FYI from Lindsey

Aced It!

On March 28, 2017, the Wall Street Journal published an opinion piece from Mark P. Mills, a senior fellow at the Manhattan Institute titled, "Saudi Arabia puts U.S. Energy Producers to a Test-- and They Ace It".

"We're witnessing the first signs of a new normal in oil markets.  Call it Shale 2.0, characterized by a potent combination: eager and liquid capital markets funding hundreds of experienced (now lean) small to midsize companies that can respond to modest upticks in price with a velocity unseen in oil markets in eons."

Many Americans will recall the humiliating vision of cars lined up for gas during a shortage engineered in the early 1970s by the Organization of Petroleum Exporting Countires (OPEC).  The U.S. economy was held hostage by a collection of countries with vast oceans of oil reserves beneath their sandy landscape.  In fact, we experienced a painful recession in 1973-4 and much of the blame can be traced to the OPEC oil embargo intended to punish the U.S. for its traditonal support of Israel.

For decades to follow, our dependence upon foreign oil imports actually grew despite lip service from successive administrations promising to reduce our vulnerability to geopolitical black mail.  It was only after oil prices crossed the $100 per barrel threshold for a sustained period when U.S. oil producers could afford to exploit huge reserves of shale oil and natural gas.

"This year sees the U.S. not only filling storage tanks to the brim but also exporting more than a million barrels of crude oil a day.  Exports are at the highest level in American history, twice the previous crude export peak in 1958.  The U.S. is exporting more oil than five of OPEC's thirteen members."

Saudia Arabia tried to thwart American oil and gas prodcution in 2015 by flooding the market with supply to exacerbate price declines that started the year before as U.S. shale production took off.  The Saudis expected the price drop from $120 per barrel to less than $30 per barrel to drive many American oil producers into bankruptcy.  Certainly this happend to some companies, but they were merely absorbed by domestic competitors with stronger financials.  Meanwhile, innovative technologies were introduced that have dramatically lowered shale prodcution costs.  "Productivity-- output per shale drilling rig-- has been rising by more than 20% a year."

OPEC has been severely challenged as recent price increases have brought even more shale investors and drillers to the market.  Even more frightening from their perspective is "software tools and techniques will now start to invade the shale domain, one of the least computerized industrial sectors."  While the U.S. still imports oil, net imports have declined by half.  We are now the world's biggest natural gas producer and have become a net exporter of energy.  Ed Morse, Citigroup's head of global commodities, states the obvious, "OPEC has lost its clout."

Mr. Mills concludes, "It's hard to imagine a more potent combination than huge markets, willing investors and galloping software technology.  It's entirely feasible for America to become a far bigger oil exporter, even  one of the biggest.  Such is the power of shale and software.  It's not what the Saudis had in mind when they launched that stress test."  It is no understatement to say capitalism accomplished in five years what forty years of political rhetoric could not-- growing oil independence and the neutering of a geopolitical bully.  Aced it!

 

 

January 2017-- Poverty is Going Extinct!

I came across a fascinating article recently by Johan Norberg writing in the December 2016 issue of the Spiked Review.  In it he makes the extraordinary claim, "poverty is going extinct." 

For purposes of clarity, the income definition of "extreme poverty" to which he is referring is $1.90 per day, adjusted for local purchasing power and inflation.  Of course, that level of income is difficult to comprehend in the United States where only the homeless might qualify.  Yet it holds profound implications in places around the world where 700 million still fall under the threshold.

Imagine, yesterday 138,000 people rose out of extreme poverty.  Today, another 138,000 people rose out of extreme poverty.   And tomorrow, another 138,000 people will rise out of extreme poverty.  Every year more than 50 million inhabitants of our planet will climb above the threshold for extreme poverty, but we never hear about this remarkable development.  Instead, we are bombarded with news of the latest plane crash or terrorist attack.  These events are genuinely tragic, but the number of people directly affected worldwide by such incidents is very small in comparison.

"Since 1990, when social critic Naomi Klein claimed that global capitalism lapsed into its most savage form, the proportion who live in extreme poverty... has been reduced from 37% to less than 10%."  Norberg described the United Nations Millennium Summit in 2000 where the assembled nations set a goal of halving the 1990 incidence of extreme poverty by 2015.  The goal was achieved by 2010, and "even though the world population grew by more than two billion... the number of people who live in extreme poverty was reduced by more than 1.25 billion people."

