Long Term: Buy and Hold [Archive]

Wimpy

10-29-2005, 03:51 PM

Boots wrote:
Next, however, is the rebalancing factor (essentially buying low and selling high). That seems to me to be justanother form of market timing and not necessary unless there is some kind of system to gauge what the right time is to buy and sell.

You raise a very important point. Why should a person ride the bull all the way up and not attempt to take some profits off the table versus riding it back down to earth again? As you suggest, however, if time is on your side why take any unnecessary risk? I think the biggest mistake people make in the market is NOT determining the type of investor or trader they are? There are all different degrees in either categoryand you've pretty much determined you are an investor versus a trader, but eluded to the possibility you might become an aggressive investor, if there was a system to gauge when to buy or sell.

I'll throw out a non-original approach or system that allows you to take some profits without undue risk. There are some assumptions built into this approach. Those assumptions are:

1. You can tell the difference between a bull and bear market by looking at various charts.

2. You can draw a trend line using a straight edge.

3. You can determinea trend channel - (upper and lower limits of a trading channel).

4. You can, by looking a chart, determine upper and lower resistance points.

If you are convinced you are in a bull market you simply sell 1/3 of your growth index allocation into strength. (I'm talking individual funds here not the collective of C, F, S, and I.) You don't have to sell this 1/3 all at once. You cansell 11% at a time until you hit your target of 33%. Ideally, you would have begun selling in the upper third of the bull trend channel and completed sellingnear the top of the channel, in a perfect world. Being the type of investor you've indicated, I wouldn't roll these profits into another growth fund, but put them directly in the G Fund. Theprofits or dry powder from this reallocation sit in your G-Fund until the price of the fund you sold retraces to the bottom third of the channel and you begin buying back in with your dry powder.

The beauty of this system is you don't have to be exact in your timing. Matter of fact, inherent in this system isthe acknowledgement you can't be exact in your timing because the future can't be predicted. Your charts and your straight edge point to probabilities but not theexact timing. If your timing is off and you sell1/3 of your growth fund too soon because an unforseen'event' took place that caused the price of your fund to exit the bull channel in a powerup trend move, after you've sold, you still have 2/3 of your position to play with to take advantage of the 'unforseen' event. If, on the otherhand, it retraces to the bottom third of the channel, you can pick up additional shares with your dry powder. By doing so, you've effectivelyintroduced the power of compounding to your TSP portfolio. Compounding is something normally associated with the G-Fund (interest bearing funds), but by selling 1/3 of a particular growth fundinto strength and buying itback on weakness you cancompound your growth fund without undue risk, provided youhave a handle on the 4 assumptions listed above.

Yes,we could potentially make more money and accumulatemore shares ifwe traded in and out with 100 percent of our given growth allocation, but thatassumesone of two things...we can either afford the inherent risk or we can predict the future. I don't recommend that approach, butmaybethat is why they call me Wimpy.

Spaf

10-29-2005, 07:23 PM

The Technician wrote:
spaf...I just put the link in to view the plot......

Divergence suggest investment into quality over non quality investments.......

http://www.bullandbearwise.com/DJIASP500Chart.asp and click on the bearish reasons why on the upper right of plot.

:dude:

Tech,

I like that bullandbearwise site! :^ Stuff in a nut shell!

This chart I like! :)[da big pic]

http://www.bullandbearwise.com/SP500Chart.asp

This chart I don't like! :X

http://www.bullandbearwise.com/CLYChart.asp [We've gone off the chart!!!]

Rgds;) Spaf

Birchtree

10-30-2005, 12:12 PM

Wimpy,

One of the nice things about the TSP is that risk is really marginal. I play the 100% game with my power account because I like the leverage that can be applied - not of course in the real sense - but I have enough of an accumulation that I can make a difference in my potential gains. I can afford the inherent risk because there isn't that much risk - and the ability to dollar cost average helps to smooth over any mistakes I may make. There is only one way to build a power account and that is by saving over many years - I've arrived. You may wonder just exactly what is a power account? IMO anything over the $400,000 mark qualifies for the designation. That sum of money will allow any participant to have a position of over 30,000 to 40,000 shares of the fund of their choice. That's the type of leverage I'm talking about and I know there are many TSP participants out there that command that kind of power. Going forward it will be even easier for the newer generations to save with no caps placed in the way - and this is the site to help them learn what to do with the money when they finally arrive too. So Wimpy, get on board and let'er rip - it's time to have some fun.

Wimpy

10-30-2005, 03:00 PM

Birchtree,

I’m on board…just on a different train. The let’er rip part is not my style, but I do appreciate the entertainment value it has…at least as a spectator sport:)

I am actually quite bullish on the ‘I Fund’ mainly because I’m very bearish on the dollar. With Bernanke’s appointment as Fed Chairman, I’m even more so.

A bull and a bear are simply opposite sides of the same coin. There is a time to sow and a time to reap…a time to buy and a time to sell. For every buyer there is a seller and for every seller there is a buyer. The only unknown, before the transaction, is at what price the trade takes place. If we were all Bulls who would we buy from? If we were all Bears who would we sell to? It takes both Bulls and Bears to make a market. I’m not married to either critter.

Selling 1/3 of the ‘I Fund’ into strength and buying it back on weakness seems like a prudent and additional way to gain shares (accumulation) and still have 2/3 invested in a Fund that I believe is in a long term bull uptrend and therefore will appreciate handsomely.

I believe in the very near future (1-2 years) the dollar will slide far and fast. By NOT selling 100% of the ‘I Fund’ during normal price rises it leaves room to take advantage of an unforeseen ‘event’ that could take the dollar much further down and the ‘I Fund’ much further up.

I wouldn’t want to be sitting on a suitcase full of cash (destined to lose much of its value) while the ‘I Fund’ train is pulling away from the station in haste. Since these unforeseen ‘events’ tend to happen at the most inopportune times, I don’t advocate being out, on a 100% basis, of a fund that is fundamentally in a long-term up trend. I could see possibly letting go of an additional 15-20 per cent in a power uptrend move or an additional 50-55 percent in a stage 3 parabolic rise, but for normal trading conditions 1/3 would be my limit…especially with Bubble Ben Bernanke in charge of the printing presses.

The only time I would consider working myself out of the ‘I-Fund’, on a 100% basis, is when there is a fundamental monetary policy change, by the powers that be, to drastically rein in the triple deficits as happened when Paul Volker (sp?) was appointed Federal Reserve Chairman. Until that time, I would not want to be sitting on the sidelines with a suitcase full of cash and 100% sold out of the ‘I Fund’.

The accumulation (with new money and also via dry powder from previous selling into strength) of more shares that are and have a potential for appreciating is what I call a ‘power’ account. I’m more interested in calculating percentage gains versus dollar gains. My small accounts are just as important to me as my larger accounts and the measuring stick I find most useful is percentage gains. I’ve found that if I take care of the percentages, the dollars have a way of taking care of themselves.

My view of dollar cost averaging has changed over the years. The ESF and PPT actions of late (last decade) tend to smooth out much of the dips in the general equities thereby reducing much opportunity for gaining cheaper shares, as has happened in previous years. That also serves, at least perceptually, to eliminate some of the risk inherent, but only as long as the ESF and PPT are supporting it. Once that pillar of artificial support is removed things could slide pretty quickly and my preference would be to pick up those general equities more near the bottom versus buying all the way down…I’m cheap and wimpy:D

The biggest risk I see in the ‘I Fund’ is the lack diversification of the Asian consumer base away from the U.S. I think the Asian markets are feverishly working to diversify their consumer base, but still have a significant way to go in spite of their motivation and current zeal in doing so. They feel very vulnerable to a dollar devaluation because they are holding such large amounts. With anticipation of Bernanke’s helicopter air drops of cash to one and all…the Asians have broken out in a cold sweat.

This appointment of Bernanke will, as a natural result, realign the Asian community into a more cohesive unit and in my opinion could lead to a competing Asian currency somewhat like the Europeans accomplished with the Euro.

These are certainly interesting times and we all wish to not only preserve what we have, but to also prosper. This a great forum to learn from one another and I appreciate all those that share their point of view so freely.

Soldat

11-03-2005, 05:22 AM

Wimpy, you have certainly done your homework.
I also have little faith in holding the dollar\S for the long run. I think that the temporary boost of our war economy will be met with a great deal of economic recession; the longer we are sustained by dependance on the war economy, the greater the ensuing depression will be.

But then again, look to domestic matters. Hurricane Katrina has been estimated to cost more than the war in Iraq and Afghanistan combined. How will this effect the markets? No doubt this will create a great many jobs in the long run. I foresee yoyo investing in the dollar, and possibly a largescale market crash inside of a year or two.

I think the best bet is on bonds and G fund all the while grinding out a few % on S and I funds in the second half of the year. From my viewpoint, the I fund is less likely to see another landslide -20%, where is, the dollar just might. Let me know.

Wimpy

11-03-2005, 10:09 PM

I'm looking for the trend in interest ratesto be up for the next couple of years with a slight pause and/or arelatively short lived retracement in 2008 before topping out in the 2011-12 time frame. 25-30 per cent interest rates would not be out of the question. I would not want to bet against thistrend by being in the F-Fund during the trend up. However, once it becomes evident all the monetary excesses have been purgedand the deficits have been corraled...the F-Fund would be a good place to have amajority position with the rest in the G-Fund. But that will be a long ways off from where we are currently sitting.

The dollar is toast for the next few years so the G-Fund will be losing a considerableamount of purchasing power. For every penny gained in interest over the next couple of years,there will be a 15, 20, or 25penny loss in what those dollars will be able to purchase. The safe no risk G-Fund is an illusion during inflationary times.

Katrina ishaving a bigeconomic impact, but if you consider what the U.S. government expended in the 12 months just prior to Katrina...it wouldrepresent an economic impact of 36 Katrinas. We have muchbigger problems in our economy than the random hurricane. When they focus onthe impact of Katrina they are straining on a knat and swallowing a camel.

Wimpy

11-04-2005, 11:25 AM

A lot of people have a hard time understanding inflation and its effects. As government workers there is a bright side to inflation, at least from a consumerist point of view, because our dollar is worth more today than it will be tomorrow. We get our money, in the form of ETF transfers, hot off the printing presses. Before the ink is hardly dry, we are spending those still warm and wet dollars on products and services TODAY while those next in line to receive the fruit of our labor will enjoy a dollar that has shrunk a bit. As they in turn spend the dollar they earned from us the recipients downstream from them will receive even a smaller dollar as it relates to purchasing power, so on and so on.

Picture yourself standing on the curb waiting for the Ding Dong ice cream truck to arrive at your place in Phoenix in the middle of August. You've got ten really good friends waiting in line with you and the reason they are really good friends is because you've all agreed to share a popcicle together. You (the government employee) are at the head of the line and without a moments hesitation rip off the wrapper and go for a couple of quick licks before passing it to your friend the neighborhood banker. The neighborhood banker gets his two licks in before passing it to one of his favored clients who has a new car dealership. The car dealer gets his two licks in and quickly passes the popcicle to his friend who owns a local rental car company. The popcicle, in the meantime, has lost20to 30 percent of its mass as a victim of the high Phoenix temperatures. Everyone, so far, with the exception of the government worker, is still licking popcicle drippings off their fingers and knuckles while enjoying the show downstream. Well, it finally makes it to the poor schmuck at theend of the line and the heat has finally taken its toll...the last little bit of popcicle drops to the groundjust as the transfer is taking place and heis left holding awetstick (he's thinking shaft). That pretty much describes how inflation works. As a consumerist, you want to be at thehead of the line and not the poor schmuckbringing up the rear.

Inflation encouragesconsuming because consumers want to get itbefore it melts, so to speak, because they know tomorrow their purchasing power will be less than it is today...and they are fearful they too could wind up being shafted.In an inflationary environment, savers (in dollars or any currency that is being mismanaged) are punished.

