a loser's game

the idea that trading adds value contains an economic fallacy that can be seen using a simple exercise described by Jack Bogle in a 2009 interview with The Motley Fool.

In this exercise, he suggests imagining that half the shares outstanding of all the stocks in the S&P 500  Index are owned by long-term investors and the other half by traders. By definition, the long-term holders who own half the shares and do not trade them will earn the market return. The traders on the other hand are trading with each other because the long-term investors are not trading with them.

As Jack concludes, “It follows as the night to the day that the traders will lose by the amount of money paid to the intermediaries, the croupiers in the middle [as well as to the IRS!]. It therefore follows logically and mathematically that buying and holding is a winner’s game and buying and trading is a loser’s game. Simple as that. No way around it.”

scary earnings

Autumn is in the air, and it's not just the leaves that will be losing their green in the coming weeks.
The Wall Street Journal is reporting that -- for the first time in nearly three years -- companies in the S&P 500 are expected to post an overall decline in profitability.

Thomson Reuters sees a 2.9% decline in earnings. S&P Capital IQ sees a slightly smaller deficit. However, both analyst trackers do see companies, on average, posting lower net income this time around.

In other words, earnings season has never been this scary.

Buffett Rule fails to pass Senate

[4/16/12] Senate Republicans on Monday blocked President Barack Obama's "Buffett Rule" legislation, which would have put a 30-percent minimum tax on millionaires, in a debate that is likely to resonate through the November general election.

Democrats, as expected, failed to garner the 60 votes needed in the 100-member Senate to move to a full debate and vote on the bill aimed at getting more tax revenues out of the wealthy.

"Tonight, Senate Republicans voted to block the Buffett Rule, choosing once again to protect tax breaks for the wealthiest few Americans at the expense of the middle class," Obama said in a statement.

Fifty-one senators voted for the bill, while 45 senators voted no, effectively killing it. Republican Senator Susan Collins voted for the tax hike, while Democratic Senator Mark Pryor voted against it.

famous last words

What are investors thinking when they make mistakes? What's going through their heads? The frame of mind that guides the biggest investment fumbles might be best summed up with a list of famous last words.

"I thought I was getting guaranteed high returns."
Everyone wants that, so no one will get it. Any legitimately "guaranteed" investment will attract so much money that returns will be pushed down to zero -- and negative after inflation. You aren't entitled to anything you're not willing to pay for.

"I want to get in now before I miss more of the upside."
One of the fastest roads to poor results. Buy businesses, not regrets.

"This was a one-in-a-million event."
Maybe it was. Or maybe you severely miscalculated the odds. Reality is almost always the latter.

"You can't afford not to own this stock."
As close as it gets to ringing a warning bell at the top of a bubble.

"I'm going to wait on the sidelines until there's more clarity."
The easiest way to ensure you'll miss the bulk of bull markets.

"It's different this time."
A cliche among famous last words, but easily the most important. Risk will never be eliminated, growth will never be limitless, and markets are never fully efficient. When it comes to big, basic principles of investing, it's never different this time. This truth explains the majority of investment blunders.

[I don't care, I'm still buying Apple.]

2012 To-do list

In a normal year, I would say there's no reason to hustle to rebalance your portfolio before year-end. But this year is different because a host of Bush-era tax rates that were favorable to investors are set to expire at the end of December, barring Congressional action. Top of mind for rebalancers? Long-term capital gains taxes, which are set to rise from 15% currently to 20% for those in the highest tax brackets, and to 10% from 0% for those in the 15% tax bracket or below. (This article summarizes some of the key investment-related tax changes that will kick in next year.)

If your portfolio review indicates that it makes sense to lighten up on a winning position that you've held for more than a year--either because its valuation seems high or because it's too large a piece of your portfolio--it's a layup to do so this year, at today's low capital gains rates. After all, tax rates may stay the same, but no one's talking seriously about them going any lower than they are right now. On the other hand, there are risks in going overboard in an effort to lock in low long-term capital gains rates. If you don't have a convincing fundamental impetus for selling a security and tax rates stay the same, unloading it now will trigger a gain that you might have otherwise deferred. This article provides an overview of key tips and traps to bear in mind if you're considering selling something preemptively.

Yet another maneuver that's worth putting on your radar between now and the end of 2012 is converting traditional IRA assets to Roth, a tack that would have multiple benefits in a higher-tax climate. First, the taxes due upon conversion would be based on 2012's relatively low income tax rates. Second, Roth assets will be even more valuable if income tax rates rise in the future because Roth withdrawals are tax-free. Finally, Roth assets aren't subject to the new Medicare surtax going into effect in 2013, which I discussed in this article.

The American budget

For more than a century, the Bureau of Labor Statistics has published a list of how an average American consumer spends his or her annual budget. Rather than the raw numbers of inflation we tend to obsess over, it highlights the impact certain goods have on people's budgets in relation to their incomes.

