Tag Archives: investment advice

Why the Bond Market Could Blow Up Any Day Now…

My Comments: The SKY IS FALLING! Actually, it’s not, but many of the headlines suggest it might be. This was published 3 months ago and as you probably know, the bond market has not yet blown up. Lots of things have changed but the bond market is just as boring today as it was then.

Just don’t begin to think it will NEVER BLOW UP. It will change, and you should hope that the change will be gradual. That gives all of us a chance to adjust and become adapted to a different world. Unfortunately, that’s not always how the markets work. Just remember, there are ways to profit from all this, and I can help you, but not with many guarantees.

Brad Johnson, 19SEP14

Since the recession, $900 billion has poured into the bond market because bonds were viewed as a safe place to put money.

But after multiple years of the Fed’s low-interest rate policies, it looks like there is only one direction for bonds to go…


Bonds lose value as interest rates rise.

You already know this… but most consumers don’t.

Already, the Fed is talking about raising interest rates in spring of 2015. Of course, news of an increase will be priced in long before rates actually rise.

What’s the actual impact of rising rates on the bond market?

Just look at the PIMCO Total Return Fund. It’s the largest bond fund in the world.

From May 1st to June 24th (2014), interest rates went up about 1%. At the same time, the Total Return Fund decreased by around 6%.

If a 1% increase in interest rates causes a 6% decline in the value of bonds, what would happen if interest rates went up 2%… 3%… or more?

Keep in mind, this is not a linear progression. At some point panic sets in and the bond market collapses as investors run for the doors. Bloomberg Businessweek reports:

“Wall Street firms are warning clients that if fund investors who view bonds as safe are hit with sudden losses, there could be something akin to a run on the bond market.

“The worry isn’t only that investors’ bottom lines would take a hit. It’s that a mass selloff could swamp the market, with demands for redemptions forcing fund managers to unload their bonds at rock-bottom prices. The ensuing losses would encourage even more investors to redeem, perpetuating the downward spiral.”

4 Ways Social Security Could Be Healthy Again

Social Security cardMy Comments: As someone who paid into the SSA system for over 50 years, it’s hard to describe the satisfaction my wife and I experience from the deposits made to our checking account every month.

As an economist, I’ve watched how the system has been modified over the years to remain the safety net it was designed to be in the 1930’s. As someone versed in how money works, I’ve remained confident that similar changes will be applied over time to make sure it remains solvent and viable for my children and grandchildren.

Simply stated, it’s not going to go away. But those of you who benefit now and those who will benefit in the years to come need to pay attention. There are those in Congress who simply don’t give a damn about you unless you already have lots of money.

By Nick Thornton / December 2, 2014

The trustees of Social Security say that retirees needn’t worry about their monthly checks vanishing. But the fact is that unless Congress acts to change how Social Security is funded, benefit reductions are inevitable.

At least one federal lawmaker is pushing to do something about it. Connecticut Democrat John Larson, who’s represented the Nutmeg State since 1999, introduced the Social Security 2100 Act this summer. It has since picked up two co-sponsors.

In its 2014 annual report, the Social Security Administration said that under current law, beneficiaries can expect to see scheduled benefits reduced to 77 percent of what is now expected in 2033.

That’s when the Social Security Trust fund will be depleted. The fund was first tapped in 2010 to help cover current obligations. When that well goes dry in 2033, the program will be solely dependent on the FICA taxes raised each year to fund mounting obligations.

And that simply won’t be enough to cover promised benefits. Already, administration trustees are projecting an average annual deficit of $77 billion between this year and 2018. Things will only get worse after that, as the wave of retiring baby boomers assures the number of beneficiaries will grow substantially faster than the number of workers paying into the program.

Beneficiaries of the Disability Insurance Trust Fund are bracing for more immediate benefit reductions. By law, Social Security assets can’t be used to fund that program. Trustees expect it to be fully depleted by the end of 2016. “Lawmakers need to act soon to avoid automatic reductions in payments to DI beneficiaries in late 2016,” the trustees wrote in their most recent annual report.

