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Israel: The Case Against Attacking Iran

bumper stickerMy Comments: George Friedman has an international reputation for his knowledge about how the world works and his ability to articulate credible analyses of what is going on. This is a fascinating article that’s very relevant to the current questions about Iran and how the world needs to respond to the existential threat they pose.

The Democrats and Republicans, mindful that most of us can only understand 5th grade words, attempt to create an “either or” decision in black and white. These words from George Friedman show how incredibly complex the issue is.  I have no clue how this is all going to play out, but I’m inclined to let professionals decide, mindful that they face the same ultimate risks you and I face. 75 years ago we were at war with Japan, but now co-exist as friends and allies. Freiedmans comments here are kinda long, so if you don’t give a damn about any of this, then simply ignore this post.

August 25, 2015 By George Friedman

On Aug. 21, Israeli Channel 2 Television aired a recording of Ehud Barak, Israel’s former defense minister and former prime minister, saying that on three separate occasions, Israel had planned to attack Iran’s nuclear facilities but canceled the attacks. According to Barak, in 2010 Israel’s chief of staff at the time, Gabi Ashkenazi, refused to approve an attack plan. Israeli Cabinet members Moshe Yaalon and Yuval Steinitz backed out of another plan, and in 2012 an attack was canceled because it coincided with planned U.S.-Israeli military exercises and a visit from then-U.S. Defense Secretary Leon Panetta.
The fact that the interview was released at all is odd. Barak claimed to have believed that the tape would not be aired, and he supposedly tried unsuccessfully to stop the broadcast. It would seem that Barak didn’t have enough clout to pressure the censor to block it, which I suppose is possible.
Yaalon, like Ashkenazi, was once chief of staff of Israel Defense Forces but was also vice premier and Barak’s successor as defense minister. Steinitz had been finance minister and was vocal in his concerns about Iran. What Barak is saying, therefore, is that a chief of staff and a vice premier and former chief of staff blocked the planned attacks. As to the coinciding of a U.S.-Israeli exercise with a planned attack, that is quite puzzling, because such exercises are planned well in advance. Perhaps there was some weakness in Iranian defenses that opened and closed periodically, and that drove the timing of the attack. Or perhaps Barak was just confusing the issue.

A number of points are worth noting: Ehud Barak is not a man to speak casually about highly classified matters, certainly not while being recorded. Moreover, the idea that Barak was unable to persuade the military censor to block the airing of the recording is highly improbable. For some reason, Barak wanted to say this, and he wanted it broadcast.

Part of the reason might have been to explain why Israel, so concerned about Iran, didn’t take action against Iran’s nuclear facilities. Given the current debate in the U.S. Congress, that is a question that is undoubtedly being asked. The explanation Barak is giving seems to be that senior military and defense officials blocked the plans and that the Israelis didn’t want to upset the Americans by attacking during a joint exercise. The problem with this explanation is that it is well known that Israeli military and intelligence officials had argued against an Israeli strike and that the United States would have been upset whether or not joint exercises were occurring.

It would seem, intentionally or unintentionally, that Barak is calling Israeli attention to two facts. The first is that militarily taking out Iranian facilities would be difficult, and the second is that attempting to do so would affect relations with Israel’s indispensible ally, the United States. Military leaders’ opposition to the strikes had been rumored and hinted at in public statements by retired military and intelligence heads; Barak is confirming that those objections were the decisive reason Israel did not attack. The military was not sure it could succeed.

The Potential for Disastrous Failure

A military operation, like anything else in life, must be judged in two ways. First, what are the consequences of failure? Second, how likely is failure? Take, for example, the failure of the U.S. hostage rescue operation in 1980. Apart from the obvious costs, the failure gave the Iranian government reason to reduce its respect for U.S. power and thus potentially emboldened Iran to take more risks. Even more important, it enhanced the reputation of the Iranian government in the eyes of its people, both demonstrating that the United States threatened Iranian sovereignty and increasing the credibility of the government’s ability to defend Iran. Finally, it eroded confidence in U.S. political and military leaders among the U.S. public. In reducing the threat and the perception of threat, the failure of the operation gave the Iranian regime more room to maneuver.