Throughout human history, as population grew, the number mired in extreme poverty grew.  Not anymore, and now the total number struggling under these conditions is less than it was in 1820.  "If this does not sound like progress, you should note that in 1820, the world only had approximately 60 million people who did not live in extreme poverty.  Today more than 6.5 billion people do not live in extreme poverty."  In percentage terms, the risk of living in extreme poverty has been reduced from 94% in 1820 to less than 10% today.  Certainly there is more work to be done, but those statistics are worth sharing, don't you think?!

 

Filial Responsibility Laws

Imagine your parents outliving their money. A terrible thought, right? Should this occur, there will be one of two outcomes. Either your parents will move in with you (or someone else), or your parents will become indigent.

Hopefully, your parents have saved, invested, and managed their money well enough to avoid such a plight, whether they live together or separately. If either or both of your parents do end up in such dire financial straits, the burden of rescuing them could fall on your shoulders. That is because 29 states have filial responsibility laws.

Imagine drawing down your retirement savings to pay for a parent’s nursing home care. Thanks to these obscure, but enforceable, state laws, this scenario has occurred.  Nursing homes can turn to these statutes to demand payment of eldercare bills. These laws can be challenged in court, but sons and daughters may have little recourse. In 2012, the Superior Court of Pennsylvania upheld a lower court ruling requiring a man to pay off a $93,000 long-term care bill owed by his mother to a nursing home. In August 2015, the same state court upheld a ruling that a man had to pay his mother $400 a month in filial support.

In the future, will assisted living facilities and nursing homes cleverly exploit such laws (and legal precedents) to file claims or lawsuits against the children of patients? Baby boomers, Gen Xers, and Millennials may face that risk.  Some filial laws do offer loopholes. In Pennsylvania, for example, children cannot be held legally responsible under the state filial law if their parent abandoned them for a decade or longer during their childhood or if the parent's immediate family is incapable of paying the debt.

How easily can a nursing home saddle you with your mom or dad's eldercare bill?  In order to cite filial responsibility laws, the nursing home or assisted living facility usually has to provide proof that the resident cannot pay the cost of care.  That minor hurdle is unlikely to deter eldercare providers as baby boomers enter their sixties, seventies, and eighties. Providers may be forced to explore every possible avenue to collect the payments that will keep them in business. 

Will Medicaid (Medi-Cal in California) pay for eldercare if a parent runs out of money? It often will.  If the applicant is already eligible for Medicaid prior to requesting coverage, that coverage can be retroactive up to three months from its starting date.   Medicaid does have its potential downside. By law, state Medicaid programs must try to collect reimbursement for coverage of eldercare costs after a Medicaid recipient passes away. While the value of a car and a home have no effect on someone's eligibility for Medicaid, that home and car can be claimed by the state as it seeks to recoup its costs. An estate is usually spared from this effort if the deceased person leaves behind a surviving spouse, children under 21, or disabled or blind children of any age. Property held in a trust should also be exempt.

If you and your parent(s) jointly own assets or accounts, that could be a problem. As an example, say you and your parent jointly own a townhouse. If you attempt to sell it after your parent's death while the state is trying to recoup Medicaid costs, the state may place a lien on it. You will have to give up some of the sale proceeds to settle the lien.

Here is a "what if" worth considering:  if your parents become destitute, how much financial responsibility will you be willing to assume on their behalf?  Given the presence of filial laws and the possibility of Medicaid liens, you may end up more involved in their financial affairs or estate than you expect.

Of course, it’s possible, with increased awareness, that criticism of these laws could prompt legislative relief.  Politicians might respond if enough of their constituents get hijacked by litigious care facilities.  Perhaps they would pass legislation to alter or eliminate the relevant state law.  Or perhaps generous campaign donations from the owners of these facilities could persuade the politicians to sustain or expand the reach of filial responsibility laws.