Larson’s bill has been assigned to the House Ways and Means Committee, which has jurisdiction over Social Security. The chairman of that committee — influential Republican Paul Ryan – will decide whether it gets reviewed.

While Larson’s office is hopeful, at least one of the bill’s proponents is doubtful Ryan will give the proposed law a full vetting.

“Since he (Ryan) has been a strong advocate of President Bush’s plan to privatize Social Security, and since it’s up to the chairman to decide what legislation gets taken up by his committee, he is not likely to take up the legislation,” said Nancy Altman, co-director of Social Security Works, a non-profit that lobbies on behalf of Social Security’s preservation.

The bill has also been sent to the House Education and Workforce Committee and the Budget Committee, according to Ed Skowronek, press secretary for Larson.

“So far it’s the only bill that strengthens benefits and keeps the trust funds solvent,” he said. “And it proves you don’t have to cut benefits. Congressman Larson is looking forward to re-introducing it in the 114th Congress. We’re optimistic that Ways and Means will take it up for consideration.’

With all of that in mind, what follows is a look at what appear to be the most important provisions of Larson’s proposal, along with what the actuaries who watch over Social Security had to say about them.

The good news is that the Social Security 2100 Act scores well, according to a letter to Larson from Stephen Goss, chief actuary at the Social Security Administration.

The proposal scores so well, in fact, that it ultimately reduces the combined programs’ reserves to 147 percent of annual costs at the end of a 75-year projection period in 2087.

A reserve level of 150 percent is considered to be solvent, meaning Larson’s bill would leave Social Security funds with a small surplus 75 years from now, according to the actuarial estimates.

And, now, here are the four core provisions of the proposal, and how the actuaries think they will change things at Social Security.

Will There Really Be a Doctor Shortage?

healthcare reformMy Comments: There is one already. An unintended consequence of ObamaCare ( the PPACA ) is that millions of people who have until now waited until the last minute and then went to an Emergency Care Center are now trying to get appointments with MDs who were already busy people. Not enough people are yet in the pipeline to provide medical care.

And it’s not just MDs. I’ve had several conversations with CPAs who are increasingly frustrated by their inability to find willing and qualifed accountants to come and work with them. Many are in their 60’s and looking to retire and get away from the grind but are unable to find successors.

I don’t know how all this is going to play out, since the demographics alone is going to create a greater and greater problem. All the baby boomers who became physicians 40 years ago are ready to do something else, just when the rest of us need more and more medical attention.

Dec 2, 2014 Arlen Meyers, MD, MBA

The conventional wisdom seems to be that we will be facing a doctor shortage due to the 10,000 boomers turning 65 each day, disparities in geographic distribution and inappropriate specialist/generalist ratios. Add that to the bottle neck in graduate medical education funding and the pundits would have you believe you’ll need to go the black market to find a doctor in the future.

Some have cast doubts, though. Here’s why:

1. There has not been enough pain spread around to all the players to motivate change. The expectation is there will be in the near future.

2. Patients are becoming more and more accepting of physician substitutes , extenders and advanced practice professionals

3. The care delivery channels and business models are changing requiring fewer doctors or less skilled professionals to execute them

4. Necessity will drive innovation, particularly with population health management tools applied to the 20% of Medicare recipients who account for 80% of the costs.

5. A shift from a sick care system to a health care system might lesson demand

6. Rethinking end of life care would reduce the demand for services.

7. The shift from hospital based care to community and home based care will drive the need for non-physician substitutes.

8. One- on- one care is migrating to team based care.

9. Surrogates and families are being given the technology tools to support aging at home initiatives.

10. The realization that doing what we are doing now and paying what we are paying will bankrupt the country and severely compromise our global competitiveness.

Healthcare manpower prognostications, to paraphrase Yogi, are notoriously unreliable particularly when they involve predicting the future. When it comes to doctor supply, don’t go all in or necessarily believe everything you click.