For the Israelis, the price of failure in an attack on Iranian nuclear sites would have been substantial. One of Israel’s major strategic political assets is the public’s belief in its military competence. Forged during the 1967 war, the IDF’s public image has survived a number of stalemates and setbacks. A failure in Iran would damage that image even if, in reality, the military’s strength remained intact. Far more important, it would, as the failed U.S. operation did in 1980, enhance Iran’s position. Given the nature of the targets, any attack would likely require a special operations component along with airstrikes, and any casualties, downed pilots or commandos taken prisoner would create an impression of Israeli weakness contrasting with Iranian strength. That perception would be an immeasurable advantage for Iran in its efforts to accrue power in the region. Thus for Israel, the cost of failure would be extreme.

This must be measured against the possibility of success. In war, as in everything, the most obvious successes can evolve into failure. There were several potential points for failure in an attack on Iran. How confident were the Israelis that their intelligence on locations, fortifications and defenses were accurate? How confident were they that they could destroy the right targets? More important, perhaps, how certain could they be that the strikes had destroyed the targets? Finally, and most important, did they know what Iran’s recuperative capabilities were? How quickly could the Iranians restore their program? Frequently, an operationally successful assault does not deal with the strategic problem. The goal of an attack was to make Iran incapable of building a nuclear weapon; would destroying all known targets achieve that strategic goal?

One of the things to bear in mind is that the Iranians were as obsessed with Israeli and U.S. intelligence efforts as the Israelis and Americans were obsessed with the Iranian programs. Iran’s facilities were built to be protected from attack. The Iranians were also sophisticated in deception; knowing that they were being watched, they made efforts to confuse and mislead their observers. The Israelis could never be certain that they were not deceived by every supposedly reliable source, every satellite image and every intercepted phone call. Even if only one or two sources of information were actually misleading, which sources were they?

A failed Israeli assault on Iran would cause a major readjustment among other regional players in the way they perceive Israel and Iran. And for Israel, the perception of its military effectiveness is a strategic asset. There was a high risk of damaging that strategic asset in a failed operation, coupled with a strong chance that Israeli actions could unintentionally bolster Iran’s power in the region. The likelihood of success was thrown into question by Israel’s dependence on intelligence. In war, intelligence failure is a given. The issue is how great the failure will be — and there is no way to know until after the strike. Furthermore, operational success may not yield strategic success. Therefore, the ratio of potential risk versus reward argued against an attack.

Considering Iran’s Capabilities

There is another side to this equation: What exactly were the Iranians capable of? As I have argued before, enriched uranium is a necessary but insufficient component for a nuclear weapon. It is enough to create a device that can be detonated underground in controlled conditions. But the development of a weapon, as opposed to a device, requires extensive technology in miniaturization and ruggedization to ensure the weapon reaches its target. Those who fixated on progress in uranium enrichment failed to consider the other technologies necessary to create nuclear weaponry. Some, including myself, argued that the constant delays in completing a weapon were rooted both in the lack of critical technologies and in Iranian concerns about the consequence of failure.

Then there is the question of timing. A nuclear weapon would be most vulnerable at the moment it was completed and mounted on its delivery system. At that point, it would no longer be underground, and the Israelis would have an opportunity to strike when Iranians were in the process of marrying the weapon to the delivery device. Israel, and to an even greater extent the United States, has reconnaissance capabilities. The Iranians know that the final phase of weapon development is when they most risk detection and attack. The Israelis may have felt that, as risky as a future operation may seem, it was far less likely to fail than a premature attack.