So how should concerned family members counsel aging loved ones? If the parents have sufficient resources and reasonable health, they should consider buying Long Term Care (LTC) insurance to transfer some of the burden that could otherwise fall upon family members.  (Likewise, you may want to consider purchasing LTC insurance to protect your own children from this predicament.)  If parents are under precarious financial circumstances, perhaps family members could subsidize the premiums for LTC insurance as a cheap alternative to paying for care or facing litigation.  Where health or collective financial means are not present, family members should look more closely at Medicaid and how to facilitate eligibility for their loved ones.  After the parent passes, however, the executor must anticipate Medicaid collection efforts and delay distributing assets to surviving family members until all claims are satisfied.

For the record, filial laws remain in place in Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, and Puerto Rico.

 

Brexit—What are the Implications?

So far only one client has called with concerns about Friday’s market decline (June 24, 2016) following the United Kingdom’s vote to exit the European Union (EU)—also known as Brexit (British Exit).  I have received dozens of commentaries from an equal number of money management firms, and this summary will help to frame the issues for investors. 

Worldwide market reaction has been universally negative with strong downward pressure on stock prices.  This is not surprising as expectations of a Remain vote drove prices higher in the week leading up to the vote on Thursday, June 23, 2016.  With many institutional traders caught on the wrong side of the vote, they are scrambling to unwind losing positions. 

Short-term we can expect greater volatility world-wide as markets try to digest the implications of the Brexit vote.  It is important to note the process of exiting the European Union will take upwards of two years.  With that much lead time, there will be concurrent and related issues that will also capture investor attention.  For example, what terms will the UK be able to negotiate with the EU in their planned departure?  Germany has expressed a desire for continuation of free trade between the EU and the UK.  However, the “eurocrats” in Brussels who oversee the European Union may play hardball as a way to discourage other countries from exiting, like Spain, Italy or Greece. 

Will the UK slip into recession and will that contribute to a European recession, or even a global recession?  A slow-down in the UK is a near certainty, and may leak into the broader EU.  However, signs of strengthening in the world’s two largest economies, the US and China, may be enough to reduce the likelihood of a global recession.  Moreover, weakening European currencies in the face of these uncertainties will promote exports and a more favorable trade environment for companies there.

The most important thing to remember during periods of great uncertainty is that historically they offer the best opportunities for long-term investors. According to J.P. Morgan, over the past 36 years, the market on average has experienced an intra-year drop of -14.2%, yet has managed to post positive returns in 27 of those 36 years.  This strongly suggests those investors who were able to stay the course experienced much higher returns than those who sold when the market was down.  This is why we hire expert money managers, to exploit opportunities for the benefit of our clients and their long-term objectives. 

 

 

The Genius of Liberated People

On May 21, 2016 the Wall Street Journal published an article called “How the West (and the Rest) Got Rich” written by Dr. Deirdre McCloskey, distinguished professor emerita of economics, history, English and communication at the University of Illinois at Chicago.  Dr. McCloskey contends so much attention is being directed at the current economic malaise, that our perspective has become clouded.  She suggests we consider what she calls the “Great Enrichment” since about 1800.

“Look at the magnificent plenty on the shelves of supermarkets and shopping malls.  Consider the magical devices for communication and entertainment now available even to people of modest means… Nothing like the Great Enrichment of the past two centuries had ever happened before.  Doublings of income—mere 100% betterments in the human condition—had happened often, during the glory of Greece and the grandeur of Rome, in Song China and Mughal India… A revolutionary betterment of 10,000%, taking into account everything from canned goods to antidepressants, was out of the question.  Until it happened.”

She then provides an overview of competing explanations for this unprecedented worldwide phenomenon.  Karl Marx, and those on the left, would say it was capitalist exploitation of the masses whose surplus production was seized and invested in “dark and satanic mills”.  Those on the right, including Adam Smith, would suggest savings provided the needed capital for economic development.  “A recent extension of Smith’s claim is that the real elixir is institutions.”

Ultimately, the professor concludes, “What enriched the modern world wasn’t capital stolen from workers or capital virtuously saved, nor was it institutions for routinely accumulating it.  Capital and the rule of law were necessary, of course, but so was a labor force and the arrow of time.  The capital became productive because of ideas of betterment—ideas enacted by a country carpenter or a boy telegrapher or a teenage Seattle computer whiz.  The coupling of ideas in the heads of the common people yielded an explosion of betterments.”