That brings us to the dilemma of saving and planning for the future. Some of that popcicle has to be stored for a rainy day.A freezer works good for popcicles, but what works for the dollar?That is the dilemma many will be faced with in the nextdecade or soand quite frankly many are going tofeel likethe poor schmuck left holding the popcicle stick.

The_Technician

11-07-2005, 06:42 AM

Wimpy wrote:
I'm looking for the trend in interest ratesto be up for the next couple of years with a slight pause and/or arelatively short lived retracement in 2008 before topping out in the 2011-12 time frame. 25-30 per cent interest rates would not be out of the question. I would not want to bet against thistrend by being in the F-Fund during the trend up. However, once it becomes evident all the monetary excesses have been purgedand the deficits have been corraled...the F-Fund would be a good place to have amajority position with the rest in the G-Fund. But that will be a long ways off from where we are currently sitting.

Wimpy, I'm not buying your high interest rates....if we had Jimmy Carter in using flim flam economics I would buy in to it.....but with the current systems in place it would be flat out depressionary to any economy in the world..... I would look to some higher interest rates fluctuating some like we have today, but only to throttle the world economies for a steady growth....-control system theory....

Take a look at control systems and you too will see what is really happening.....

:dude:

Mike

11-10-2005, 01:19 AM

I don't see double digit interest rates anytime soon. The major inflationary pressure on our economy is coming from energy costs, which by definition are extremely volatile. Wage growth isn't all that tremendous, and core inflation is relatively tame. What this tells me is the Fed funds rate won't clear 6-7%.

Where to put your money? Diversify your holdings and catch a part of every wave. This will also reduce volatility. If you only have TSP, put part of your money in all five funds (I'm just gonna ignore the L here). If you have something in addition to TSP (Roth or regular brokerage account), try to invest in things that you can't get via TSP with your other accounts: emerging markets, commodities, REIT's, etc. I'm not doing that just yet, though - I want to wait for those markets to fall out of favor and drop before I invest in them.

Mike

11-10-2005, 04:01 AM

http://moneycentral.msn.com/content/Savinganddebt/Savemoney/P133222.asp

This is a link to an article on inflation - including the winners/losers and how the market behaved the last time around (to summarize, the market did pretty well, with big double-digit gains in six of the ten years).

A few interesting points:

Don't bother aggressively paying down fixed rate debt. Even when inflation isn't going nuts, you're still paying the bulk of this debt with devalued currency. A 2006 dollar could be worth 4% less than this year's. A 2016 dollar could be worth a lot less than that. Keep this in mind if you have a 30 year mortgage (like I'm about to have :D).

Don't bail on stocks or bonds just because of inflation. As I said earlier, the market beat inflation even during the worst inflationary period in 50 years. As a hedge, invest in commodities, which tend to keep up well with inflationary pressures (imagine that).

For the frugal consumers out there - be prepared to substitute. I've already done this many times, particularly with beef prices skyrocketing in recent times (switched to poultry - and now that bird flu is hitting globally, I'll have to switch to pork).

It's definitely worth a read.

cowboy

11-10-2005, 08:28 AM

Mike the consumer! You need to eat beef it's whats for dinner! Besides the cost of the others are just as high when u figure out that half of it is bone or fat! Besides u can't eat that dollar anyway and it is going down in value! LOL!! :DCowboy up city slicker and pay for 2 decades of biting the hand that feeds you! We need that low dollar to heal the working man and rural economies!

Mike

11-10-2005, 09:51 AM

As long as it doesn't give me food poisoning, I gotta say ten packs of chicken drumsticks for $10 is a steal. That works out to about $0.15 per drumstick! :D

Fat's good... greases the ol' digestive tract. :^

Wimpy

11-11-2005, 10:53 AM

Stagflation is a term in macroeconomics (http://en.wikipedia.org/wiki/Macroeconomics) used to describe a period of characteristic high inflation (http://en.wikipedia.org/wiki/Inflation) combined with economic stagnation, unemployment (http://en.wikipedia.org/wiki/Unemployment), or economic recession (http://en.wikipedia.org/wiki/Recession).

Stagflation is thought to occur when there is an adverse shock (http://en.wikipedia.org/wiki/Supply_shock) (a sudden increase, say in the price (http://en.wikipedia.org/wiki/Price) of oil (http://en.wikipedia.org/wiki/Oil)) in a country's aggregate supply curve. The effects of rising inflation and unemployment are especially hard to counteract for the central bank (http://en.wikipedia.org/wiki/Central_bank). The bank has one of two choices to make, each with negative outcomes. First, the bank can choose to pursue a loose money policy to stimulate the economy and create jobs by increasing the money supply (http://en.wikipedia.org/wiki/Money_supply) (by lowering interest rates) and exacerbate the inflation problem further. Or second, pursue a tight money policy (by increasing interest rates) to try and rein in inflation at the cost of perhaps increasing unemployment further.

http://en.wikipedia.org/wiki/Stagflation (http://en.wikipedia.org/wiki/Stagflation)

--------------

Stagflationwas seededduring the Nixon and Ford era and came into full bloom during Carter's term. I think we are heading there again. In my opinion this economy is rolling over. It will continue to tease and tempt the perma bulls as it continues to grind sideways. In an inflationary evironment, grinding sideways means your position is losing money. The DOW points remain relatively static while inflation erodes away atthe foundation of one’s portfolio.

Once the recession and/or depression becomes more apparent, even the perma bulls, en masse, will throw in the towel and capitulate but probably after the DOW hits 7500 or so and the S&P hits 850. The DOW will most likely find a final resting place around 3500 and the S&P around 400 and they both will remain there for quite some time. Stocks, in general, will be the most hated and despised investment vehicle of all time.

Since we are hearing more and more about stagflation these days, let’s go back and take a look at some interesting data during the time frame Nixon, Ford,and Carter were in office. The DOW was capped at 1000 from 1966-1983 http://www.stockcharts.com/charts/historical/djia1900.html. That was 17 years of sideways chop. Can you imagine listening to a perma bull saying this rocket is about to launch for 17 years only to listen to the fuse sizzle, crack, sputter, fizzle and refuse to stay lit, over and over and over again? Like broken clocks we ALL can be right twice a day, if we pick a spot to fixate on and remained glued to it forever. Eventually, the perma bulls were right in the same fashion a broken clock is right twice a day, but many of them missed wonderful opportunities during that time frame to make money in oil, gold, and silver. There is a price to be paid for being a perma bull in any market. Everything that goes up…gotta come down. That was also true in oil, gold, and silver. Gold peaked in early 1980 at around $850.00 an ounce and silver peaked at around $50.00 per ounce. By the way, I think interest rates peaked around 18% or more in 1981. Both gold and silvercame down pretty rapidly in price with a tease here and there (bear rally) that drew more suckers in at prices that still haven’t been recovered for over 25 years for those Johnny Come Latelys that bought gold at 500.00 and above. I think gold bottomed in 2001 at 255.00 or thereabouts and has almost doubled in price in the last 4 years during the stealth phase of the gold bull market. The stealth phase (Phase I) of any bull market is when the smart money is slowly and methodically accumulating so they are fully positioned to aggressively accumulate (Phase II), via trading, as fund managers pile in on the good news and out on the bad, over and over and over again. The smart money and the nimble fund managers finally sell their over bought positions to the not so nimble fund managers, along with Flo at Mel’s Diner, hair stylists, shoe shine boys, and dentists, during the final blowoff in phase III of the bull market.

The soft landing we used to hear about was all about creating opportunities for the smart money and nimble fund managers to unass their positions without getting gored. This has been accomplished quite nicely, thus far. The only speculators left in general equities, at these valuations and per Alan Greespan, are those that have a propensity for losing money. Flo at Mel’s Diner, hair stylists, shoe shine boys, and dentists have yet to be taken to THE woodshed, but their time is close at hand and it won’t be pretty. They’ve all been spanked and spanked pretty hard, but since they still haven’t figured out where we are in the business cycle and are still singing the perma bull, “In it For the Long Haul”, song, they are destined for the flogging of a lifetime. If they don’t plan on retiring until 2035, many of them may break even.

So, why will the DOW collapse to 3500 and the S&P to 400 if we are comparing ourselves to the Carter era of stagflation? Why won’t the DOW and S&P simply grind sideways in the 10,000-10,500 range for the next few years before making a run for 30,000?

Essentially, what was different about the 1970s from where we are at today?

In the 1970s this country had a manufacturing base and companies representing that base were not in bankruptcy. We also had a central bank that exercised a bit of restraint. In the 1970s the CPI wasn’t based on a phoney factoring whereby housing, food, and fuel were excluded because they offended a loose monetary policy. In the 1970s Social Security recipients and retirees, in general, were getting COLAs based on real CPI figures. Today, companies using wage scales based on these phoney CPI figures are short changing their workers. On the other side of the coin, real inflation is eroding the purchasing power of those artificially fabricated low wages. So, wage earners and retirees are taking a double hit from inflation and fraudulent CPI figures. REAL (factoring inflation and phoney CPI numbers) wages have been and will continue to go down.

In the 1970s the central bank didn’t lower interest rates to 50 year lows like they have just recently. Prior to Nixon closing the gold window in 1971, there was a natural governor on the printing presses that kept the central banks honest for fear of foreigners rushing the banks and cashing in their dollars for gold and rush the window they did. The very reason Nixon closed the gold window was because foreign central banks WERE trading their dollars for gold. Foreign central banks saw the handwriting on the wall and gold began a steady climb from $35.00 an ounce to $850.00 an ounce in less than a decade. After 1971, the dollar was only as “good as gold” if you believed it was and that belief was fading pretty rapidly. After 1971, the only governor the money supply was hitched to was manufacturing. Manufacturing has long since evaporated.

The only thing currently supporting the U.S. economy is DEBT. It is the only thing of significance the U.S. produces and exports. That is exactly what the difference is between then (1970s) and now. Not very diversified are we?

What kind of foundation is this pyramid of DEBT sitting on? What did a 1.25% federal funds rate spawn? It spawned business activity way out kelter with the reality of markets. It has caused a misallocation of resources on many fronts.

In 1999 we had massive off-budget infusions of liquidity for Y2K. In 2001 we had massive off-budget infusions of liquidity for 911. And since then, there are continued off-budget liquidity infusions for the war in Iraq and Afghanistan along with infusion of liquidity for those expensive ladies (Katrina and Rita) who stormed across center stage in the Gulf states.

Currently, we have the fraud of the fed raising rates on one hand while priming the pump with the other. That seemingly creates warm and fuzzies for the naïve hard money wannabes and wails of anguish from the easy money ‘gotta have it now’ crowd. Hey, guess what? It is still easy money when rates are being raised on one hand while massive infusions of liquidity are taking place on the other. The rate game is simply smoke and mirrors and the foreign central banks are sniffing a skunk in the cabbage patch. The foreign holders of our debt are no longer going to hold their nose and sign blank checks. They are easing very gently out of their dollar positions on every rise in the dollar.

What’s up with the so called recent dollar strength? Has anything fundamentally changed with the triple deficits to warrant this little turnaround. Not hardly. The dollar’s recent strength is based on the Euro’s weakness tied to the burning of Paris and other cities in France. Sooner or later the Euro will be recognized for the basket of junk it is and the dollar and the Euro will go down together. Care to guess what currencies will go up, relative to the U.S. dollar and Euro, when this happens? Resource rich countries. Why? Because China is resource poor but coming into their Industrial Age with a vengeance. Because of technology transfer from the West, the China industrial age will be compressed beyond our wildest imaginations driving commodity prices through the roof. Watch resource rich Canada and their currency over the next few years. Seeing is believing. China is buying up resource companies in Canada right now.

Speaking of Paris. Does anyone think that can’t happen here?

A disenfranchised immigrant population, from North Africa (former French colonies), not liking being ‘have nots’among the French ‘haves’ are burning the town down. I hear the turmoil is spreading outside of France. There has been a lot of immigration into the Eurozone from these third world countries and we, in the U.S., have our share of immigrants as well.