Barak’s Motivations

Whether intentionally or not (and I suspect intentionally) Barak was calling attention, not to prior plans for an attack on Iran, but to the decision to abandon those plans. He pointed out that an Israeli chief of staff blocked one plan, a former chief of staff blocked a second plan and concern for U.S. sensibilities blocked a third. To put it in different terms, the Israelis considered and abandoned attacks on Iran on several occasions, when senior commanders or Cabinet members with significant military experience refused to approve the plan. Unmentioned was that neither the prime minister nor the Cabinet overruled them. Their judgment — and the judgment of many others — was that an attack shouldn’t be executed, at least not at that time.

Barak’s statement can be read as an argument for sanctions. If the generals have insufficient confidence in an attack, or if an attack can be permanently canceled because of an exercise with the Americans, then the only option is to increase sanctions. But Barak also knows that pain will not always bring capitulation. Sanctions might be politically satisfying to countries unable to achieve their ends through military action or covert means. As Barak undoubtedly knows, imposing further restrictions on Iran’s economy makes everyone feel something useful is being done. But sanctions, like military action, can produce unwelcome results. Measures far more painful than economic sanctions still failed to force capitulation in the United Kingdom or Germany, and did so in Japan only after atomic weapons were used. The bombing of North Vietnam did not cause capitulation. Sanctions on South Africa did work, but that was a deeply split nation with a majority in favor of the economic measures. Sanctions have not prompted Russia to change its policy. Imposing pain frequently unites a country and empowers the government. Moreover, unless sanctions rapidly lead to a collapse, they would not give Iran any motivation not to complete a nuclear weapon.

I don’t think Barak was making the case for sanctions. What he was saying is that every time the Israelis thought of military action against Iran, they decided not to do it. And he wasn’t really saying that the generals, ministers or the Americans blocked it. In actuality, he was saying that ultimately, Prime Minister Benjamin Netanyahu blocked it, because in the end, Netanyahu was in a position to force the issue if he wanted to. Barak was saying that Israel did not have a military option. He was not attacking Netanyahu for this decision; he was simply making it known.

It’s unlikely that Barak believes sanctions will compel Iran to abandon its nuclear program, any more the current agreement does. My guess is that for him, both are irrelevant. Either the Iranians do not have the ability or desire to build a bomb, or there will come a point when they can no longer hide the program — and that is the point when they will be most vulnerable to attack. It is at that moment, when the Iranians are seen arming a delivery system, that an Israeli or U.S. submarine will fire a missile and end the issue.

If Barak didn’t want a strike on Iran, if Netanyahu didn’t want a strike and if Barak has no confidence in agreements or sanctions, then Barak must have something in mind for dealing with an Iranian nuclear weapon — if it ever does appear. Barak is an old soldier who knows how to refrain from firing until he is most certain of success, even if the delay makes everyone else nervous. He is not a believer in diplomatic solutions, gestures to indirectly inflict pain or operations destined for failure. At any rate, he has revealed that Israel did not have an effective military option to hamper Iran’s nuclear program. And I find it impossible to believe he would rely on sanctions or diplomacy. Rather, he would wait to strike until Iran had committed to arming a delivery system, leaving itself wide open to attack — a nerve-racking solution, but one with the best chance of success.

Pressure Mounts on China

Nixon+ChinaMy Comments: None. This speaks for itself.

Commentary by Scott Minerd, Chairman of Investments and Global CIO, Guggenheim Partners, August 21, 2015

More bad news out of Asia: Chinese manufacturing conditions are back at the same levels as they were at the height of the financial crisis in 2009, a clear sign that China’s economy is slowing.

The preliminary Caixin China purchasing managers’ index (PMI) fell to a 77-month low of 47.1 in August, down from July’s final reading of 47.8. Any index reading below 50 represents a contraction. The data had an immediate effect on local markets—the Shanghai Composite Index dropped 4.3 percent to its lowest level since July 8—and China’s fragility will do nothing to shore up confidence in global markets.

We all know the dramatic steps that were necessary to revive the Chinese economy in 2009—a 4 trillion renminbi (RMB) stimulus package, equivalent to about 12 percent of China’s annual gross domestic product (GDP) at the time. China will need to take drastic action again, and to a greater degree than it has done in recent weeks.

