Brian Wesbury’s Inflation Alert

Given the melt downs and bounce backs in the equity markets the last few days, this would seem a untitledgood time to post this.

Brian Wesbury (white shirt) and Bob Stein are optimists about the markets and the economy.  They believe the markets are undervalued given interest rates and corporate profitability.  They believe that the American economy is too resilient to be broken even by the over-regulation and taxation policies of the current administration.

Given their mindset, this article below came as a bit of a shock to me.  It’s a bit like hearing Gen. George Patton tell Gen. Dwight Eisenhower “there’s a battle coming I’m afraid we won’t win”.

Read it.  You’ll come away with a much clearer understanding of the corner the Federal Reserve has painted itself into, the likely actions the Fed governors will take to extricate themselves, and what a couple of long term market optimists think will come to pass as the Fed’s extraordinary money printing finally hits home.

“The bottom line is that there appears to be an increase in liquidity – potentially a large one – heading the economy’s way. That’s good for stocks over the next year, or two, but after that, if a bubble forms, the dangers will rise appreciably.”

The website from which this was taken is here.

Repudiating Milton Friedman
 by Brian Wesbury and Bob Stein
 
Milton Friedman taught the world that the “transmission mechanism” for central bank policy worked through the quantity of money – the amount of money injected into, or subtracted from, the economy. It now appears many members of the Federal Reserve don’t believe this anymore. According to Fed Chair Janet Yellen, the Fed plans on ending bond purchases later this year, and then, without unwinding QE, start to raise the federal funds rate. By moving this way, the Fed is making the case for a permanently larger balance sheet and hoping it can use interest rates to manipulate economic activity. But if banks expect excess reserves to stay in the system longer, perhaps even permanently, it is almost certain they will become more aggressive about lending even as they move up their expectations of when and how much short-term rates will rise.This, in turn, would boost the money supply sharply, driving up asset prices, economic activity and inflation in the months and years ahead.

Historically, most Fed watchers (including us), have talked in terms of the federal funds rate when communicating about Fed policy. But it’s not because short-term rates are important by themselves, but because short rates rise and fall as the Fed manipulates the supply of reserves. A lower interest rate typically means more money growth and therefore more liquidity in the economy. Interest rates are a way of measuring money growth, like the mercury level in a tube measures temperature. Quantitative Easing (QE) has complicated things. The Fed built massive excess reserves in the banking system by buying bonds and creating deposits to pay for them. And with so many excess reserves in the system, the overnight federal funds rate has been pushed to near zero. Normally, these deposits would have resulted in a surge of lending (in turn, multiplied by the banking system), which would have boosted the M2 money supply. However, banks have been unwilling to use the lending capacity created by the new deposits. This has happened for many reasons. First, banks are reluctant to lend when the Fed made it clear for years that the extra deposits were temporary. Second, Dodd-Frank hyper-regulation and new capital standards have squeezed banks’ desire to leverage their balance sheets. Third, artificially low interest rates make it less attractive to lend.

The result: the Monetary Base has grown at a 32% annualized rate since September 2008, but the M2 money supply has only grown at a 6.7% rate. And as Milton Friedman taught us, it’s M2 that matters, not the monetary base. That’s why inflation has remained low.

As we discussed last week, with $2.6 trillion in excess reserves in the banking system, the Fed can’t control the federal funds rate as it did prior to 2008 – using supply and demand pressures – by adding or subtracting reserves. One major problem is that, by law, the Fed can’t pay interest on the reserves held by Government Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac. So, these firms lend their reserves to other banks at a lower rate than the Fed is paying banks on reserves.

If the Fed lifts the interest rate it pays banks on reserves, the GSEs might charge more and boost rates, or they might not. As a result, the Fed is experimenting with a system of “repos” – where the Fed, in effect, would borrow the excess reserves of the GSEs at set interest rates. Using this new tool, the Fed will try to manipulate short-term interest rates throughout the financial system.

This gets around the law that says GSEs can’t earn interest on reserves, and it will probably lift the federal funds rate. However, it still does not fix the problem of massive excess reserves in the system and, more importantly, it telegraphs that the Fed is willing to let excess reserves sit in the system for much longer.

Banks, in response, will likely become more willing to boost lending. And right on cue, commercial and industrial (C&I) loans have grown at a 23% annualized rate in the past two months, while the M2 money supply has jumped to a 9% growth rate.