How long will disinfranchised immigrants in the U.S. remain happy and contented as they watch food, fuel, and housing costs go up and their REAL wages go down? The most passive and loveable animal will bare its fangs when backed into a corner. And Bush is worried about Avian Flu? How about immigrant flu instead? They will probably come out with a vaccine for that also…they could call it Immiflu.

All in all, everything looks just peachy. DOW 30,000…no problemo...sunshine and roses everywhere we look….a chicken in every pot…you got it. Free housing, free health care, free cars…and free money dropped from helicopters courtesy of Bubble Ben Bernanke. Why save when we can spend ourselves into prosperity? I’ll drink to that. Zippity, dooh daah… WHOOPS! One minor hiccup in the ole esophagus…the people (foreign central banks) signing our debt checks are starting to get a little irritated with us…imagine that :shock:

Birchtree

11-11-2005, 12:16 PM

Wimpy,

In a previous incarnation were you known as DMA? Because if you were you missed your golden praise party that would have been a wondeful event.

Any way - don't make me cry - I was raised in the investing world with all that history - my college of hard knocks you know. Now I realize the world won't end unless Hillary is elected - that would be a sad day.

As far as the disinfranchised immigrants are concerned if my property were subject to attack someone unfortunate little bastard would get shot. No questions asked. Fortunately most of the immigrants I have seen and dealt with come from Mexico and they have proven to be hard working and honest family people.

But it's good to come in contact with your view points - we all have opinions and I have enough courage of my convictions to put my money where my thoughts rest.

Dennis-#2 perma bull

Quips

11-11-2005, 12:59 PM

Mike wrote:
I don't see double digit interest rates anytime soon. The major inflationary pressure on our economy is coming from energy costs, which by definition are extremely volatile. Wage growth isn't all that tremendous, and core inflation is relatively tame. What this tells me is the Fed funds rate won't clear 6-7%.

I just talked with Flo at Elmer Fudd'sDiner; she happens to be my financial analyst.

Flo tells me that a Fed funds rate at 6-7% is enough to satisfy our nation's creditors without torpedoing their own economies. Interest rates at that level would definately slow down the accumulation of more debt. Hopefully from that time forward it would take cash -- and not debt -- to buy things.

Oil prices are decreasing now, and the financial markets have taken notice. Less money in thegas tank means more money in the retail stores; less money in the gas tanks also means lower trade deficits; and so it goes to a dollar that depreciates at a slower rate, i.e. the dollars that would have gone up in fumes and to the oil producers will now buy retail goods from overseas producers.

Hate to think of someone taking out a loan to fill up a gas tank ... and no, those who use credit cards for such things are the one's who pay them off within 30 days.

Flo too doesn't understand two different inflation rates: one that tells us inflation is about 2% a year and another that figures it at 4.7%. Flo thinks that there is a difference between inflation and a devalued currency.

The I-Bond now pays about 6.72% interest for the next 6 months, while theEE savings bondis something like 3.23%. Talk about a yield curve! Talk labout losing to inflation! So, yeah, I can easily see the Fed FOMC interest rates continuing to climb to 5% in the hope that long term interest rates will increase as well. The spread between the EE rate and the I Bond rate has to find some kind of middle ground.

If oil falls to $50 a barrel the Fed will be in a fix. If it continues to raise its overnight rate while the price of oil decreases, the yield rate will surely invert at some point, and Greenspan himself said that he doesn't think that is as important now as it used to be.

Anyhow, Flo watched some kind of Senate committee meeting on C span with the CEO's of five major oil corporations. Flo, while no fan of Big Oil, said why blame them for higher oil prices when consumers could pay less just buy owning a more fuel efficient means of transportation or using it less often?

Show-me

11-11-2005, 01:12 PM

Interesting little tid-bit. Not something I would run out and buy today. At least there are some advances going on.It's coolfor those of us with mechanical/maint. backgrounds. Car engine that runs on air pressure w/ 200km range. Price is right also. $7k to $12k

http://www.theaircar.com/

Quips

11-11-2005, 04:40 PM

The dollar may lose a little of its luster soon as the European Central Bank will increase its interest rate.

Will affect the I fund:

http://www.bloomberg.com/apps/news?pid=10000085&sid=aWrYhv_b4Eko&refer=europe

Quips

11-12-2005, 11:09 AM

I can appreciate the pessimistic point of view since one needs to be prepared for the worse, but hope for the best.

It is hard to say who is in the driver's seat now a days since many of our trading partners hold American debt in spades and so may exertconsiderable leverage from that advantage. But anything they may do to take advantage of that situation will affect their own peoples and economies as well.Trouble startswhen the advantages outweigh the disadvantages on either side.

It is safe to say with a standard of living near the highest in the world, America has had that advantage for a long time now. So what could reduce that standard?

As we have seen, high energy prices reduce it. But so far we have seen that deficit spending and trade deficits -- so far -- have had little effect because of the trickle down effect even such debt produces. Yet far from deflationary, such policies can lead to worthless money and hyperinflation. But I think excess foreign capital has something to do with it as well as its excess labor.

Talk about a conundrum!

It is like a bubble economy; it reminds me of the internet bubble of 2001-2002. All investors -- from insurance companies, to banks, to utilities, to corporations, and to individuals -- were burned badly by creating a capacity that far surpassed any demand. It was a mania that infected all but a small minority. It affected the Kudlows and the Abbey Joseph Cohensfar less that those on main street and those who were guided by their advice. A small minority of people were unaffected by it and were in cash during that time.

It would seem to me that much of the excess foreign capital and labor has been a result of American/western investments and -- especially -- its debt. A debt backed by the US government and its printing presses ... haha.

Well, the US government -- last time I heard -- was a government of the people, by the people and for the people. So the American people are ultimately responsible for its government's fiscal and economic deficits. There will be hell to pay to make good on thatoverseas capital and labordebt and you can bet it will fall on the shoulders of the little guy. Chances are the littler the guy, the greater the burden will be. And they will really pay for theGreat Societyall haveenjoyed via tax cuts and deferred payment plans/debt up until then.

And that is the best case scenario: a nation of survivors. It is hard to imagine the American lifestyle regressing tothat of the late 1930's-early 1940's. But instead of owning one's soul to the company store, it will be owning one's soul to those who hold the reigns ofcapital and labor. So it makes me wonder if the American people now have the character to endure such times and such an onerous burder without canabalizing each other or some patsy nation.

Yet what will it take to bring that on? Well, I would suppose the best case scenario would be when other central banks quit buying American debt.Interest rates would climb, climb, climb. The spending of the peopleand itsgovernment -- except in cash --would inevitably have to be reduced while debt repayment would have to be increased. Just look at the repudiation of labor contracts/pensions and benefits over the last 20 years! Those contracts, like the peace treaties in Europe during the 1930's and 1940's, were seen as little more than scraps of paper by some then as they are even now. The eligibility age for Social Security would go up, while its payments certainly would stay the same if not decrease. Medicare deductables would go up, co-pays would go up and would as its eligibility age.

The worse case scenario would bethecomplete rejection of the dollar by its overseas holders and their attempts to dump it. But they couldn't avoid hurting their own interests by dumping it en mass; if any major holder (or two or three) would try such a thing it would hurt the interests of others as well as our own, but to a lesser extent. It could be seen as cutting one's loses, cutting off one's nose to spite one's face, or being that first creditor to get something back from a bankrupt economy. The result ofsuch actionswould come in the form of inflation.

So to hope for the best, but to be prepared for the worst one would has to eschew debt. Yet, alas, what if the piper that holds our debt also demands higher taxes or user fees? Who is to say they won't? Who is to say what new taxes or user fees would be enacted? There would be no place to hide. It would be like the perfect storm. I can't see that happening, but hey, at the start of the Iraq war the military talked about bombing them back into the stone age. The same thing would happen in the worst case scenario, but American would be bankrupted into the stone age.

Again, I can't see that happening. But Floridians know what happens when Nature has its way during hurricane season and when its eye cuts a path through metropolitan areas. No electricity, no gasoline, no water. Again though, the perfect financial storm -- or war -- would also affect the dumpers of our currency. And while cutting off America -- their nose -- they would spite their own faces. It would look like Kudlow's or Cohen's or Kramer's financial portfolio in March of 2003 as opposed to the average "market savy" TSPer's porfolio during that same time.

Wimpy

11-12-2005, 06:01 PM

Quips wrote:
I can appreciate the pessimistic point of view since one needs to be prepared for the worse, but hope for the best.

Quips,

I agree. A differing point of view, whether perceived as pessimistic or optimistic, is no reason to ‘shoot the messenger’. I may see a turd floating in the punch bowl while others, with a different point of view, may see a bobbing Baby Ruth. That’s what makes markets.

Matter of fact, every trade is based upon a fundamental disagreement. One person sells a position he feels is no longer worth hanging onto, at the going price, while the one purchasing it believes it IS worth owning at that price. They have a fundamental disagreement. What is agreed upon is the price at which the trade is executed. Essentially, traders agree to disagree.

We simply need to evaluate the information to see if it has any practical application and act accordingly. Over time we can also evaluate the source (the messenger) of the information, as to credibility, and shortcut the information gathering process. By cutting through the ‘noise’ and getting to the heart of a matter more efficiently we create more opportunities for productive activity.

Cheers,

11-12-2005, 06:58 PM

Wimpy wrote:
Quips,

I agree. A differing point of view, whether perceived as pessimistic or optimistic, is no reason to ‘shoot the messenger’.

Cognitive dissonance makes one do stranger things than that

Wimpy

11-13-2005, 06:20 PM

Discontinuance of M3

On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).

http://www.federalreserve.gov/releases/h6/discm3.htm (http://www.federalreserve.gov/releases/h6/discm3.htm)

http://images.picsearch.com/is?256158385229

Is that Bubble Ben Bernanke (BBB)with his head in the sand or is this simply an image in BBBsmind (wishful thinking) ofthe Chinese finance minister?

Kinda of funny...the U.S.powers that becriticized China for a lack of transparency related totheir currencypeg and now we have theFed announcing their hide and go seek strategy with the M3.This is really starting to get fun to watch.:D

Quips

11-13-2005, 06:38 PM

Securitizing Reserves May Be Clever, And Risky: Andy Mukherjee
Nov. 14 (Bloomberg) -- Two economists at the International Monetary Fund have devised a plan for Asian nations that want to keep their foreign-currency reserves from further swelling while avoiding pressure to let their currencies rise too much.

According to Eswar Prasad and Raghuram Rajan, the conflicting goals can be reconciled. The trick, the researchers say, lies in securitizing of a part of the reserve assets.

Rather than paying for low-yielding U.S. Treasuries by issuing costly public debt, Asian central banks can more efficiently export excess capital by letting privately owned mutual funds pool local savings to buy foreign stocks and bonds.

The central bank would take local currency from these mutual funds in exchange for dollars. Investors wouldn't be able to withdraw their money, though they would be able to sell their shares to others on the stock market. Thus, domestic money supply wouldn't increase, and there would be no inflationary pressure.

Each quarter the government would auction licenses to fund managers who want to bid for the privilege of offering wealthy households a chance to internationalize their assets -- an opportunity normally not available to retail investors in Asian nations that have restrictions on capital account transactions.

The IMF researchers' proposal is an intermediate approach that they say could be used to prepare the ground for eventual capital-account convertibility with the authorities controlling the timing and quantity of outflows in the transition period.

Group of Eight

Rajan is the IMF's chief economist, and Prasad heads the Fund's financial studies division in Washington. Their recommendation, recently published in a policy discussion paper, doesn't constitute the lender's official policy.

It's nevertheless an idea that merits consideration.

Eight of the world's 10 biggest reserve holders are from Asia, with Japan ($823 billion) at the top and China ($769 billion) close behind.

This Group of Eight, which includes India, South Korea, Taiwan, Hong Kong, Singapore and Malaysia, has, in the past five years, more than doubled its combined official holdings of foreign securities, mostly Treasuries, to $2.5 trillion.

