Tag Archives: retirement plans

Will Trumpism Outlive Trump?

Pieter-Bruegel-The-Younger-Flemish-ProverbsMy Comments: Before you criticize me for posting what appears to be a political comment, consider what I think is the takeaway phrase from the following dialog: “Trump doesn’t matter, Trump’s voters do”.

There’s a reason there are so many pissed off people on both sides of the Atlantic. And unless and until our elected leadership takes steps to understand the anger and develop policies and solutions to mitigate that anger, we’re all going to get sucked further into a black hole.

By Isaac Chotiner June 28 2016

David Frum, the Canadian-born conservative, has been writing about politics here and abroad for many years. His books and essays, going back to Dead Right in the mid-1990s, offer a critique of the modern conservative movement that is often withering. A former staffer in the George W. Bush administration (where he helped coin the phrase axis of evil), Frum, after leaving government, had a falling out with his bosses at the American Enterprise Institute. He is now a senior editor at the Atlantic.

Despite his reputation as a moderate, Frum is actually very conservative on subjects such as foreign policy and immigration. It was the latter that I wanted to discuss with him this week, in the wake of the Brexit vote. (He is chairman of the board of the British center-right think tank Policy Exchange; the views he expresses in this interview, however, are his own.) Over the course of our conversation, which has been edited and condensed for clarity, we discussed how conservatives should view immigration, the real grievances behind the Brexit vote, and the post-Trump Republican Party.

Isaac Chotiner: You wrote that you thought Angela Merkel was the person most responsible for Brexit. Why?

David Frum: Immigration has been a large and accumulating problem in the United Kingdom. It involves competition for jobs to a lesser degree; competition for social services; pressure on hospitals; pressure on housing, especially the incredibly expensive South of England. Of course, also in the U.K., migration has a very large security element in a way that is not true here. A lot of the migration to Britain from the Middle East was Britain’s own decision, because half the migrants to Britain that come are non-EU people, admitted through the British system. The people who Merkel admitted, once they get papers, will be able to move anywhere in the EU.

Presumably they would come for jobs though, yes?

Right, the point is that more than half of all the net new jobs created in Europe are created in the U.K. What that means is they’re created in the Southeastern corner of England. That is the mightiest job magnet on the whole European continent. It’s sucking in labor from the whole continent. So those 1.1 million people that landed and submitted in 2015, and a lot more in 2016, once they get the right to reside in Europe, some will end up in Germany, some will probably go to Sweden, a lot will end up in England.

You mentioned the southeastern corner of England, which is where London is, but that is the area that voted “Remain,” no?

Right. This is sometimes represented as a completely irrational action. Is it so irrational? All these jobs are being created in the Southeast of England. So there you are, living in some formerly industrial town in the North, and you’re thinking, maybe I should move. Maybe I should leave this town and move to London and look for work. When you make that decision, you look at the prices and you say, “There’s no way I can afford housing in the Southeast of England. When I make inquiries about looking for work, they’re much happier with the labor they’re getting from the Poles, who by the way are willing, in order to get settled, to live eight to a house.”

I want to talk about conservatism and immigration skepticism, because I think it is fair to say you are an immigration skeptic.

Yeah. I was also somebody who hoped that Britain would remain in the EU, and I have a lot of respect for the EU project. There’s a lot about it that’s annoying and bureaucratic, but in the end, it’s a really important and beneficial and to some degree inspiring thing. In the same way that global free trade is that. We’ve been operating for a long time on the idea that, if you’re in favor of the free movement of goods, then you should be in favor of the free movement of capital and the free movement of people. They’re all the same thing. It may be that when we try to have all three of those things, we end up with none of them.

But it does seem like this issue has gotten to a point where the whole debate has been influenced by inflammatory racial rhetoric. How do you have the conversation when that is the case?

Look, it’s not a binary issue. The choice is not no immigration or open borders. It’s a question of how much, and what kind. It’s true that the immigration debate attracts racists. It also attracts romantic ideologues of all kinds. When you tell a country, when you tell people in the country, that the only people who deal with the problem you care about are the fascists, they are going to say: “Who are these fascists of who you speak, and what is their phone number?”

