking Greece and other EU countries into a failed economic experiment — the euro — it is now actively destroying wealth, stability and European solidarity.

The dangers of that process are all the more pronounced because Greece is in a highly strategic location. To the south lies the chaos and bloodshed of Libya; to the north lies the instability of the Balkans; to the east, an angry and resurgent Russia.
Knowing all this, the administration of Barack Obama is increasingly incredulous about the EU’s apparent willingness to let Greece fail. To some in Washington, it seems as if the Europeans have forgotten all the strategic lessons learnt during the cold war about the country’s importance.

That, however, is unfair to the Europeans. Their response to the criticism from Washington is that the EU works only because it is a community of laws and mutual obligations. If you allow a country such as Greece to flout those laws and obligations — by, for example, reneging on its debts — then the club will begin to disintegrate anyway. If, by contrast, you kick Greece out there is still a chance of confining the damage to one country.

The crisis also has profound implications for democracy, the original rallying point that drew Greece into the EU more than three decades ago. Alexis Tsipras, the prime minister, now argues that far from securing Greek democracy, the EU has become its enemy, trampling on the will of the people.

In reality, of course, this is a clash of democratic mandates — pitting Greek voters’ desire to ditch austerity against the voters (and taxpayers) of other EU countries, who want to see their loans repaid and are loath to let an unreformed Greece continue to benefit from EU money.

It may be that those two democratic wills can be painfully reconciled in next Sunday’s referendum. If the Greek people vote to accept the demands of their EU creditors — demands that their government has just rejected — Greece may yet stay inside both the euro and the EU. But it will be a decision by a cowed and sullen nation. Greece would still be a member of the EU. But its European dream will have died.

A Basic Social Security Quiz…

Social Security cardMy Comments: Many are railing against capitalism these days and others against socialism. If you’re adamantly opposed to socialism, I trust you’ve refused to cash your social security checks. Yes, you paid into the system, but the bulk of the money you get comes not from what you put in, but from what our children have put in.

While I believe strongly in capitalism, I thoroughly appreciate the monthly check my wife and I receive from the Social Security Administration. Yes, it shifts some of the financial burden to future generations, but it today represents a social contract we have with the United States. I’ll work hard to help clients and others understand how it exists to help them survive if the need is there.

By Jamie Hopkins – 6/17/2015

Most Americans do not properly understand their Social Security options and it’s not a surprise to the financial services industry. A new survey of roughly 1,500 Americans was conducted by KRC Research on behalf MassMutual and found that 72% of respondents could not pass a true or false ten question quiz on Social Security.

In fact, the lack of knowledge about Social Security is consistent with a comprehensive retirement income literacy test, the RICP® Retirement Income Survey, which was conducted by The American College and found that only 20% of Americans could pass the test but that a slightly higher amount understood Social Security.

Perhaps more troubling was that 62% of the survey respondents over age 50 failed the test. This is a group of people that will rely heavily upon Social Security in retirement, as nearly 1/3rd of current retirees rely almost solely upon Social Security for their retirement income. This highlights an important finding in the MassMutual survey as only 15% of respondents expect to rely solely upon Social Security, which indicates that many people misunderstand how important Social Security is to their retirement income. This age-group should be focusing on retirement planning.

However, many are ill-informed about their main retirement asset, Social Security. This lack of knowledge creates an environment for making uniformed decisions that could detrimentally impact one’s retirement. “Americans who lack the proper knowledge and information about Social Security may be putting their retirement planning in jeopardy,” said Phil Michalowski, Vice President, U.S. Insurance Group, MassMutual. “In fact, many may be leaving Social Security retirement benefits they’re entitled to on the table, or incorrectly assuming what benefits may be available in retirement.”

The full MassMutual Social Security survey is available to take here, now let’s take a look at a few of the most important questions that were misunderstood by the respondents.