Reserves in each of these economies now stand between 20 percent and 108 percent of gross domestic product.

Three Theories

Theories abound as to why Asian nations have pursued such aggressive accumulation.

The ``Asian mercantilism'' argument says that by building reserves, central banks in the most-populous continent counter pressure on their undervalued currencies to appreciate, letting their exporters maintain a trading advantage.

According to the ``Revived Bretton Woods'' theory, cheap Asian currencies are the cornerstone of a mutually beneficial agreement between the U.S., which is the world's financial ``core'' and Asia, which is its ``periphery.''

The periphery is allowed to expand its exports by keeping its currencies undervalued, as long as it supplies capital to the core to pay for its spending excesses.

There also is the ``insurance'' argument, which says that the Asian financial crisis of 1997-98 so badly shook the region's confidence about its ability to sustain inflows that it decided to build a war chest, a ``do-it-yourself IMF,'' to prepare for a sudden flight of capital.

`Everything Except Armageddon'

Whatever the motivation, eventually ``reserves are enough to protect against everything except Armageddon,'' say Prasad and Rajan. ``With the precautionary value falling, and explicit financing costs rising, reserve accumulation creates a growing strain on government finances, in addition to creating a perception of exchange rate manipulation in some cases.''

The U.S. Treasury is under pressure from some members of Congress to label China a currency manipulator in the Department's semi-annual report to lawmakers.

Will Prasad and Rajan's approach find any takers in China, where anyone buying U.S. shares at the current rate of about 8.09 yuan to the dollar may have to take an exchange-rate loss when the fund is liquidated five years later? By the time the fund's dollar proceeds are converted back into the Chinese currency, the yuan is almost certain to have risen.

Although the authors don't answer the question directly, they do appear to think that their plan might work in China: ``Even taking exchange rate appreciation as a given, in countries where deposits in fragile state-owned banks constitute the only viable domestic financial asset, there could be considerable interest in alternative investment opportunities that include foreign bonds and equities.''

And that could be more risky than the plan not taking off.

What if It Did Work?

Consider the extreme situation in which China hands over the entire $250 billion or so that it adds to reserves every year to mutual funds to invest overseas.

The Chinese central bank wouldn't have to sell more bonds to ``sterilize'' its money supply. The currency risk on the central bank's balance sheet would get capped at the existing level. That would buy China more time to hold on to its undervalued yuan.

The dollar may slide and U.S. interest rates may rise on the news that People's Bank of China is fed up with buying Treasuries.

It's a highly improbable scenario because retail Chinese investors are unlikely to pour $20 billion of their savings every month in mutual funds that invest overseas.

Nevertheless, Prasad and Rajan might want to include a statutory warning before sending their plan to Chinese policy makers: ``Implement in moderation; excessive use can kill global economy.''

Mike

11-14-2005, 03:29 AM

There are at least three fundamental differences between the current economy and the one in the 1970s.

1) The federal tax rates were MUCH higher in the 1970s than they are today. Higher tax rates suppress economic growth, and I would argue that they served as one of the reasons for a stagnant economy.

2) Energy efficiency - our economy is significantly more efficient in this area now than it was then. A 50% rise in oil prices back then certainly would have sent us intoa recession or almost totally flat GDP growth. That hasn't happened yet, even though oil prices have climbed dramatically in the last two years.

3) Structure - in the past, the US economy focused much more heavily on manufacturing / industrial production. China and India are moving through their own versions of the industrial revolution, so I believe they will become the global leaders in this area. The American economy has moved beyond manufacturing and is now focused much more on high tech / R&D / pharmaceuticals / service-based industry.

In short, I do not see stagflation in our immediate future.

Show-me

11-14-2005, 06:39 AM

Hello Mike,

I see at least one difference between now and then........population and our appetite to consume natural resources. How would that factor in?

Pete1

11-14-2005, 08:31 AM

How Not to Ruin Your Lifeby Ben Stein
Finance Home (http://finance.yahoo.com/) > How Not to Ruin Your Life (http://finance.yahoo.com/columnist/archives/headline/yourlife/2005) > Cement, Steel, and Stocks

Cement, Steel, and Stocks
by Ben Stein (http://finance.yahoo.com/columnist/bio/yourlife)
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Printable View (http://finance.yahoo.com/columnist/article/yourlife/1464?p=1)
http://mtf.news.yahoo.com/mailto?url=http://finance.yahoo.com/columnist/article/yourlife/1464&title=Cement,%20Steel,%20and%20Stocks&prop=fi nance&locale=us] (http://us.rd.yahoo.com/finance/allnews/columns/email/*Email this Page[/b]
Friday, November 11, 2005

http://us.news2.yimg.com/us.yimg.com/p/fi/pr/55890.jpg (http://finance.yahoo.com/columnist/bio/yourlife)If you are an inveterate reader of financial publications as I am, occasionally certain recurring themes pop up that tell a tale. The one I have been noticing lately is about two oddly basic materials: Cement and steel.

Let's go back a few months or a year ago or even a few weeks ago. The story was that because of immense building in China and India, because of the stunning U.S. housing boom, because of the need to rebuild in the Louisiana-Mississippi region after Katrina, building supplies were going to be in very short supply. This was going to drive up costs and inflation and harm the recovery. There were stories about builders in the Southeast simply being unable to get steel for building or cement for laying foundations even before the hurricane.

Now, Chinese and Indian steel mills are cutting prices dramatically to sell their products. Cement is not exactly being given away, but shortage conditions have eased very considerably. China's output of cement is growing so rapidly that it is forecast to become a net cement exporter soon (if it isn't already). This will have a huge effect on cement availability everywhere.

Inflation or Economic Slowdown?

All of this goes to a set of fundamental questions and answers about the world economy.

If building commodity prices, or at least some of them, are falling and if the supply coming from China is beginning to exceed the demand from China, what effect will this have on world prices? And if oil is collapsing in price (at least in the short run) as consumers show far more ability to conserve than had been expected, what effect will this have on the domestic inflation rate? To put it another way, if major commodity prices are falling on world markets, does this portend an explosion of demand or a world slowdown?

One of the few advantages of being 60 years old, as I am, is that I have lived through many business cycles. If memory serves, collapsing steel prices are often a harbinger of a world slowdown. If memory serves -- and here I know I am right -- collapsing prices of gasoline at the pump are a hint that the next inflation headline numbers will not be cause for alarm -- at least not for alarm in an upwards direction.

Let's step back. We have rising hotel room prices, rising air fare prices (but not for long), and rising wages for energy workers. Balanced against that is gasoline that's about 80 cents a gallon cheaper at the pump than it was a few weeks ago, steel off 30 percent from its high in the spring, and plentiful cement -- at least more plentiful than it was. The weight certainly seems to be in favor of less drama about inflation and more concern about growth.

What It Means for Investors

Surely, this means that the incoming Federal Reserve chairman, the brilliant Dr. Benjamin Shalom Bernanke, will not need to raise interest rates any further. This, in turn, means less pressure on long-term bond prices and a possible lowering of long term rates, including mortgage rates (which might breathe more life into the housing market ... this bubble may not be dead yet by a long shot). And above all for us stock market investors, a lower interest rate (or a halt in steadily rising rates) means that earnings are worth more because they are discounted back to the present value at a lower rate. This may sound complex, but what it basically means is that a dollar of earnings in 2010 is worth a lot more if interest rates are low than if they are high. This variable is one of the absolute basics of the stock market's valuations.

If the main factor working to keep stock prices in check has been inflationary fears and the interest rate fears that go along with inflationary fears, those factors may soon be gone. Alas, there is always an "on the other hand" and in this case, the "other hand" may well be forecasting an economic slowdown and a slowdown in corporate profits. But the signs of that are still few. What we are seeing is solid economic growth, a rapid return to a non-inflationary environment, and an interest rate that is friendly to stock holders.

Of course, there will be fluctuations, and there could be terrorism or a natural disaster. And a housing debacle (which I do not expect) could wreck consumer confidence. But the tea leaves about inflation are distinctly encouraging. There will always be peaks and valleys, but today looks like an awfully good time for the long term investor in broad indexes to jump in. Stocks are still trading at reasonable price-earnings ratios and price-book ratios by the most recent 15-year standards and with the inflationary haze lifting, we could see a happy moment for the man or woman building for retirement.

Mike

11-14-2005, 08:32 AM

The aging population won't be an economic issue of consequence for at least ten years. Even then, it might be much ado about nothing - longer lifespans will force a number of people to continue working at least part-time, which will offset the problem of rising vacancies in the labor market. Furthermore, I'd imagine that prices of goods and services used predominantly by the elderly will move considerably higher as more people reach old age/retire. For people on fixed incomes (pensions / 401k disbursements), this means their nest eggs will be eaten away more quickly - which becomes a source of pressure to return to work at least on a limited basis.

Resource consumption is simply a demand issue - and as long as we have a raging appetite to consume, it'll be tough for the economy to go through long periods of stagnant growth. I guess that's a bit of a good news/bad news situation, given our debt status.

Overall, I'll say that we should manage to do okay - provided that the government doesn't get too cute with its fiscal and monetary policies. A return to a neutral (no surplus / deficit) budget would bea nice start. Stable interest rates would also be a good idea... a 6% fed funds rate should be sufficient to cap the speculative / reckless investment happening in the housing market to some degree, and it would also maintain our t-bill appeal to foreign investors seeking nice returns.

Wimpy

11-15-2005, 09:26 PM

P.S. Re: Discontinuance of M3…

As an interesting exercise I did a google search on ‘Discontinuance of M3’. It doesn’t appear this event is attracting much mainstream[/i] news attention. I would venture to say when this is implemented in March of 2006, there won’t be any coverage then either. In March they will have the excuse it’s old news, but today they have no excuse whatsoever. Any financial news reporter worth his salt would have been all over this fed release and exposed this chicanery for what it truly is, but then again, he who pays the piper calls the tune. I just looked at the first couple of pages of search results and came up with blogs and other alternative news sites. If anyone has a different result, please let me know.

And the mainstream press sometimes speculates about why they are losing marketshare or exposure to other up and coming alternative new sites. Hmmm. Oh well, maybe there will always be enough sheeple interest in ‘runaway bride’ stories and articles about ‘water skiing’ squirrels for them to keep afloat. If that doesn’t do it they can always expand sports coverage. Yeah, thatta do it :^.

Wimpy

11-17-2005, 09:19 AM

Here are some interesting 1970s facts and food for thought that may allow us to see into the future a bit and give us a chance to prepare and profit.

1. Federal tax rates in the 1970s[/b] were high mainly due to ‘tax bracket creep’ resulting from inflationary pressures that the tax tables didn’t provide off-set for.

Conclusion[/b]: History has a way of repeating and I think the ‘tax bracket creep’ is no accident but rather a design feature that will be used as a revenue enhancer in the face of declining sales tax revenues associated with the eventual recession.

After a few painful years of taxpayers picking up the tab for excess federal and state spending and after the deficit is reduced, some politician, right on cue, will raise the issue of ‘tax bracket creep’ and will become a hero to the ‘little people’. Faith will be restored in the politicians ability to take care of the ‘little people’ and voter turn out in political elections will be on the increase versus the current decline we have lately experienced.

2. Energy efficiency in the 1970s versus today. [/b]Vast improvements have certainly been made in the area of fuel efficiency, but what one needs to recognize is that most third world countries were still using bicycles and mopeds as the predominant form of transportation in the 1970s. Car pooling was an art form in some of these third world countries with up to 18 people sharing a Datsun pickup with the front wheels just barely remaining on the ground. With the current industrialization going on in China and India, these populations will be desiring and able to afford a greater share of the energy pie.

Crude oil refiner acquisition costs went from an average annual price of $3.46 to $14.27 a barrel in 1979. With today’s lofty prices it doesn’t sound too terrible, does it? Let’s translate it into percentage terms. That translates to about a 412 % increase in fuel prices. And yes, we had recession in the 1970s. Since we are only talking about the 1970s, I won’t go into detail regarding the more than doubling of the average annual price of oil between 1979 to 1981.

