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Another Reason For Donald Trump

My Comments: The white middle class of America is dying faster than other demographics. According to this study, white people with low levels of education have a “cumulative disadvantage”. The result is an increased level of morbidity and mortality.

Relative income is down, health outcomes are worse, unstable marriages more frequent, all leading to a collective despair across a broad cross section of the population.

If I’m in this group, then I’m more likely to want help and recognition for my problems than the Democratic party and its candidates was able or willing to recognize. Time to pay attention people!

From Julia Belluz, on March 23, 2017.

In 2015, a blockbuster study came to a surprising conclusion: Middle-aged white Americans are dying younger for the first time in decades, despite positive life expectancy trends in other wealthy countries and other segments of the US population.

The research, by Princeton University’s Anne Case and Angus Deaton, highlighted the links between economic struggles, suicides, and alcohol and drug overdoses.

Since then, Case and Deaton have been working to more fully explain their findings.

They’ve now come to a compelling conclusion: It’s complicated. There’s no single reason for this disturbing increase in the mortality rate, but a toxic cocktail of factors.

In a new 60-page paper, “Mortality and morbidity in the 21st Century,” out in draft form in the Brookings Papers on Economic Activity Thursday, the researchers weave a narrative of “cumulative disadvantage” over a lifetime for white people ages 45 through 54, particularly those with low levels of education.

Along with worsening job prospects over the past several decades, this group has seen their chances of a stable marriage and family decline, along with their overall health. To manage their despair about the gap between their hopes and what’s come of their lives, they’ve often turned to drugs, alcohol, and suicide.

Meanwhile, gains in fighting heart disease have stalled, and rates of obesity and diabetes have ploddingly climbed.

So the rise in mortality for white mid-life people in America since the late 1990s is actually the final stage of a decades-long process. “It’s about the collapse of white middle class,” said Case. Here are the five big takeaways from the researchers’ new opus.

Donald Trump Is Not Having Fun

My Comments: Please understand I am not interested in throwing gasoline on an existing fire. I am interested in understanding how we got to where we are and how we might influence the future for the betterment of EVERYONE OF US.

Yes, I did vote for Hillary and did not vote for DT. I didn’t much like Hillary but as someone trained and experienced in evaluating existential risks, I felt there was a greater threat to my future well being, and that of my children and grandchildren with DT in the White House than if HT was there.

I’m OK with a fundamental evaluation of the assumptions that permeate out society. What, exactly, are our values as a society and how do those manifest themselves as a nation? That includes how we treat our elderly and less capable citizenry, climate change, health care, the environment and our role on the planet, both economically and militarily.

DT is a disruptor and if he is to be the initiator of this re-assessment, I can live with that.

But so far I’ve seen gross negligence, incompetence, and the inability to identify people to populate the various agencies that define us as a nation in the 21st century. The unanswered questions about Russia and their influence on our re-assessment I find troubling. The process of governing cannot simply disappear from the scene, but that’s what appears to be happening. How this will all play out is anyone’s guess, but play out it will and all of us must make our thoughts heard over the next months and years.

By Katy Waldman \ March 21, 2017

If your name is Donald Trump, the past few weeks have brought a crescendo of bummers. Your party’s vaunted health care plan appears dead on arrival, beloved by none and mocked by all. The “fake news” has continued to harp on Russia, emboldened by treacherous leakers and disrespectful TV comics. You dragged yourself to yet another meet-and-greet with a foreign leader whose professorial eloquence made you feel like a shlub. This time, it was Irish Prime Minister Enda Kenny, who proceeded to shame you and your Muslim ban with a flowery ode to America’s history of welcoming refugees. “Four decades before Lady Liberty lifted her lamp,” Kenny said, as you steamed and darkened like a charcoal briquette, “we [the Irish] were the wretched refuse on the teeming shore. We believed in the shelter of America, in the compassion of America, in the opportunity of America. We came and we became Americans.”

Then, the crowning indignity: As reports swirled about your record low approval ratings, you had to play nice with German Chancellor Angela Merkel, a woman who dares to disagree with you on trade and immigration but not in a sexy, impertinent way. (Flashbacks to that nasty Hillary Clinton.) After a private conversation during which you could neither tweet nor watch Fox News, you were forced to prolong the unpleasantness by inviting the press into the Oval Office for questions and photos.

