Tag Archives: investment advice

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

Stopping the Iran Nuclear Deal

Nixon+ChinaMy Comments: Readers of my daily posts know I agree with the proposed agreement. I disagree with the notion that the inevitable outcome of failing to approve the deal is war with Iran. But that’s not to say there won’t be some serious negative consequences. Switzerland, for example, has already lifted most of it’s sanctions against Iran.

Stephen Collins Aug. 11, 2015

The fate of the nuclear deal with Iran appears to be in some jeopardy. Key democrats in Congress – most notably New York Senator Chuck Schumer – have recently announced that they would vote to reject the agreement. So passage of the agreement is far from a done deal, with more than two dozen Senate Democrats remaining in the uncertain column.

Opponents regard the deal with disdain, characterizing the accord to curtail Iran’s nuclear program as counterproductive, naïve and reminiscent of England’s appeasement of Nazi Germany.

Critics of the Joint Comprehensive Plan of Action (JCPOA) are right to be skeptical of Iran’s commitment to multilateral accords. The International Atomic Energy Agency reported on several occasions – including in 2005, 2008 and 2011 – that Iran had violated important articles of the Nuclear Nonproliferation Treaty. But even given Iran’s lackluster record, I’d argue that a move by Congress to block the accord would result in a less favorable security outcome for the US and its allies.

The benefits of the deal for Iran are substantial. They include extensive sanctions relief that would allow Iran to resume oil export sales and gain access to frozen assets, estimated at US$55 billion. That would give the regime an enormous incentive to abide by the terms of the accord. In return for sanctions relief, Tehran has agreed to relinquish 98% of its supply of enriched uranium, limit its centrifuge operations and restrict enrichment to 3.67%. These actions would significantly lengthen Iran’s “breakout period,” or the time needed to create a nuclear weapon.

Additionally, the JCPOA also includes a carefully crafted verification protocol that permits intrusive and technically savvy inspections of known and suspected nuclear facilities.

Critics want to coerce Iran into complete capitulation so that it would cease all nuclear activities in perpetuity and allow “anywhere, anytime inspections.” Barring that, they advocate starving the regime so that it would be unable to afford nuclear, militant or terrorist activities.

But this sort of result was unfeasible. Short of Iran actually testing a nuclear device, the P5+1 – the US, Germany, China, UK, Russia and France – were never willing to support a marked increase in economic pressure.

What if the deal fails? A blocked deal would lead to several alarming consequences.

A no-deal Iran would have 33,000 pounds of enriched uranium instead of just 660 pounds. It would be able to produce enough fuel for a nuclear weapon in a few weeks instead of a full year.

If Tehran does aspire to build a nuclear weapon, as critics maintain, the dissolution of the deal would, in fact, facilitate their goal. The regime has publicly stated that it would speed up enrichment if the deal was blocked. Iran would also possess additional paths to a bomb without the deal’s prohibition on Iran reprocessing its plutonium.

What is more, the collapse of the plan would scuttle the enhanced transparency that the international community would have gained about Iran’s nuclear program as a result of inspections.

In the wake of a blocked deal, the solidarity underpinning the present multilateral, UN-backed sanctions program would dissipate. That would leave the US standing alone or with few allies. The historical record shows that without multilateral sanctions, the US lacks leverage to make Iran capitulate.

Additionally, China and Russia are likely to benefit by exploiting American obstinacy as an excuse to strike trade deals with Iran. That would bolster China’s economic and Russian’s strategic positions.

But the most dangerous diplomatic setback would be the effect a botched deal could have on America’s transatlantic alliances. America’s allies strongly back the deal. Blocking the JCPOA would quite likely result in a deep rift between the United States and its NATO allies, crippling support for future collaboration.

And then there is the question of how the sinking of the pact would complicate nonproliferation objectives far beyond the Middle East. America’s perceived unwillingness to negotiate on nuclear diplomacy would further marginalize any pro-diplomacy voices inside North Korea, arguably the more significant nuclear threat. Blocking the accord would ossify Pyongyang’s distrust of the US and give greater momentum to North Korea’s nuclear buildup.