1. Social Security Full Retirement Age:

“Under current Social Security Law, full retirement age is 65.” This statement is false. According to the survey, nearly 71 percent of respondents answered this question incorrectly. This can be confusing for many people as full retirement age under Social Security was 65 in the past and many of our parents might have retired when the full retirement age was 65. Additionally, Medicare eligibility starts at age 65, which creates an anchor point in many people’s minds that full retirement for Social Security benefits is also age 65. However, full-retirement for Social Security benefits varies based on the year in which you were born. For those individuals born from in 1943 until 1954, their full retirement age will be 66. For those born in 1960 or later, the full retirement age for Social Security benefits is age 67. It is important to understand your full retirement age for Social Security benefits because if you claim benefits before full retirement age the amount of money you receive could be permanently reduced.

2. The Earnings Test:

“I can continue working while collecting my full Social Security retirement benefits – regardless of my age.” This statement is False. Nearly 56 percent of respondents did not answer this question correctly. Again, it is important to understand your full-retirement age. If you have claimed Social Security benefits prior to full retirement age and are still working and you earn too much then your Social Security benefits will be currently reduced under the earnings test. This does not penalize the worker as much as many think as benefits lost under the test are essentially restored by a recalculation of benefits at full retirement age. Also, once you reach your full retirement age, the earnings test no longer applies, and you can both have earnings from employment and receive Social Security benefits.

3. Spousal Benefits:

“My spouse can qualify for Social Security retirement benefits, even if he or she has no individual earnings history.” This statement is True. Social Security provides spousal retirement benefits for spouses of workers eligible for Social Security retirement benefits. The amount that the non-working spouse is eligible for under Social Security is based on the working spouse’s full retirement benefit, and the age of the spouse. To receive the maximum benefit, the spouse has to attain full retirement age before claiming. Benefits are reduced if benefits are claimed between age 62 and full retirement age.

The Federal Government has put resources and significant efforts into helping people better understand their benefits and the United States Social Security Administration has great resources online to help better understand your benefits and claiming options. However, Americans still need a lot of help making important retirement decisions. According to Michalowski, one of the goals of the MassMutual survey was to bring increased awareness and education to people around the importance of Social Security benefits. In fact, MassMutual has developed online material to help consumers with understanding some basics of Social Security. Ultimately, Michalowski believes that financial professionals need to play a serious role in helping Americans better understand Social Security by working with clients and making sure they have the knowledge to make informed decisions regarding their retirement. This also means you need to ask your financial adviser questions about Social Security, find out about your benefits, and don’t leave anything on the table because you didn’t ask the right question or didn’t understand your benefits.
CONTINUE-READING

Exposing The Dark Side of Personal Finance

financial freedomMy Comments: A recent report that airlines may be colluding on price is but one example of corporate excess that pervades our system. It’s not yet systemic, but given the opportunity, corporate America will take steps to advance its own cause at our expense.

After 40 years as a financial planner, I’m sensitive to questionable behavior by companies and their agents. With Rand Paul now suggesting the world is again about to end, anyone I can reach needs to be careful and know how to respond to those who step in your space and try to take your money. I echo the authors comments about the two named personalities; there is typically a collective groan at financial symposiums whenever their names surface.

by Brian Kay, Leads4Insurance.com, January 2015

This video is a great interview with Helaine Olen, author of the new book “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.” The interview – and her book for that matter – really sticks to it the talking heads of the personal financial industry such as Suze Orman and Dave Ramsey.

First, she calls out Orman for suggesting that people put all their savings in the stock market, a strategy Orman does not employ to her own finances out of concerns for stock market volatility.

More broadly, Olen objects to the idea that one person can give blanket advice to millions of viewers and readers.

“The idea that anybody can give specific advice to millions of people… it doesn’t really work. We’re all specific. We are not archetypes,” Olen said.

Bingo.

Every person has a different income than the next. Different needs embedded in their tightly woven budgets. Different plans for retirement. Different levels of comfort with savings and investing.

And it should be mentioned that all those talking heads are millionaires. It’s much easier for them to say, “Paying down all your debt is your number one priority” when they can immediately do so with the change in their couch cushions.