We expect this to continue. Money growth should accelerate further and, because the Fed believes Friedman was wrong, or because it thinks GDP needs to rise significantly to get to potential, it will allow this to happen. As a result, that sugar high caused by Fed policy we have heard about for so long, looks like it may finally arrive.

The downside of all this is palpable. If money growth takes off and threatens inflation, the Fed will attempt to stop it by raising interest rates. The hope will be that by raising rates, banks would view loans as less attractive than holding excess reserves. But, if short-term rates go up, so will other rates and banks would still have an incentive to boost loans.

If the Fed finds itself in this cycle, it could be forced to raise rates faster and further than it would have in the past. Or, the Fed may start operating like China’s central bank, which means it would regulate loan growth or use other means of central control.

In the end, it is excess reserves that are the real problem, not the level of interest rates. Milton Friedman was not wrong, and trying to run a central bank like a regulatory body creates big risk.

The bottom line is that there appears to be an increase in liquidity – potentially a large one – heading the economy’s way. That’s good for stocks over the next year, or two, but after that, if a bubble forms, the dangers will rise appreciably. Stay tuned.

The Social Morality Of Individual Responsibility II

My good friend SS got a reply from one of her good friends regarding yesterday’s post and passed it along.  The reply reads:

This fellow (Cato) has a rather cavalier, let-them-eat-cake attitude.  In his scheme, Medicare would be for the very affluent only. The middle class would be priced out very quickly by having to pay 15% of each and every medical requirement. At the price of procedures today running into the hundreds of thousands, the average retiree would not be able to write checks for his 15% “portion” of each procedure and would be soon bankrupted. Perhaps “Cato” is driving toward this, with all the hoi polloi grouped into an ever more restrictive Medicaid, and a small number of folks like himself funding whatever is asked for their own care.

And I’m sure you (SS) noted that he (Cato) neglects to recognize that we did not ask to have Medicare – it was forced upon us. Now when it is too late to go back and get our old coverage, he wants to significantly change the rules.

My response to SS regarding her good friend’s critique is as follows:

Let’s see if I understand your friend, SS.  First, we’re all victims, having Medicare forced upon us against our wills.  Nonsense.  We’ve persistently and happily voted ourselves massively expensive entitlements over the last 40 years, then refused to pay the level of tax needed to fund it, pushing more than 60% of the total cost onto unborn generations in the form of massive debt and unfunded liabilities.  Your friend apparently thinks placing the next few generations in what I call “entitlement slavery” to these debts and liabilities is just fine.  News flash to your friend: the next few generations will not allow themselves be enslaved to the programs we’ve gifted to ourselves.  The changes they will install to protect themselves will make my suggestions seem generous.

Second, your friend is saying a percentage co-pay, which is what the 15% is … in a merged Medicare-Medicaid system assuring required (if not desired) care … somehow damages the middle class in ways the bankruptcy of the Medicare system will not?  More nonsense.  The affluent will be cared for regardless.  The question is will the rest of us be cared for at all, when demographics overwhelms mathematics and the Medicare system goes dark.  Your friend’s required assumption is that Medicare will survive without significantly changing the rules.  It won’t.

Finally, SS, your friend is not offering another way to put Medicare on a sound footing.  Criticism is easy.  Alternative ideas are not.  I am not suggesting we let them eat cake.  I’m trying to assure there will always be, at least to the minimum daily requirement, bread.

Chew on this crust:  20% of Americans qualify for welfare.  70% qualify for entitlements right now, and 100% of over-65s qualify for Medicare.  It’s that 50% of Americans and 80% of seniors who must embrace “the social morality of personal responsibility” if the system is to survive.

 

The Social Morality Of Individual Responsibility

Consider this graphic.

CBO_Feb2013_chart6-crop

Then consider this blurb from a longer post here, a rant referring to senior entitlement rights being on the “chopping block”.  That 15% surcharge mentioned below would, prospectively, apply to the costs of medical services one uses, over and above Medigap premiums, which, also prospectively, would preclude the possibility of 100% coverage.

“Under Obama’s budget plan, beginning in 2017, new Medicare beneficiaries who purchase more generous medigap plans would face a surcharge of approximately 15% of the average medigap premium. Many Republicans support this idea and House Budget Chairman Ryan argues that medi-gap premiums could be overhauled to “encourage efficiency and reduce costs.”