Let the record show that President Trump, in this moment, is not having fun. The bulk of his torso caves in on itself like the imploding Affordable Care Act. As Merkel leans toward him for a handshake—a perfunctory gesture of politeness—Trump angles his body in the other direction and refuses to meet her eyes. His shoulders hunch, his arms hang limply, he shifts uneasily from side to side. They can’t make me! he seems to sulk. Being president stinks. I want to play golf and yell at babies.

Trump does not quite have it in him to leave the room. His tantrum is equal parts fury, self-loathing, and a desire for love and approval. When a large enough star collapses, it becomes a black hole, thirsty for all the light and warmth it can swallow. This president is the teeniest, tiniest of black holes. He doesn’t have the gravity to attract anyone or anything. He is enraged, exposed, alone.

Before the Merkel summit, Trump’s handshake mostly made the news for its aggro endlessness. (The president manhandled Japan’s Shinzo Abe for 19 seconds.) That said, Trump has declined to clasp ladyfingers before. During the second presidential debate, he and Hillary Clinton sparked a mild scandal by forgoing the traditional greeting at the top of the show.

Back then, however, Trump smiled. He stood tall, perhaps anticipating the highlight reels his fans would create. He knew he was flouting convention and seemed delighted to play the rogue. On the campaign trail, Trump was a troll with a gleam in his eye, mischievously selling himself as an alternative to the pious bullshit of politics-as-usual. Standing across from Clinton, he wasn’t so much skipping the handshake as “skipping the handshake,” polishing his brand through a kind of kayfabe that mingled ironic posturing with genuine cruelty.

At rallies, candidate Trump zigzagged hypnotically between charm and menace. After an infant interrupted his speech, he cooed that he loved babies. “What a baby. What a beautiful baby,” he said. “Don’t worry about it, you know?” Then, in an instant, he transformed into a baby-hater: “I was only kidding. You can get that baby out of here.” Which was Trump the character, and which was Trump the person? Speaking to reporters in July, he quipped, “I will tell you this, Russia, if you’re listening—I hope you’re able to find the 30,000 emails that are missing.” But he couldn’t possibly be inviting a foreign power to hack his electoral opponent, right?

As Emily Nussbaum argued in her essay “How Jokes Won the Election,” the GOP nominee’s willingness to claim he was “just teasing” allowed him to smuggle evil into the mainstream. We thought the outrageousness was part of the act. In retrospect, we fell for a man using irony to veil his true hatred and bitterness.

Now that veil is gone. Having checked his bag of winks at the White House door, Trump has morphed into a professional angry person. He seethes at his staff. He fumes at celebrities. He threatens other countries. He denounces the judiciary. The typical Trump press conference no longer consists of sly innuendo and catchy slogans. Instead, we watch Trump rail against the Democrats and declare BuzzFeed a “failing pile of garbage.”

On Twitter, insult comedy (“Happy Thanksgiving to all—even the haters and losers!”) has become conspiracy-mongering (“This is McCarthyism!” “FAKE NEWS.”) Trump’s online persona “seems to have shifted from puckish to paranoid,” mused the New York Times on Tuesday, in one of many articles documenting his mounting rage. Even attempts at humor, such as the president’s suggestion that he and Merkel might bond over being wiretapped by Obama, read as poorly disguised resentment. They evoke candidate Trump’s cringeworthy routine at the Al Smith dinner, which appeared to be less about diffusing tension than exorcising demons.

Why is Trump so out of sorts? It could be that he’s simply found, in fire-and-brimstone Donald, his latest role. Yet it seems equally likely that Trump has stumbled into an Aesop’s fable of his own making. Having received what he so fervently wished for, he’s now found that leading the free world is a miserable chore. Trump, who loves Trump more than he loves anything else, used to jet around selling that self-love to voters. Now he’s stuck in meetings pondering policies and ideologies that matter a whole lot more to the American people than they matter to him. As a candidate, he got to accuse the establishment of trashing the country. He played hype-man for a future in which he’d refresh our ideals. Now he’s accountable in the present to all the men and women whose lives haven’t become fairy tales since he took office. That’s not fun. That’s a full-time job, and that’s the one thing Donald Trump has never wanted.

How Timing Impacts Your Retirement Portfolio Longevity

My Comments: Many a client has asked “How long will my money last?” and the only rational, unsatisfactory answer is “It depends”.