That’s really, I think, the lesson of Brexit and Trump: When your country has a problem, responsible people have to address it in a responsible way. If they refuse, the problem doesn’t go away. Oh well, your conscience doesn’t allow you to address this issue. No, they’re going to hire a Donald Trump or exit the EU and break up the European Union.

I think one liberal response to that would be, well, people on the right who are worried about this issue should do more to get racists out of their ranks.

Look at what’s happened in the U.K. I don’t think Brexit is a racist reaction. Brexit is not a racist thing. The immigration issue did not express itself like George Wallace; it expressed itself in this kind of labor-protectionist way that was as attractive to people, more attractive in many ways to the people on the left than the people on the right.

You also had Nigel Farage and so on.

If we’re trying to protect the good things in globalization, that is not only challenged by people on the far right. Podemos just had a bad election in Spain, but there are a lot of these reactionary movements that present themselves as being on the left and present themselves as being anti-racist, but they’re profiting from the strains created by too rapid change. Their agenda is going to be destructive of the open society that conservatives and liberals alike want to conserve. Each for their own reasons.

How do you think Trump has changed the immigration debate here?

This is one of my concerns about him, one among many. I fear what he’s done is he’s made this debate so polarizing and so toxic. How do you rescue something from the likely wreckage of the Trump campaign? He didn’t offer anything useful, but he was speaking to something real. To a great extent he was exploiting it, but it was still real.

So you think he has made the task of discussing it harder?

Yes, right, and he’s also locked Democrats and liberals into an immigration solution much more extreme than they had a decade ago. So now Obama’s immigration executive actions are a baseline position.

You started writing about Trump early and were an early critic, but has anything surprised you about the last few months of his campaign?

Who hasn’t been caught by surprise again and again? I did not believe he was going to win the nomination. I thought that something would happen that would cut off this obviously self-destructive adventure. So the fact that he won the nomination surprised me. The fact that he’s still on his way to being the Republican nominee, I never stop finding that surprising. The fact that the Republican Party didn’t … Trump is a kind of opportunistic infection and the fact that the patient didn’t have strong antibodies—that to me is a real surprise.

Did you think he’d be able to pivot in a way that he hasn’t?

No, no. You can’t stop being the person you are.

It seems to me that one possible advantage that he’s blown is the idea that he could benefit from some sort of outside event. It seems like the degree of his solipsism has prevented that from happening. We’ve had an awful attack by an ISIS-inspired attacker and economic uncertainty. He’s reacted to both in such a bizarrely solipsistic way.

He had some elements of a wider populist appeal on health care and on social insurance generally, which appealed to some more middle-class people. That seems to have been dropped. We don’t hear him anymore defending Social Security and Medicare. He may do it again. As he’s proceeded, his campaign has become ever more about himself and whether people are nice to him or not.

Do you think the Republican Party is going to try to stay away from Trumpism, assuming he loses? Or do you think we are likely to see a figure rise by saying, “We need to move the party more in a populist-nationalist direction?” We just need somebody who is 20 percent less rough around the edges.”

I’m not going to predict that because that’s going to be the debate that we’re going to have. Republicans are at risk, though, of having a debate between two positions that can’t work. Some people are saying that the real lesson of Trump is that we need to double down on pure ideology.

Which is the lesson they normally draw after a loss.

Right, whatever the Wall Street Journal editorial page says, plus 15 percent. Those who have gotten close to Trump, they’re going to present him as what—a victim of his own tax lawyers and media bias?—but not ask the question: Hey, how did anybody ever imagine this as anything other than a catastrophe in the making? What I hope we can discuss is: Trump doesn’t matter, Trump’s voters do. How do we talk to them? They just told us something unusually important about a big section of American life. They’re in a lot of trouble. They wanted bread, they demanded bread, and they got a stone. Someone needs to offer them something that can do them some good.

What John Oliver Got Right (and Wrong) About the DOL Fiduciary Rule

My Comments: The financial services industry is starting to come to terms with what is known as the DOL Fiduciary Rule. Some of us embrace this new standard and others think the world is about to end.