Take, for example, how much of an average consumer's annual budget is devoted to food:

In 1901, the consumer spend 46.4% of their budget on food.  This dropped to 32.5% in 1950.  Then to 22.6% in 1972.  And to 12.8% in 2005.  It may have bottomed though as it was 13.0% in 2011.

How about apparel?  It was 17.6% in 1918.  8.4% in 1972.  3.5% in 2011.  (My budget for apparel is probably like 0.01% or less.)

In 1960, typical consumers devoted 36.3% of their budget to food and apparel (combined). Today, 16.5% of an average budget goes to those two categories. That's a difference of 20 percentage points. And since we aren't eating less or wandering around less clothed; it truly does mean that one-fifth of an average consumer's budget was freed up within with 50 years. And that's just looking at food and apparel alone.

What happened to that 20% of our budget? That's where things get interesting. Spending 20 percentage points less on food and apparel means we get to spend more on other categories. And a lot of those other categories include products and services that have made our lives demonstrably better.

For example, the percentage of our budgets devoted to health care has more than doubled since 1901.
Some will say that's a bad thing. Healthcare, after all, has seen inflation well beyond the rate of wage growth in recent decades. But there's another, deeply positive side to it. The quality of the medical care grew exponentially in the last century. And we can afford to spend more on health care today in part because large parts of our budgets have been freed up thanks to the relative decline in expenses like food and apparel. We've traded expensive pants for penicillin. That's a wonderful thing. And it has helped push average life expectancy up from 48 years in 1901 to 78 years today.

What else are we spending more of our budgets on today? Education:

In 1901, it was 0.0% (!).  1.1% in 1960.  2.1% in 2011.

[And how about cable TV?  I'm pretty sure it was 0.0% in 1901!]

the fiscal cliff

WASHINGTON (AP) - A typical middle-income family making $40,000 to $64,000 a year could see its taxes go up by $2,000 next year if lawmakers fail to renew a lengthy roster of tax cuts set to expire at the end of the year, according to a new report Monday.

Taxpayers across the income spectrum would be hit with large tax hikes, the Tax Policy Center said in its study, with households in the top 1 percent income range seeing an average tax increase of more than $120,000, while a family making between $110,000 to $140,000 could see a tax hike in the $6,000 range.

Taxpayers across the income spectrum will get slammed with increases totaling more than $500 billion — a more than 20 percent increase — with nine out of 10 households being affected by the expiration of tax cuts enacted under both President Barack Obama and his predecessor, George W. Bush.

The expiring provisions include Bush-era cuts on wage and investment income and cuts for married couples and families with children, among others. Also expiring is a 2 percentage point temporary payroll tax cut championed by Obama.

The looming expiration of the large roster of tax cuts is one of the issues confronting voters in November, with the chief difference between Obama and GOP candidate Mitt Romney being the tax treatment of wealthier earners. Obama is calling for permitting rates on individual income exceeding $200,000 and family incoming over $250,000 to go back to Clinton-era rates of as much as 39.6 percent.

Both candidates call for rewriting the tax code next year, but any such effort promises to be difficult and could take considerable time.

Economists warn that the looming tax hikes, combined with $109 billion in automatic spending cuts scheduled to take effect in January, could throw the fragile economy back into recession if Washington doesn't act. The automatic spending cuts are coming due because of the failure of last year's deficit "supercommittee" to strike a bargain. The combination of the sharp tax hikes and spending cuts has been dubbed a "fiscal cliff."

the dividend cliff

Last week, NYU Stern professor Aswath Damodaran wrote a blog post on the coming fiscal cliff and the impact it could have on dividend stocks in particular. Later in this article, I'll get more specific about which stocks are most likely to see effects from higher taxes on dividend stocks, but first, let's take a closer look at Professor Damodaran's argument.

The crisis we're facing now is a direct result of the way in which tax cuts were structured over the past decade. In 2001 and 2003, new tax laws reduced rates on ordinary income, dividends, and capital gains substantially, with one of the biggest benefits being given to dividends. For most stocks, dividends had their maximum tax rate reduced to 15% -- a big savings over prior law's treatment of dividends as ordinary income potentially subject to much higher marginal tax rates for high-income taxpayers.

With these tax laws, though, was a catch: They would expire in 10 years. After a two-year extension back in 2010, these cuts are now once again slated to go away at the beginning of 2013, and the coming election gives politicians little incentive to do anything about the looming deadline until after the first week of November.

Damodaran does a good job of explaining what impact higher dividend taxes should have on rational investors. Essentially, he argues that investors value stocks based on their after-tax dividend yield. So if taxes on dividends rise, investors will demand a higher pre-tax dividend yield in order to end up with the same amount of income after taxes.