Unfortunately, luck plays a major role in our lives. If you’re alive and well today, chances are you’ve had at least some good luck. In answering the above question, much depends on timing, which is typically something over which we have NO control. Little more than deciding the date of your birth.

Follow these thoughts by Kevin Michels to get some additional insights.

Kevin Michels, CFP® February 20, 2017

How long will your retirement nest egg last? This is an intricate question to answer and many factors come into play such as rate of return, the value of your savings, annual withdrawals, inflation, etc.

However, one factor that is very important and is largely not spoken of is the timing of when you retire. In fact, the timing of when you retire is so important it can make the difference between running out of money in retirement or leaving a multi-million dollar inheritance to your children and grandchildren.

A Retirement Example

Let me explain by example. Let’s take 10 imaginary couples and pretend they have each saved $1 million for retirement. Each couple invests the full $1 million in the S&P 500 for the duration of their retirement, which we’ll assume lasts for a period of 30 years. Each couple also plans on withdrawing $100,000 per year from their portfolio and will increase that amount by 3% per year to account for inflation. The only difference between each couple is the timing of their retirement. The first couple retires in 1977, the second couple in 1978, the third couple in 1979, and so on and so forth.

All else being equal, aside from the timing of each couple’s retirement, how will they each fare over a 30-year period? The disparity between the longevity and value of each couple’s retirement portfolio is staggering.

Three out of the 10 couples actually ran out of money before the 30-year period ends, simply because they chose to retire one year too early or one year too late, while the other seven couples end the 30-year period with balances ranging from $500,000 to $3.2 million.

The three couples that ended up running out of money (1977, 1981, 1986) all had something in common. The first five to 10 years of their investment returns were subpar. The perfect storm for a short-lived retirement portfolio is created when you pair investment losses with withdrawals in the first five to 10 years of retirement. You get so far behind, that it becomes impossible to catch up. This is known as “sequence of returns risk.”

To put this into perspective, take a look at the table below regarding the most successful couple, who retired in 1979 and ended with $3.2 million, compared to the least successful couple who retired in 1977 and ran out of money in 20 years.

Couple

Longevity of Retirement Nest Egg

Average Annual Return of S&P 500 for 30-Year Period

Average Annual Return of S&P 500 for First 5 Years of Retirement

1977 – 2006

$0 after 20 years

12.48%

8.13%

1979 – 2008

$3.2 million after 30 years

11.00%

17.36%

Although over the long term the S&P returned 1.48% more per year in 1977 to 2006 than 1979 to 2008, the couple that retired in 1979 will leave a multi-million dollar estate largely because in the first five years of retirement they have superior investment returns than the couple who retired in 1977.

Safeguards to Protect Retirement Investments

Fortunately, we can put safeguards into action to mitigate the sequence of returns risk.

1. Don’t invest your entire portfolio in the S&P 500 or any other one asset class.

For the most part, it is good for retirees to be invested in stocks. This protects against inflation risk and low yields in the bond market as we’re seeing now. But volatility comes with stocks so it’s also important to include some bonds or bond funds in your portfolio as well, to smooth out returns.

2. Always keep at least the next two years of expected withdrawals in cash or short-term bonds.

In our example, each couple planned on withdrawing $100,000 per year and increasing that amount by 3% a year for inflation. So in their first two years of retirement, they could have liquidated $203,000 ($100,000 for year one and $103,000 for year two) and kept it in cash to safeguard against short-term volatility. This would have saved the couples who retired in 1977 and 1981. Both of those couples started their retirement with negative returns.

3. Rebalance your portfolio annually.

Rebalancing is simply the practice of selling high and buying low. If your portfolio is invested in 70% stocks and 30% bonds and the stock market underperforms the bond market for a year or so, naturally the stock portion of your portfolio will decrease while the bond portion will increase. If at the end of the year your portfolio is now made up of 65% stocks and 35% bonds, you can sell the 5% of bonds to reinvest in low-priced stocks or to keep in cash for future withdrawals.

4. Aim for a lower withdrawal rate in the first five years of retirement.

Your withdrawal rate is calculated by dividing your total withdrawals for the year by your total portfolio value at the beginning of the year. In our example, the withdrawal rate for our retirees starts at 10% ($100,000/$1 million), which is high for the first five years of retirement. As previously stated, the longevity of your retirement portfolio is greatly affected by your returns and withdrawals in the first five years of retirement. If each one of these couples would have started with a lower withdrawal rate, even 9%, they all would have had money left over at the end of the 30-year period. Try to start with a lower withdrawal rate and then increase it as your portfolio grows.