Then consider this affronted comment about that blurb from SS, a very good friend of long standing.

“If I am willing to pay for a more expensive (100%) supplemental Medicare policy, why should I be penalized for it?”  SS

Here’s my response to SS.  Those of you who deeply believe you have a right to all the over-promised entitlements we’ve lavishly voted ourselves in the last 40 years but refused to fully pay for are not going to like this at all.  Fair warning given.

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

In August 2012 I wrote a blog post, SS, in If I Were King precisely about the deep problem of Medicare.  I said in that post that I’d reduce the basic Medicare coverage from 80% to 65% of cost, and limit Medigap policies to 20% of cost.  I would require 15% of cost out of pocket for every medical procedure, up to and including “the final year” costs and hospice.  I had written previously, in October 2011 (“Limits“), that I thought Medicare and Medicaid would be merged into a seamless system, so that if one had no money to cover that 15% the care would be delivered, but under Medicaid, not Medicare.

The 15% in the current Ryan-Murray plan and the 15% in my proposal from almost two years ago arises from the same source.  People with 100% coverage, no matter how that total coverage is acquired, tend to access medical care more frequently and for lesser, often trivial, issues.  It’s the difference between the way we approach an all-you-can-eat fixed price buffet and an ala carte menu at a restaurant.  We will eat more at the buffet to “get our money’s worth”.  We are far more price conscious in the ala carte restaurant.

Once we’ve paid the Medicare premium through our Social Security check, and paid the 100% coverage Medigap premium, we approach medical care as an all-you-can-eat proposition, because there is little or no additional cost to each additional medical contact.  The 15% cash out of pocket in my post, and the 15% Medigap surcharge (which is a far less effective method in my view) are intended to reduce the marginal demand for medical services by imputing a direct cost to each individual for each demand.

100% coverage = buffet mentality.  Your willingness to pay for 100% coverage is not the deep problem.  “Skin in the game” = price awareness and a much needed personal restraint regarding trivial medical issues.  Unrestrained demand is the deep problem.  The Loud Left wants access reduced by bureaucratic review and approval.  Individual restraint induced by an irreducible 15% cash out of pocket and seamlessly merging Medicare and Medicaid is a better idea.

The Medicare system is essentially on a death march.  5 years from now you will see demand for services rejected; arbitrary rejection of bureaucratically-determined trivial and unnecessary medicine.  10 years from now you will see the system implode completely.  That or a system that results in individual self-restraint.  Choose your poison.

And if you want a broader view of entitlements, read my blog series “Phoenix World”.  Therein I cover the other half of the evolution of Medicare and of all entitlements for that matter: means-testing for net worth that pushes the cost of all entitlements directly back onto the positive net worth recipient.  This system does not tax Peter’s wealth to pay Paul.  It requires that Peter use his wealth to cover Peter’s entitlements to the extent Peter is able … essentially all of the over-promised entitlements Peter is due will be paid to him, but with this new approach to means-testing there will be no guarantee Peter will get to keep them.

I just finished a four week course at Collin College on Phoenix World in which I built the core of my thinking on a phrase I coined: “the social morality of individual responsibility”.  I argued that the ultimate social immorality is unnecessary dependence on the commons, on the state.

Think about the implications of that phrase a bit, in light of the “wealthy being means-tested for all of their personal entitlements” … in light of the idea that the next few generations WILL NOT submit to becoming entitlement slaves to the over-promises we’ve voted ourselves in the last 40 years, the cost of which we’ve refused to cover by taxing ourselves, the cost of which we’ve shoved forward upon the next few generations … and it’s true meaning, and the nature of Phoenix World as well, becomes clear.

 

There’s Data And Then There’s Hysteria

Don’t confuse the two.  Data is often used to create hysterical posts.  The data is real enough in most cases; the data is good in this specific case.  The hysteria arises in the vast majority of cases solely from the predisposition of the writer, and is anchored in a lack of data comparisons.  By which I mean a single data point is of little value in any analysis and of no use in coming to conclusions of any sort.

Trends in solidly-sourced data over statistically significant periods of time are useful.  Snapshots, even if the data is solidly-sourced, are not.