Arlen Meyers, MD, MBA is a Professor at the University of Colorado School of Medicine and President and CEO of the Society of Physician Entrepreneurs at http://www.sopenet.org and ceo@sopenet.net.

What Doctors and Families Have That Advisors Don’t

financial freedomMy Comments: As a financial advisor for the past 40 years, I’ve somehow overcome the perception that people with specialized knowledge can not always be trusted, especially with your money.

With so many threats coming at us from every direction these days, some of which are not realistic but promoted by the media as a way to deliver eyeballs, asking the right questions is one way to cut through the nonsense and arrive at meaningful information.

It’s not so much the answers that are critical, but the questions asked that are critical to our future satisfaction. Some of us are just better at asking those question than others.

Bob Stammers / November 20, 2014

Clients want advice from someone they know has no ulterior motives.

Imagine your doctor asked you to lose 10 pounds but you demurred. Maybe he’s telling all his patients in order to lower demand for Twinkies and the like so he can have more affordable access to junk food for himself.

That scenario is, of course, utterly absurd. Nobody would suspect a medical professional of short-changing a patient for such crass reasons, yet something along those lines does nag at the conscience of investors in their quest for financial advice.

They worry that the professionals proffering the advice are pushing products from which they themselves will profit but which may or may not be good for them, and even if beneficial, perhaps not optimal.

That is why, says Bob Stammers, the CFA Institute’s director of investor education, so many people looking for financial advice go to friends and family when they have important decisions to make.

Ironically, the friends and family members may have little knowledge about finance; the advantage they have is that they are not suspected of having any ulterior motives. In short, they are trusted.

“People really want that education and information at the point of decision making,” says Stammers in an interview with ThinkAdvisor.

“When they make decisions, they usually ask for advice,” he continues, “so an advisor can offer advice at time when people are willing to digest it.

But to do that, you have to build relationships of trust,” something the financial services industry is uniquely ill-equipped to do, says Stammers, who notes the industry remains in its familiar dead-last spot on an annual global survey of trust, well behind the automotive and pharmaceutical industries, and even taking a back seat to media and banking.

But this industry and societal problem can in some sense provide an “opportunity,” says Stammers, for individual advisors to build trust one investor at a time.

To further that ambition, the CFA Institute is actively promoting its Statement of Investor Rights, a campaign aimed at empowering consumers through awareness of what they should expect from the professionals serving them.

The 10-point list includes the right to objective advice (No. 2), to disclosure of existing or potential conflicts of interest (No. 5) and fee transparency (No. 8).

“If you work under an ethical code, there should be no problem providing all these rights,” says Stammers, who says these ethical expectations flow from the investment process inherent in his own CFA Institute’s charter.

So how does an advisor, whether or not he or she is one of the 120,000 CFA charter holders worldwide, break down the barriers to trust amidst a public that has duly noted the Madoff affair, the LIBOR scandal and the Wall Street firms that sold clients mortgaged-backed securities and then shorted them, making money on both sides of the trade?

“That stuff gets into people’s heads and they remember it,” comments Stammers, who advises advisors on a two-step trust-building process:
“First you build credibility, then you demonstrate integrity. You build credibility with past experience, with credentials like the CFA charter. As people do more and more due diligence, they’ll start looking for people who have these characteristics.”

“But then you articulate the ethical framework you work under,” he continues, specifying that by unambiguously explaining how you get paid and by clarifying the potential for conflicts of interest and how you seek to avoid them, you are demonstrating your integrity.

For advisors already convinced of their ethics or bored with the topic, Stammers offers a key insight as to why they should make ethics a primary daily focus, and why the medical profession is a relevant comparison to their own work.

It comes down to the role advisors believe there are providing in investor education.

“Investor education is a misnomer,” the CFA Institute’s director of investor education says. “It’s really about behavior change: How do you provide investors with the principles and best practices so that they can change their behavior to start doing correct things—by making better decisions and avoiding common mistakes that often plague investors.”

Investors will summon the courage to make these difficult changes when they can repose as much trust in their financial advisor as they have in their doctor.