Critics of the deal emphasize the danger presented by the windfall of unfrozen money Tehran will acquire. They predict that money will flow to Iran’s military and its investment in militant foreign activities, including sponsorship of terrorist organizations.

They’re not wrong – funding will probably flow in this direction. Still, the danger presented by this for the US and its regional allies is far less than the threat posed by the robust nuclear program that will likely emerge in the deal’s absence.

Moreover, the amount of funds freed up by the end of sanctions that will be devoted to military ends is probably much less than critics suggest.

Iran has pressing economic matters it must deal with immediately. The regime will have to invest between $100 billion and $200 billion in its oil and gas industries simply to reestablish past production levels. To satisfy the rising expectations of the public regarding the economic bounty it expects to materialize after the deal, the government will also have to invest in the domestic economy.

If the bulk of the unfrozen money does indeed flow to the military, the US and its allies might even benefit from a better financed Iranian military, which could use the new funds to step up its military operations against the Islamic State.

Still, simply signing a deal with Iran does not automatically make this episode of diplomacy a success. The devil is indeed in the details – implementation and verification.

The international community must prove its resolve to Iran. Iran must be shown that it will be held accountable and that automatic “snapback” provisions of the deal will be reimposed in response to a significant and unresolved violation.

The deal indeed fails to achieve all that the US could have hoped for. Still, the accord offers a credible path to a peaceful resolution of the crisis, and therefore it would be far too risky to turn it down.

Read the original @ http://www.businessinsider.com/there-are-alarming-consequences-to-stopping-the-iran-nuclear-deal-2015-8#ixzz3icvmd6U8

Obama’s Long, Hot Iranian Summer

My Comments: To deal or not to deal, that is the question. Most people are focused on the political implications of the agreement, and whether it’s a good deal for us or not. I’m very concerned about the economic implications as well. My blog post tomorrow talks about the high probability that Saudi Arabia will completely exhaust its currency reserves by the end of this decade. This has the potential to completely rearrange the balance of power in  the Middle East, and if Iran is free to resume building a nuclear weapon, we’re all in trouble.

The net effect of these two seemingly unrelated circumstances could lead to a conflict of biblical proportions in the Middle East. We are now involved with Turkey in attempting to reverse the gains made by ISIS. Couple that with the financial relationship we have with Saudi Arabia, to name just one country, the chances of a dramatic shift in the balance of power if we cannot contain the nuclear ambitions of Iran increases dramatically.

Granted, the agreement cannot ultimately guarantee that Iran does not get a nuclear weapon. But it does realistically allow some time for counter measures to get put in place. If the outcome is the removal of the Saudi government in its present form, all bets are off. Never mind the lives to be lost in a conflict between the US and Iran, imagine the cost to us and the rest of the free world if the oil now flowing to Europe, Russia, China, India, etc. from Saudi Arabia stops. Talk about a global economic crisis. And all because few people in Congress are willing to look beyond their hatred of Obama. Dumb, and you and I will pay for it, again.

Edward Luce, August 2, 2015

A US rejection of the deal would give Tehran a green light to revive their nuclear agenda

Six years ago, Barack Obama’s big domestic reform almost went up in flames during an August of town hall protests. He was accused of trying to set up death panels for the elderly. This time his big foreign policy deal is under fire — though the allegation has not changed.

The Iran nuclear deal will apparently create a death panel just for Israel. The difference in 2015 is that Mr Obama is already lobbying Congress. His legacy, and the future of the Middle East, hinges on whether the deal survives next month’s vote on Capitol Hill.

The noisiest protest will take place on Thursday when the top 10 Republican candidates appear on Fox News for their first presidential debate. Among them will be Mike Huckabee, the former Arkansas governor, who believes the deal “will take the Israelis and march them to the door of the oven”. Ted Cruz, the Texas senator, says: “Hundreds of billions [sic] of dollars will flow to Iran that they will use to fund radical Islamic terrorism to murder Americans.” Donald Trump says Mr Obama has been taken “to the cleaners”. Only Jeb Bush has risked nuance. He has been pilloried for saying Republicans should be more “mature and thoughtful” about it. Yet he, too, says the deal should be binned.