Take this arm-waving for instance, from a recent post on ZeroHedge … a site I read regularly, in full disclosure, but not a site one can read uncritically and without a healthy dose of skepticism.

According to stunning new numbers just released by the federal government, that we detailed yesterday, nine of the top ten most commonly held jobs in the United States pay an average wage of less than $35,000 a year.  When you break that down, that means that most of these workers are making less than $3,000 a month before taxes.  And once you consider how we are being taxed into oblivion, things become even more frightening.  Can you pay a mortgage and support a family on just a couple grand a month?  Of course not.  In the old days, a single income would enable a family to live a very comfortable middle class lifestyle in most cases.  But now those days are long gone.

The following is a list of the most commonly held jobs in America according to the federal government.  As you can see, 9 of the top 10 most commonly held occupations pay an average wage of less than $35,000 a year

  1. Retail salespersons, 4.48 million workers earning  $25,370
  2. Cashiers  3.34 million workers earning $20,420
  3. Food prep and serving staff, 3.02 million workers earning $18,880
  4. General office clerk, 2.83 million working earning $29,990
  5. Registered nurses, 2.66 million workers earning $68,910
  6. Waiters and waitresses, 2.40 million workers earning $20,880
  7. Customer service representatives, 2.39 million workers earning $33,370
  8. Laborers, and freight and material movers, 2.28 million workers earning $26,690
  9. Secretaries and admins (not legal or medical),  2.16 million workers earning $34,000
  10. Janitors and cleaners (not maids),  2.10 million workers earning, $25,140

Overall, an astounding 59 percent of all American workers bring home less than $35,000 a year in wages.

So if you are going to make more than $35,000 this year, you are solidly in the upper half.  But that doesn’t mean that you will always be there.

The critical side of me says this one data point needs comparisons to data going back 15 to 20 years to determine if, in the glorious past, the list of ten most numerous jobs was different.  The skeptic in me tells me to suspect that if it was significantly different and had deteriorated substantially this writer would have been falling all over his narrative to show that deterioration, as it would back up his hysterical conclusions (see the link in red font, below).

The writer, BTW, is Michael Snyder, author of The Economic Collapse blog, which alone gives you an indication of his predispositions.  That he does not create a trend line and relies on you to respond emotionally (OMG, this is horrible!!!!) to this snapshot undercuts his message, his method, and his conclusions.

Well, it does for me anyway.  You make your own judgment.  I’m going to assume that list of ten jobs, and the percentage of jobs paying less than $35,000 annually in inflation-adjusted 2014 dollars, has not changed materially over the last few decades.  We have a myriad of problems in the workforce.  Until data emerges to prove otherwise my working skeptical, critical assumption will be that this is not one of them.

 

Sabbatical

My sincere appreciation to all of you for your comments and interest in my rants and other posts the last couple years here in Cato’s Domain.  With this related trio I’ve just posted … “The Juvenile Investor“, “The Mature Investor“, and “A Battle Plan For Personal Independence” … I’m going to take a sabbatical.  If you’re coming into the Domain for the first time I hope you will take time to scan through the collections at the top of this page:  “2013-2017″, “If I Were King”, and the others.

I’ve got a pile of must-read books that have accumulated and are calling loudly.  Also, The Wizard and I, having been migrating up the left coast from San Diego since mid-December, are headed into Arizona for a couple weeks to hike in the mountains and desert around Tucson.  And I have a lecture series to prepare that I will be giving in March at Collin College’s “SAIL” program.

Busy spring.  Much relearning to do.  Be back in a couple months.

Cato

inspire-others-211

 

A Battle Plan For Personal Independence

I noted in “The Mature Investor” that the only way to invest rationally is to do so against a lifetime plan that 1) funds your personal idea of independence for the rest of your life and 2) tells you how much isCreate-The-Future ‘enough’ to do that.  This is budgeting on a whole other level.  Not just month to month or year to year but era to era as your life evolves.  This strikes most people as being a strange idea.

Why should it though?  Do you want to be a wage slave for the next 40 years?  Even if you do the odds are you will not have a defined benefit pension waiting at 65, a pension for which someone else is totally responsible.  It’s much more likely it will be defined contribution (401k) and you will have to invest the contents of that account if you want to retire well.  True?  So if you’re going to have to learn to invest anyway why not go semi-pro and buy your freedom 10 or 15 years early?  Wake the hell up.