In short, it institutionalizes the idea that if you are providing financial advice to the consuming public, you are bound to act in your client’s best interests. While many believe this has been the case all along, it’s been largely a myth. If push comes to shove, the companies for whom the large majority of brokers and advisers work for do not want to be held accountable for the recommendations and offerings made by their sales people. They have argued vehemently against this new standard and with the help of millions of dollars spent on lobbyists, the new rules are a watered down version of what was originally proposed.

But in my opinion, it’s a good first step. If those in my profession are ever going to achieve the professional status of Certified Public Accountants (CPAs) and attorneys, we’re going to have to, in every respect, conform to a fiduciary standard.

June 17, 2016

The Department of Labor’s fiduciary rule has been a battle for our industry for about six years now, and consumers rarely know about or understand the potential changes. But last week, the rule took on a new audience: the viewers of “Last Week Tonight with John Oliver.”

I spend almost every day reading something about this rule, whether it be about lawsuits, what advisors should do about it or how the industry should embrace it. The rule itself is extremely complicated and so are the things advisors managing retirement accounts must do. As Oliver explains, “for the average person saving for retirement … [it] doesn’t need to be this confusing.”

Oliver does a decent job of explaining why the rule came about, but he also sways in favor of the DOL, which doesn’t seem to be the opinion of our industry.
I see how many of our industry’s people are worried and furious about the harm it could cause, but I also see why the DOL and consumers think the rule is important to protect Americans and their money. Just take a look at this Reddit thread where consumers are concerned about the “hidden fees” their accounts may be facing. Here’s a look at hits and misses of the video:

What he got right:

In the beginning of the video, Oliver begins to discuss how the term “financial advisor” is not a credential but rather just a job title. Although he may have angered advisors for mocking their job titles, it’s true that consumers may not know these are not reflective of the advisor’s credentials.

Oliver goes on to explain how the fiduciary rule is good for consumers because they should have someone acting in their best interests. This makes sense because in order to create a successful retirement plan, many different products and investments will most likely be needed to make sure a client will have enough income for as long as they live. It only makes sense for advisors to be fiduciaries, right?

Where Oliver was wrong:

Although he was right to state that the titles “financial advisor, financial analyst, etc.” virtually mean nothing, he failed to mention that consumers bear part of that burden. When hiring someone to manage your money, one would think the consumer would do some research on the people chosen to manage that money. Really, it comes down to the lack of financial education our country faces.

Oliver also suggests people should be investing in low-cost index funds, which the show seems to imply is a good investment for any and every person. From my experience though, every portfolio and client situation is different, which is why financial advisors are important in the first place; suggesting one type of investment as a be-all, end-all for investors could create a sticky situation in the long run.

In case you missed it (or if you didn’t make it to the last two minutes of the video), here are the five retirement saving tips the show gives to its viewers:
1. Start saving now.
2. Invest in low-cost index funds.
3. Ask if your advisor if they’re a fiduciary.
4. As you get older gradually shift your assets from stocks to bonds.
5. Try to keep your fees under 1%.

One more thing to point out is that Oliver seems to think that annuities are almost always a bad investment decision. Annuities have been the subject of the “bad” in our industry according to Elizabeth Warren and Suze Orman (both of which he cites as fighting against the investment products).

To me, what this video tells consumers is that they should be aware of exactly how their money is being invested. Advisors should be clear to their clients about how they’re being compensated, and in turn, clients should communicate any concerns they have with their advisors.

My hope is that this video helps educate consumers at least on the importance of saving for retirement and that it sparks conversation.

Saudi Arabia May Go Broke Soon

My Comments:  If Saudi Arabia ceases to function and Iran has a nuclear weapon, what are the implications for the rest of the world?

I accept that I’ll be just a memory by 2045. However, the United States may then be the only country on the planet with the ability to both unilaterally feed itself and produce 100% of the energy it needs. Food and fuel are as critical today as they were millennia ago.

Yes, there are environmental reasons to oppose fracking anywhere in the world but you have to admit the technology has the potential to dramatically change existing global economic and political dynamics.

How all this plays out politically with concurrent changes to existing global security arrangements is yet to be seen. It helps explain Russia’s recent moves to be more aggressive and paranoid about their future. As for Saudi Arabia, without oil to pump, they become a ghost town. We need to think about all this as we argue for or against the pending Iran nuclear deal.