In the end, the decision of when to retire isn’t as important as the plan you have in place to ensure your retirement capital lasts the duration of your life. Before you begin living the golden years, make sure you work with your spouse and potentially a financial planner to have a plan in place that will provide peace of mind during those years of market turmoil.

3 Charts That Show Stock Market Euphoria Is Totally Unprecedented

My Comments: I’m thinking of getting into the markets. That’s a sure sign the bottom will soon drop out.

Jesse Felder on March 18, 2017

Last week I focused on fundamentals, sharing 3 charts that show stock market valuations are totally unprecedented. This week I’ll focus on sentiment.

When looking at sentiment many people like to look at surveys. I prefer to look at what people are actually doing with their money. It’s a fact that we are now seeing record inflows into the equity markets but how do we put this into context?

First, I would just note that Rydex traders have been a good contrarian indicator for a long time. They recently positioned themselves more bullishly than any time in the history of this fund family, even surpassing the peak seen during the height of the dotcom mania.

I also like to look at margin debt, or total borrowing in brokerage accounts, as way of assessing speculative fervor. Nominal margin debt recently hit a new record high but I prefer to normalize this measure by comparing it to the size of the economy. This adjusted measure also recently hit a new, all-time high greater than that set in 2000.

Finally, we can look at household financial assets invested in the stock market compared to those in money market funds. Here is where we see the direct result of 7 years of zero percent interest rate policy. Households now have more than 15 times as much money invested in stocks than they do in money market funds, well beyond anything we have seen since the invention of these cash vehicles.

With as much money as they are now pouring into the equity markets, investors might do well to remember that bull markets aren’t born on euphoria.

Source: http://seekingalpha.com/article/4056252-3-charts-show-stock-market-euphoria-totally-unprecedented

A Retirement Checklist

My Comments: There’s a fundamental difference between strategies and tactics. If you don’t now know the difference, and you realistically plan to retire at some point, then I encourage you to learn and understand the difference.

Too many people get caught up in tactical steps, responding to what they might see on TV or in response to a salesman or saleswoman wondering why their commission is still in your pocket.

In the context of retirement, your first effort is to develop a comfort level with the strategic implications of moving away from the work force and into what we favorably think of as retirement. Only when you (and your significant other) come to terms with how you want the rest of your life to play out should you then explore the various tactical steps that will allow you, hopefully, achieve your strategic goals.

The following checklist is about the best outline I’ve found to help you get where you want to go.

Kelly Henning, CFP  \  July 8, 2016

Clients often ask financial planners, “Will I be OK in retirement?” Before looking at a client’s assets and expenses to answer that question, we ask follow ups such as, “What do you want your retirement to look like?” Each individual’s perspectives on retirement are unique. Some people want to remain in their current house and community. Others wish to downsize and stay in the area close to family and friends. There is yet another group that wants to leave expensive Northeast states and move south or west.

Thus, it’s key to expand on a client’s retirement goals earlier rather than later.

The checklist below illustrates different items to think about as retirement approaches, from ten years before to right after retirement begins. The earlier one starts planning for retirement, the more prepared one should be not only financially, but also emotionally.

5 to 10 Years Before Targeted Retirement
• Brainstorm retirement goals and dreams of what your retirement will look like.
• Think about where you want to live and whether you want to downsize.
• Revisit goals and timeframe annually.
• Obtain annual credit report.
• Pay down mortgages and other debts to strive to become debt-free by retirement age.
• Revisit progress toward achievement of retirement goals, and adjust retirement contributions and/or spending as appropriate.
• Review estate planning needs and update documents, titling and beneficiaries as needed.
• Consider the need for Long Term Care insurance.

1 to 5 Years Before Targeted Retirement
• Attend pre-retirement workshops and/or consider a personal life coach to help prepare for the transition.
• Get comprehensive medical, dental and vision exams while still covered by employer health insurance plans.
• Consider Social Security claiming strategies.
• Request estimates of pension or retiree medical benefits.
• Get educated about Medicare options.
• Revisit estimated budget for income and expenses anticipated in retirement.

6 to 12 Months Before Targeted Retirement

For income tax planning:
• Speak with your accountant about your expected new income bracket and how to plan for it.
• Discuss possible Roth IRA conversion or other tax planning strategies.
• Know if you are eligible for any outside retirement plan contributions.