The challenge is that attempts by the People’s Bank of China (PBoC) to inject liquidity are being sterilized by offsetting sales of reserve assets to stem a more dramatic slide in the exchange value of the RMB. This limits the impact of actions to increase monetary liquidity as is evidenced by the recent unintended rise in short-term rates in China.

As a result, the PBoC will soon be forced to reduce bank reserve requirements while allowing for a more rapid devaluation of the RMB. Time is not on the side of Chinese policymakers. Given the severity of the current domestic slowdown, pressure is mounting for more radical policy action.

Expect to see further downward pressure on commodity prices, global equities, and U.S. Treasury yields. The first sign that we are approaching a bottom for all three will be when China caves and allows the RMB to adjust to a more appropriate level, which could mean another 25–30 percent decline in the value of the RMB against the U.S. dollar.

Things will get worse before they get better, and investors around the world are demonstrating appropriate concern. Unfortunately, relief is nowhere in sight.

Get Ready For A Bear Market

moneyMy Comments: This person may be right, or not. Yesterdays sell-off sure was ominous but you never “know” until it’s too late. One way to profit from the downturn is with alternative investments. Only very few investment managers use them as a matter of course when promoting their skill set to the public.

Those of you who know me may know about a company called Portfolio Strategies. My associate Alan Hagopian and I use them almost exclusively when positioning our clients money for the very same reasons described in this article from Axel Merk. We don’t try to hit any home runs, but being able to make money when everyone else is losing theirs is very helpful.

Axel Merk, Merk Investments Aug. 4, 2015

Increasingly concerned about the markets, I’ve taken more aggressive action than in 2007, the last time I soured on the equity markets. Let me explain why and what I’m doing to try to profit from what may lie ahead.

I started to get concerned about the markets in 2014, when I heard of a couple of investment advisers that increased their allocation to the stock market because they were losing clients for not keeping up with the averages.

Earlier this year, as the market kept marching upward, I decided that buying put options on equities wouldn’t give me the kind of protection I was looking for. So I liquidated most of my equity holdings. We also shut down our equity strategy for the firm.

Of late, I’ve taken it a step further, starting to build an outright short position on the market. In the long-run, this may be losing proposition, but right now, I am rather concerned about traditional asset allocation.

Fallacy of traditional asset allocation
The media has touted quotes of me saying things like, “Investors may want to allocate at least 20% of their portfolio to alternatives [to have a meaningful impact on their portfolio].” The context of this quote is that because many (certainly not all!) alternative investments have a lower volatility than equities, they won’t make much of a dent on investors’ portfolios unless they represent a substantial portion of one’s investment. Sure, I said that. And I believe in what I said. Yet, I’m also embarrassed by it. I’m embarrassed because while this is a perfectly fine statement in a normal market, it may be hogwash when a crash is looming. If you have a theoretical traditional “60/40” portfolio (60% stocks, 40% bonds), and we suppose stocks plunge 20% while bonds rise 2%, you have a theoretical return of -11.2%.

Now let’s suppose you add a 20% allocation of alternatives to the theoretical mix (48% stocks, 32% bonds, 20% alternatives) and let’s suppose alternatives rise by 5%: you reduce your losses to -7.96%. But what if you don’t really feel great about losing less than others; think the stock market will plunge by more than 20%; and that bonds won’t provide the refuge you are looking for? What about 100% alternatives? Part of the challenge is, of course, that alternatives provide no assurance of providing 5% return or any positive return when the market crashes; in fact, many alternative investments faired poorly in 2008, as low liquidity made it difficult for investors to execute some strategies.