To show his work, Damodaran goes through a concrete example in valuing the S&P 500 under a change in tax laws. Based on his latest observations, he believes the S&P 500 could be vulnerable to a roughly 15% drop from current levels based solely on dividend taxes.

above GDP

It is a great market, isn’t it? From the beginning of the year, the S&P 500 has gained 16.4%, fueled by central banks’ quantitative easing actions around the world. We thought that the stock market was overvalued already at the beginning of the year…

If the central banks’ goal is to elevate the stock prices, they have done it successfully. But if their goal is to stimulate the economy, we are not sure if they have achieved their goal. But one thing is for sure, a higher current valuation of any asset classes always increases the risks of investing in them. A higher gain in the past means a lower gain in the future.

Now for the third time since 1970 (that is when our data become available), the total market cap index is more than 100% of the GDP. The other two times were in the late 1990s to 2000 and 2006 to 2007. Both ended badly, unfortunately.

total return index

For most investors, the stock market, as they know it, is  the Dow Jones (INDEX: ^DJI) and the S&P 500 (INDEX: ^GSPC) . For the media, the two represent everything. How's the market doing? Better cite the Dow or the S&P.

It's unfortunate, really. Both indexes that we've come to obsess over have flaws. The Dow weights its components by share price, giving IBM (NYSE: IBM) 22 times the weight of Bank of America (NYSE: BAC) . No one I know has ever rationalized this practice. The S&P is weighted by market cap, which makes more sense, but often skews it toward the market's most overvalued companies.

Yet, both share a more glaring defect: They don't include dividends.

We fixate over how much the market indexes have gone up or down in the last month, year, or decade. But since the S&P 500 was created in 1957, one-third of average annual returns have come from dividends. Assuming dividends are reinvested, rising market prices on shares purchased with dividend proceeds means 82% of the market's cumulative return is the result of reinvested dividends. Why would we ignore that? It's the equivalent of measuring how much your child has grown while ignoring everything from the neck down.

Ironically, Standard & Poor's calculates a "total return" index that adjusts for dividend payments. But few pay attention to it, particularly in the media. In the last decade, the S&P 500 Total Return Index has been mentioned in news articles fewer than 100 times, according to Google.

tax rates and the national debt

in a related story (to trickle-down economics below), I wondered what the relationship was between tax rates and the national debt.

For one data point, Reagan cut taxes and the national debt tripled (see that same trickle-down economics post).

So google tax rates and the national debt.

The first result is an article from money.cnn.com entitled, "National debt: why tax revenue has to go up."

Nobody likes having to pay more in taxes. And it's true that the country is on track to spend more than it can afford. So why can't Congress just cut spending to put the federal budget on a more sustainable path?

First answer: the problem is too deep to fix with spending cuts alone.

Here's just how deep: Say lawmakers wanted to permanently freeze the national debt held by the public where it is today -- 67% of GDP. They would need to cut spending by 35%, or about $1.2 trillion, immediately. And those cuts would need to be permanent, according to the Government Accountability Office.

How hard would that be? Consider that in 2010, all of discretionary spending -- including defense -- totaled $1.4 trillion.

So does the country have a spending problem or a revenue problem? In truth, it's both. (Obama's deficit problem: His tax cuts)

"Everybody would like low taxes. And they'd like government to do everything that they think government should do. But the arithmetic can be a problem," said Susan Irving, director of federal budget analysis at the Government Accountability Office.

Of course, Congress doesn't have to hike tax rates in order to raise more revenue. In fact, fiscal experts would prefer that lawmakers lower rates while eliminating or reducing the hundreds of tax credits, deductions and exemptions on the books. Such "tax expenditures" deprive federal coffers of more than $1 trillion a year.

***

The next article is the National Debt FAQ, the The Muser website apparently written by J.C. Adamson (his solution is to leave the big party and become independent).  Anyway here's some excerpts from his FAQ.

We have this debt because our government (that's you & me) spends more than it collects in taxes. The solutions are:

How can we get out of this mess?

The solutions are:

• Spend less. That's a lot harder than it sounds; most government spending that could be cut is relatively minor. The things that cannot be cut (or would be extremely difficult to cut) are huge.
• Tax more. If we can't—or won't—cut spending, it's our only choice.
• Realistically, we have to do both. During the five fiscal years 2003-2007, the deficit averaged 12.3% of spending.* I can't conceive that growth in the economy is going to amount to 12.3% anytime soon. I can't imagine that we can reduce actual spending by 12.3%. So taxation has to be a part of this. 
• * The high during this period was 18%, the low 6%. The January 2008 forecast for 2008 was 8%, but that didn't include the costs of the economic relief package. Revenue could also drop more than forecast due to recession. The Committee for a Responsible Federal Budget has a commentary on this.
• If we are really ready to sacrifice significant spending programs, perhaps we could cut overall spending by as much as 8% or 9%. But think what that means! The average increase in spending over the past 5 years has been almost 5%. If inflation in the next few years averages 3%, and we stop the increases in spending, and we reduce spending by a real 8%, that totals 16%!! What do you think? Is that 8% reduction realistic? Nah, 1% or 2% is more realistic.

• So we have to increase taxes—we have no choice. Won't that hurt our economy? Probably not. And reducing the amount of GDP that's diverted to debt interest will surely help.