Will it survive the onslaught? That depends on Mr Obama’s own party. To a person, Republican lawmakers oppose the deal, some apocalyptically. Even former isolationists, such as Rand Paul, who will also appear on the Fox podium, are now hawkish on the Islamic Republic. Much like Obamacare, the Iran deal will rely solely on Democratic votes on Capitol Hill. Many are wavering. To salvage the deal, Mr Obama must use his veto to override an all but certain majority vote against it. He will need a third of either chamber to do so. That means either 34 of the 46 Senate Democrats or 145 of the 188 House Democrats.

It will boil down to whether he, or Benjamin Netanyahu, the Israeli prime minister, holds more sway with undecided Democrats. Chief among them is Chuck Schumer, the New York senator, and probable next leader of the Senate Democrats. Mr Netanyahu has said Israel’s survival as a nation is at stake. In fact, it is his own job security as the country’s leader that is in the balance. He has built his career on hyping the existential threat from Iran. His coalition controls just 61 of 120 Knesset seats. He broke all rules in March by speaking to the US Congress against a president’s set piece initiative. Never before has a foreign ally done anything this egregious. Having breached the limits once, he has nothing to lose. The American Israel Public Affairs Committee and its allies plan to spend up to $40m lobbying against the deal. Much of it will be targeted at Mr Schumer. Mr Netanyahu will be working the phones as furiously as Mr Obama.

It is easy to forget that America’s legislature is supposed to be evaluating what is in America’s national interests. But Mr Obama’s real task is to convince fellow Democrats it will be good for Israel’s security. On paper, this ought to be straightforward. Though undeclared, Israel has an estimated 80 nuclear warheads. It also has “triad” capabilities – it can launch missiles from sea, air and land. Opponents of the deal say it will unleash a Middle East arms race. But as Bruce Riedel, a former senior official at the Central Intelligence Agency, put it: “A nuclear arms race has been underway in the Middle East for 65 years. Israel won it.” For the next 15 years at least, Mr Obama’s Iran deal cements Israel’s status as the Middle East’s sole nuclear weapons state.

Mr Netanyahu’s allies say the deal will unfreeze $150bn for Iran to spend on terrorism. This is absurd on multiple levels. First, the US Treasury says just $55bn in assets will be repatriated. Much will remain frozen under sanctions unrelated to Iran’s nuclear programme.

Second, Iran already spends what it wants on its regional proxies: unlike nuclear weapons, terrorism is a cheap business. With at least $3bn in annual US military aid — and more promised by Mr Obama — Israel has more than enough ability to keep defeating Hizbollah and Hamas on the battlefield.

Third, Iran suffers from an estimated $500bn in infrastructure backlog, of which up to $200bn is needed to reboot its oil industry. Iran’s government was elected on the promise of restoring economic growth. It will lose office if it wastes too much of the proceeds on foreign adventurism.

Would a rejection by Congress lead to a better deal? This is critics’ most frequent line. It is a fantasy. Rather than bringing Iran back to the table, America’s unilateral rejection of a deal it negotiated will push its own partners away. The horse has already bolted. Countries such as China, Russia and India have made it clear that they will resume trading ties with Iran regardless of what Congress does. Even the European three — the UK, France and Germany — are likely to press on. Moreover, a US rejection would give Iran’s hardliners a green light to revive their nuclear agenda. Instead of waiting a decade or more, Tehran could develop a warhead within months, according to the International Atomic Energy Agency.

Facts, as they say, are stubborn things. But perception matters more. The chances are that Mr Obama can scrape together enough support to uphold this deal. But it will be close. Either he or Mr Netanyahu will end this summer victorious.

Is it 1929, 1987 or Something Else?

money mazeMy Comments: Those of us with money we plan to use in retirement have to pay attention to what is happening to the stock and bond market. If nothing else it helps us decide if we want to manage it ourselves or get someone to help us.