Conclusion[/b]: Energy prices will continue to rise. Yes, there will be short term pull backs in prices, at key times,…and possibly as a result of tapping the strategic reserves, but they will be short lived. As those reserves become depleted, oil prices will skyrocket as they did in the 1970s.

If we establish $25.00 a barrel as this decade’s bottom for oil, as a comparable base line to the 1970 price of $3.46, and tack on a 412 % increase, not even factoring Asian demand, we wind up with a price of $128.00 per barrel of oil. Asian demand could take prices much higher and that is the very reason China is aggressively courting oil rich countries and aggressively involved in oil exploration off Asian coastal waters in cooperation with Vietnam and the Philippines.

Japan has laid claim to this potential oil under the seabed and the U.S. has purportedly sent a nuclear warship to the area, but quite frankly the U.S. is stretched pretty thin right now, militarily speaking. Financially speaking, China is operating from a superior position of strength. If the U.S. gets too testy with them all they have to do is quit buying treasuries for a week and the message will come across loud and clear to back off.

3.Structure: [/b]Manufacturing is certainly going, going, and gone. There is no reason Tech, R&D, and Pharmaceuticals won’t move off-shore as well.

Conclusion[/b]: That leaves services and government. The service industry is the lowest paid. Probably the most thriving of the service industries will be medical and assisted living care for an aging baby boomer population whose penchant for fast food and fast living will catch up with them. I see immigrants filling many of these jobs as changing bed pans for minimum wage plus 50 cents probably won’t appeal to soft around the gills U.S. workers who will prefer to ‘have it their way’ at Burger King for minimum wage plus 25 cents. I’m exaggerating just a little on the low wages, but I think you get my drift.

The robotics industry will even allow surgeons to live and work off-shore to avoid malpractice lawsuits. Surgeries will be able to be performed remotely with a combination of robotics, joy sticks, buttons and video imaging. The technology is there and surgeons are getting tired of playing the litigation lotto. The medical malpractice litigation lotto entitlement will be going the way of the horse and buggy. Or…with the high price of fuel, the horse and buggy could become a hot item. I’ve started pricing horse and buggies already…you know…buy low…sell high. Seriously, if you live in a climate where weather is agreeable…buying a gas or electric moped might be a good fall back plan…especially after those huge SUVs are off the streets and in the salvage yards being recycled for scrap metal export to China. Yes, the salvage and scrap metal business might be another booming industry.

Then there is us…government workers. With declining tax revenues associated with a recession or depression, tax revenues won’t be able to support government payrolls. Heck, tax revenues don’t support government payroll now. Government employees will be asked to do more for less and pensions and benefits will be slashed as well. It began with FAA going to pay banding and is now spreading to DHS. Unions…phffffff…they will be in a back pedaling mode for quite some time, if not forever. Union dues will have to be reduced with the wage crunch or people will opt out after doing their own cost/benefit analysis.

------------------------------------

[/b]
Summary[/b]: Stagflation (high prices, high unemployment/underemployment, and lower wages) will most likely be with us for the next decade.

Entitlements will be slashed. Make your savings and investment decisions accordingly.

Mike

11-18-2005, 02:07 AM

1. You won't see federal rates approaching the level seen in the 1970s as long as Republicans are in power. Those rates are anti-growth and would only worsen a recession, which would further damage the amount received by the gov't. I think that voter pressure would rise on the spending side of things - it's difficult for the average Joe to figure out why the government needs 2 1/2 trillion dollars per year out of us just to break even.

2.$120 oil is irrelevant. Why, you ask? Such a price shock would lead to a number of things. On the supply side, you'd have more exploration, probable elimination of offshore drilling bans by states such as Florida, and a move by oil companies to secondary / tertiary recovery methods (which are currently cost prohibitive) to obtain more oil from "dry" wells. I would also venture a guess that whoever was in charge at that point would create some type of bipartisan/independent commission similar to the BRAC to assign locations in the country where new refineries are to be built to help address the problem of gas supply shortages (in my estimation, they should be doing this right now, but I digress). On the demand side of the equation, consumers would demand more hybrid / fuel efficient vehicles. The government would no longer need to set a mandatory efficiency standard, as the free market would take over. When prices spiked following Katrina, SUV sales plunged and hybrids were flying off the lots. That was with oil approaching $70. :shock: So, if people do the same amount of driving with fuel efficient cars, you cut overall gasoline consumption by a significant amount. Also keep in mind that we are the richest country in the world - if we have problems paying for gas / oil at $120 per barrel, how do you think China and India could deal with it? My underlying point here is that oil going to that price level is simply unsustainable. The resulting economic slowdown worldwide combined with longterm behavior shifts would put a rather quick end to it.

3. Tech, R&D, and pharmaceuticals all require a highly skilled workforce and top-of-the-line equipment. This quickly limits where you can locate such facilities. Would all these American scientists / researchers, etc be willing to relocate overseas along with the companies? Doubtful. Unless the workers can be completely replaced elsewhere at lower cost for the same results (or better), you won't see wholesale relocation, and instead, you will see a continuation of the multinational approach where some things are done in each area (i.e. producing computer chips in the silicon valley but having call centers in India or somewhere else). As for robotics, yes, that is the wave of the future, but the startup costs are huge. I'm very familiar with this on the medical side of things. Robotics were briefly discussed at this facility, but the costs were too high. Even for just a partial implementation of it, the cost was over $1 million, and that was in the lab alone. :shock: Costs need to drop in order to bring that type of revolution about. Also, the robotics need to be designed and built somewhere, and given our status as one of the world's leaders in technological development, I'd say at least some of that would be done here in the States.

You'll probably see my view as overly optimistic just as I see yours as overly negative. However, as long as American ingenuity reigns supreme and immigrants continue to wish to locate here, I see our future as a bright one... as long as the government doesn't try to micromanage to the point of absurdity (which is precisely what has happened in Europe and is why their economic numbers have been atrocious for years now).

Wimpy

11-18-2005, 09:45 AM

I think some of the difference in our economic outlook may be attributed to our age or the generation we grew up in. You were born in the late 70s and I was born in the early 50s. That doesn’t completely explain the differences in our outlook as there are many in my generation with an outlook similar to yours. Some children growing up within the same family unit take on more of their parental generational traits and/or quirks than their siblings, so there can sometimes be a bleeding over or overlap of values from one generation to another and the generational distinction less finite. In other cases, however, the generational distinctions are quite clear, especially when viewed from a macro perspective. There is very little distinction between my values and the values my parents had. We were very close. They lived through the depression and valued hard work and[/b] savings[/i]. That doesn’t necessarily mean later generations don’t have a work ethic and are spendthrifts, but it certainly, relatively speaking, colors our outlook somewhat and our savings and investment decisions. And I think the current negative savings rate generally supports that viewpoint.

Although, savings is very important to me, my outlook on what to save[/i] differs from many of those in my parent’s generation. In my parent’s generation the dollar was KING. My parent’s generation had not experienced the erosion of value of the currency during their formative years and was somewhat surprised when they took their early retirements thinking their $250,000 in CDs would carry them through their twilight years in Sun City. Most of them had to go back to work to make ends meet. Inflation kind of snuck up on them because they were not paying attention to monetary policy changes taking place. Since 1913, with the formation of the Federal Reserve, monetary changes have become increasingly intrusive on our pocketbooks and few are paying attention.

The FED doing away with the reporting of M3 is a perfect example. The mainstream press totally blew it off as insignificant, but international financiers and central banks took notice. Not only did they take notice, but they took action. Normally, short term fluctuations between gold and the dollar share an inverse relationship. When gold is up the dollar is down and vice versa. Recently, however, gold and the dollar have been going up together and we’ve also seen where the I-Fund hasn’t followed its traditional pattern in relation to the dollar. The recent run-up in gold is the international smart money community voting with their financial feet and saying with one loud voice, “If you are going to play games with your currency and keep those games hidden from public view, we will choose to place our confidence in something more tangible and they are buying gold. The dollar will turn back down and continue its descent with a vengeance. The hiding of the M3 is as comparable to Nixon closing the gold window in 1971 as to the effects it will have on gold/dollar relationship. The hiding of the M3 is a Weimar Republic style move that could very well lead to hyperinflation and the removal of the U.S. dollar as the world’s reserve currency. It may not even survive as a currency at all. You can’t have honest weights and measures by removing the numbers from the scale. Eliminating M3 removes our ability to view how fast the money supply is increasing. I would surmise that the FED is preparing to pump massive amounts of liquidity into the system and they don’t want their actions to be scrutinized. Typically, as in most government actions, the outcome will be what they least desire.

There is only one thing backing the U.S. dollar and that is confidence. The U.S. dollar is a con-fidence game. With the removal of M3, a bit of that con-fidence was lost. How much con-fidence was lost? Watch gold…it IS telling the story.

Much like face lifts and boob jobs are a desperate and vain attempt to defy reality and gravitational forces, discontinuance of M3 reporting is a desperate and vain attempt to dishonestly remove natural gravitational forces from the financial equation.

If you think it works, go to Aspen and watch those old hags get off their leased jets in their fur coats with their hair pulled back in a bun so tight they can’t even blink their eyes. It will provide hours of amusement and entertainment.

On the other hand, if the lights were turned down a bit and after a few drinks…hey, who knows? That is what the FED is counting on with their manipulations. They are hoping if the lights are turned down a bit…that old hag they are trying to pimp will produce some revenue especially if they can get their financial news media buddies to serve the Johns some intoxicating news that will dull their wits a bit.

It doesn’t take much to impress John and JoeSixPack…the glitter, glamour, and speculative heat of scoring big time with this doll-ar is just too much for the average John and Joe to resist and their wallets sitting on the night stand will get emptied as they drift off in the ‘afterglow’ of a ‘gotta have it now’ evening of good times. The awakening will be a rude one, however, as they look over and see the sun shining through the window illuminating the doll-ar they are sharing more than space with. The sick and repugnant nature of the heated affair will conjure up images of a raccoon using his teeth to dismember himself to be free from the jaws of a steel trap. The Johns will vainly attempt to flee from clutches of this doll-ar, but the true hag underneath the face lift and boob job will force herself on this John with all the ferocity and tenaciousness of a woman about to be jilted. Poor John and Joe might as well put on their victim faces right now…they haven’t a chance.

The old farts who got left sitting at the bar while the young bucks walked out with their fur wrapped trophy doll-ars, are quietly smiling to themselves as they get up and head on home with their money safely tucked away for a rainy day.

But while that may generally be true, sad to say, there are still old farts out there who don’t know they are old farts and pretend to be young bucks…you know the 50-60 year old guywearingthe gold chains and medallions around their necks doing the comb over and driving Vettes who ought to be mature enough see through the folly of face lifts, boob jobs, and fur coats, but for some reason can’t pull themselves out of the quicksand of denial.They gotta alotta horsepower, but no traction.

The young bucks have one up on the foolish old fart doing the comb over and driving the Vette. They (the young bucks) have time on their side and can recoup. The foolish old fart is toast.

Soldat

11-18-2005, 09:55 AM

Some of you guys should write books!

Anyways, buy and hold is my game until Dec24-26, then its over to G for a couple months, then ease back into the game.

Birchtree

11-18-2005, 12:41 PM

Wimpy,

What do you think: If the Dow, OEX, and the SPX are the only indexes that rally importantly from here and the MID and SML do not, would this suggest that a termination price top of the entire advance from the 10/02 bottoms would be the preferred interpretation?

Now, for someone born in the early 50s, the expectation gained of experience should demonstrate a greater appreciation of a well tuned deisel motor or a V8 with electroglide. Even a dated Mercedes can still give you an exhilarating ride. It's not always the packaging that is important but the degree of fine tuning that allows the performance that one anticipates. Some who have gained fine tuning knowledge realize that the appropriate fuel must be used or the motor will keep on dieseling and sometimes that is exactly the point.