And given the poor public image of the financial services industry today, the onus is on individual financial advisors to pave a path of trust that enables positive investor outcomes, Stammers argues.

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.

Division and Crisis Risk Sapping the West’s Power

My Comments: I make no apologies for having supported and voted for Barack Obama in 2008 and 2012. Much of the pressure from the right, in my opinion, is irrational and disguised racism.

Here is an opinion from England, my birthplace and true friend of America. It’s an interesting perspective and to the extent you are interested in understanding the dynamics of global economics, a helpful thing to read.

By Gideon Rachman / September 1, 2014

The people who prepare President Barack Obama’s national security briefing must be wondering what to put at the top of the pile. Should it be the Russian assault on Ukraine, or the advance of the Islamic State of Iraq and the Levant (known as Isis) in Iraq and Syria? And what items should go just below that?

The violent anarchy in Libya, the dangerous stalemate in Afghanistan, the looming political crisis in Hong Kong, or a confrontation between Chinese and US planes, near Hainan island? The US president might reasonably ask why all these crises are breaking out at the same time.

His critics have a ready answer. They argue that the Obama administration has shown itself to be weak and indecisive. As a result, America’s adversaries are testing its limits and the US-led security order is under challenge in Europe, the Middle East and Asia.

There is no doubt that the US is war-weary after the conflicts in Iraq and Afghanistan. However, the multiplication of security crises around the world is not just about Mr Obama and the US. In fact, the obsession with what the Americans are doing points to the underlying problem. Its allies have come to rely excessively on the US to guarantee their security.

As a result, the biggest weakness in the global security system is not a lack of resolve in Washington, but the learned helplessness of America’s regional allies. The Nato summit this week in Wales represents a crucial opportunity for America’s most important allies to start doing more to share the burden. If they fail, the inability of the US to police the world alone will become increasingly apparent, and the various global security crises will intensify.

The pattern of Nato spending reflects Europe’s increasing reliance on the US. At the height of the cold war, America accounted for roughly half the military spending of the alliance, with the rest of Nato accounting for the other 50 per cent.

Now, however, the US accounts for some 75 per cent of Nato spending. Last year, of the 28 Nato members, only the US, Britain, Greece and Estonia met the alliance’s target of spending at least 2 per cent of gross domestic product on defence. Even the UK may soon slip below 2 per cent, with the British army on course to shrink to about 80,000, its smallest size since just after the Napoleonic wars.

Even when it comes to the non-military side of security, the Europeans have lagged well behind. The US was quicker to push through sanctions on Russia, and its measures have been tougher, despite the fact that Russia’s undeclared war in Ukraine is a much more direct threat to Europe.

This same over-reliance on the US is evident in the Middle East. The rise of Isis is a massive threat to the dwindling band of stable regimes in the region, above all Saudi Arabia and the Gulf states. In recent years, these countries have spent lavishly on their armies and air forces. And yet it has been left to the US to wage the bombing campaign against Isis, while the nations of the Gulf Co-operation Council keep their 600 combat planes on the tarmac and complain about American weakness.

A similar pattern is on display in Asia, where US allies such as Japan and the Philippines agitate for the US to increase its military commitment to the region in response to an increasingly assertive China. And yet, even as they call for US help, America’s allies in east Asia have been unable to present a united front, in opposition to China’s maritime claims.

This litany of allied weakness is dangerous precisely because America is indeed more reluctant to “bear any burden” (in President John F Kennedy’s famous words) to uphold the international order. The Iraq and Afghanistan wars have left their marks. So has the financial crisis of 2008. Mr Obama’s reluctance to deploy military force is not an aberration or a personal folly. It is an accurate reflection of the mood of the American people, with opinion polls showing the highest levels of isolationism in more than 50 years.

That mood could shift in response to Russian aggression and to the chaos in the Middle East. However, even if it does, the days when the US was capable of being the world’s super-cop – with relatively little assistance – are coming to a close.