Economic philosophies alone cannot explain this miracle.  “If capital accumulation or the rule of law had been sufficient, the Great Enrichment would have happened in Mesopotamia in 2000 B.C., or Rome in A.D. 100 or Baghdad in 800.”  For centuries China was the most technologically advanced country, but none of these empires were able to spark an economic explosion of such magnitude.

Instead, it was in northwestern Europe where the Industrial Revolution and, later, the Great Enrichment began. “Why did it all start at first in Holland about 1600 and then England about 1700 and the North American colonies and Scotland, and then Belgium and northern France and the Rhineland?  The answer in a word is LIBERTY.  Liberated people, it turns out, are ingenious.  Slaves, serfs, subordinated women, people frozen in a hierarchy of lords or bureaucrats are not.  By certain accidents of European politics… more and more Europeans were liberated.”

She then makes a distinction about this burgeoning liberation.  “It was not an equality of outcome.  It was equality before the law and equality of social dignity.  It made people bold to pursue betterments on their own account.”  To put it bluntly, it was not a socialist model but rather a capitalist model of free enterprise that birthed this historic development.

In her essay, Dr. McCloskey concludes, “The Great Enrichment is the most important secular event since human beings first domesticated wheat and horses.  It has been and will continue to be more important historically than the rise and fall of empires or the class struggle in all hitherto existing societies.  Empire did not enrich Britain.  America’s success did not depend on slavery.  Power did not lead to plenty, and exploitation was not plenty’s engine.  Progress was not achieved by taxation and redistribution.”  The Great Enrichment was triggered by the expansion of individual liberty and opportunity for those willing to innovate and work hard for personal advancement.

I found Dr. McCloskey’s essay to be refreshing, especially after seeing a recent YouGov survey where respondents younger than 30 years old rated socialism more favorably than capitalism (43% versus 32%, respectively).   The “Iron Lady” Margaret Thatcher, Prime Minister of the United Kingdom, famously remarked, “The problem with socialism is you eventually run out of other people’s money.”  Winston Churchill shared this insight, "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."  During this election cycle, let’s not forget the benefits of individual liberty and equal opportunity that sparked the Great Enrichment as described by Dr. McCloskey.

 

 

March 2016-- Corporate Tax Rates

What follows is from a speech on March 1, 2016 at the University of Chicago Booth School of Business by Larry Summers, Harvard economist and former U.S. Treasury Secretary during Bill Clinton's administration:

"With respect to private investment, tax reform is critical.  Permit me an analogy here.  Imagine that you are running a library and that there is a substantial volume of overdue books.  You might offer amnesty to get people to return the books.  You might announce you  will never offer amnesty, so people will take fines seriously and return the books.  Only an idiot would put a sign on the door saying, "No amnesty now, but we're thinking hard about amnesty for next month."

You laugh, but American corporations have $2 trillion-plus overseas.  If they bring that cash back right now they pay 35%.  If you've picked up any newspaper in the last seven years, you'll know that Congress has been actively debating changes to that policy-- for seven years.  Just like the sign on the door of the library saying they're thinking about amnesty for next month.  It would be hard to conceive a policy better designed to keep that cash outside the U.S. and not invested in the U.S. than the policy we have pursued.  That's why I stress business tax reform as important for economic growth."

How refreshing to hear a compelling argument for reducing corporate tax rates from a Democratic stalwart.  It is a healthy reminder we must look past political rhetoric that gets spewed during crazy election cycles and focus on policies that will lead to a desired result.  In this case, repatriation of $2 trillion dollars  would seriously boost tax revenue for the next administration AND contribute to massive reinvestment that should boost U.S. employment and wages!

 

November 2015-- What is the Forecast?

History tells us March 9, 2009 was the end of a severe bear market that saw nearly every asset class tumble by close to 50%.  What began in October 2007 amidst a profound slide in real estate values became a free fall in September 2008 when Lehman Brothers declared bankruptcy.  If you listened to the media during this turbulent period, you could not help but be pessimistic.  Indeed, just five days before the current bull market began in March 2009 only 18.9% of individual investors were "bullish" on U.S. stocks (source: AAII).

George Soros, a famous hedge fund manager, remarked "the worse a situation becomes, the less it takes to turn around-- and the bigger the upside."  How many media forecasters were predicting the explosive rebound in financial assets such that the S&P 500 stock index matched its previous high by March 28, 2013?  Since then, the S&P 500 has set an additional 107 all-time closing highs, including 44 more in 2013, 53 in 2014, and 10 year to date in 2015 (source: BTN Research).