Why?
Scholars and pundits alike say diversification pays off in the long-run, so why should one deviate from a traditional asset allocation. So why even suggest to deviate and look for alternatives? The reason is that modern portfolio theory, the theory traditional asset allocation is based on, relies on the fact that market prices reflect rational expectations. In the opinion of your humble observer, market prices have increasingly been reflecting the perceived next move of policy makers, most notably those of central bankers. And it’s one thing for central bankers to buy assets, in the process pushing prices higher; it’s an entirely different story for central bankers trying to extricate themselves from what they have created, which is what we believe they may be attempting. The common theme of central bank action around the world is that risk premia have been compressed, meaning risky assets don’t trade at much of a discount versus “risk-free” assets, notably:

Junk bonds and peripheral government bonds (bonds of Spain, Portugal, Italy, etc.) trade at a low discount versus US or German bonds; and
Stocks have been climbing relentlessly on the backdrop of low volatility.

When volatility is low and asset prices rise, buyers are attracted that don’t fully appreciate the underlying risks. Should volatility rise, these investors might flee their investments, saying they didn’t sign up for this. Differently said, central banks have fostered complacency, but fear may well be coming back. At least as importantly, these assets are still risky, but have not suddenly become safe. When investors realize this, they might react violently. This can be seen most easily when darlings on Wall Street miss earnings, but might also happen when central banks change course or any currently unforeseen event changes risk appetite in the market.
CONTINUE-READING

Fundamental Truths

profit-loss-riskMy Comments: If you have money invested somewhere you may be  wondering how the next several months are going to unfold. We’re in the sixth year of a bull market and that’s a historically long time without a serious correction. This commentary by a very knowledgeable person may give you some insights worth having.

Commentary by Scott Minerd August 17, 2015

Markets that are in the midst of transition do not behave according to script, despite the best efforts of policymakers to script them. Last week, China loosened control of its currency, resulting in its biggest one-day loss in two decades, compounded by additional losses over the following days. As of this writing, the renminbi (RMB) has depreciated by close to 3 percent since the start of last week. This “surprise” move roiled markets and triggered concern that other central banks would follow suit, but the reality is that the fundamentals were so overwhelming that the People’s Bank of China’s (PBoC) action was practically unavoidable, as I wrote on July 31.

Central banks and policymakers often perpetuate confidence-inspiring narratives in the face of contradictory fundamentals. In this instance, Yi Gang, a vice governor at China’s central bank, told investors at a May 22 meeting that given the size of China’s trade surpluses, further currency devaluation would not be necessary. Unfortunately, Mr. Yi’s statement turned out to hold as much water as when then-U.S. Federal Reserve Chairman Ben Bernanke told us in the spring of 2007 that the subprime crisis was a contained and limited event. After allowing the RMB to weaken, the PBoC made the unusual move of hosting a press conference last Thursday to defend its actions and to reiterate that the RMB has made sufficient valuation adjustment that it would not devalue further.

We should know by now that the reality of a situation can be very different to how policymakers package it for public consumption. The problem is they often say exactly what the market wants to hear, not what it needs to know. The lesson to be learned is to trust the fundamental underlying data. In the case of China, the latest weakness in trade data—China’s July exports declined by 8.3 percent year over year, much worse than the 1.5 percent decline expected by the market—would suggest the RMB faces more downward pressure. When policymakers are telling you one thing and the data are telling you something different, heed the data.

Right now, the Fed is telling us that it is going to raise rates soon. I don’t know what the definition of “soon” is, but most players in the market think that soon means sometime this year. Of course, the Fed is conspicuously retaining its data-dependency clause, affording it the privilege to change its mind. Unlike in China, the economic data in the United States is much more aligned with and supportive of policymaker guidance. We are on course for a Fed rate increase this year. Whether the Fed acts or doesn’t act in September or December doesn’t matter—we know it is coming. For investors, there are more pressing matters at hand in almost every other major global market. On top of a slowdown in consumer activity, Europe faces the prospect of a slowing economy due to export demand falling off in China and the uncertainty created by Greece, which probably means that rates in Europe will go lower. Similarly, Japan’s economy will suffer as China, its largest trading partner, loses steam and the devaluation of RMB makes Japanese exports less competitive. The depreciation of the RMB will put more downward pressure on commodity prices, so we are not at the end of the road for industrial metals or energy price declines. Regardless of a Fed rate hike, demand for safe-haven U.S. Treasuries as a result of all this global turmoil could push yields meaningfully lower, even as low as 1 percent. While the data on the U.S. economy is clearly showing softness, which seems to correlate with a drop off in exports of capital equipment to Europe and China, the U.S. economy is nowhere near recession territory.