401(k) or 403(b) plan:
• Plan to max out contributions for the current year.
• Confirm all funds in 401(k) accounts are vested.
• Confirm whether funds are pre-tax only or pre-tax and after-tax.
• Coordinate with wealth manager to keep 401(k) or 403(b) funds in the plan or roll to an outside IRA.
• If rolling to an outside IRA, open new account and obtain account number and custodian address/wire instructions for future deposit.
• If retiring between ages 55 and 59.5, you may want to wait to roll over due to options to take penalty-free withdrawals from your 401(k) in year of retirement or take 72t distributions for at least five years.

Pension benefits:
• Obtain all pension benefits available through current employer.
• Determine whether or not a lump-sum pension option is available and whether it is preferable for you.
• Other qualified and non-qualified retirement benefits.
• Obtain information on all additional plans offered by the company and information on vesting, tax, and transfer of these accounts.

Social Security Benefits:
• Login to http://www.ssa.gov, create an account and obtain a current benefits statement.
• Be sure to complete this step for spouse.
• If divorced, contact Social Security directly at (800) 772-1213 and obtain information on taking benefits as an ex-spouse.
• Coordinate Social Security Analyzer tool with benefits statements to determine your claiming strategy.

2 to 3 Months Before Retirement
• Paid time off: If you have any accumulated sick days, vacation time or other PTO days, determine if/how you will be paid for these days.
• Advise your supervisor and HR representative in writing of desired retirement date.
• Hopefully you’ll agree on a specific date (e.g. first week in January depending on payroll and other items).
• Consider a date which you will be eligible for year-end bonus or other benefits, including 401(k) matches, profit sharing, or stock options.
• Request retirement package of paperwork from HR.
• Depending on the size of your company, HR will generally provide its own packet of paperwork and forms that need to be completed.
• Determine date for exit interview with HR/supervisor.
• Make final decision on all insurance, including medical, dental, vision and life insurance (timing will depend on company policies).

One Month Before Retirement
• Obtain via online or phone all the paperwork to roll your 401(k), 403(b) or other retirement accounts, out of the plan into an outside account, if that’s the choice you’ve made.
• Complete paperwork and contact HR to see if plan administrator signature is required.
• Paperwork will be sent in following retirement date.

One Week Before Retirement
• Confirm that HR retirement package has been completed and all relevant documents are signed.
• Clean-up desk/emails, etc.
• Remove any personal/private information from work email and computer.

Post Retirement
• Complete the 401(k) rollover paperwork, which you should submit following retirement date

There are many decisions to consider as one prepares for retirement, from healthcare options to account logistics. Understanding what should be done and when well in advance of your retirement date can be key to reducing stress in the months and weeks before you stop working. Employers will have deadlines on paperwork submission, some of which are your last day of work or thirty days after. Knowing these deadlines and seeking information in advance is essential. Use all available resources, such as your company’s human resources department and your professional advisors, to help make the transition as smooth as possible.

Attention, Seniors: A New Social Security COLA Bill Was Just Introduced in Congress

My Comments: This might be good news if it wasn’t so unlikely to happen.

Sean Williams | Mar 18, 2017

According to the January snapshot provided by the Social Security Administration, nearly 41.4 million retired workers are receiving a monthly benefits check from Social Security totaling an average of $1,363. While that may not sound like a lot, Social Security benefits comprise more than half of all monthly income for 61% of retired workers, based on SSA data. Without Social Security, it’s very likely that the poverty rate for seniors would soar, and many would struggle to make ends meet.

But as many of you also probably know, Social Security is beginning to run into some roadblocks. Two major demographic shifts — the ongoing retirement of baby boomers which is lowering the worker-to-beneficiary ratio, and the lengthening of life expectancies over the past five decades — are weighing on this vital program. According to the 2016 report from the Social Security Board of Trustees, the program will have exhausted its more than $2.8 trillion in spare cash by the year 2034, at which point a benefits cut of up to 21% may be needed on an across-the-board basis.

Congress can’t forget about current retirees

It’s pretty clear from this data that Congress needs to act with some degree of expediency to ensure that Social Security offers a financial foundation during retirement for the many generations of workers to come. However, Congress also has to be careful not to forget about the tens of millions of seniors already receiving Social Security.