I think we’re due for a correction. I’ve alluded to this several times over the past many months and here, once again, are comments from someone far more in touch with reality than am I. Regardless of your circumstances, if you are expecting to live a while, you will need money. If any of it is coming from investments, then this might help maintain your sanity. Or not.

July 31, 2015 by Scott Minerd

Having spent the summer ruminating over the macro events in Europe, my focus has now turned to the U.S. stock market crashes of 1929 and 1987. Why, you might ask? The answer lies in China, where policy interventions in the face of a steep selloff are quickly becoming the first blemish on Xi Jinping’s leadership record.

Whether the current period becomes known as China’s version of 1929’s Black Thursday in the United States or a much healthier scenario analogous to 1987’s Black Monday, now depends very much on the strategy its policymakers adopt over the next few months. For China’s sake, I hope it is the latter, but at this point investors should take note that the world’s second-largest economy could just as likely find itself at the epicenter of this century’s greatest equity market correction.

Fueled by demand from Chinese retail investors, the Shanghai Composite Index soared by more than 150 percent from mid-2014 and early June 2015. In the same period, the Shenzhen Composite Index rose by more than 200 percent. Such exuberance has come to a violent end, with indices down almost a third from their June 12 peak of more than $10 trillion in market capitalization.

Despite the recent selloff, the Chinese stock market is still grossly overvalued, with the median price-to-earnings (P/E) ratio* for the Shanghai Composite Index hovering around 40, more than double the median P/E ratio of the S&P 500. By another valuation measurement, the market-capitalization-to-gross-domestic product (GDP) ratio for China is currently above 60 percent, well above its average of 40 percent over the past 10 years.

From here, the best case for Chinese equity markets may be a scenario similar to what happened in 1987 in the United States, when, after a huge selloff in October, the market retraced, then reversed, but ultimately established a base that began a rally that lasted until 1989.

The alternative scenario to 1987 is 1929, the course upon which China currently seems set.

Chinese policymakers’ unorthodox attempts to bridle the runaway market resemble the policy response of the United States in 1929, which basically relied on investor groups to purchase large blocks of stock in the hope of propping up equity markets. As in 1929, this type of market intervention will do nothing to solve the fundamental problem in China’s equity markets today. The unresolved issue is that prices have detached from fundamental value due to a wave of debt-fueled retail investor mania.

This too is analogous with 1929. China’s sky-high margin-debt-to-total-market-capitalization ratio is estimated to be near 10 percent. In reality, it is likely even higher when you factor in margin lending by China’s shadow banking system. By comparison, U.S. margin debt is currently less than 3 percent of total market cap, but in 1929, margin debt in the United States reached a high of 12 percent of total market capitalization prior to the stock market’s collapse.

The clear answer at this point is not for China to endeavor to apply splints to its broken market, but instead for the People’s Bank of China (PBOC) to flush the system with cash and allow the renminbi (RMB) to depreciate significantly. Unfortunately, this may not be palatable. Chinese policymakers will do anything they can to avoid devaluation ahead of the International Monetary Fund’s November decision on the RMB’s special drawing rights (SDR) status. China may not have that long to act if it is to avoid a full-blown disaster. In the meantime, my best estimate is that the PBOC will be forced to increase sales of Treasury securities to prop up the RMB as more capital flows out of China. I would expect up to $300–500 million of Treasury liquidation may be necessary to hold the line on RMB depreciation in the coming months.

If China’s crisis does turn into a 1929 scenario—which would be devastating for China and would have broad implications for the rest of the world—one takeaway for investors is that the United States is likely to remain at least somewhat insulated. A Chinese slowdown will put energy and commodity prices under pressure, which will benefit U.S. consumers and U.S. manufacturers as input prices fall, and should help support earnings in the near term.

The transitory period that lies ahead, however, promises to be rocky for all global markets. Consider how much Greece’s $300 billion debt crisis roiled investors (a figure dwarfed by the $3 trillion lost by Chinese equities markets since June). Under any circumstances investors should expect to see increased market volatility with a growing safe-haven bid for Treasury securities, which I expect will push the U.S. 10-year note to 2 percent or lower in the near term. Renewed downward pressure on interest rates will increase market volatility and is likely to adversely affect credit spreads. On a positive note, lower interest rates, along with declining energy prices, should spur U.S. housing activity, and assuage any lingering concern caused by last week’s disappointing new home sales data, which fell 6.8 percent to 482,000 homes sold in June.