Uncertainty eventually yields to opportunity, and while it would probably be premature to jump in today, there are places in the world where things are getting cheap enough that they deserve a look. The bottom line is we are now into the dog days of summer. Markets have little new information upon which to act. Given the light volumes and lack of new buyers, risk assets will continue to languish. Risks remain to the downside (lower prices) as new data, especially from overseas, seem more likely to disappoint than to support improvement in economic activity. Negative surprises like the sudden decline in the Malaysian ringgit will continue to put downward pressure on commodity prices, which will probably spill over into both stocks and corporate debt, especially those of commodity companies like energy and mining. We are likely to see credit spreads widen (ground zero will continue to be in the energy sector), stock prices decline, and long-term interest rates rally.

I do not believe the swirling uncertainty portends a giant bear market for risk assets, but we have not had a U.S. equity market correction in over four years—it has been 1,471 days since the last correction started, more than double the historical average since 1928 of 706 days—so we are well overdue. In short, I doubt we have seen the worst. We should not be surprised at this seasonally challenging time to see a meaningful selloff in equities. I would expect that the current downward pressure on risk assets will abate sometime in late September or early October. Until then, the environment should be supportive for longer duration U.S. Treasury notes and bonds. Caution is the watchword.

Obama’s Climate Plan Makes for Canny Politics

My Comments: In keeping with tradition, the President’s critics are having the usual hysterics about his recent announcement designed to reduce carbon emissions. If I were the owner of a bunch of coal mines, I’d probably be unhappy too.

But for the rest of us who don’t own coal mines, which is virtually all of us, it’s another step toward somehow delaying what appears to be the inevitable, which is rising sea levels. If scientists said there appeared to be an asteroid whose trajectory was likely to cause it to impact with our planet 50 years from now, I’d be upset if politicians said it was nonsense, and refused to allocate funds to perhaps find a remedy.

While the new rules do will not satisfy the far left, governing is the art of the possible, which most on the right have forgotten all about.

by Nick Butler on August 3, 2015 in the Financial Times

Having solved the Iranian problem US President Barack Obama has selected climate change as the next building block in the construction of his legacy.

The contents of his “clean power plan”, which he announced on Monday, are important for their substance and, equally, for their political impact — not just for the Paris climate negotiations in December but more importantly for the presidential election next year.

On the substance, the move is an unprecedented peacetime assertion of political authority over the private sector. Even if some states resist the instruction to cut emissions by about a third from a 2005 base within 15 years, many will obey — with serious consequences for the businesses involved and their investors. Coal-fired power plants will be closed and, with export potential limited, dozens of US coal mines will close as well. No wonder the reaction from the industry is fierce.

The beneficiary will be the solar business. Mr Obama’s plan echoes the initiative launched last month by Hillary Clinton as part of her campaign for the Democratic presidential nomination, designed to increase the amount of solar power generated by 700 per cent by 2027, using regulatory power to boost the market share of renewables.

The number is ambitious but the pace of technical progress means growth could be achieved without a big increase in subsidies or consumer prices. Across the US the costs of solar is falling and beginning to reach “grid parity”— which means they are competitive with the lowest cost fossil fuel without the need for subsidies. Mrs Clinton’s proposal cuts with the grain of emerging reality.

Nuclear and natural gas are left, under Mr Obama’s proposals, to fend for themselves, with no mandated market shares and no subsidies. As things stand, the gas industry can cope but, short of a breakthrough that reduces production costs, new nuclear in America looks almost as lost as it does in Europe.