Real people are living under the economic pressure that hasn’t seemed to let up on those living and working on the ground level of our economy. They rely on credit for medical emergencies, unexpected repairs to their cars and homes, or to help them get through a long drought of unemployment.

Though I am not a big fan of her financial recommendation to “always buy indexed funds,” I strongly agree with her assertion that our financial problems stem from a culture that avoids having frank conversations about debt and savings.

If you are like me and can’t standing seeing flocks of people led astray by these “experts,” take solace in knowing that you provide an antidote to our culture’s financial problems.

By that, I meant that you provide honest, frank discussions with clients about their personal finances, savings and debt. You provide personalized financial advice to them for their – and only their – situation.

Not only do you provide that ideal financial solution, your solution is less complicated, more applicable and more trustworthy.

A book can’t ask a person what their biggest financial concerns are. A talking head on TV can’t say something relevant to everyone watching (though they think they are).

A book can’t build up enough trust with clients to hold them accountable to achieving their stated financial dreams. A talking heard can’t follow up with prospects after initial meetings via phone, e-mail or snail mail.

And neither can answer a call or text from clients when they have questions.

My hope is that you use this as ammo to keep fighting the good fight and to dare to ground people who are lead into the clouds by famous “experts” and dropped without a parachute.

THE FOUR ESSENTIAL CHARACTERISTICS OF ALL BEAR MARKETS

money mazeMy Comments: This article comes from January, 2009 and was written by Nick Murray. Two months later, the bear market that started in mid 2008 was over, though it took some time to realize.

Meanwhile, we’ve been in a bull market for over six years now, and many are suggesting we are overdue for a correction. These comments will help you better understand how this is all going to play out.

By Nick Murray, January, 2009 (gratefully used without permission; I have no idea where it was published)

This material is loosely adapted from my forthcoming book, Behavioral Investment Counseling. Bits and pieces of this material have certainly appeared, explicitly and implicitly, in this newsletter over the years, and will not be unfamiliar to longtime readers. They are collected, synthesized and offered here in the interest of rushing some more long-term perspective to the front lines in the current pitched battle against panic.

A bear market, as I’ve suggested elsewhere in this issue, is a period of time during which people who believe this time is different, sell their common stocks at panic prices to people who understand that this time is never different. The very first truth of bear markets – the perception after which we must order all our other perceptions – is that all bear markets are fundamentally the same.

If and to the extent that this is true, the question then becomes: in what identifiable (and therefore predictable) ways are they all the same? What can we know about a bear market as we are going through it – despite all its apparently unique terrors – which will never fail to restore our perspective and defeat the urge to capitulate? I believe that there are four such immutable truths.

(1) Bear markets are an organic, natural, constant element of a never-ending cycle. The capital markets are capable of perfectly psychotic behavior — constrained only by their capacity for emotional excess — in the relatively short term (a year or two; rarely more). In the intermediate to longer term, the capital markets in general and the equity market in particular are powerless to do anything but reflect the underlying economic fundamentals.

And as long as human nature is the essential driver of all economic activity, economies will alternately cycle above and then below their long-term sustainable trendlines — overshooting their capacities in optimistic expansions, and then undershooting them in frightened contractions. The dot.com bubble is an example of the former; the great unwinding of 2000 – 2002 the latter. The cheap-credit-fueled real estate/mortgage bubble of 2003 – 2005 typifies the former, and the current unpleasantness the latter.

Human nature being what it is, any economic enterprise worth doing is worth overdoing, and the capital markets must follow not just a similar but the same cycle of euphoria and panic. We have met the enemy, as Pogo Possum said all those years ago, and he is us.

(2) Bear markets are as common as dirt. We are currently struggling through the thirteenth bear market (which I and most others define as a decline in the broad market of about 20% on a closing basis) since the end of WWII. Thirteen episodes in 63 years seem to imply that they occur on an average of about one year in five (though with lamentable irregularity). At that rate, you’ll see eight of them in a 40-year career of working and saving, and six more in the average two-person retirement.