Here’s a quick and dirty battle plan, the details of which you and only you can decide, that will act as a framework for the work you can no longer ignore.

133-dont-just-talk-do-7b0d6bd1-sz500x750-animateFirst: the hardest part is deciding what you want.  Write down your dream life on an Excel sheet.  Imagine it with no limits.  When will it kick in?  Where will you live?  How much do you want to spend, year by year, on travel and cars and all the accessories of a good life … whatever a good life means to you?  Focus on the big ticket items first and let the smaller stuff filter in as you go.

Do you buy a new car every four years?  Six?  How much will you pay for them?  Write that down.  Got kids?  How will you pay for their education?  When will you have those costs?  Write that down.  Want to buy a house?  When?  How much for a down payment and how much of a mortgage?  What will insurance and utilities and repairs cost?  Write those down.  Do you know the difference between being retired at 50 and at 65 and at 80, in terms of expenses?  There is a huge difference.  Find out what it means to be, as my Dad used to say, “young old” and “old old”.  Write it down.  If you have no idea where you’re going you will never get there.

Second: commit to saving 10% of your gross income from day one, no matter how little you make.  Think of it as tithing yourself or creating a freedom fund … whatever it takes to light the fire in your psyche.  If you can’t do this you will never create the investable base from which you will eventually grow your freedom.

Third: learn to calculate and think in DCF (Discounted Cash Flow) andNPV NPV (Net Present Value) terms.  DCF/NPV, going from the present to the future, is called ‘compounding’.  As in compound interest.  DCF/NPV, going from the future to the present, is called ‘discounting’.  It’s just compounding in reverse.  How much will you need to fund your dreams? What is the Present Value Equivalent of that future sum?  Is that PVE less than you currently have invested for and committed to that expense … if so, you are well on your way to funding your dream … if not, either increase the contribution rate, say to 11% of your gross income, or downscale your dream to fit the funding.  Fund it or reduce it.  Find the balance between spending today and dream fulfillment tomorrow.  Get the idea?  You can do this with every expense for the rest of your life.

top-taps-giveupFourth: now that you know what you want to fund and how much of that funding is in place today and how much will be required in the future making choices between buying useless toys today and losing a dream tomorrow becomes much, much easier.  You are less prone to impulses.  The first few years are the hardest because the goals seem distant and the funding small.  But the years fly by in an unbelievable rush and blur … ask anyone over 60 … and the investments build up.  The closer you get to funding your freedom and breaking the financial shackles of job and government dependency the more the elation builds.  Then one day your Excel sheet tells you you have ‘enough’.  Trust me.  There is no high like sticking your middle finger in the air, saluting everything governmental and corporate that is conspiring to keep you pinned down, obedient, and subservient and just walking away.good-ol-points-25

Fifth: consider government entitlements a bonus, not a base.  You can’t rely on them, all things considered.  If they happen, good.  If they don’t, no problem, because they were never essential to success from the beginning.

Your life is not, as the hackneyed old adage goes, a dress rehearsal.  One shot and one only.  Make it yours and yours alone.  But in this world, strapped and trapped by institutions governmental and corporate designed to put you in harness and keep you there, that freedom must be earned and funded.

307-fear-31So.  Did I actually do all this stuff?  Yes.  Starting on a drive The Wizard and I took to Urbana, Ohio when I was 24 years old.  Did I actually write an Excel sheet for the rest of my life?  Yes.  Only it was in Lotus123 … Excel didn’t yet exist … on an IBM PCJr that took about 90 seconds to recalculate.  Did I actually invest 10% of gross income every year?  Yes.  10% minimum.  15% in good years.  20-25% for taxes, including income and property taxes.  65% of gross to live on.  I left the anthill 22 years later and taught finance as an adjunct professor at The University of Texas @ Dallas for 7 years for $4000 a year, just because I loved teaching and because the money was no longer essential to our success.  The Wizard retired 14 years ago, at 50.  We aren’t rich, but we know how much ‘enough’ is, and that we have ‘enough’.

Not bragging.  Really.  Just giving witness.  Anyone can do this.  All it takes is the passion to live life on one’s own terms to the greatest degree possible and the willingness to invest in and for yourself.  It’s your life and your choice, of course.  Just trying to help.