Missing from the proposals is any new push to develop science that will increase the efficiency of energy supply and consum­ption. That is a pity as low-income consumers in countries such as India need fuel sources that are both low cost and low carbon if climate change is to be beaten. But policies directed to developing such technology may come later — there is, after all, more than a year until the election.

That brings us to the politics of Mr Obama’s plan. It is worthy of Frank Underwood, Kevin Spacey’s Machiavellian anti-hero in the Netflix series, House of Cards . In the black arts of politics, one of the most precious achievements is to define the differences between you and your opponents on your own terms. An­other is to force opponents into positions they wish to avoid. A third is to divide them against themselves. Mr Obama has managed all three in one go.

The Republicans predictably walked into the trap. Marco Rubio, the Florida senator seeking the Republican nomination, instantly declared the policy “catastrophic”. Mitch McConnell, the Republican majority leader in the Senate, who campaigned for his seat last year on the slogan “Coal Guns Freedom”, called for individual states to disobey the new laws. Even Jeb Bush, who has been trying to sound rational on the question, was forced to condemn the president’s initiative as “irresponsible”.

Given the nature of the Republican voter base and the views of big donors such as the billionaire Koch brothers, those who seek the Republican nomination can do little else. The problem for them (and the beauty of Mr Obama’s political play) is that, as they walk in the direction of those who will determine which of them is the candidate next year, they are walking away from the views of the voters who will determine the outcome of the election.

According to the public polls, for instance from the Yale Project on Climate Change, global warming has become a real concern. Coal is seen as dirty and unhealthy. Mrs Clinton, assuming she secures the Democratic nomination, may not win some of the coal states. One of the fascinating subtexts of her initiative, and of the president’s proposals, is the deliberate distancing of the Democratic leadership from organised labor, including the once powerful mining unions. But the calculation must be that she will gain overall by being on the side of the future.

Mr Obama’s proposals are detailed and complicated, and will now be subject to every sort of legal challenge. They are unlikely to be implemented in full. In themselves they will not solve the global problem of climate change, nor force any other country to follow suit. But they do serve to define the direction of American energy policy and also of American electoral politics.

The writer is a visiting professor at King’s College London and a former BP group vice-president for strategy

More Social Security Mistakes

My Comments: Did you know you can choose from any one of 96 months to start your Social Security benefits? If you live to normal life expectancy, your choice of month can mean as much as several extra $100k for you and your family. The message: don’t sign up without first exploring what is in your best interest.

Sandra Block, July 30, 2015

Social Security will probably represent a big part of your retirement income.

One common mistake is to use the wrong retirement age when deciding when to file for benefits. Many people think that they’ll be eligible for full benefits at age 65, but that’s not always the case. If you were born between 1943 and 1954, your full retirement age is 66. Starting with those born in 1955, full retirement age will gradually rise in two-month increments to age 67 for people born in 1960 or later.

Why is this important? Once you reach full retirement age, you can claim your full Social Security benefit. Claim earlier and your benefits will be reduced. In addition, once you reach full retirement age you can earn as much as you want without forfeiting some of your Social Security benefits.

A second mistake is to ignore how filing for benefits will affect your spouse. There are several things married couples can do to increase their combined benefits. For these strategies to work, you must coordinate the timing of your claims. For example, the higher earner could delay filing a claim until age 70. Meanwhile, the other spouse could claim a spousal benefit, providing some income in the meantime. If you’re the higher earner, the timing of your claim could also have a big impact on the amount of benefits your spouse will receive if you die first.

Finally, if you filed at 62 and now regret it, don’t overlook the possibility of a do-over. You can withdraw your application within 12 months of the date you filed, pay back your benefits, and restart at a higher amount later. If you’ve already passed the 12-month mark, you still have options. Once you reach full retirement age, you can voluntarily suspend your benefit. You’ll earn delayed retirement credits until you start claiming benefits again.

This is just the tip of the iceberg. There are many more costly Social Security mistakes that you need to avoid in order to maximize your retirement benefits. Read more HERE.