One had better get used to them. Moreover, since their beginnings and endings are impossible to time, one had better develop the emotional maturity and financial discipline to remain invested through them.

(3) Equities’ great volatility is the reason for, and the driver of, their premium returns. “Volatility” does not, other than in the hyperbolic lexicon of catastrophist journalism, mean “down a lot in a hurry.” (Nearly four years in five, equities go up a lot — quite often in a hurry — but journalism somehow never characterizes such markets as “volatile.”) Rather, volatility refers to the extreme unpredictability — up and down — of equity returns in the short term.

For example, you have not only never seen but cannot even imagine bonds providing a 20% total return in one year (through a combination of interest and price appreciation), and then posting a 20% negative return the next year. You would intuitively say that bonds just aren’t that volatile, and you’d be right.

Equities do it all the bloody time. Equities are that volatile. You just never know what they’re going to do from one period to the next. And the premium returns of equities are an efficient market’s way of pricing in that ambiguity. There are no good markets and bad markets; there is one supremely efficient market. And its way of dealing with equity volatility is to demand — and get — returns which have nominally been about twice those of bonds, and — net of inflation — real equity returns that are nearly three times greater. Premium equity volatility and premium equity returns are thus two sides of the same coin.

Take care then, in moments of great stress such as the current environment occasions, not to wish away the volatility of equities, because you are, whether you realize it or not, wishing away the returns.

(4) A bear market is always — repeat, always — the temporary interruption of a permanent uptrend. As I write, the broad market, as denominated in the S&P, is in the neighborhood of 1200, late in the thirteenth of these very common ends-of-the-world (for so each and every bear market is characterized by the media). The tippy-top of the market the night before the onset of the first of these thirteen cataclysms — May 29, 1946 — saw the S&P close at 19.3.

Think of it, dear friends: from the peak before the first bear to something approaching the trough of the thirteenth, stock prices alone (ignoring the compounding of dividends) have risen more than 60 times in about as many years. And why? Because earnings are up 60 times — and, in this great golden age of globalizing capitalism, they are of course still going up. The advance is permanent; the declines are temporary. Always.

But mustn’t there be some way of defending capital against these horrific if transitory episodes? Must there not be some formula, some reliable strategy for taking capital out of harm’s way? As a matter of fact, no.

Bear markets begin and end often, but not regularly: there is no consistent way of anticipating when an ordinary market correction will deepen into a genuine bear, nor when — having done so — the bear market decline will run its course. Peter Lynch wrote something to the effect that more money has been lost by people trying to anticipate and avoid bear markets than in all the bear markets themselves. (This is the equity market corollary of Paul Samuelson’s observation that the consensus of economists had forecast nine of the last three recessions.)

Bear markets are so irregular and evanescent, and bull market advances so powerful and long-lasting, that trying to time the market becomes the ultimate fool’s errand: it is a formula for long-term returns which are a fraction of the market’s. Churchill famously said that democracy is the worst form of government ever formulated by man, except for all the others. Buy-and-hold is, in exactly the same sense, the worst equity investment strategy ever devised by man.

Except for all the others.

Insurers Backed Obamacare, Then Undermined It; Now They’re Profiting From It

healthcare reformMy Comments: Remember those frantic days right after the PPACA was passed? How soon would we see death panels? Could Grandma survive? The world would end very soon.

In my writings, I’ve argued there are five primary stakeholders in the health delivery system here in these United States. 1. Insurance companies; 2. pharmaceutical companies; 3. the hospital industry; 4. physicians; and 5. patients (you and I). I argued that the alternative to acceptance of the PPACA was to cede the future of healthcare to the two of these five that would most likely prevail in making the rules for the rest of us to live by if the PPACA didn’t survive. God help us if the two winners turned out to be insurance companies and big pharma. Or insurance companies and hospitals. Talk about death panels.