How do we explain the widespread pessimism driving current volatility?  University of Pennsylvania's Philip Tetlock, who studied the predictions of political forecasters, writes: "The better forecasters were... self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes, and were rather modest about their predictive abilities.  The less successful forecasters were like hedgehogs: they tended to have one big beautiful idea that they loved to stretch, sometimes to the breaking point.  They tended to be articulate and very persuasive as to why their idea explained everything.  The media often love hedgehogs."

This commentary is not intended to deny the inevitability of market corrections.  Instead, I want to affirm the truth espoused by another famous investor, Peter Lynch, who reminds us, "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections."  In the face of volatile markets, John Bogle, founder of the Vanguard Funds advises "Don't just do something.  Sit there!"  That is easier said than done when "hedgehogs" confidently tell us otherwise.

It seems human nature is always in conflict with successful investing where patience helps to neutralize risk.  The lessons of this aging bull market then, are also the lessons for the next bear market.  We may fantasize about our ability to dodge the bear, but for most investors, the real opportunity lies in being positioned for the next bull market.  The sooner we lay aside the pessimism of short term thinking hedgehogs, the better we can enjoy the historical veracity of long term optimism.  In this grand season of thanksgiving, let's remember the words of J.P. Morgan over a century ago who stated flatly, "Any man who is a bear on the future of this country will go broke."

 

 

Spring 2015-- Peak Oil Demand?

Conventional wisdom proclaims the demand for, and the price of, oil will inevitably rise in the coming decades.  Surely worldwide population growth and an exploding middle class among the developing nations will be the driving forces behind this prediction.

If true, then many of today’s geopolitical and economic dynamics are likely to persist and deepen.  For example, Russia’s ability to use oil as a weapon will continue to fuel an aggressive foreign policy.  In our own hemisphere, Venezuela may be able to continue its irresponsible domestic and international policies without fear of going bankrupt.  OPEC, and Saudia Arabia in particular, will continue to wield considerable influence in the global marketplace.

Yet there are reasons to question this view.  One contrarian is Amy Myers Jaffe, the executive director of energy and sustainability at the University of California, Davis (my alma mater).  She is also chairwoman of the Future of Oil and Gas for the World Economic Forum.  In the May 6, 2015 edition of the Wall Street Journal, Ms. Jaffe outlines several factors she believes will lead to peak global oil demand within the next two decades.

She cites general agreement among experts that “a combination of policy inducements, energy taxes, and technological breakthroughs has resulted in a peak in oil demand in the largest industrialized economies.”  Europe’s oil use has dropped considerably since the mid-1990s, while the U.S. Energy Information Administration identifies 2007 as the peak in our demand.  Even China is expecting peak oil demand by 2025 “as the country transitions to less-energy intensive activities.”

A surprising nod to big data recognizes “exponential gains in productivity… for everything from transportation logistics to industrial equipment… that offer dramatic savings on energy use.”  For example, airlines use big data to ensure fuller flights and better routes, while mobile apps help drivers avoid traffic congestion.  Similar efficiencies are expected in the rail industry.

Demographically, the world is experiencing rapid urbanization as workers seek to integrate their job and family life in cities where opportunities are plentiful.  Perhaps you’ve noticed how heavily populations within large cities rely upon mass transit.  Subways, light rail, taxis, Uber, and other iterations of shared transportation portend a decline in car ownership.  Of course, tele-commuting will become even more pervasive in the global economy and further reduce our dependence upon fossil fuels.

These are trends that have already been identified and don’t even speak to innovation in renewable energy.  Many are now using government tax credits to purchase solar for their homes or businesses.  Tesla is the current face of electric cars, but technological improvements will likely attract more interest among consumers from a growing list of manufacturers.

As investors, we must learn to question the consensus.  When someone is interviewed on TV or authors a book proclaiming a “universally accepted view”, we should politely ignore their prophetic utterances.  Instead, watch in awe struck wonder as innovation and incentive reshape our world in ways we can scarcely imagine.  Keep the faith!  