For China, the outcome to this crisis is still far from a foregone conclusion. There is still time for its policymakers to refocus. The best path would be to further loosen monetary policy and inject as much liquidity as possible into its markets—even if this forces the party to relax its control of the RMB and put some strategic political objectives on the back burner. If it doesn’t adopt this strategy, China may learn the painful and lasting lessons taught by the calamitous market collapse in the United States in 1929.

How to Fix Our Interstates

My Comments: As a resident of Gainesville, Florida since 1959, I remember when I-75 appeared locally. Bud Johnson and I would explore the countryside on our bikes on weekends. Among my memories are a bridge under construction near Warren’s Cave and I-75 was simply a cleared trail through the woods. Another day we found ourselves along the Williston Road and found a cleared path leading south to Payne’s Prairie. I recall piles of sand trucked in and flowing across the prairie toward the south. Lots of snakes.

And then is was open all the way to Atlanta and beyond. Two lanes each way over concrete slabs that jarred the car every 30 feet or so. Painful, but it got you there quicker than when the only route was US 41 or US 19. Another old memory is of returning from a trip to north Georgia in Pete Ricca’s old DeSoto sedan, me driving late at night since everyone else had had more to drink than me. What all this has to do with ‘fixing the interstates’ is obscure, except that they are now pretty old, and things wear out, and it’s in our national interest to find a way to keep them functional.

By Reihan Salam July 28, 2015

I hate the Interstate Highway System. I realize that this is an awkward time to bring this up. Many of you are no doubt planning road trips, and I’m sure you’re grateful for the fact that you do not have to traverse dirt roads in your Conestoga wagon en route to the Grand Canyon. Though I don’t know how to drive myself, I can absolutely see the appeal of barreling down the highway at top speed, singing along to Top 40 radio between bites of my delicious egg and cheese biscuit taco. I don’t begrudge you your love of the interstate, nor would I dream of dynamiting it into oblivion. Now that we have these wildly expensive marvels of modern engineering, we shouldn’t allow them to crumble, to the point where only Imperator Furiosa and Mad Max would have the guts to drive them. But we have to do something about the interstate highways, because as things stand, crumbling highways are exactly what we’re going to get.

In case you’ve missed the latest highway news, the Senate and the House are battling it out over which idiotic short-term fix we ought to settle for in order to keep federal highway funding flowing for the next few months or the next few years. One group of lawmakers, led by Sens. James Inhofe, R-Oklahoma, and Barbara Boxer, D-California, has devised a grab bag of revenue-raisers, from selling off oil in the Strategic Petroleum Reserve to hiking various custom fees to funky maneuvers involving the Federal Reserve that I won’t even pretend to understand. This deal, backed by Senate Majority Leader Mitch McConnell, R-Kentucky, would finance the highways for the next three years. Another group, led by Rep. Paul Ryan, R-Wisconsin, chairman of the House Ways and Means Committee, wants to link highway funding to a broader overhaul of corporate taxes, with an eye toward encouraging U.S. multinationals to bring profits back home from their foreign subsidiaries. For now, however, Ryan and the House GOP want a short-term solution that will fund the highways for about five months to buy time.

What’s so awful about these proposals? For one thing, they don’t fully account for the fact that most of the Interstate Highway System needs to be rebuilt, as the highways were built to last about 50 years, and the system was first established in 1956. Even with the best maintenance money can buy, you can only extend the life of these old roads by so much. How much will it cost to rebuild these highways, and to expand them to accommodate increases in traffic? Robert W. Poole Jr., a transportation expert at the Reason Foundation, estimates that it will take roughly $1 trillion. Others have estimated that reconstruction and modernization could cost as much as $3 trillion. You will be shocked to learn that Congress has barely begun to think through what it will take to rebuild and upgrade our highways.