Last week the Supreme Court once again upheld key elements of the PPACA. Today, in the Gainesville Sun is a letter from a health care attorney suggesting that with the consolidation of insurance companies, we are inexorably moving toward a Medicare for all system, run and administered by ultimately perhaps three major insurance companies, subject to the framework imposed by the PPACA.

I still fail to understand why the GOP considers this a threat to the survival of the Republic. Health care for everyone, with corporate America intimately involved with the whole system, with help for those who cannot afford it from the government. A healthier workforce, better health outcomes, more opportunities for economic growth (and profits) and less stress for people like you and me. How is this different from the interstate highway system, brought to you by the Republican Party back in the 1950’s? Built by private companies, and maintained by the government.

Saturday, 23 May 2015 by Wendell Potter, Center for Public Integrity

Anyone who still thinks the Affordable Care Act was a “government takeover of health care” should consider this headline from the news pages of last Thursday’s Investor’s Business Daily: UnitedHealth Profit Soars On Obamacare, Optum—April 16, 2015

That’s from a Wall Street publication whose editorial writers have rarely missed an opportunity to bash the health care reform law. Here are a few other headlines, these from IBD’s editorial page, just since the first of this year.
More Phony ObamaCare Numbers From The White House—March 16, 2015
Shock Poll: Half The Uninsured Want Obamacare Repealed—March 3, 2015
Democrats Keep Running Away From ObamaCare—February 2015
CBO Now Says 10 Mil Will Lose Employer Health Plans Under ObamaCare—January 27, 2015

It wouldn’t surprise me if UnitedHealth Group executives helped shape the opinions of those editorial writers during the reform debate. One of the things I did in my old job as head of PR for one of the country’s other big for profit-insurers was arranging for my CEO to have “desk side chats” with bigwigs at important publications like Investor’s Business Daily. We would often leave those meetings with an invitation to submit an op-ed, as was the case several years ago when Ed Hanway, Cigna’s CEO at the time, and I visited with then Dow Jones CEO Peter Kann and Daniel Henninger, deputy editor of The Wall Street Journal editorial page.

The CEOs of the largest for-profit health insurance corporations were very wary of Obamacare as it was being drafted on Capitol Hill. They didn’t really say so publicly—in fact they had their chief lobbyist, America’s Health Insurance Plans’ Karen Ignagni—claim to support reform.

“You have our commitment to play, to contribute, and to help pass health care reform this year,” Ignagni told President Obama during a March 5, 2009, meeting at the White House.

But insurers were playing a duplicitous game. Later that year, Ignagni’s group began secretly funneling tens of millions of dollars to allies like the U.S. Chamber of Commerce to finance anti-Obamacare PR and ad campaigns. The big for-profit insurers, which gave AHIP the lion’s share of the secret money, arguably are more responsible than any other special interest in turning the public’s attitudes against reform.

Although the insurers stood to gain financially from a law that would require Americans to buy coverage from them, many Wall Street financial analysts and investors worried that some provisions of the law might cut into insurers’ profit margins.

Analysts and investors in particular didn’t like the section of the law that would require insurers to spend at least 80 percent of their premium revenues on health care. Before the law, many insurers routinely spent 60 percent or less of their revenues on patient care. The less spent on care, the more available to reward shareholders.

Wall Street also didn’t like the provision that would have created a government-run public option to compete with commercial insurers, and they didn’t think the penalties on Americans who refused to buy coverage were harsh enough.

Partly because of the anti-reform advertising blitz insurers financed in late 2009 and early 2010, Congress capitulated and gave up on the public option. And lawmakers agreed to make the penalty for not buying insurance more painful with every passing year.

But despite the worry, it turns out that the law the insurance industry’s shills demonized has been awfully good to insurance company investors.

Here’s how IBD’s Vance Cariage reported UnitedHealth Group’s first quarter 2015 earnings report last Thursday: “UnitedHealth Group delivered its best quarter in years Thursday as it benefited from new Obamacare customers, another strong Optum-platform showing and tame medical expenses. The nation’s No. 1 health insurer also raised its full-year 2015 sales and earnings guidance.” (Optum is a fast-growing division of the company that provides data and other services to its health plan division as well as to employers and other insurers.)