***

Next is Mark B. Evans in the Tucson Citizen.  (Who's Mark B. Evans?  He's the editor of the Tucson Citizen.  What is the Tucson Citizen?  It's an internet publication which succeeded the print edition which stopped in 2009.  According to wikipedia, it's "a compendium of blogs . . . written by Tucsonans for Tucsonans.  No mention of whether it leans to the left or right.

There is this pernicious misbelief that nothing affects the economy more than taxes. Raise them and the economy goes down, lower them and the economy goes up.

It’s not true. Tax policy is one small part of an enormously complex American economy. President Reagan lowered taxes and the economy went up. Reagan raised taxes and the economy went up. George H.W Bush raised taxes and the economy went down. Bill Clinton raised taxes and the economy went up. George W. Bush lowered taxes and the economy crashed. Barrack Obama lowered taxes and the economy did nothing.

See a pattern? Neither do we.

The only pattern you can see with all of these presidents is they spent more money than they took in. In the 31 years since Reagan took office, the government has spent more than it received in every year but one.

So now the national debt is a few billion dollars short of $16 trillion.

What do we do about it? The Republicans want to tax less and spend less. The Democrats want to tax some people more and some people less but spend the same (or more, who really knows since they haven’t proposed a budget). Neither of those will work.

The only plan that will work, Simpson-Bowles, named after former Sen. Alan Simpson and former Clinton chief of staff Erskine Bowles, would tax more and spend less.

Because it gores everyone’s ox, neither Democrats nor Republicans like it. So they didn’t pass it and debt continues to pile up while the Congress does nothing.

Nothing will have to become something soon. There is no way around the fact that we’re all going to have to pay for 30 years of profligacy.

One way or another, we’re all going to have to pay a tax.

***

I think we're eventually going to go with Simpson-Bowles.  What is Simpson-Bowles?

The National Commission on Fiscal Responsibility and Reform (often called Bowles-Simpson/Simpson-Bowles from the names of co-chairs Alan Simpson and Erskine Bowles; or NCFRR) is a Presidential Commission created in 2010 by President Barack Obama to identify "…policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run."^[1] The commission first met on April 27, 2010.^[2] A report was released on December 1, 2010,^[3] but failed a vote on December 3 with 11 of 18 votes in favor, with a supermajority of 14 votes needed to formally endorse the blueprint.

Coincidentally they apparently penned an op-ed in USA Today (yesterday).

The Simpson-Bowles commission offered a reasonable, responsible, comprehensive and bipartisan solution that won the support of a majority of Democrats and Republicans on the commission. [but not Paul Ryan] Most importantly, it would reduce the deficit by $4 trillion over the next decade — enough to put the debt on a clear downward path relative to the economy.

Our plan showed that this problem is too large to cut our way out, it’s too large to tax our way out and it’s too large to grow our way out. We need a combination of cutting low-priority spending throughout the budget, reforming entitlements to slow the growth of health care spending and make Social Security solvent, and reforming the tax code to promote growth and generate revenue in a progressive manner. As we make these changes, we must be sure to phase them in gradually to protect what is clearly a very fragile economic recovery and to avoid cuts that would harm the most vulnerable in society.

The “fiscal cliff” is the exact wrong way to reduce the deficit. By mindlessly cutting spending across-the-board, letting tax rates go up on everyone and abruptly taking $500 billion out of the economy in nine months, going off this fiscal cliff would throw us back into recession.

*** (and more)

The Tax Policy Center vs. the Wall Street Journal

the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution that evaluates tax proposals submitted by presidential candidates, examined the effect of Romney’s tax rate cuts combined with the elimination of several common tax deductions. Those include the mortgage interest deduction, charitable giving deduction and the exclusion for health insurance. The center published its findings on Aug. 1, 2012.

To try and keep with Romney's guiding principles, the authors eliminated deductions and write-offs -- starting with the deductions for top earners first -- until they came up with enough revenue to offset the $360 billion in tax cuts that are part of Romney's plan.

They determined that people who earn $1 million or more in taxable income would see an average net tax decrease of $87,117. They’d save $175,961 from Romney's tax cut, but lose $88,444 in deductions.
"They would still get a tax cut," said Adam Looney, one of the authors. "The dollar value of the tax cuts is just way bigger than the mortgage interest and other deductions. There’s no way to implement this plan in a way that doesn’t result in a pretty big tax cut for that group (those making more than $1 million)."

People who earn between $500,000 and $1 million would see a cut of about $17,000, and taxes for people with incomes between $200,000 and $500,000 would decrease by about $1,800, the study found.
But to make Romney's plan revenue neutral, deductions would also have to be removed for people with incomes below $200,000, and the effects of that would be significant, the study found. In fact, the elimination of the deductions would mean outright tax increases for everyone with incomes below $200,000. People with taxable income between $50,000 and $75,000, for example, would see an average net tax increase of $641. They’d save $984 from Romney's rate cut, but lose $2,672 in write-offs.