 

December 2014

A recent editorial appeared in the Wall Street Journal (12/23/2014) written by Bret Stephens.  "The Marvel of American Resilience" focused on the extraordinary history of U.S. innovation that impacts the world at large.  Recent examples he included were social media, mobile applications, cancer immunotherapy, and fracking.

History shows how American ingenuity and risk taking have been a steady source of economic and social benefits around the globe.  Right now we find the combination of horizontal drilling and hydraulic fracturing revolutionizing the delivery of cheap oil.  To quote from the editorial: "Fracking has now upended energy markets, pummeled petrodictators, confounded OPEC, forged deeper North American economic ties, slashed U.S. greenhouse-gas emissions to their lowest level since 1995, and sunk a nail into the coffin of most renewable energy schemes..."  Consumers worldwide are enjoying a remarkable break in energy costs that enables them to redirect expenditures toward a higher quality of life. 

For those of us old enough to remember OPEC manipulating oil prices in the U.S. and trying to dictate our foreign policy with supply disruptions, this is an unexpected treat.  Meanwhile, countries like Russia, Iran and Venezuela who threaten regional or global peace, must focus more on domestic concerns.  

Mr. Stephens concludes his editorial by reminding Americans of some important truths:  "We are larger than our leaders.  We are better than our politics.  We are wiser than our culture. We are smarter than our ideas."

In the year ahead don't let your perception of life, this country, and our world be distorted by the media focus on disasters and upheavals.  We are blessed to live in America, and the world's inhabitants continue to see us as that "shining city on a hill" referred to by a previous resident of the White House!

 

Fall 2014-- Recent Market Volatility

Many have been asking my professional opinion on the dramatic uptick in stock market volatility and recent declines in stock indices.  I do not have divine insight, but I do have opinions informed by thirty years of experience as an investment advisor.

The U.S. stock market has shown remarkable stability during its climb from the 2008-2009 global credit crises.  After this extended period of low volatility and relatively steady gains, it appears anxiety has returned.  Of course, there are many issues that deserve our attention: concerns over the Ebola virus and potential for a pandemic, continued unrest between Russia and Ukraine, perpetual unrest in the Middle East, unspeakable cruelty perpetrated by ISIL and other terror groups worldwide, and the orgy of partisan rancor leading up to the elections. One could reasonably complain there is always something to fear, including fear itself.  

Conversely, one could point out that economic opportunity exists in every kind of environment.  Consumer demand never stops for goods and services delivered to market by publically traded companies that we invest in.  Even during our so-called “jobless recovery,” we are witness to increased demand for housing and automobiles, not to mention the latest iphone 6!

The best protection any investor has for market volatility is to know their investment time horizon.  If someone expects to be liquidating an investment within three years, those assets should be repositioned for safety, even if the stock market is experiencing dramatic growth.  There may be some gains missed by such an action, but when time is short, you must consider the impact of a sudden downturn from which you cannot recover.  But for long term investors, short term volatility has minimal impact on their long term opportunity for growth.  In fact, mutual fund managers can use the short term decline in prices to purchase favored companies at reduced share prices. 

This message will sound familiar to our long tenured clients.  Together we have experienced huge market declines (2000-2002 and 2008-2009) followed by rebounds to new heights.  While there are no guarantees with investing, perhaps you can find comfort knowing your advisor is available whenever you need perspective or reassurance. 

 

 

Beware Agenda Driven Fuzzy Math

 

An opinion piece appeared in the Wall Street Journal on October 17, 2013 written by Andrew Biggs, the former deputy commissioner of the Social Security Administration.  He offered a counterpoint to a published report from the American Association of Retired Persons (AARP) claiming that "Social Security generates nearly $1.4 trillion in economic activity and supports more than nine million jobs."

 

In 2012, Social Security paid out almost $715 billion in retirement, survivors and disability benefits.  The AARP report correctly points out that recipients spend those benefits which then trickle down through multiple layers of the economy.  "Because of the mulitplier effect, every dollar of Social Security paid out translates to almost two dollars in spending in the United States."

 

Of course, AARP rightly views Social Security as a critical safety net for their senior citizen constituents.  But this does not excuse them from publishing a report that engages in fuzzy math.  What the study overlooks is the money pulled out of the economy through Social Security payroll taxes to fund these benefits.  Retiree spending undoubtedly has a multiplier effect, but reduced saving and spending from workers resulting from the payroll tax has an offsetting "divisor effect."