UnitedHealth Group’s revenues grew an eye-popping 13 percent, from $31.7 billion in the first quarter of 2014 to $35.8 billion in the first quarter of 2015. Net earnings on a per share basis were even more impressive, growing 33 percent, from $1.10 to $1.46 per share.

One reasons for the glowing results was the fact that UnitedHealth added 570,000 new customers during the first quarter of 2015 from the Obamacare exchanges. And contrary to conventional wisdom, that the formerly uninsured Obamacare customers would overuse medical services, UnitedHealth executives said that wasn’t the case.

In fact, the company’s CEO, Stephen J. Hemsley, said that even with the new Obamacare enrollees, the company “improved” its medical loss ratio, which measures the percent of revenues spent on medical care, from 82.5 to 81.1 percent. He used the word “improved” because, as I noted, Wall Street loves it when insurers spend less on medical care.

That decrease was viewed as a very positive development by investors. By the end of Thursday, they had bid up the company’s share price by 3.6 percent, to $121.60, just shy of the all-time high of $123.76 set on March 30.

I can’t wait to see how IBD’s editorial writers spin UnitedHealth’s Obamacare success. I’ll let you know if and when they weigh in. But don’t hold your breath.

This piece was reprinted by Truthout with permission or license (and appears here without anyone’s permission or license). It may not be reproduced in any form without permission or license from the source. (Oh, well. So sue me. And good luck with that.)

Here’s What the Next Recession Could Look Like

Bruegel-village-sceneMy Comments: There is no doubt that both politicians and financial people generate success by evoking fear in those to whom they are talking. Sometimes it’s legitimate, but much of the time its BS designed to persuade you to part with your vote and/or your money. What follows here is consistent with my belief that while there will be another downturn, it’ll be nothing like the last one.

 

Corey Stern Jun. 20, 2015

Since World War II, the average expansion period for US gross domestic product has lasted less than five years — and the current expansion is now in its sixth year. Does that mean we’re due for another recession?

The GDP slowdown in Q1 of this year had some economists fearing that a recession was near. But recent strong economic data has calmed those fears.

Recessions don’t just happen because they are overdue; they need to be induced by some event.

In a note Thursday, Dario Perkins of UK-based Lombard Street Research pointed to the stock bubble as the most likely cause for an upcoming “lesser recession.”

“Asset prices have risen sharply over the past five years in response to low long-term interest rates and aggressive central bank stimulus,” Perkins wrote. “This presents an important risk to the global economy, perhaps the most likely trigger for the next recession.”

He added, on a positive note, that unlike the most recent economic downturn, the next one would likely only be tied to stock prices. This is because while stock values have skyrocketed over the past few years, home values in developed economies have made modest gains. Though a stock market crash would be a bad thing, it wouldn’t nearly have the same effect on GDP a housing market crash.

Think dotcom bust, not global credit crisis

Perkins illustrated his point by comparing the effect on GDP from both the dotcom crash and the subprime-mortgage crisis. During the dotcom bust, which didn’t affect housing prices, GDP continued to rise for the most part in the quarters following the stock market peak.

He also pulls research from the Bank of England showing that credit trends, while very similar to the trajectory of the business cycle, have peaks that are twice as large and twice as long. The worst recessions are those that coincide with a credit crunch, as in 2009. But we are still in a credit upswing since then. In other words, the next recession isn’t likely to be accompanied by a credit bust, which will further mitigate the harm done.

The next downturn will also be protected by the still sluggish recovery from 2009. That is, there are fewer imbalances, less systematic risk, less household debt, and less bank leverage.

A more mild recession will be good for central banks that have limited tools left to respond to an economic crisis. Interest rates — already near zero — can only go so much lower, and a very high benchmark would be needed to justify restarting QE.