One of the more contentious battles in Washington is in regards to what should be done (if anything) about Social Security’s cost-of-living adjustments, or COLA.

Right now, Social Security’s COLA is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). As with any of the CPI variants, it takes into account the price movements of a pre-determined basket of goods and services and compares that year-over-year data.

For Social Security, the average CPI-W reading from the third quarter of the previous year serves as the baseline figure, while the average reading from the third quarter of the current year serves as the comparison. Any decrease in year-over-year prices means a 0% COLA for the following year. Thankfully, Social Security benefits cannot be decreased due to deflation, albeit beneficiaries have had three years of no COLA, and a minuscule 0.3% COLA over the past eight years. Any increase in the year-over-year CPI-W is passed along and rounded to the nearest 0.1% in the following year.

A new Social Security COLA bill was just introduced

The debate in Washington involves whether or not the CPI-W is the best measure to tie Social Security’s COLA to. According to one Congressman, it’s not.

Earlier this month, Rep. John Garamendi (D-Ca.) introduced the CPI-E Act of 2017 into Congress. The sole purpose of the Act introduced by Garamendi would replace the CPI-W with the Consumer Price Index for the Elderly, or CPI-E, in calculating Social Security’s COLA. The CPI-E strictly measures the spending habits of households with people aged 62 and up. Since roughly two-thirds of all Social Security beneficiaries are seniors, switching to the CPI-E would (presumably) be more accurate in representing their spending habits.

For instance, according to data found in Garamendi’s press release that accompanied his bill, which already has 24 co-sponsors, the CPI-E rose at an average rate of 3.1% between 1982 and 2011 compared to just 2.9% for the CPI-W over the same time span. In other words, seniors could receive a larger COLA most years with the CPI-E.

Why, you wonder? The CPI-E places a considerably larger emphasis on medical care expenditures and housing costs, which for seniors are often much higher than that of working-age Americans as measured by the CPI-W. Likewise, the CPI-W tends to overemphasize the impact of educational, apparel, transportation, and food expenditures, which just aren’t as important for seniors when compared to working Americans.

In recent years, weaker fuel prices at the pump and stagnant food prices have been the main cause of seniors’ weak COLAs. Plus, medical care inflation has outpaced Social Security’s CPI-W-based COLA in 33 of the past 35 years. According to estimates from The Senior Citizens League, had the CPI-E been used in place of the CPI-W over the past 25 years, the average retired worker would have netted an extra $29,600 in payments.

Switching to the CPI-E probably isn’t in the cards

However, before you get too excited, realize that the chances of this bill succeeding in a Republican-led Congress are slim-to-none.

For starters, the CPI-E has its shortcomings, too. For example, the CPI-W factors in more households than the CPI-E, meaning that it’s providing more data points and presumably a more accurate picture of what Americans are spending their money on.

Also, the CPI-E fails to take into account the rising costs associated with Medicare Part A. Medicare Part A covers in-patient hospital stays, surgical procedures, and long-term skilled nursing care. Even if the CPI-E Act of 2017 were to pass and be signed into law, seniors would likely still fail to keep pace with the true medical care inflation they’re facing.

There’s also that not-so-tiny problem about Social Security running out of spare cash between now and 2034. Switching to the CPI-E without any additional revenue generation would mean depleting the Trust’s spare cash at an even faster rate.

And, of course, the CPI-E is the complete opposite of what Congressional Republicans are angling for. Rep. Sam Johnson’s (R-Tx.) Social Security Reform Act of 2016, introduced in December, called for a switch to the Chained CPI, which Republicans seem to prefer over the CPI-W. The Chained CPI factors in a consumer behavior known as “substitution,” which the CPI-W does not. The Chained CPI assumes that consumers will trade down to lower-priced goods and services if the goods and services they currently buy become too pricey. Thus, the Chained CPI grows at a slower pace than the CPI-W, which could place seniors in a bigger hole to medical care inflation.

Clearly, this isn’t the last we’re going to hear about the COLA debate on Capitol Hill. But, don’t expect COLA reform to happen anytime soon.

It’s Bubble Time!

My Comments: I’ve been around long enough to have experienced some bubbles in the markets and they’re not pretty. Especially the one in 1987 when my colleagues and I stared at each other in disbelief as our money and that of our clients disappeared in a cloud of dust. We’re due for another. And while this article is mostly about a housing market bubble, we have one building in the S&P500 and the DOW. You should be very careful if you are in retirement or planning to enter it soon.