 

The article quotes many other studies that consider the effects of government transfers that reach a very different conclusion.  This more objective view suggests the economic effect of Social Security benefit payments is not $1.4 trillion or nine million jobs.  At best, it's zero!

 

There is probably little debate about the benefits to society as a whole for helping support seniors and others who would be at risk without Social Security.  But offering distorted economic arguments only makes rational discussion more difficult.  Recent events demonstrate there is an extreme shortage of rational discussion in Washington D.C. already.

 

To quote Mr. Biggs, "just as in grade-school mathematics, when you consider only one side of an equation, you're almost sure to get the answer wrong."  Let's hope our representatives in government consider both sides of every issue so we can begin to see rational, bipartisan solutions to the complex challenges of our time.

 

 

 

February 2013-- Significant and Durable Trends


The talking heads of TV and Cable, along with the disembodied voices of the radio airwaves, seem to dwell mostly on the negatives.  If these are your primary sources of information, then you are bound to feel depressed.  This FYI is intended to expand your awareness of developing trends likely to have a significant impact on our economic future. 

 

The first trend has barely been address by media centers. As the cost of oil has risen around the world, the search for new methods of extraction has led to an energy revolution within the United States.  Walter Russell Mead is the James Clarke Chace Professor of Foreign Affairs and Humanities at Bard College and Editor-at-Large of The American Interest magazine.  He recently observed:

 

"If the energy revolution now taking shape lives up to its full potential, we are headed into a new century in which the location of the world’s energy resources and the structure of the world’s energy trade support American affluence at home and power abroad….The energy bonanza changes the American outlook far more dramatically than most people yet realize. This is a Big One, a game changer, and it will likely be a major factor in propelling the United States to the next (and still unknown) stage of development — towards the next incarnation of the American Dream."

 

How about the rise of the global consumer?  Researchers at the McKinsey Global Institute estimate the worldwide population of the "consuming class," or those with disposable income, will nearly double in the next 15 years!  The growth of the middle class in China and India leads the advance, but countries in Latin America and Africa also have an exploding consumer class.  This translates into an additional $30 Trillion (with a T) in buying power!  By the year 2025, the McKinsey report projects for the first time in history more people will be middle class than poor. 

 

In the years ahead, this global middle class will demand goods and services without regard to national borders.  Economic interdependence between nations will be driven by a population that wants a better quality of life for themselves and their children.  These concepts are part of the American fabric, but totally new for two-thirds of the world's citizens. 

 

Keep an attentive ear for the quiet developments and peaceful revolutions going on all around.  Human progress is a function of the inspired dreams of the optimistic among us.  So don't let the media's filtered pessimism hide the bright future that breaks upon the horizon.  Good morning world!

 

 

 

CalPERS and CalSTRS:

 

Some clients have asked about the financial condition of CalPERS and CalSTRS from which their pensions are derived.  On Monday, December 14, 2009, the Wall Street Journal (page C3) reported on the sharp downgrade of each from AAA to Aa3 by Moody's Investors Service.  The article suggested the three notch downgrades were, in part, a reflection of the recent spike in unfunded liabilities following the funds' negative returns for the year ended in June.  

 

"CalPERS is trying to reduce its unfunded liabilities, or the difference between assets and obligations, which were $35 billion before the 24% investment loss last year.  Yet many California municipalities are struggling with their own budget pressures and didn't welcome higher contributions."  Therefore, "CalPERS... last month (agreed) to defer an increase in local-government contributions to the fund from 2011 until 2012."

 

I suspect this issue will become more prominent as the calendar approaches 2012.  If investment returns permit a more gentle increase, then we may hear very little.  If investment returns are meager, or there is a genuine effort made to close the preexisting gap in funding, then we may see a political debate about continuing the benefit for new hires. 

 

I do not foresee politicians risking a hostile response by the unions regarding current employees.  It is possible, however, that future employees will be less likely to have this pension available upon retirement. 

 

 

 

The views expressed are those of Lindsey Randolph and should not be construed as investment advice.  All economic information is historical and not indicative of future results.  All information is believed to be from reliable sources; however, we make no representations as to its completeness or accuracy.  Discuss all information with your advisor prior to implementation.