And now the Wall Street Journal:

This editorial largely draws on other work. It echoed Jensen’s criticism that the Tax Policy Center failed to consider certain tax breaks. It labeled the center authors as "class warriors"  and charged that  the center "ignores the history of tax cutting."

"Every major marginal rate income tax cut of the last 50 years," said the editorial writer, "1964, 1981, 1986 and 2003 — was followed by an unexpectedly large increase in tax revenues, a surge in taxes paid by the rich, and a more progressive tax code—i.e., the share of taxes paid by the richest 1 percent rose."

The editorial also said the center’s findings are "refuted by President Obama's own Simpson-Bowles deficit commission report. The Romney plan of cutting the top tax rate to 28 percent and closing loopholes to pay for it is conceptually very close to what Simpson-Bowles recommended."

***

Is Romney's plan conceptionally close to Simpson-Bowles?

From Forbes (Howard Gleckman)

In the recent contretemps over Mitt Romney’s tax plan, some Romney partisans have asserted that the Massachusetts governor’s revenue plank mimics the tax elements of the deficit reduction plan proposed in 2010 by Erskine Bowles and Alan Simpson, the chairs of President Obama’s deficit fiscal commission.

This claim is absurd. These two proposals could hardly be more different.

True, both propose a significant across-the-board rate cut on ordinary income. But after that, their tax plans have about as much in common as Infected Mushroom and the New York Philharmonic.

The Bowles-Simpson tax reform was fundamentally a trillion-dollar tax increase designed to help cut the deficit, while Romney flatly opposes any deficit-reducing tax hike. Bowles and Simpson would have raised taxes on capital gains and dividends, Romney would cut them. Bowles and Simpson included very specific proposals for eliminating popular tax preferences. Romney is largely silent on how he’d broaden the tax base to pay for his rate cuts.

[OK, maybe not Forbes, since this piece also appeared in the Christian Science Monitor]

OK, maybe Gleckman is biased.  But here's Erskine Bowles himself.

This month, Romney said that his tax reform proposal is “very similar to the Simpson-Bowles plan.” How I wish it were. I will be the first to cheer if Romney decides to embrace our plan. Unfortunately, the numbers say otherwise: His reform plan leaves too many tax breaks in place and, as a result, does nothing to reduce the debt.

The “zero plan” our commission recommended offered both parties an appealing bargain: lower tax rates for everyone in return for sweeping reduction in tax loopholes of every stripe. Taxpayers and the economy would benefit from a vastly simpler Tax Code, and getting rid of loopholes would produce more than $1 trillion of the $4 trillion needed in deficit reduction. Our commission produced an alternative plan showing how much individual rates would need to go up, and who would have to pay for them, if lawmakers decided to preserve certain tax expenditures.

The most important lesson Al [Simpson] and I learned on the commission is that to fix the debt, everything must be on the table. Americans everywhere have told us that as long as the sacrifice is shared, they are ready to do their part. The surest way to doom deficit reduction is to play favorites by taking things off the table.

So although I give Romney credit for pledging to reform the Tax Code to reduce loopholes, his current proposal will not take us to the promised land. Our commission’s tax plan broadens the base, simplifies the code, reduces tax expenditures and generates $1 trillion for deficit reduction while making the Tax Code more progressive. The Romney plan, by sticking to revenue-neutrality and leaving in place tax breaks, would raise taxes on the middle class and do nothing to shrink the deficit.

[Note: Bowles served in the Clinton administration.]

***

Why didn't Obama support Simpson-Bowles?

[From the Huffington Post] Journalists here are homing in on Vice President Joe Biden's criticism of the GOP for not supporting any of the deficit-reduction proposals over the past year, noting that President Barack Obama did not embrace a report put out by the co-chairs of the Simpson-Bowles panel.

The problem with Biden's statement isn't that it's false. The problem is that it's true. With unemployment above 8 percent and the economy sputtering along, cutting government spending would have slowed growth further. Obama's 2011 focus on the deficit over job creation was a failure on every level, failing to reach a deal and turning the focus away from job creation.

The White House, contrary to media carping, did, in fact, desperately pursue a "grand bargain" that would dramatically trim the deficit, the sort of deal Alan Simpson and Erskine Bowles were pursuing. In so doing, the Obama administration was willing to raise the Medicare retirement age and agree to a host of other cuts to social programs that would have caused real pain, in exchange for a disproportionately small amount of tax hikes.

Obama's pursuit of this deal led him to push the Senate to create a commission to hash one out. When Senate Republicans bailed on it, he created one by executive order. That panel -- Simpson-Bowles -- rejected the co-chairs' conclusions -- meaning there was no actual report for the president to support.

But Obama didn't give up, agreeing with House Speaker John Boehner (R-Ohio) to dramatically cut spending in exchange for limited revenue increases. Meanwhile, a bipartisan group in the Senate was also working on a deficit-reduction deal.

Obama publicly backed the deal -- the kind of public support journalists are now saying was lacking.