After reading your post it dawned on me that it was autobiographical - a sketch in memory - then I realized you are toast and it was just flatulence from all that Kombucha tea. But it was a good read. Your buddy Birchtree.

Soldat

11-18-2005, 05:58 PM

Birchtree, dont be angry that Wimpy denies your materialistic and consumerist society that plagues humanity. And jeez, you didn't even offer a valid argument to Wimpy's "auto-biographical" "sketch in memory". Next time try harder to defend the new "union" of religion and state, commonly known as materialism, that you hold so close and dear. Just remember, a man is judged by his deeds<read:a notable achievement> and not his "deeds"<read:a legal document signed and sealed and delivered to effect a transfer of property and to show the legal right to possess it>.

Birchtree

11-18-2005, 07:56 PM

Soldat,

Good buddy, thanks for stepping up it only proves my original point - you are the father - I'm not wrong, I'm not wrong. I retract my humble apology and you are toast.

Birchtree is never angered - only humored. But it is now evident that both you and Wimpy (and I'll wait on the next aliase to surface) are both absolutely clueless and without temerity when it comes to servicing the intricacies of an electroglide V8. Most V8 models especially of the classic mode require a minimum warm up time of at least 20 minutes before peak performance is achieved. Then it becomes delightful cruising - kinda like on low RPMs with reduced energy expenditure. Any woman over 45 years of age can offer finer details.

A technician recently said regarding M3 and I quote, "...that every bear out there that hasn't been right all during this advance is now crying to high heaven that "now the the Fed is hiding this M3 information from the sheeple" or some such non sense"

You should know that the S&P 400 Mid Cap Index has placed a new all time high.

Quips

11-18-2005, 08:13 PM

Wimpy:

My long term outlook could be similar to much of what you have written about, BUT you haven't addressed the article I posted about Securitizing Reserves May Be Clever, and Risky.

The article -- from what I can make of it -- states thatthat would be a very good strategy to keep things more or less in line with the staus quo as far as world trade and the dollar's value is concerned. It may even hold off the economic apocalypse you allude to for the system as a whole.

Short term I believe there are positive returns to be made for the next few months; after which time I will renew my subscription to Brinker's market timing newsletter for his viewpoint. He doesn't micro-manage market timing moves, but he was VERY correct in Jan. 2000 and April 2003. But I know too that past results do not guarentee future returns.

If securitization of US reserves is a sham, then, yeah, I'd have to side with your outlook.

Mike

11-18-2005, 10:17 PM

First off, the gold market has been bullish for quite some time - it would be very difficult to prove causation here with regard to the fed's policy on notreleasing M3 data going forward.

Secondly, even if the fed no longer releases that data, there are still numerous types of data that investors can analyze to figure out what's going on in this economy. If the fed decides to print a bunch of money, the consequences should show up quickly. A spike in the overall price level would be the first obvious one.

Birchtree

11-19-2005, 04:25 PM

Medusa - here is the set up - come get some if you are inclined.

The S&P is replacing AT&T with Amazon in the 500-stock index.

In 2006 I think the emphasis will be on growth rather than value. One reason is scarcity. After a remarkable 14-quarter string of double-digit earnings gains, increases could be harder to come by next year. Consider that the valuation gap between growth stocks and value stocks has narrowed considerably - for example the difference between the P/E ratios of the S&P Barra growth index and value index was 3.7 points at the end of the third quarter of this year, down from 18.7 points at year-end 2000. That gives growth stocks some head room to advance. Remember that four years ago the small/mid caps were roughly 20% under-priced relative to large caps. Now they are better than 10% over-priced. Moreover, in a rising interest rate environment, large-caps tend to do better.

It will be important to note going forward whether the current break outs :S&P, DTA, NDX composite, are confirmed by new highs on the DJU and NYSE cumulative daily advance/decline indexes as well as by volume. If these measures fail to exceed their recent peaks, such negative divergences would suggest that the market is in a mature stage of its post 2002 cyclical bull market and is vulnerable to a cyclical decline in 2006 - separate from the approaching 4 year cycle low. No one wants to be left alone on the top before it implodes. I think the forward guidance from GE will help with the light at the end of the tunnel.

I notice some participants are basking in the sun from success at trading - my accolades to you all - can you feel my pain. If we are entering a wave 3 price expansion the opportunities will be shallow and probably minimal - good luck. The trader wants to cash out at the top, grabbing profits and shirts on everything and sitting back with a clean slate; the investor understands the value of patience, knowing the truly big money is made in the long cycles.

Dennis

Quips

11-20-2005, 11:31 AM

Just a thought on the big picture.

Bernanke mentioned that the extraordinarily high savings rate by foreigners has a lot to do with the sustainability of American fiscal and trade deficits; because of that foreign central banks continue to hold huge reserves of American debt ... and they increasingly carry more and more or it. So this nation is more and more (literally) in debt to them.

And the more anyone is in debt to anyone else the less control one has of their own finances, i.e. the less freedom one has.

While that is a little scarey, we need to see why other peoples' choose to save at extraordinarily high levels.

Could be that the majority of the people in developing countries are truely on their own. The family unit is still THE MAJOR social welfare agency they have. They have nothing else: no social security system, no medicare, no 401k, no pension system, no medicaid, no student loan agencies, etc etc.

So they will typically save 20-30% of their income; it is disheartening to know that their savings is being used to bankroll the Great Society. We all know what working conditions must be like there as well: probably abysmal.

And so long as things remain the same there, things will just as be continue suave bolla here.

The only thing that can upset that status quo as I see it is some kind of unintended calamity that threatens the relative lifestyle of all people ... like some kind of jump in the value of a natural resource like oil or some kind of war.

Other things happen more gradually: like lifestyle changes that encourage greater consumption/less saving by those in developing countries; like social welfare programs that make families in developing countries much less dependent on their family unit. Those things don't happen overnight.

Meanwhile, barring any kind of sudden shift in the demand for natural resources or a war, I can't see any big changes for the worst. The securitization of the dollar seems interesting as a means to even sustain a greater standard of living both here and abroad.

But if there is a sudden shift in the demand for resources--with either less of a supply (war) or a greater demand -- will not that be satisfied by less savings by all those who are affected by it? Damn right there will be less savings. And more of what would have been saved will go up in -- let's say -- fumes. And there will definately be a crunch: $3, $5, $7 a gallon gasoline. And that will crunch everyone world wide.

So knowing all this, it would be in America's interest -- really -- to give token assistance to those developing nations that need it when natural disasters strike. It is like our assistancebecomes a substitute for the social welfare programs they haven't developed. I suppose that is what charitable giving helps to achieve too, but let's be frank about that -- not anAmerican gives until it hurts in that regard.

Mike

11-21-2005, 12:28 AM

Foreign aid to developing countries is a joke because most of it ends up in the hands of the corrupt dictatorships and never reaches its intended recipients.

Higher gas prices would not impact all countries in the same fashion. European nations impose extremely high taxes on gasoline, so the cost per gallon there is considerably higher than in the US. $3 per gallon would be cheap to them.

As for foreign countries buying up our debt, they benefit from that just as much as we do. They get a fixed (and decent) return on our t-bills, while we get to continue borrowing money rather than cutting spending/raising taxes. This allows the US to continue its role as the world's leading consumer. Considering how strong our appetite is for foreign goods, do you think foreign countries really want to do anything to change this? If they don't buy our debt, real interest rates will climb until someone does. That puts a pinch on anyone wanting to borrow money - which is bad for our economy and the global one as well.

Other countries are just as powerless in all of this as we are. We want to borrow instead of tax/gut our programs, and they want US consumers to have the money to continue buying their goods.

Quips

11-21-2005, 10:11 AM

I would suppose some would differ with your assessment Mike, i.e. whether the overseas person is being penalized for saving or if that lifestyle is an immediatebenefit to them.

Chances are most there have differing interpretations of immediate gratification.

Of course here the savings rate is ZERO.

The price for gasoline in Europe is much more expensive than it is here due to taxes, but as the price of oil fluctuates, so do the prices there as they do here, e.g whereas where we may pay $2.25 and it may increase to $3.00, there they may have once paid $6.25 and it will increase to $7.

Wimpy

11-21-2005, 07:53 PM

”If securitization of US reserves is a sham, then, yeah, I'd have to side with your outlook.” –Quips

Comment: I wouldn’t know whether it was a sham or not, but if I was a Chinese investor or any investor, for that matter, there would be a limit to the amount I would invest in ‘funds’ where I couldn’t completely liquidate my position. I think this plan is wishful thinking on the part of someone who really wouldn’t buy into himself, but he is simply hoping others will. -- Wimpy

-----------------

“First off, the gold market has been bullish for quite some time - it would be very difficult to prove causation here with regard to the fed's policy on notreleasing M3 data going forward.” -- Mike

Comment: You are correct, the gold market has been bullish for quite some time, but the point I was making was the relationship between the dollar and gold has changed recently. Gold, in times past, has gone up when the dollar has gone down, but recently gold and the dollar having been moving up together somewhat. When the dollar turns south, however, gold will go north with a vengeance. -- Wimpy

------

”Secondly, even if the fed no longer releases that data, there are still numerous types of data that investors can analyze to figure out what's going on in this economy. If the fed decides to print a bunch of money, the consequences should show up quickly. A spike in the overall price level would be the first obvious one.” ---Mike

Comment: The consequences of a mismanaged currency show up quicker with more transparency. Remove the transparency and some will see the difference quicker than others and profit from the hanky panky. I plan on being one of those that profit from the shenanigans. In other words, I will be at the front of several popcicle licking lines simultaneously versus my schmuck buddy with the comb over. He will be left sitting in his Vette with a dry stick thinking about the good old days. --Wimpy

-----------------

“While that is a little scarey, we need to see why other peoples' choose to save at extraordinarily high levels.

Could be that the majority of the people in developing countries are truely on their own. The family unit is still THE MAJOR social welfare agency they have. They have nothing else: no social security system, no medicare, no 401k, no pension system, no medicaid, no student loan agencies, etc etc.”
-– Quips

Comment: And this is coming to a country near and dear to both of us with the curtailment of entitlements. The key question to ask at this point is what will the Asians do about it? Will they be able to diversify away from the U.S. consumer quick enough? They are already starting to because they feel more than a tad uncomfortable with this ‘global interdependency’ thingee because they’ve just figured out that interdependency is a double edged sword. In good times every thing is great x2…if times are bad, however, every thing is bad x2. Wouldn’t it be nice if we could have our cake and eat it too? Some think so…but I prefer reality. --

Wimpy

Mike

11-21-2005, 10:31 PM

The national savings rate is not zero. I've said it before and will say it again - it's a bad formula they are using. Housing assets held in this country = trillions of dollars. When looking for savings, look there.

These savings would show up in the stock / bond market if our tax policy wasn't so ridiculously skewed in favor of home ownership. I saw a suggestion in a column the other day saying we should replace the deduction with a tax credit based on the interest paid instead - that means if you pay $5000 in interest, you'd see the same tax benefit regardless of your income level. I agree with that approach - if you're paying the same interest (which is the justification for the tax benefit), then you should receive the same benefit.

The Chinese will have a hard time moving away from American trade - that's worth many billions of dollars annually to them.

Wimpy

11-22-2005, 12:04 AM

Mike wrote:
The national savings rate is not zero. I've said it before and will say it again - it's a bad formula they are using. Housing assets held in this country = trillions of dollars. When looking for savings, look there.

Mike,

De-nial ain't just some river in Egypt.

What you said above about real estate/housing would've been true 35 years ago, but with all the home equity loans people havetaken outto purchase depreciating assets like cars, boats, cruises, and the like...that ain't savings. That is consumerism, pure and simple. And to top it off, with the high rate of ARM loans...this consumerism or savings, as you call it, is a few interest points away from evaporating into thin air. People are borrowing against their homes for 'routine' budgetary items. That ain't savings by any stretch of the imagination.