Chris Martenson / Feb. 27, 2017
It’s impossible to predict with certainty how much more insane our financial markets will get before an inevitable correction. But my personal bet is: A lot!

For my reasons why, take a few minutes to watch the chapter on bubbles below from The Crash Course. For those who haven’t seen it before, the takeaway is this: bubbles pop only when greed in the market has been exhausted. https://youtu.be/7KpwrJHC6_0

Bubbles make no sense economically. Or rationally. But they happen all the time as a part of the human condition. Even while financial bubbles are enabled by dumb monetary and banking decisions, their actual genesis is rooted in primal human emotions. Greed on the way up, and fear on the way down. The hardest part about these bubbles is not being swept up in them. As the above video shows, history is chock full of asset bubbles. We humans just never seem to learn. Like Charlie Brown’s endless attempts to kick Lucy’s football, we get suckered in by the promise of easy riches, only to end up flat on our back when the market suddenly yanks that promise away.

Wash, rinse, repeat.

Most of you reading this might be thinking “Hey, I’m a reasonable, intelligent person. I won’t fall victim to the next bubble.” Perhaps, but maybe not. The numbers say that the majority of you will. Unfortunately, being smart — even a genius — is no protection against being ruined by a bubble.

Remember from the video that even Sir Isaac Newton, easily one of the most brilliant humans ever to live, got his clock cleaned by the South Sea Bubble:
Bubbles are much easier to enter than to exit. As they build, all your friends and neighbors are diving into the pool and enjoying easy riches. You deserve some of that good fortune, right? And there will be plenty of eager parties willing to help you get on the bandwagon.

When the bubble pops, though, action becomes much harder to take. At first, everyone assumes that the sudden drop is a temporary aberration and that the party will shortly resume. As prices fall further — and they typically fall at a faster rate than when they were rising — folks become paralyzed by fear on the way down, slowly realizing that their paper profits may indeed be gone for good. At first they’re unwilling to give up the dream of the “sure thing” they so recently had, and then, once the losses start mounting, they find themselves resistant to locking in those losses by selling. Instead, they hold on to the increasingly threadbare hope that prices will at least recover to where they can ‘get their money back.’

Of course, that never happens. For all those who bought in during the mania, their money was hopelessly betrayed the moment they placed their bet. And that’s what bubbles are – merely bets. And that bet is: I bet I can get out before everyone else.

That’s mathematically impossible for the majority. It’s really only possible for a very tiny few who have the vision and the discipline (and more often than not, the luck) to pull it off. Very rare are the people who get out at the top.

Don’t Be A Victim

So, to avoid becoming victim in the future, the first thing you need is the clarity to know when you have a bubble on your hands.

Well, it really doesn’t get any clearer than this:
Why Toronto (and Other Cities) Inflate Housing Bubbles to the Bitter End
Feb 20, 2017

“Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal (NYSE:BMO) Chief Economist Doug Porter told clients in a note last week.

Many have called it “housing bubble” for a while, but now it’s official, according to BMO.

In January, the benchmark price and the average price were both up 22% year-over-year, with the average price of detached homes up 26%, of semi-detached homes 28%, of townhouses 27%, and of condos 15%. Double-digit price increases have become the rule in recent years.

But this jump was “the fastest increase since the late 1980s – a period pretty much everyone can agree was a true bubble – and a cool 21 percentage points faster than inflation and/or wage growth,” Porter explained in his note, cited by BNN.

Holy smokes! Or rather, what are people smoking up there? Bubble weed, or something. A 22% yr/yr gain? On top of a string of recent years of double-digit gains?

Here are two more features about bubbles we need to keep in mind:
1. Bubble exist when prices rise beyond what incomes can sustain
2. Bubbles always have a blow-off top

First, house prices rising a ‘cool’ 21 percentage points above wage growth over a single year is the very definition of bubble behavior. Simple math tells us that anyone who borrows to buy property eventually has to pay that loan back.

The money to pay back that property loan comes from wages. Ergo, property prices and wages cannot depart from each other forever, or even for very long, without a lot of repayment defaults resulting.

As for ending in a “blow-off top”, that’s just how history tells us bubbles finally exhaust themselves. They draw in every last sucker and lazy-thinking ‘investor’ until there’s no “greater fool” left willing to pay a higher price. This doesn’t require 100% participation from the local population; only 100% participation from everyone who can be drawn in. When that finally happens, that’s when the bubble bursts all of its own accord.