As soon as Obama got behind the bargain, the GOP fled.

***

[Forbes/Josh Barro] The reason Obama didn’t back Simpson-Bowles is much simpler: it’s a big tax hike on the middle class. The President made a campaign promise not to raise taxes on families making $250,000 or less—98 percent of all American families. Though he has signed a couple of bills that violate that promise at the edges (raising the cigarette tax and, arguably, imposing an individual health care mandate) he has made a clear decision that it would be against his political interest to endorse any broad-based income or payroll tax increase on middle-income families. He could not endorse Simpson-Bowles because Simpson-Bowles is unpopular.

[Washingon Post/Ezra Klein] Perhaps the most common Washington criticism of the White House is that they didn’t embrace the Simpson-Bowles plan. That was, in the eyes of many pundits, the moment when President Obama revealed himself as a typical liberal rather than a postpartisan reformer. But the New York Times today suggests that much of Washington is misreading a tactical decision as an ideological one.

It’s a frustration for many White Houses that the best way to get things done is not necessarily to support them. For all that Washington thrills to the spectacle pf presidential leadership, the opposition party tends to recoil from proposals that are too closely associated with the White House. The calculus is simple: If a bill belongs to the president, then its passage is a defeat for the opposition. This dynamic is, in part, why both parties spend so much time negotiating behind closed doors. The trick is to agree on a proposal before it can become associated with either party, and thus before its passage can become a loss for one side.

[NewsBusters/Noel Sheppard] Obama didn't support Simpson-Bowles due its proposals regarding Medicare and Social Security. The far-left never would have accepted this and it could have seriously harmed him at the polls.

[Bill Maher in the same article] Let’s be honest why he didn’t: because the Republicans who were with him when he started Simpson-Bowles after he said he was for it said they weren't, because they can't do anything he does because it has cooties. That’s what happened. That’s what happened.

***

Wait.  Simpson-Bowles raises taxes on the middle-class?

[Ginny Welsch] Bowles-Simpson raises the retirement age, cuts Social Security benefits, increases out-of-pocket costs for Medicare, eliminates deductions for mortgage interest and health-care benefits, eliminates subsidized student loans, and raises taxes on the bottom 80 percent of families, while cutting taxes for the top 20 percent. And that’s just the beginning. It represents a large upward shift of wealth from the middle class.

[Wikipedia]  $100 billion in increased tax revenues through various tax reform proposals,^[13] such as introducing a 15 cent per gallon gasoline tax and eliminating or restricting a variety of tax deductions such as the home mortgage interest deduction and the deduction for employer-provided healthcare benefits.

[So I suppose it's these proposals that would hit the middle class]

Looking at Wikipedia references, led to this article from the Washington Post

Step two would be tax reform. The plan would squeeze $100 billion a year out of the tax code through a comprehensive strategy that would eliminate all the expensive and popular deductions known as tax expenditures. Special rates for capital gains and dividends would be gone, and the inheritance tax would reappear at a rate of 45 percent for estates worth more than $3.5 million for individuals and $7 million for couples.

 Not all of that cash would be dedicated to deficit reduction. Some of it would pay for an overhaul of the tax code that would lower rates for most taxpayers and eliminate the unpopular alternative minimum tax. The six current tax brackets would be replaced by three brackets with rates of 8 percent, 14 percent and 23 percent. The corporate tax rate, currently one of the highest in the industrial world at 35 percent, would be reduced to 26 percent.

[So I assume it's the gasoline tax and elimination of the mortgage interest deduction that would hit the middle class.  But then it would be offset by a lowering of the tax rates.]

saving for college

I'm thinking of opening an account for Mason's college expenses.

I see there's a Coverdell Educational Account which is sort of like an IRA, but for education instead of retirement.  It looks like it works more like a Roth as withdrawals are tax-deductible.

Are there other plans?

Google saving for college.  I see there's a 529 Plan too.

[10/2/12] Education IRAs were first introduced in 1998. The idea was to allow families within given income guidelines to set money aside for college without having to pay taxes on earnings or distributions. Originally, contributions were limited to $500 per child per year. In 2001, as part of the tax cuts signed into law under President George W. Bush, use of the Education IRA was greatly expanded and the measure was redubbed the Coverdell Education Savings Account after Paul Coverdell, a U.S. senator from Georgia who had supported this expansion and who had died the year before. Among the most significant changes were an increase in the annual maximum contribution--to $2,000 per child--and the expansion of covered educational expenses to include those for students in kindergarten through 12th grade.

Fast forward a decade and here we are, with the Bush tax cuts (which were extended under President Obama two years ago) about to expire and taking the expanded Coverdell provisions with them. That means that, unless Congress and the president act, beginning in 2013 Coverdell contributions will again be limited to $500 per year, and proceeds from Coverdell accounts will again be usable only for college-related expenses. Other restrictions also will go into effect, including eliminating the age-limit exclusion for special needs beneficiaries and adding an excise tax that makes it prohibitive to contribute to both a Coverdell and a 529 account for the same beneficiary in the same year.