Spaf

11-22-2005, 12:26 AM

Wimpy,

There is a fair warning in your post. Some folks ain't planning for their retirement!
IMHO....>OPM should work with Departments to better educate all government guys and gals on a retirement strategy, and not leave it up to harem-skarem.

At first I was kind of skeptical about the TSP Lifecycle funds. However, If one choses not to manage their funds, its the next best alternative.

The government folks have a lot going for them, but they need to be educated and start developing a plan for their retirement. And not wait till it's too late!

OPM should advise employees when they start working for the government, then periodically. Waiting till they want to retire is wrong!

Maybe, some Departments do it differently, great, but all departments should be in step on the retirement matter!

My 2 cents! Rgds, and be careful! :) Spaf

Mike

11-22-2005, 02:59 AM

Wimpy wrote:
Mike,

De-nial ain't just some river in Egypt.

What you said above about real estate/housing would've been true 35 years ago, but with all the home equity loans people havetaken outto purchase depreciating assets like cars, boats, cruises, and the like...that ain't savings. That is consumerism, pure and simple. And to top it off, with the high rate of ARM loans...this consumerism or savings, as you call it, is a few interest points away from evaporating into thin air. People are borrowing against their homes for 'routine' budgetary items. That ain't savings by any stretch of the imagination.

I have not been able to find any national statistics that track just what percentage of home owners have taken out HELOCs. Do you have access to any such data? If so, I'd like to see it. The second issue here is that it is simply impossible to track where all this money is going. Yes, frivolity is a problem, but I wouldguess there are many other purposes involved here.Having a low interest option to obtain the cash to do some costly remodeling is one thatimmediately comes to mind, and this is hardly frivolous - and if done correctly, will substantially increase the value of one's property. I know of a few people who have done this to replace kitchen cabinetry / flooring, etc. - all of which can cost thousands of dollars.

Quips

11-22-2005, 06:55 AM

Usually the equity one has in a house is NOT counted as "savings" by most financial planners.

One only needs to go back two generations in America to discover that the average working stiff who had the family unit as the major social wefare agency was not satisfied just by being afforded a back breaking joband the fruit of such labor being exclusively poured into the plant in which he worked in and in thepockets of those who owneditscapital. LOL Mike.

The same thing in principle is going on today, but on a different scale. Time will tell how long that will continue, but as I said before, such things generally happen gradually and hopefullly over decades; and it is a good thing when it does happen that way rather than abruptly.

I just read a Vanguard newsletter (August 2005) that stated that debt should not exceed 25-35% of one's gross income(!). It also mentions that visiting family and friends and volunteer work -- and not taking lavish vacations -- will help to keep one's retirement comfortable throughout its many years ... if not decades as well.

Now, does the average American anticipate a healthy retirement until its conclusion? How many anticipate it many not be as carefree healthwise at 70 asthey areat 40 or 50? And what will that cost be?

44 million Americanshave no health insurance.How much will Rx drugs cut into disposible/discretionary income as well as other major health care costs?

Like I said before, I have to respect the pessimistic outlook, but I hope for the best. It would be prudent not not only respect such pessimism, but to err on the side onconservatism.

Wimpy

11-22-2005, 10:25 PM

Quips wrote:

44 million Americanshave no health insurance.How much will Rx drugs cut into disposible/discretionary income as well as other major health care costs?

I talked to a guy today whose wife is a retired elementary schoolteacher. Her health insurance (family plan)premiums are $1,000.00 a month with a $2,000.00 yearly deductible. Gulp!

Mike

11-23-2005, 04:40 AM

Rather than just superficially talk about the uninsured numbers, I have chosen to dig deeper. You can thank me later for being bored. :P

http://www.kff.org/uninsured/upload/Health-Insurance-Coverage-in-America-2002-Data-Update.pdf

Highlights:
43.3 million have no health insurance
21% are under the age of 19
40% are age 19-34
8% are 55-64 years old
31% are age 35-54

Thoughts: The likelihood of carrying insurance is directly linked to income (obviously). However, those under the age of 34 showed a substantially higher likelihood of being uninsured even at higher income levels. What this tells me is that people in this age demographic (of which I'm a part) aren't particularly interested in carrying health insurance (probably thinking they don't / won't need it for many years). Also note that Minnesota is one of the states with the lowest uninsured rates in the country. :^

Lastly - ifyou don't count your home equity as a type of savings, what exactly do financial planners call it then? If you ignore it completely, I think you're doing yourself a disservice. It may not be the most liquid of assets, but it's still an asset that can certainly work to your advantage (as Pyriel most certainly knows). If you retire and decide to sell your relatively high cost housing in order to move toa place that's cheaper (something I will most certainly do in 30 years or so), then I'd say your home equity will definitely count in the savings column. In a roundabout way,I think I have concluded that equity should be counted as deferred savings - it's there, but you don't benefit from it until you sell the property.

rokid

11-23-2005, 06:28 AM

Mike,

Interesting info.

I was surprised that of the16 states with the lowest uninsured rates, 9 were in the Midwestand 5 were in the Northeast - all clumped together geographically in their respective regions.Not surprisingly, the West and the South, with a couple of exceptions, hadhigh rates of uninsured.Unfortunately, two of the most populous and, supposedly, liberal states, New York and California, also had high rates of uninsured.

I'm assuming Michigan's low rate of uninsured is due to the unions - particularly the United Auto Workers. However, what's the story with the other Midwest states? Unions, socially conscious business, good government, high rates of government employees,other?

Quips

11-23-2005, 06:58 AM

Most financial planners do NOT count the equity in one's principle residence as savings. Um, I look at it this way: how many people that you know of are willing to draw on that equity and invest the proceeds in the stock market?

There is a line between speculating and investing; and maybe the difference is a matter of one's expertise and temperment. However, Bob Brinker is one who differenciates between "house" money and money for savings/investment.

Is it prudent to take out 50% of one's home equity and put it in the stock market?

How about even 10%?

LOL However,it is hardly conservativeto leverageone's principle residence for any other investment -- maybe other than for its own improvement -- much less for frivilous purposes. Butsomecan see others pushing the envelope with the interpretation of that as well.

cowboy

11-23-2005, 09:33 AM

Mike wrote

I think I have concluded that equity should be counted as deferred savings - it's there, but you don't benefit from it until you sell the property.

Cowboy says, "Biggest mistake everyone makes!! " I seen more people go broke thinking this than you can imagine. It is paper and that is all it is.

On the insurance thing. Too many big shots want the little man to carry insurance. truth o the matter is; The little man only has so much money and insurance is just a drag on liveable income, so most of us hillbillies just take this approach, either we buy insurance and be broke or we don't and live our lives to the fullest while we can and let the health care system be damned. Government is supporting the health and insurancesystem too much and needs to cut costs and let the system start to function on their own in my opinion.

Mike

11-23-2005, 10:19 AM

Borrowing against your equity to reinvest is a complicated issue. You'd have to assess the following:

What is your interest rate?
What is your best/worst case scenario for market return?
How long will you have this money in the market?
How has your home value changed over the past 10 years or so?
How much would it change if you simply pumped the money back into the home via remodeling/upgrading?

If I owned a house last year and had a lot of equity, I probably would've borrowed against some of that and moved itinto the market. Given the interest rate cycle and how the housing market responds to it combined with the very low interest rates last year, it would've made a lot of sense to do this. A 10% return (achievable with a well-diversified account) funded by a ~5.5% loan is certainly worth a look, particularly with evidence starting to mount that the housing market was starting to plateau.

It all comes back to one's risk tolerance, though. Doing something like that certainly isn't for everyone.

Rokid - MN is a relatively high income state, and yes, the government generally funds its priorities in a rather healthy fashion. There's also that "upper midwest value system" I guess.

cowboy

11-23-2005, 11:04 AM

Always pay off your mortgage on your house if at all possible prior to investing in anything else. Having equity in your home is the best thing u can do for yourself period! The falsehood of theAmerican public is the idea that interest is a tax deduction which is what all capitalists will sell you. You canonly save so much in taxes if youare spendingon interest. It is way better to pay off the loans and pay that extra tax then to use it at a highrisk.I am not saying it is not beneficial in certain situations, such as being put into a higher tax bracket.

Investment people that are selling you something will tell you, you will need so much money more when u retire but if you have your big ticket items paid for entering retirement this is not so.When it comes to sellingyour home there is no income tax on it so build your equity there.

If you talk to a bank for money when interest was low very few of them would give you a fixed rate they know the law average lays with them. If they did they want 2% more than the going rate to do so. Plus there the possiblility anyone can lose there job and or have health problems. Stocks go down just as easy as up remember that!

Mike

11-23-2005, 11:44 AM

Every situation is different.

If I'm healthy and have at least 30 years to retirement, I can shoulder the risk. I wouldn't recommend any of this to my parents, for example.

Most businesses are started with borrowed money. Gotta stomach some risk to make the real bucks. Same can be said for people borrowing to the hilt just to get through college (I had to do that).

I'm sure a few would call me nuts to willingly walk into a $40,000 hole just to get a bachelor's degree, but who's laughing now? That debt is about 2/3 wiped out now, and I'm well on my way... :^

Yes, ladies, I'm financially solvent. :l

grandma

11-23-2005, 11:53 AM

cowboy wrote:
If you talk to a bank for money when interest was low very few of them would give you a fixed rate they know the law average lays with them. If they did they want 2% more than the going rate to do so. I talked to the mortgage co, banks recently about a home improvement loan based on my equity.(80% of mortgage is paid off.) The banks wanted it to be `on signature' with 8-10% interest, the mortgager wanted it to be 2nd mortgage or else re-finance at a higher interest than paying now, and `probably no propertyre-assesssment.' The insurance/tsa co will do it for 5.5% over 5 years max. When I figure out amt needed, I will undoubtedly go with the tsa fund.

cowboy

11-23-2005, 12:08 PM

If you did not have 80% equity in your property than u would not be able to do what u are doing as they would not loan you the money. Just ask them.If I was close to retirement I would not do this as I would still want my home paid off! The idea that you have 80% equity now and still have it in 5 years is too short term. There will always be clauses in a contract that is what keeps lawyers happy.

Wimpy

11-23-2005, 01:02 PM

Why should home equity NOT be counted as savings?

1. There are always exceptions, but by and large most people are tapping their home equity lines of credit for ‘consumption’ and are upside down in their mortgages. Where is the data? I don’t have to look any further than my own family trying to keep up with the spending habits of their neighbors and I also overhear telephone conversations at work where people are moving money out of their HELOC account into their checking’s account to put a down payment on that new boat or car or pay for an exotic vacation or cruise. As unwise as these HELOC consumerist purchases are, they are still better than common equity purchases, in my opinion.

My own son is upside down in his mortgage and teetering on the verge of bankruptcy. He thought he was a market whiz kid (he had a broker’s license). He took out a second on his over valued house and dumped that money into commodities…ON MARGIN. When he got margin calls on the commodity futures that turned south, instead of selling enough commodities to cover the call, he got cash advances (100k plus) from credit cards to cover the margin and to meet daily expenses. Part of the income from his ‘day’ job, factored into his debt load threshold, was OVERTIME. Guess what? The OVERTIME went poof! The housing market is now flattening where he is and he can’t sell the house for enough to cover his outstanding debts. Will his Dad bail him out? NO WAY! Besides that, he’s got enough integrity not to ask since I warned him repeatedly about margined commodity accounts and over valued real estate. He had margin (2nd on house) stacked on margin (leveraged commodities) stacked on margin (credit cards). His actions had my stomach in a knot from day 1 of his little adventure and that knot turned into a perpetualwanna puke feeling knowing what the inevitable outcome would be.

What is doing him in and the generation he belongs to is ‘instant gratification’. He wanted TODAY what it took his parents 30 years to achieve. Will he recover? I’m sure of it, but he won’t have any wind at his back. He will be pedaling uphill into a head windall the way to the end.