The Next Bear Market?

financial freedomMy Thoughts: Like a broken clock that is right twice a day, my talking about the coming market crash will be seen as truth. Some, including me, think the downturn has already started. Something will trigger a free fall, and then it’ll start going back up. There are strategies that will help you survive and thrive and they are alluded to here.

Jesse Felder, TheFelderReport.com – Jul. 30, 2015

Yesterday I found myself reading GMO’s latest quarterly letter and thinking, ‘Wow, I’m fairly bearish but Jeremy Grantham just sounds like a grumpy old man!’ Until I came upon this passage:

“…you may think that I am particularly pessimistic. It is not true: It is all of you who are optimistic! Not only does our species have a strong predisposition to be optimistic (or bullish) – it is probably a useful survival characteristic – but we are particularly good at listening to agreeable data and avoiding unpleasant data that does not jibe with our beliefs or philosophies.

Facts, whether backed by 97% of scientists as is the case with man-made climate change, or 99.9% as is the case with evolution, do not count for nearly as much as we used to believe. For that matter, we do a terrible job of planning for the long term, particularly in postponing gratification, and we are wickedly bad at dealing with the implications of compound math. All of this makes it easy for us to forget about the previously painful market busts; facilitates our pushing stocks and markets on occasion to levels that make no mathematical sense; and allows us, regrettably, to ignore the logic of finite resources and a deteriorating climate until the consequences are pushed up our short-term noses.”

We are only a few years removed from one of the worst financial crashes in our history and investors have already put it out of their minds. Most importantly they have forgotten perhaps the greatest lesson of that time: overpay for a security and you are essentially taking much greater risk with the prospect of much reduced reward.

Right now, stocks as a whole present very little in the way of potential reward. According to Grantham’s firm, investors should probably expect to lose money over the coming seven years in real terms (after inflation). Other measures (explained below), very highly correlated to future 10-year returns for stocks, suggest investors are likely to earn very little or no compensation at all over the coming decade for the risk they are assuming in owning stocks.

In trying to quantify that risk, Grantham’s firm suggests that investors are now risking about a 40% drawdown in order to earn less than the risk-free rate of return. I have also demonstrated recently that margin debt in relation to GDP has been highly correlated to future 3-year returns in stocks for some time now. The message we can glean from record high margin debt levels is that a 60% decline over the next three years is a real possibility. Know that I’m not predicting this outcome; I’m just sharing what the statistics say is a likely outcome based on this one measure.

This horrible risk/reward equation is simply a function of extremely high valuations. As Warren Buffett likes to say, “the price you pay determines your rate of return.” Pay a high price and get a low return and vice versa. Additionally, if you can manage to buy something cheap enough to build in a “margin of safety,” your downside is limited. However, when you pay a high price you leave yourself open to a large potential downside.

Speaking of Buffett, his valuation yardstick (Market Cap-to-GNP) shows stocks are currently valued just as high as they were back in November 1999, just a few months shy of the very top of the dotcom bubble. Investors should look at this chart and remember what the risk/reward equation back then meant for the coming decade. For those that don’t remember, it meant a couple of massive drawdowns on your way to earning very close to no return at all. (Specifically, this measure now forecasts a -1% return per year over the coming decade.)

Instead, investors today choose to hide behind an “eminence front.” They ignore these facts simply because they are unpleasant to think about. Despite the horrible risk/reward prospects of owning equities today, they have now put nearly as much money to work in the market as they did back in 1999. (This measure is even more highly correlated to future 10-year returns. It now forecasts about a 2.5% return per year over the coming decade.)

It’s truly an astounding phenomenon that investors, after experiencing the very painful consequences of buying high – not just once but twice over the past 15 years, can once again be so enamored with paying such high prices yet again. Amazingly, they are as eager as ever to take on incredible risk with very little possibility of reward. It proves that “rational expectations” are merely the imaginings of academics and have no place in real world money management. It also validates Grantham’s view that it’s not him who is pessimistic; it’s investors who are too optimistic.
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