In a perfect world, we could hop in a time machine and convince Ike that the Interstate Highway System was in fact a terrible idea.

But our real challenge is not squeezing out just enough money to keep our existing interstate highways in good working order. Nor is it figuring out how to find a trillion, or trillions, of dollars to pay for an upgrade. It is facing up to the fact that the Interstate Highway System has helped drain the life out of our big cities and figuring out a better, smarter, more sustainable way to connect Americans from one end of the country to the other.

Though the Interstate Highway System was first established in 1956, it was inspired by a miserable journey that took place decades earlier. In 1919, the U.S. Army sent a truck convoy from Washington, D.C., down a long, winding, and occasionally treacherous path to San Francisco. The convoy took just over two months to reach its destination, and the general crappiness of the roads was a memory that one of the young officers along for the ride, Dwight Eisenhower, would never forget. Decades later, after Eisenhower had helped vanquish Nazi Germany in part by taking advantage of its autobahns, gleaming superhighways far more advanced than almost any of the roads then in use in the United States, he decided to make the construction of a vast national highway network his first priority as president.

What you might not know, however, is that according to Helen Leavitt, author of the felicitously titled Superhighway-Superhoax (somehow I suspect Leavitt feels the same way about the interstate highways as I do), Ike didn’t realize that the interstate highways would slice through America’s biggest cities until it was too late. The result of building a centrally planned highway system that doesn’t just connect cities (an inter-metropolitan system) but that also runs through them (an intra-metropolitan system) has been a bona fide disaster, as Marlon Boarnet explained in an article published in Transport Policy in January of last year. Essentially, proponents of the Interstate Highway System decided that they needed to make its benefits tangible to urban lawmakers, so they included a number of urban highways in their plans. What they failed to reckon with is that a one-size-fits-all approach to highways that might make sense for routes connecting cities across vast distances would by definition have to ignore the particular local challenges found in each individual city.

Before the interstate, local transport plans were local. That is, they were sensitive to the particularities of different cities and regions, and they were responsive to issues of particularly local concern, like limiting traffic congestion and integrating automobiles with other modes of transportation, including public transit. For political reasons, local transportation authorities had little choice but to accept that new highways had to minimize disruption in existing neighborhoods. Moreover, planners in this era had to be thoughtful about how this new infrastructure was going to be paid for. The interstate changed all of that.

In the pre-interstate era, most of America’s superhighways were turnpikes, financed by tolls. Because these roads had to pay for themselves, there was a powerful incentive to avoid building more road than was strictly necessary. Early plans for a national highway system involved tolls as well. Yet lawmakers in the Deep South and sparsely populated Western states objected to the idea, fearing that their highways wouldn’t generate enough toll revenue to make them financially viable. Thus was born the idea of financing the entire Interstate Highway System through a federal tax on gasoline, which would redistribute resources from states that generate a lot of gasoline tax revenue to those that generate very little. This new federal tax wound fund a Highway Trust Fund, and through it the federal government would meet 90 percent of the cost of new highway construction, including local highway construction. Since the Interstate Highway System was almost entirely funded by the federal government, local policymakers found it hard to resist going along with plans that tore neighborhoods apart. Who in their right mind would turn down “free” money? Who would turn it down if the neighborhoods that were being destroyed were full of people who didn’t have a ton of political power, as was frequently the case?

While this approach seemed to work pretty well in the first few decades of the interstate, it has proven destructive in the long term. Over time, as the cost of maintaining the federal highways has crept upward, lawmakers have been reluctant to raise the gas tax to a level high enough to keep up with rising costs. And so every few years Congress has to scramble to find some clever way to prevent federal highways from falling into utter decrepitude. It turns out that redistributing gas tax revenue from states with lots of drivers to those with very few also means redistributing gas tax revenue from states that need more transportation infrastructure than they have to states that have more transportation infrastructure than they need.