2. There are always exceptions, but by and large most people are not willing to sell their homes when markets are topping and rent when it makes more economical sense or move to an area where property prices are more down to earth and redeploy their capital there.

By and large, the location where most people live and work is an accident of birth and they fail to take advantage of regional economic inequalities and distortions by MOVING.

3. There are always exceptions, but by and large most people feel wealthier when home values are rising and SPEND more. Some call it the ‘wealth effect’, but I call it an illusion. So, even if one doesn’t draw down on their HELOCs, the inclination is still to spend more as home values rise thereby off-setting negatively what unrealized paper gains they see in their equity.

4. There are always exceptions, but by and large most people experiencing the initial[/i] effects of an economic downturn, SPEND more. Egos won’t allow them, in the beginning of a downturn,to lose face in front of their neighbors. In the end, however, due to paralysis, they lose not only face, but they lose their shirts, pants, shoes, and socks...and they sometimes lose their spouses.
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Mikesummed it up best when hesaid:

“In a roundabout way,I think I have concluded that equity should be counted as deferred savings - it's there, but you don't benefit from it until you sell the property.[/b]” (Emphasis mine – bolded/underlined portion)[/i]

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Basically, an unrealized gain is a ‘Paper Tiger’, whether we are talking real estate or equities. To borrow against either position is what they call a MARGINED position. In equities, where MARGIN is exercised, you will get a MARGIN CALL when prices retreat below standard reserve requirements. In real estate, although there are no MARGIN CALLS per say, but there are BANKRUPTIES (forced sales) which is kind of the same thing.

I don’t know how many times I’ve heard people say on this board, “We made some bucks today”, but when you look at their allocations, they haven’t changed. If an investor or trader doesn’t sell into those gains, they haven’t made anything at all. Same thing goes for the flip side. People say, “We lost a bunch today”, but you look at their allocations and they haven’t changed. If an investor doesn’t sell into those losses, they haven’t lost anything at all.

Taking too much stock in counting unrealized paper profits or losses can negatively affect the emotions...and is not the best position from which to be making good investment or trading decisions.

Mike, I truly hope you are the exception to the rule. You are a pleasure to discuss things with, even though we don’t agree, because you have such a cool head.

Mike

11-23-2005, 01:49 PM

Wimpy wrote:

"Where is the data? I don’t have to look any further than my own family trying to keep up with the spending habits of their neighbors and I also overhear telephone conversations at work where people are moving money out of their HELOC account into their checking’s account to put a down payment on that new boat or car or pay for an exotic vacation or cruise."

That is called 'anecdotal evidence' - which while significant to the person providing it has little statistical validity. I want to see a large sampling / survey ofhow manyare getting these HELOCs / 2nd mortgages, what the average amount is, and what they are using them for... I'd think that somebody keeps track of this. The government tracks darn near every other statistic imaginable, so why not one that has some serious potential consequences to the future of the American economy (particularly given the fact that the bankruptcy laws were altered a bit... :shock:). While your examples apply to the consumer-gone-nuts part of the population, mine apply to the more common sense "I just want to remodel my house" approach. Which is more prevalent? There is no way of knowing unless it's being tracked by someone - either the government or an industry group.

"By and large, the location where most people live and work is an accident of birth and they fail to take advantage of regional economic inequalities and distortions by MOVING."

I feel privileged to have been born in this state (generally highly educated population, fairly low crime rate, decent air/water quality). I also live in the most lucrative part of it (sadly also the highest cost of living part, but I can't win 'em all), and I'm near the top nationally in earnings for my field - so as long as I wish to do what I currently do, there's no sense doing it anywhere else. As for other people who stay in a cruddy area, they might be tied down by family or something else. It's pretty easy to move around while you're young and single, but it becomes exponentially more difficult if you're married and/or have kids.

My deferred savings comment is somewhat tied to TSP (tax deferred). What the numbers are really don't matter unless you cash out. I try to keep my emotions in check when dealing with it, since I'm just trying to monitor percentages. As long as I average about 7% per year or so, I'll be fine. It's similar when talking about real estate - your house may be worth $200,000, but that isn't important unless you are actually attempting to sell it and have people making offers in that ballpark. If 30 year rates climb closer to 8%, you aren't likely to find too many buyers out there.

As for me, no need to worry. I don't have any "leveraged" positions, so my potential loss is always limited to whatever is invested, and very little of that is ever in a purely speculative area. I probably save / invest more than 99% of the people in my age group (eyes glaze over and jaws drop when I talk about any of this with my peers). Re: housing, something will be mentioned about that next week. Stay tuned. :^

Quips

11-23-2005, 07:13 PM

Mike wrote:

If I owned a house last year and had a lot of equity, I probably would've borrowed against some of that and moved itinto the market. Given the interest rate cycle and how the housing market responds to it combined with the very low interest rates last year, it would've made a lot of sense to do this. A 10% return (achievable with a well-diversified account) funded by a ~5.5% loan is certainly worth a look, particularly with evidence starting to mount that the housing market was starting to plateau.

It all comes back to one's risk tolerance, though. Doing something like that certainly isn't for everyone.

Mike, that is what is called leverage. Most hard money people would roll their eyes over the comments you made. And comments like that would make a stock broker drool like a coyote around achicken coop.

By the way, how much home equity-- costing 5.5% upfront -- would you stake on that hypothetical 10% return? How much of that home equity, either in dollars or as a percentage--would you feel comfortable risking in the stock market?

The only positive thing I can think of about that scenario is that there are mutual funds out there that have really high "load" fees ... some as high as 5.5 - 5.75%.

Can you image borrowing at 5.5% and investing in a mutual fund with a "load" of 5.75%? :PThere goes 11.25% already! :s

Or maybe someone feels froggy about a sector equity fund ... like oil. Lets say the average "load" on such a fund is 3%. Then the hypothetical investor is now only starting 8.5% in the hole.

Or better yet, shorting an oil sector fund now with money from a home equity loan.

Come on man, that isn't b@lls, (mailto:b@lls,) that's crazy or desparate. Sure, the reward is fantastic if it turns out well,and maybe the only thing to lose is sleep over it. But I am skeptical about such things.

Mike

11-24-2005, 01:30 AM

Warning! I'm about to start babbling. :D

Quips wrote:

"Mike, that is what is called leverage. Most hard money people would roll their eyes over the comments you made. And comments like that would make a stock broker drool like a coyote around achicken coop."

Given the expectation of interest rate hikes and the accompanying run up in mortgage rates which is certain to put a lid on housing prices, would it not make sense to move your capital elsewhere to achieve a positive return? Sadly, this environment took shape when I was too young (and repaying student loans) to take advantage of it. This won't be the case the next time around (if there is a next time - I have a hard time believing rates will drop all the way to 5% again - if our national debt picture doesn't improve soon, the real rates will be pushed higher and stay higher to sustain the funding of the debt). A nice alternative to going the HELOC route would simply be to sell the house in the high price / low interest rate environment and buy a cheaper place. Depending on the equity, this could mean a tiny mortgage or none at all, plus money to spare to invest elsewhere as the slow-growth/no-growth housing price climate hits with a vengeance. Given my aversion regarding taking on extra debt, this is the option I would most likely take. While I enjoy speculating about potential maneuvers, I typically end up doing what makes the most sense / is the most reasonable. It's a sickening personality trait. :P

What am I willing to risk in the stock market? The answer to that is a complicated one. What is my time horizon? By the time I achieve the equity necessary to seriously consider any of this, I'm probably pushing 40 years of age. My life situation could be vastly different then, and depending on market performance over the next 13 years, my confidence in the market could also shift. Point is, weare likely tobe in a vastly different world in 2018. As for the present time, given my horizon is over 30 years, I wouldn't hesitate to throw $30k into the market and let it ride 'til 2035. Problem is, my budget wouldn't allow such a loan, so it's really a moot point. My choice of investment vehicle would be the ETF model that has low emissions (read: low fees/expenses). That would allow nice diversification and flexibility at low cost.

"Come on man, that isn't b@lls, (mailto:b@lls,) that's crazy or desparate. Sure, the reward is fantastic if it turns out well,and maybe the only thing to lose is sleep over it. But I am skeptical about such things."

My day-to-day rule is don't risk what you can't afford to lose. Ifmy TSP dropped to zero tomorrow, I'd certainly be angry as heck about it, but it wouldn't be the end of life as I know it. Same goes for my brokerage and Roth accounts. If I have to work into my 70s, that isn't the end of the world, either. For the most part, I like working. Few other things in life make me feel as alive and vital as working does - and quite frankly, I think I'd get bored if I had nothing but leisure time on my hands. Maybe I should blame my upbringing, but I think that being active and productive is one of the keys to a happy life. Working is my preferred way of accomplishing that. Will I need this money late in life? Probably not. I can be a bit of a tightwad and tend to live well below my means. I have no trouble eating things like mac n cheese even thoughpeople making what I do in a year probably eat steak and the like more than once a month.They probably also take more than one vacation a year, and it probably costs them more than a few hundred bucks. :P

I'm not exactly sure where I'm going with all this, but I'll say this: there's no need to worry about what I'm doing (unless it's with women but we won't go there :shock:). My credit is in goodshape, my debt is being paid down aggressively (even though it's @5-6%), and I have a stable job that pays well. Life could be far worse than this. :^

Quips

11-24-2005, 10:31 AM

Vanguard has its own version of "L" funds. I thought the follow stats were interesting:

For those set to retire this year, 2005, their asset allocation is 31% equities, 69% bonds; over the past year the return was 4.44%. The fund itself has assets of $676 million.

Interesting because the rate of return in that fund just about covers the rate of inflation (I do not believe inflation for those over age 60 is about 2%, e.g. the I savings bond will pay 6.73% for the next six months.

Given that with the recommended withdrawl rate of 5%, well, we can see the principle of that account being depleted by about 7% a year

hmmmm ... it begins to add up, doesn't it?

Vanguard's 2015 retirement fund has assets of $1.9 billion and its asset allocation is about 53% equities and 47% bonds for an average yearly return of 6.39% That just about covers the I bond's rate (of inflation) for the next 6 months. If that asset allocation were used for CURRENT retiree's, a draw down rate of 5% a year would help one's retirement assets last longer, but it would last about 20 years at that pace.

hmmmm ... still kind of tight, huh?

Vanguard also has "L" type funds for those retiring later as well ... just like TSP. A 5% withdrawl rate is relative to the amount in the fund of course and whether all of that amount is spent. And if it is in a Roth account, well, there is no manditory distribution requirement. But there are manditory living expenses to be paid in retirement, lol.

So, the larger the equity allocation, the more short-term volitility.

Vanguard's 2025 retirement fund has assets of $2.1 billion with a 58/42 allocation and a return rate of 7.25% over the past year.

Its 2035 retirement fund has assets of $1.1 billion, a 76/24 allocation and a return rate of 9.58% over the past year.

While we work and contribute to our retirement funds NOW, volitility is usually disconcerting for most, but dollar cost averaging is of some consolation. However, when those contributions cease, that volitility will be more disconcerting for most. If those withdraws are made on a monthly basis, e.g. less than 0.5% a month, that would be similar to dollar cost averaging a withdrawl rate of 5% over a year's time. Monthly checks would fluctuate in cash amounts ... some months more than others; some months less. However, if there is a protrated downturn ala Jan. 2000 to April 2003, it will makea life cyclemore difficult to ride out.

Vanguard's asset allocation for potential 2045 retirees is 88/12; the fund has assets of $500 million. Its return over the past year has been 10.76%.

Now given all of that, will expenses decrease for most in retirement? Well, hopefully the primary residence is paid off, but medical expenses (premiums, co-pays, deductables) for mostbecome realduring that time. For some it isn't a matter of whether they are will to work part or full time in retirement to help defray expenses, but are they physically able.

Then there are reoccuring expenses: health insurance premiums, home and car expenses/maintanence/insurance. Inflation too.