Perkins explains: Suppose, for example, the next recession is caused by the bursting of a bubble in equity prices. Would QE be able to reverse such a decline? And if central banks were blamed for causing this bubble, would they be willing to try to reflate the bubble with the same policy? Obviously we can only speculate about this, but it is clear both the Fed and the Bank of England were anxious to stop doing QE because they were concerned about its potential impact on financial stability.

In short, while Perkins thinks a stock market crash could cause a recession soon, the effects will be nothing like those felt in 2009.

Source: http://www.businessinsider.com/what-the-next-recession-could-look-like-2015-6#ixzz3djPsygjj

5 Dumbest Investing Bets

Social Security 3My Comments: There is a distinction between dumb and ignorant. The second you can fix with mental effort, but the first just happens. Sometimes I wonder if people are born this way or whether they have to work at it.

These five ‘bets’ happen often. Many times it’s because someone has “sold” them the idea, whether on TV or in person. Either way, the outcome can be avoided if you are willing to exercise some mental effort on your own behalf. Like reading this article by Allan Roth.

by Allan S. Roth JUN 15, 2015

When I look at professionally designed investment portfolios other advisors have assembled for clients or prospects, I nearly always find something that concerns me. Maybe it’s because of fees, or because they’re choosing active rather than passive strategies. I can even debate the validity of “core and explore.”

But roughly 80% of the time, I see one or more of these five really dumb investment strategies.

Absolutely none make sense. And they have virtually no chance of working for the client. Admittedly, many advisors don’t actually know that they are executing any of these five strategies, though that won’t console clients much.

Here are the five strategies I suggest you avoid.

1. GAMBLE IT AWAY
Clearly, it would be illegal to siphon off some of our clients’ money and gamble it away in Las Vegas. Anybody would see the obvious folly; after all, every Las Vegas game (from blackjack to craps) is staked in favor of the house.

Clients understand that an advisor needs to take some risk to get returns, but they want advisors to invest money in vehicles that at least have some expectation
of gains.

To be fair, I’ve never actually seen advisors literally take their clients’ money to Vegas. But that’s essentially what they are doing when they invest in certain alternative
investments.

For example, managed futures and options are zero-sum games — not a penny has ever been made with these strategies, in the aggregate, before costs. I’d even go as far as to say that, after the costs (both the funds’ and the advisor fee), the odds at the tables in Vegas look attractive by comparison.

Only slightly better are market-neutral funds, which have an expected return of the risk-free rate, which is currently about 0.01% — close to zero, for all practical
purposes.

The typical response from advisors is that they are making one of these investments because they are uncorrelated with the stock market. Well, taking a chunk of your clients’ money to Las Vegas isn’t correlated with the market either — but that doesn’t make it any less dumb.

Only 31% of financial advisors felt they understood alternative funds “very well,” according to a survey by Natixis Global Asset Management, yet 89% of them used alternatives. That’s not just dumb, but
irresponsible.

2. BET ON BOTH SIDES
If gambling away clients’ money in Vegas is dumb, the concept I’m going to describe is dumber. If you’d bet half of a client’s money on Seattle in this year’s Super Bowl and the other half on New England, you would have been sure to lose by paying the bookie twice.

No advisor would suggest that, of course. And yet planners do something equivalent when they buy an inverse or levered inverse market fund, which bets against the broader equity market (and in the case of the levered version, the fund borrows to bet against the market).

It might only be a strategy I disagree with if they didn’t also have the client long in stocks; often the advisor will have both a levered inverse S&P 500 fund and an S&P 500 fund.

Typically, advisors claim the inverse position is a hedge against the possibility of a declining market. They often say something like, “You’ll be glad you own the inverse fund if markets plunge.” OK, but why pay a management fee to be in on both an up and a down market?

You can’t win by having both a short and long S&P 500 fund. Wouldn’t it be far more cost-effective to hedge by keeping some cash on the sidelines? This is especially true now that cash can earn an FDIC-insured return of 1% annually, if you do a little research.

One might assume, at least, that one of the two bets must be right, since you can’t lose on both sides of a bet — but one would be wrong. In 2011, for instance, both the ProShares UltraPro S&P 500 (UPRO), a triple levered long fund, and the ProShares UltraPro Short S&P 500 (SPXU) lost double digits.