The World Bank estimates that this year, China will probably become the world’s largest economy, measured by purchasing power. America’s defence budget is falling, as the US struggles to control its national debt. The gradual relative decline of the US is a much worse problem than it might otherwise be, because America’s closest allies in the EU are in the grip of severe economic crises, which are eroding their ability to exercise power.

Collectively, the west now accounts for a decreasing share of the world economy – as new sources of power and wealth rise up in Asia. A western-dominated world is therefore in danger of looking increasingly like an anachronism – and that is the proposition that, in their different ways, President Vladimir Putin of Russia, Isis and the Chinese military are testing.

The perception of declining western power now threatens to become a self-fulfilling prophecy. The only way for North Americans and Europeans to stop that happening is to work together with greater determination and purpose to combat the crises burning out of control on the fringes of Europe, in Ukraine and the Middle East. That work needs to start at this week’s Nato summit.

As Benjamin Franklin put it: “We must all hang together or, assuredly, we will all hang separately.”

The Wall Of Worry, Illustrated

My Comments: Readers of this blog post over the past six months have noted my concerns about a coming market crash and what it might do to your ‘nest egg’. Perhaps you remember my comments about a wall of worry, a phrase that gained traction in past years as the market climbed and climbed and climbed. The image here is a chart of the S&P500 since the major dip in 2009. You will have to decide if it’s real or whether it’s different this time.

James Osborne, Nov. 18, 2014

“The market climbs a wall of worry.” You’ve heard it hundreds of times. It sticks around because it’s true. And we know it is true, at some level. But it is always in the moments of true worry that we want to discount this (and all other) time-hardened wisdom.

Because we will forget, here’s what the Wall of Worry has looked like over the past five and a half years.

a) Unemployment is 9%. Corporate earnings fell 90% over the last 12 months. 10 major banks went bankrupt or sold at fire-sale prices in the last 9 months in the United States alone. The ultimate blue chip GE just announced it is cutting its dividend by 66%.
b) Unemployment is still going up! The US Dollar is absolutely tanking. There’s no way this dead cat bounce is legit.
c) Deficit spending is out of control! We are on a path to ruin.
d) Dodd-Frank will cripple the financial industry and permanently slow economic growth.
e) The US is going to hit the debt ceiling and default on its obligations. We will lose our position as the world’s reserve currency and life as we know it will be over.
f) The “Arab Spring” is destabilizing the Middle East and will lead to international war.
g) China’s “hard landing” will have a ripple effect on the global economy, which is not strong enough to take such a big blow.
h) Greece. Italy. Spain. Portugal. The Euro is a failed experiment. The “Grexit” will cripple already-weak European countries. A lack of stability will lead us all back into a global recession.
i) Too much “uncertainty” surrounding Obamacare is preventing US companies from reinvesting in their own growth.
j) More “uncertainty” surrounding US politics as we head into the 2012 elections. If Obama wins, the country’s economy will be in tatters.
k) North Korea is threatening the world with nuclear weapons. It’s not “safe” to be in the markets.
l) The Boston bombings claim the lives of 3 people and injure hundreds more.
m) Unable to produce a spending bill, the US Federal Government shuts down. Our country is clearly too dysfunctional to invest right now.
n) Russia invades Ukraine. We are on the brink of a possible global war. Only fools would be invested now.
o) Ebola outbreaks reach the US. A spread could decimate the global economy.

Let’s not forget that all along the last five years we’ve had hand-wringing over unemployment (which was over 9% two years after the recession ended), home prices, wage growth, Fed activity, lazy millennials, idiot politicians, global unrest, trade imbalances, peak oil (and now the horrors of falling oil prices), and my favorite, endless “uncertainty.”

So when the next bear market comes, when things get scary again and you try to tell yourself that it was “easier” back in the bull market, pull this back up. It’s never easy. There is always uncertainty. There is always a great reason to sit on the sidelines and wait for better economic conditions. Except that the better conditions never come, and in the process you miss the incredible power of long-term compounded returns.