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The Mature Investor: An Homage

QandBond“Age is no guarantee of wisdom”, said the exceedingly young “Q”.

“And youth is no guarantee of innovation”, replied ”007″.

………dialogue from the movie “Skyfall”

I make no claim of wisdom either for myself nor for mature investors in general.  I do strongly stake a claim to experience.  And for the few elders willing to toss off the illusions and delusions of youth … and there are fewer than one might think, unfortunately … I stand to honor their results.

This is what any truly successful mature investor will tell you.  These are the universals.

Fundamental #1:  It takes a great many small failures to reach one resounding success.  If you can’t335-yoda-23-52014cd3-sz340x440-animate stand to lose don’t bother to invest.  Call it the ‘Yoda Principle’.  But think of it this way: if you win 50% of the time and lose 50% of the time, let your winners run long and large, cut losers early and keep losses small, you will be among the blessed few who can retire self-funded, sans ‘golden handcuffs’, at 50, provided;

Fundamental #2 : The key … well, my key anyway … was, while time was still my ally and not my enemy, always and only to invest significant stakes.  No piecemeal, toe in the water, ‘diversified’ bull.  If you invest not for cocktail party bragging rights but with the sole and bloodless intent to buy your freedom and fund an independent life, and you invest only significant stakes, you only need to win once.  And once you do in a significant way the many small failures cease to matter.  IOW, don’t let your ego get in the way of your goals.

Then, let me offer a few hard-earned ideas you might want to consider.

First:  It’s not a damned game.  Don’t “play” the market.  It’s not a pinball machine.  It’s your enemy, ArtOfWarnot your competitor.  It will destroy you if you let it.  Attack it.  Learn everything you can about it mechanically and functionally.  But bells and whistles are not where winning comes from.  Read “The Art of War” over and over until you’ve internalized it.  Cynicism is your best friend.  Markets can only be understood through experience, and that comes hard.  Accept early mistakes as tuition … it’s an amazing feeling when the lights finally go on and you understand markets down in your gut.  No one “knows” the market but the best “feel” it.  It gets a lot easier after that.

Second:  Learn to dissect a “financial” statement, composed of three interlinking parts.  Income statement: starts with revenues, ends with profits.  Cash flow summary: starts with profits, ends with cash balances.  Balance sheet: starts with cash balances, ends with shareholder’s equity.  And the first insight needs to be that there’s nothing financial about that statement.  It’s a ”accounting” statement.  It was compiled by bloody accountants, following the bloody rules of accounting, audited and certified by more bloody accountants.  Accounting is a 500 year old train wreck.  But it’s the language of commerce, and you need to be able to read it.  You will be ready when you can ferret out “cost of capital” from the detritus of the three accounting reports; determine the real return on R&D expenditures; begin to see both gross and subtle differences between a CEO who came up through marketing and one who rose through engineering … CEOs leave their fingerprints all over “financial” statements.  Accounting is a massive lie in which the truth is buried by CEOs and accountants.  Learn to dig it out.

Third, you win by investing in winning managements.  Not “companies”.  Learn to “see” a great management team in the accounting wreckage of annual reports.  Learn to recognize an Planningincompetent one, too.

Fourth, think long and very hard on this idea:  You can’t rationally invest a dollar if you don’t know with a high degree of specificity when you will spend that dollar.  IOW, make a long range plan, preferably for the rest of your life.  That is what you’re trying to fund, isn’t it?  How much will the rest of your life cost?  The core of that plan is that long dated money you won’t need for years should be in high risk/high reward investments.  The shorter the time to expenditure, the less risk you take.  Money you will need in the next 36 to 48 months stays in short dated bonds and MMFs and your checking account.

Fifth:  Answer the question: “how will I know when I have ‘enough’?  This will require a solid understanding of what exactly you’re investing for and how much it is likely to cost and is the goal of that plan I just mentioned.  If you’re investing to live free of corporate shackles, ‘enough’ is something you will want to know, because when you have enough you can stop grinding out 40 hours a week, put the combat of investing aside and focus on what is truly important.  If you’re just living to invest, OTOH, you won’t care how much enough is because there will never be enough, which means you’re living a hollow, purposeless life surrounded by your toys.

you-put-it-so-good-08

Sixth:  Become an expert on five industries, any five, then invest solely in your areas of expertise.  The alternative is investing in every goddam thing that crosses your TV screen, just throwing mud at a wall hoping some of it sticks … see “The Juvenile Investor” for more on this.