By Ambrose Evans-Pritchard 05 Aug 2015

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

Bank of America says OPEC is now “effectively dissolved”. The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run,” said the Saudi central bank in its latest stability report.

“The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” it said.

One Saudi expert was blunter. “The policy hasn’t worked and it will never work,” he said.

By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year – and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. “We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days,” he said.

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” said Rex Tillerson, head of Exxon Mobil.

He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.

The wells will still be there. The technology and infrastructure will still be there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 – since the threshold keeps falling – they will crank up production almost instantly.

OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for “clean fracking” in China as plasma pulse technology cuts water needs.

Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia’s giant Ghawar field, the biggest in the world.

Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.

The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The ‘fiscal break-even price’ is $106.

Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.

He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up – entirely reliant on imported weapons – that will propel Saudi Arabia to fifth place in the world defence ranking.

The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. “Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon,” said Jim Woolsey, the former head of the US Central Intelligence Agency.

Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.

The reserves peaked at $737bn in August of 2014. They dropped to $672 in May. At current prices they are falling by at least $12bn a month.

Khalid Alsweilem, a former official at the Saudi central bank and now at Harvard University, said the fiscal deficit must be covered almost dollar for dollar by drawing down reserves.

The Saudi buffer is not particularly large given the country’s fixed exchange system. Kuwait, Qatar, and Abu Dhabi all have three times greater reserves per capita. “We are much more vulnerable. That is why we are the fourth rated sovereign in the Gulf at AA-. We cannot afford to lose our cushion over the next two years,” he said.

Standard & Poor’s lowered its outlook to “negative” in February. “We view Saudi Arabia’s economy as undiversified and vulnerable to a steep and sustained decline in oil prices,” it said.

Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry. The report has caused storm in Riyadh.

“We were lucky before because the oil price recovered in time. But we can’t count on that again,” he said.

OPEC have left matters too late, though perhaps there is little they could have done to combat the advances of American technology.

In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers – and the solar industry – to come of age. The genie cannot be put back in the bottle.

The Saudis are now trapped. Even if they could do a deal with Russia and orchestrate a cut in output to boost prices – far from clear – they might merely gain a few more years of high income at the cost of bringing forward more shale production later on.

Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.

The government can slash investment spending for a while – as it did in the mid-1980s – but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.

Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.

Diplomatic spending is what underpins the Saudi sphere of influence in a Middle East suffering its own version of Europe’s Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.

We may yet find that the US oil industry has greater staying power than the rickety political edifice behind OPEC.

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.

The Next Bear Market?

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

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

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

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

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

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

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

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

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

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

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

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

5 Dumbest Investing Bets

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

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

by Allan S. Roth JUN 15, 2015

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

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

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

Here are the five strategies I suggest you avoid.

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

Why Poor People Vote for Republicans

My Comments: OK, that’s too simplistic, but there is a point to be made here.

Back in 2007, with the presidential election cycle in full swing, I recall seeing an old, bent and rusty pickup truck. In the front was mom, dad and 2 kids. The truck bed was full of odds and ends that that suggested they were moving somewhere with all their earthly possessions.

The truck, however, was emblazoned with every possible McCain/Palin sticker possible. I tried to imagine why someone, presumably on the lower end of the economic totem pole, would seriously promote and presumably vote for someone or an ideology that so clearly misrepresented their best interests. I still have no idea, but the same people are today flocking to join the clown car parade driven by the Republican Party.

By Chad R. MacDonald on July 19, 2014

Considering how Republicans constantly attack the poor, they shouldn’t have a chance with anyone who isn’t already rich. So why do they?

Republicans like to say they are all about personal responsibility. Then of course, they support the SCOTUS decision taking personal responsibility away from citizens and placing it in the hands of corporations. (TK: except for John McCain)  They lie about a war, have us believing in non-existent weapons of mass destruction, and then try to blame the situation in Iraq on the subsequent administration.

The GOP advocates slashing food stamps, denying unemployment assistance, opposing affordable healthcare, and cutting taxes for the wealthy. They constantly demonize poor people, and think the economically disadvantaged deserve only scorn and insults. If you’re poor, you’re just lazy. End of reasons. Yet they get heavy votes from lower income Americans. How are they doing this?