3. BORROW AT 4%, LEND AT 2%

This is pretty much the opposite of how a bank makes money. It’s a common mistake, and there is an enormous amount of money at stake when people get it wrong.

This error typically surfaces when a client comes to me with a mortgage at 4% and bonds paying 2%. Advisors typically argue that the mortgage is only costing the client 3% after taxes and that clients can get higher expected returns on their overall portfolio. When interest rates go up, they say, clients will be glad they have this cheap money.

Unfortunately, it’s still just as dumb for the client to be borrowing money at twice the rate they are earning on a comparable low-risk investment that also happens to be taxable. If rates do go up (and the top economists have a great track record of calling that wrong), then the clients’ bonds and bond funds go down. The client can’t win.
As far as taxes go, one must remember that the goal is not to pay less in taxes, but rather to make more money after taxes. As a CPA, I know that taxes matter — and in roughly 75% of the cases I’ve looked at, the tax argument makes it even more compelling to pay off the mortgage.

That’s because the clients either aren’t getting the full value of the mortgage interest deduction (due to phase-downs or part going to meet the standard deduction), or are getting hit with the extra 3.8% Medicare passive income tax on the investment income they have from not paying off the mortgage.

I’ve had more than a few advisors tell me how wrong I am on this point, but I’ve given everyone a chance to prove it by lending me money at 2% and borrowing it back from me at 4%. To date, no one has taken me up on this offer.

4. GUARANTEE A LAG
I’m not one to say that active management can’t ever beat the low-cost index equivalent — although research suggests that active funds do tend to lag the broader market.

I am, however, willing to go out on a limb and say that a high-cost index fund can’t beat the lower-cost one. For example, take the Rydex S&P 500 C fund (RYSYX) — which has an expense ratio of 2.32%, or more than 46 times the 0.05% expense ratio of the Vanguard S&P 500 Admiral (VFIAX). One would expect it to underperform by the differential of 2.27% annually — although, according to Morningstar, the five-year shortfall was actually a bit higher, at 2.74% annually as of the end of May.

I used the most extreme example I could find, but in general, when it comes to index funds, you actually get more by paying less. The larger, lower-cost funds tend to be far better at indexing, as smaller funds must buy more expensive derivatives.

In the true confessions category, I’m actually guilty of this mistake myself: I own the Dreyfus S&P 500 Index fund (PEOPX), which carries a 0.50% expense ratio — not as egregious as the Rydex, but well above the Vanguard option. Dumb as it is, the tax consequences of moving to a lower-cost fund are just too huge to make the switch.

5. LEAVE CASH UNINSURED

I have clients that come to me with as much as tens of millions of dollars earning 0.01% annually, which I round to nothing — although, in truth, that money will double in value in a mere 6,932 years.

In some cases, the advisor is even charging an AUM fee — so the money is actually losing value. And the money isn’t even federally insured.

If the client is going to keep cash, at least get it federally insured and earning 1% interest; as of early June, that was still possible with FDIC-insured savings accounts at banks such as Synchrony or Barclays. It’s fairly easy to get
millions of dollars in FDIC insurance by titling the accounts correctly.

Taking on more risk for a fraction of the return is just dumb. Really smart people sometimes do really dumb things. Sometimes what drives us is ignorance, while other times it’s the financial incentives.

For example, advisors who get compensated by a percentage of assets under management may be loath to tell clients to reduce those assets by paying down the mortgage or keeping cash outside the advisors’ custodian.

But being a fiduciary means advisors must constantly examine what they are doing for clients. That means taking a step back and looking at what admittedly might be some unpleasant facts.

If you find yourself using some of these strategies, at least examine the arguments being presented here. Then think of how you will answer your clients if they come to you with logic that’s similar to what I’ve presented.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for The Wall Street Journal and AARP the Magazine, and has taught investing at three universities. Follow him on Twitter at @Dull_Investing.