In the late 1950s and 1960s, most observers didn’t see new federally funded urban highways as a problem. Rather, they saw them as an exciting new tool to revitalize downtowns and to raze so-called slums, some of which were in fact living, breathing, tightknit neighborhoods. This optimistic take proved wildly off-base. Nathaniel Baum-Snow, an economist at Brown University, analyzed the effect of highway construction on U.S. cities from 1950 to 1990. By comparing cities that received many new highways over this period with those that did not, he estimates that one new highway passing through a central city reduced its population by roughly 18 percent. Where did these people wind up? In the suburbs, of course. Furthermore, Baum-Snow estimates that while the aggregate population of America’s major cities declined by 17 percent in the wake of the construction of the Interstate Highway System, this population would have grown by 8 percent had the interstate highways never been built. In this counterfactual world, Americans would now be living in denser, more compact neighborhoods, where they’d spend more time walking and less time driving. Local infrastructure would have needed to be financed locally, and so cities that had mastered the art of building and maintaining infrastructure efficiently would enjoy a huge advantage over those that had not. Instead, our central cities have shrunk, our suburbs have sprawled, and we’ve grown dependent on a gargantuan federal highway system that has grown frighteningly expensive.

In a perfect world, we could hop in a time machine and convince Ike that the Interstate Highway System was in fact a terrible idea. Let state governments keep building turnpikes. Let states and cities build their own local infrastructure, financed by local drivers and guided by local wisdom. If poor states wanted to build gleaming new superhighways, well, encourage them to issue bonds to pay for them, to be paid back through their own gas taxes.

Assuming time travel is off the table, let’s learn from our mistakes. First, let’s get the federal government completely out of the business of maintaining the interstate highways crisscrossing our big metropolitan areas. Hand these roads over to state governments as soon as possible, and free state governments to finance these roads in any way they see fit, from higher state gas taxes to variable tolls they could use to reduce traffic congestion. Second, for interstate highways that connect cities across deserts and cornfields, let’s replace the federal gasoline tax with per-mile tolls. One of the many problems with the gas tax is that as gas mileage improves, and as a small but growing number of drivers turn to electric vehicles, gas tax revenue is not keeping up with the needs of the highway system. Per-mile tolls can solve that problem by charging drivers according to how much they actually use the highway system, regardless of the kind of vehicle they’re driving. And as Robert W. Poole Jr. explains, they can be pegged to the cost of each road and bridge, which will help ensure that roads and bridges are adequately financed.

After adopting this approach, we will see states investing in the infrastructure projects that best meet their needs, with some states, like California and New York, choosing to invest more heavily in urban mass transit while others, like Texas and Utah, build bigger and better highways. What remains of the federal highway system, meanwhile, will evolve over time, as the routes that attract the most traffic will grow in line with their per-mile toll revenue while those that attract the least will stay the same size, or perhaps even shrink. We’ll have an infrastructure worthy of a bigger, denser, more decentralized America—the kind of infrastructure that Ike, in his infinite wisdom, would be proud of.

Gamma-ray Rain From 3C 279

Gamma-raysMy Thoughts: An example of our insignificance in the universe; here is a short (1.10 mins) video that portrays a shower of gamma rays from a galaxy far, far away. The video was posted on a web site I often visit sponsored by NASA. Every day there is new image or video that reflects something about the cosmos and our observations of it. (Astronomy Picture of the Day or APOD)

Our daily concerns about politics and investments and economics are both real and imagined. However, in the context of the data that this video represents, and its source mega zillions of miles away, our concerns and worries are profoundly irrelevant.

The explanation from the NASA site reads as follows: If gamma-rays were raindrops, a flare from a supermassive black hole might look like this. Not so gently falling on the Fermi Gamma-ray Space Telescope, from June 14 to June 16, the gamma-ray photons, with energies up to 50 billion electron volts, originated in active galaxy 3C 279 some 5 billion light-years away. Each gamma-ray “drop” is an expanding circle in the timelapse visualization, the color and maximum size determined by the gamma-ray’s measured energy. Starting with a background drizzle, the sudden downpour that then trails off is the intense, high energy flare. The creative and calming presentation of the historically bright flare covers a 5 degree wide region of the gamma-ray sky centered on 3C 279.

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.