There are many factors as to why this is so, including gerrymandering districts, such as what just made news in Florida, and voter suppression. But these particular elements have been covered extensively, and they aren’t the only reasons for this phenomenon. Republicans rely on a myriad of tactics to keep their poorer constituents voting against their own economic interests.

One tactic is misdirection. They paint Democrats as irresponsible whenever they can. They call our President, a man graduating manga cum laude from Harvard Law School, a community organizer. In short, they use smear tactics.

Meanwhile President Obama has proven eminently effective as leader of the nation. He has made healthcare accessible to millions of Americans, kept the USA out of a handful of wars, boosted the economy, and fixed some of the mess left behind by the Bush administration. Yes, he has a long way to go and he’s far from perfect, but Obama has faced an uphill battle of Republicans refusing to work with him even before he took office.

Yet many conservatives who know better say that the President hasn’t done anything to help the country. Or, hilariously, that he’s some kind of tyrant, right after saying he’s weak on foreign policy for not starting enough wars.

You also can’t ignore the infiltration of conservative talking points into the faith of Red Staters. Evangelists, televised or not, spearhead the Religious Right and are awful for “us against them” sermons and mentality. Don’t believe me? Look to Pat Robertson and his hateful rhetoric against LGBT Americans, Chic-Fil-A, or, again, the recent Hobby Lobby ruling for just a few examples

These people believe that their God is conservative. The #ccot (Christian Conservative On Twitter) hashtag gets heavy use. There you will find Christians tweeting anti-Obama, anti-immigrant, anti-gay, and anti-Democrat statements. And all of them believe God is on their side. It is the very definition of zealotry.

Throw Fox News into the mix, which Politifact recently reported as disseminating more false information than truth. When you travel through Red States, Fox News is on in most gas stations, fast food restaurants, and public areas. An unabashedly conservative media outlet, Fox News continually broadcasts a right wing agenda to its viewers.

They blame The Other; immigrants, ethnic minorities, LGBT Americans, and women, while saying people need to “take America back” They repeatedly bash the President, give platforms to lobbyists and corporate shills, and constantly work to undermine progress and support obstructionists. They do all of this while telling the viewer that they are the chosen people of God and America.

Then they tell you the most important part, everyone else is lying to you. Don’t touch that dial. Fox News creates fake “wars” on Christmas, Easter, Thanksgiving, and whatever will shock their audience. This paranoia is sown to distract their viewers from voting from the GOP’s real war on poor people.

With Red State Education kept slashed, distrust against science and critical thinking is sown and everyone is highly encouraged to go to church for more political divisiveness and false moral superiority. And Fox News backs all of this up. That’s how you get voters opposing their own health care, supporting corporations poisoning their water, or advocating cutting taxes for the wealthy.

This is a pure definition of the French word ressentiment. Yes, it sounds like the English “resentment” and is somewhat similar in definition. But it defines the phenomenon of an electorate voting against their own economic interests. “A generalized feeling of resentment and often hostility harbored by one individual or group against another, especially chronically and with no means of direct expression.” It’s textbook population control.

This also plays into how many conservatives get made fun of as ignorant hicks, as they are manipulated to be this way. They swallow whatever story is spoon-fed to them, no matter how ridiculous. Birther crap. Benghazi mistruths. Even that Obama is the Anti-Christ. They cannot and will not accept that what they are saying is not true. They will not compromise or reason in debates, no matter how crazy their argument.

That gets seen by everyone else, correctly, as a willingly obstinate ignorance and even pure insanity, absolutely frustrating anybody dealing with them. This leads to insults, both sides of the debate dig in their heels, nothing gets accomplished, and the conservative thinks they have “won.” Meanwhile the political divide widens even more.

“Divide and conquer,” remember? Clear thinking Americans realize that their President is not a Kenyan/Muslim/Fascist/Socialist/Communist/Tyrant/Weakling/King/Coward/Anti-Christ/Whatever. But if you inject enough irrational fear and/or loathing into your base, they won’t question you when you say someone else is to blame for their troubles.

And there you have the roots of the majority of America’s divisive issues and why poor people continue to vote against their interests. This problem is so deeply ingrained it will take generations to die out. And by then, we’ll have a whole new set of problems if we haven’t been defeated by the current ones. But you tell that to the kids today and they won’t believe you.