Liberty's Outlook

is the newsletter (archive) sent out from Liberty Coin Services.  I think they're sending it to me (on occasion) because I bought some silver coins about 25 years ago.

Here's some of their latest:

Despite all the recent fireworks, though, in my judgment, we haven’t seen anything yet!

I look for gold and silver to be much stronger for the balance of 2012. It is not out of the question that gold could reach $2,000 and silver could top $60.00 by year-end.  [the prices were 1690.75 and $32.75 as of 9/5/12]

The main reason for expecting precious metals prices to soar are that the financial problems that are hurting the US and global economies have not and will not be cured by politicians and bureaucrats. In fact, they are getting worse day by day.

The actions taken by the US government have the effect of destroying the value of the US dollar. Quantitative easing is just another way of saying inflation of the money supply without having to mention the “I” word.

Inflation of the money supply always ends up reducing the purchasing power of the currency, no matter whether people realize it or not and no matter how the government inflating the currency describes it.

So, it isn’t the value of gold or silver that is changing. After all, an ounce of pure gold or silver last year is still worth an ounce of pure gold or silver today. Rather, the actual problem is the falling value of the dollar when compared to gold or silver.

During his speech at Freedom Fest in Las Vegas in July, Wall Street Journal Senior Economist Stephen Moore said he considered the 2012 US Presidential election to be the most important since 1980. While I understand his reasons, I don’t agree that the 2012 elections are that important.

Why?

First, the candidates are lying. Second, even if they were honest, neither they nor other politicians have the backbone to genuinely solve the problems.

None of the major candidates for president are being honest about the financial problems of the US government, the economy, and the US dollar.

Rather than discussing the more accurate accrual basis of accounting of government finance, which includes rising future liabilities for things like Social Security, Medicare, and other pensions incurred during the accounting period, the Libertarian Gary Johnson, incumbent Democrat Barack Obama, and the Republican Mitt Romney mislead people by only referring to the numbers from the cashflow basis of accounting. [wow, even the Libertarian?]

Overall, the fiscal plans of Obama and Romney are quite similar and won’t prevent the US dollar from falling further in value.  While Johnson advocates a huge 43% reduction in federal expenditures, that still leaves the US budget deficit in the trillions. Although Johnson may tip the results of the election, he will not win. No matter whether Obama or Romney is elected, the US government will be headed by someone who has repeatedly deceived the public and has no real plans to save the US economy and dollar.

I think the decline of US economy and US dollar are past the point of no return, no matter who is elected. I anticipate that they will fall so much in the coming months and years that the dollar may fail as a currency.

From that perspective, I’m sure you can see why I don’t think it matters who becomes the next US president. Whoever is elected, the real problems with the US economy and the dollar will not be addressed.

...

A recent poll by the Adelphi University Center for Health Innovation about personal emergency preparedness behaviors revealed that almost half of US households do not have any emergency plans in place!

While this particular survey focused on response to health emergencies (the West Nile virus is now considered an epidemic among Michigan’s citizenry and there have been substantial multi-day power outages along the Gulf Coast), I expect that a high percentage of Americans are also not financially ready for the economic catastrophes coming our way.

Think about your personal circumstances. What problems would you endure if the electricity failed for a week or more where you live and work? You would not be able to write checks or use your credit cards. Banks, grocery stores, and gasoline stations could be closed.

Do you have enough food and medical supplies to manage for at least a few days without electricity? And,
even though its value is declining, do you have a stash of Federal Reserve Notes to use when checks and credit cards are not accepted forms of payment?

To a greater extreme, do you have some physical gold and silver set aside in your direct possession as your insurance against the failure of the US dollar? [at last!]

and so on..

The editor, and I assume writer, is Patrick Heller (seems to be right up Buddy's alley).  Fortunately you can survive all this by loading up on gold and silver (conveniently being sold by Heller's company as a public service).

What's cool [or scary] is that Heller could be appearing in a movie.

I have now an investor in the making of a motion picture titled Alongside Night. I am one of the executive producers along with actor Kevin Sorbo and others. In addition, my company, some of the staff of Liberty, and I will make cameo appearances in the film. Retiring Congressman Ron Paul (R-TX) will play himself in the film. There will also be a few other surprises that I’m not going to disclose just yet except to tell you that gold plays a significant role.

The movie is adapted from the 1979 novel Alongside Night written by J. Neil Schulman. The subtitle of the book at the time was “A Novel of 1999.” The book projects a plausible scenario how life in America
could deteriorate as governments expand their power over the citizenry.