There’s another way for a bubble to end, but it practically never happens.

Responsible bankers and lenders could prevent the bubble’s formation by simply not lending ridiculous amounts. It almost never happens for the same reasons that people buy overpriced houses: greed and our social programming to follow the herd. If all your banker buddies are making big bucks writing loans to anyone who can fog a mirror, then you’ll be rewarded for doing the same. Nobody wants to be the lone, unpopular voice urging restraint when the crowds are going wild.

The quotes below from the 1850s show how this dynamic is nothing new to society:
Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.
In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.
―Charles Mackay,in Extraordinary Popular Delusions and the Madness of Crowds

Well, the good people of Toronto — as well as Vancouver, Palo Alto, Melbourne, and a large number of other real estate markets — have fixed their minds on the delusion that the recent skyrocketing price appreciation means that home prices will continue to always rise from here. So get in now! You can’t lose! Don’t risk getting priced out of the market!

What is particularly crazy about this is that we just saw 10 short years ago how this movie ends. But those caught up in the current mania simply aren’t thinking logically right now. They’re fully captured by the bubble mania. And, as before, it’s lonely out here for those of us trying to be the voice of sanity and reason. Nobody wants to hear that now. And later, once the painful correction has wrought its destruction, those of us who dared to sound an alert may be blamed as responsible for the losses – as if by pointing out the delusion we caused the burst to happen.

Conclusion
I could go on and on, risking being the boy who cried wolf, and point out all the other obvious bubbles infecting our financial landscape that all but assure a very difficult future of financial and economic pain. But I won’t at this time, having already pointed out the major bubbles in last week’s article, The Mother of All Financial Bubbles.

The delusion much of society wants to believe in is that we can get something for nothing. That is, to become rich, all we have to do is buy an asset like a house or Apple (NASDAQ:AAPL) stock and simply wait. The wealth will just magically arrive. No work performed, nothing new created, nothing done. Just buy, and wait.

Of course, even a cursory examination of all of life in nature (or before humans invented thin-air money printing) quickly reveals that actual wealth comes from hard work, usually coupled with taking risks. But somehow we’ve slipped back into the common and very human delusion of that our current culture has somehow figured out how to escape the old bonds of wealth creation. This time is different!

The Romans re-minted coins in smaller and less pure weights and it worked! For a while. Then its empire collapsed on itself. Zimbabwe (and now Venezuela) printed and it worked! For a while. Then its citizens were left impoverished. Society’s dangerous conceit is in thinking that somehow we’ve managed to, this time, escape the hard rules of wealth creation and have discovered a new principle by which we can all get wealthy without doing anything at all. All you have to do is play the game. Put your money to work! Buy stocks and houses and you can’t go wrong!

And it’s working! For now. But when we back up a bit, it’s pretty easy to see how this cannot be true. Not for the majority. Why? Because real wealth isn’t a paper gain on a house. Nor is it even money in the bank. Or a large stock portfolio. Real wealth consists the final things you consume: food, appliances, transportation, entertainment, clothes, energy, etc. Those are real things. They have to come from somewhere. Which means they have to be produced, stored, transported, and sold. By themselves, your cash and your stock portfolio have no value. Those are merely claims on true wealth.

So how can it be possible for everyone to be exponentially increasing their claims on real wealth, without the underlying pie of real wealth itself, increasing at an equivalent rate? It’s not. And that’s the painful lesson that gets learned and re-learned as each new generation gets duped and then dumped by an asset bubble. Sadly, bubbles used to happen only once in a generation. Once those burned by the last bubble have died off, the younger generation has no living memory to prevent them from getting suckered by the next one. But for some reason, our current generation has something of an addiction to bubbles. We’ve lived through the tech stock bubble, the real estate bubble, and now we’re living inside the ‘everything’ bubble.

What’s wrong with us?

My advice is to sell your house if you live in Toronto, or a similarly bubblicious real estate market. Similarly, reduce your exposure to stocks and bonds at these record highs, and develop a wealth protection strategy with a financial adviser who understands the risks in today’s markets. Know what the bubble signs are and be smarter than Newton by standing aside, nodding knowingly, and tolerating your “smart” friends and neighbors. It’s one of the very hardest things to do, but it’s also one of the most important. Odds are high you’ll be proven the smart one once the current bubble bursts.