Finally.  Always take enough risk to achieve your goal if you win, but never so much as to wipe you out if you lose … read fundamentals #1 and 2 again.  The idea here is simple.  If you need 7% returns to get where you are going over a 15 year term, investing in 5% instruments is a waste of time.  Learn NPV (discounted cash flow) mathematics until you can teach it in a graduate business school.  It’s the only truly universal language, spoken everywhere in the world.

So that’s it.  This isn’t easy.  It’s hard work, in fact.  Freedom and independence always have been hard work.  But trust me, it is worth it.  It’s your life and your choice, of course.  Just trying to help.

Happiness

 

The Juvenile Investor: A Rant

The greatest passion of … and greatest enemy of … the juvenile investor is ‘the trend’.  Momentum.  The herd instinct … with its occasional stampedes … is the cause of more personal investment disasters than anyone could possibly count.  Bubbles are not inflated out of caution and clear-eyed valuation of risk.

If you are “crowd-sourcing” your investment decisions you are guaranteed to be a long term loser because in the long term the crowd is just a ignorant, navel-gazing mob; because momentum is just the aggregateMomentumShift effect of that ignorance.  If you are constantly trying to buy what’s hot and sell what’s cold you are on average and over time buying at the top and selling at the bottom.  Or worse, you’re buying just prior to the top, after the “momentum” up has been established, getting a bit of reinforcement as that bet peaks out and pays off in pennies.  Then you’re selling just before that bet bottoms out, waiting until the “momentum” downward has been firmly established, paying for the pennies gained with dollars lost.

Investing in a rear view mirror, expecting the past to dictate the future by chasing “performance”, is just mindless.

The reason you are assured long term failure is that there is a 99.99% chance your “crowd” has no clue what it’s doing; that your “crowd” is not composed of the 100 brightest insider minds on Wall Street.  And you are not alone.  Every year 75% or so of professional day traders and market timers, including those professionals who manage mutual funds and pension funds, end up losers.

Group think is for ego-inflated juveniles.  Peer pressure drives kids in high school in the direction of “cool” but group think is mutually assured destruction for investors.  You may see yourself as the “Wolf of Wall Street” but you’re a sheep ripe for shearing, if not a lamb ripe for slaughter.

CramerCNBC and Fox Business and Bloomberg and Seeking Alpha and the “hot tips” you get from watching the options traders on TV who think long term is two weeks are comedy shows to any truly successful investor.  Daily market action is noise being processed through these venues as something important.

Do you think the great investors listen to any of these fools?  Do you think Warren Buffett and George Soros give a good goddam what CNBC’s talking heads have to say … about anything?  These two men and a few others, most notably in our lifetime Sir John Templeton … the guy to started investing in war-ravaged international markets that no one else wanted to touch in 1946 and the guy who made famous the adage “buy when there’s blood running in the streets” … became billionaires by buying when the crowd was panic selling, and selling when the crowd was in a buying frenzy.

The markets are extremely expensive relative to any standard valuation model you choose to consult.  This one, applying a standard metric all the way back to 1871, is the one I’ve chosen.  You don’t have to agree with the 24.9 P/E ratio this metric produces … but you can’t say this graphic is distorted or biased in any way.

Crestmont-PEJan2014

There is room overhead for the market mania to continue.  The late 1990s tech bubble and the period just prior to the 1929 crash are in orange.  The vast majority of the last 142 years the market has not been this highly priced.  To the juvenile investor, none of this matters, as the market is “crowd-sourcing” a mindless buying panic at the moment, and being left out is unthinkably awful.  There is no pain for a juvenile investor greater than missing out, is there?  No pain for a teenager like not being “cool”.

Here’s another old Wall Street adage you might want to ponder for awhile: “no tree grows to the sky”.

 

Saturday Snark: The American Paradox

The American paradox for budget cutters trying to deal with massive federal deficits is that 75% of Americans are for cutting federal spending, while 75% of Americans will vote against anyone who actually does.  Then after we continuously re-elect people who have “brought home the bacon” to our township, city, county, and state 90% of us tell pollsters we have no respect for an “out of control” Congress.  Jeremy and Pierce nail it.

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