[Then again, Buffett prefers stocks over gold.  But I suppose some gold wouldn't hurt.]

trickle down economics

"Trickle-down economics" and "the trickle-down theory" are terms in United States politics to refer to the idea that tax breaks or other economic benefits provided by government to businesses and the wealthy will benefit poorer members of society by improving the economy as a whole.^] The term has been attributed to humorist Will Rogers, who said during the Great Depression that "money was all appropriated for the top in hopes that it would trickle down to the needy." The term is mostly used ironically or as pejorative

Economist Thomas Sowell has written that the actual path of money in a private enterprise economy is quite the opposite of that claimed by people who refer to the trickle-down theory. He noted that money invested in new business ventures is first paid out to employees, suppliers, and contractors. Only some time later, if the business is profitable, does money return to the business owners—but in the absence of a profit motive, which is reduced in the aggregate by a raise in marginal tax rates in the upper tiers, this activity does not occur.

Proponents of Keynesian economics and related theories often criticize tax rate cuts for the wealthy as being "trickle down," arguing tax cuts directly targeting those with less income would be more economically stimulative. Keynesians generally argue for broad fiscal policies that are directed across the entire economy, not toward one specific group.

In the 1992 presidential election, Independent candidate Ross Perot called trickle-down economics "political voodoo."

In New Zealand, Labour Party MP Damien O'Connor has, in the Labour Party campaign launch video for the 2011 general election, called trickle-down economics "the rich pissing on the poor".

A 2012 study by the Tax Justice Network indicates that wealth of the super-rich does not trickle down to improve the economy, but tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy.

***

During the Reagan Administration it seemed that trickle-down economics worked. Reagan cut taxes significantly -- the top tax rate fell from 70% (for those earning $108,000+) to 28% (for anyone with an income of $18,500 or more). The corporate tax rate was also cut, from 48% to 34%. Reaganomics was successful in ending the 1980 recession. This was amazing, since the recession was marked by both double-digit unemployment and inflation, a dreadful situation known as stagflation.

However, it's difficult to say whether trickle-down economics was the only reason for the prosperity. That's because, while Reagan cut taxes, he also increased government spending -- by 2.5% a year. Reagan nearly tripled the Federal debt, which went from $997 billion in 1981 to $2.85 trillion in 1989. This spending went primarily to defense, in support of Reagan's successful efforts to end the Cold War and bring down the Soviet Union. Therefore, trickle-down economics was never really tested, since government spending is also a spur to economic growth.

To end the 2001 recession, President George W. Bush cut income taxes with JGTRRA, which ended the recession by November of that year. However, unemployment rose to 6%, so Bush cut business taxes with (EGTRRA) in 2003.

Apparently, the tax cuts worked. On the other hand, the Federal Reserve lowered the Fed funds rate from 6% to 1% during this same time period. Just like during the Reagan Administration, it's unclear whether tax cuts, or another stimulus, were what worked.

If trickle-down economics worked, then lower tax rates during the Reagan Revolution should have increased the lowest income levels. In fact, the exact opposite has occurred. Income inequality has worsened. Between 1979 and 2005, after-tax household income rose 6% for the bottom fifth of income earners. That sounds great, until you see what happened for the top fifth -- an 80% increase in income. The top 1% saw their income triple. Instead trickling down, it appears that prosperity trickled up!

***

Helping to clinch his eventual victory, Barack Obama declared in a 2008 presidential campaign ad, "The old trickle-down theory has failed us" [source: Yo­uTube]. This statement and Obama's victory resound like a death knell to an economic mentality that some say served to line the pockets of the rich. However, the trickle-down theory to which he refers remains a highly controversial topic. That Obama seeks to end trickle-down policy is certain, but what the theory really suggests and whether it has succeeded have been less clear.

Why do trickle-down economists think that taxing the wealthy less leads to an increase in production? That can be explained in terms of tax revenue. Some argue that giving tax breaks to the wealthy can actually increase tax revenue for a government. This might seem difficult to believe, but Arthur Laffer argued otherwise. Working off ideas posed by 14th-century Muslim philosopher Ibn Khaldun and John Maynard Keynes, Laffer concluded that government tax rates and revenues don't have a directly positive correlation.

In what became known as the Laffer Curve, Laffer showed that the relationship between taxes and revenues looks like a curve rather than a straight line. In other words, tax revenues don't rise consistently like tax rates do (which would look like a straight, positive correlation). Laffer's curve shows that when tax rates are at zero, revenues are zero as well -- the government makes no money when it taxes nothing. But it's the same result if the tax rate were 100 percent. Think about what would happen if the government demanded every cent in your paycheck. Why work -- or why tell the government what you're making? The government would bring in no money because there'd be no incentive to work or to report earnings.

So tax revenues are zero when the tax rates are at zero and 100 percent -- most agree about that. The question is, what does it look like between these extremes? The Laffer Curve postulates that once the rates get too high, the steep taxes discourage work to an extent that the revenues themselves suffer. Take another scenario: By June, you've already made a million dollars, and the progressive tax system promised to tax that income 50 percent. However, anything you make over a million will be taxed 90 percent. Why work the rest of the year when you know you can only keep 10 percent of your income? You'd probably take your half a million and retire to your beach house until next year. At this point, the taxes are discouraging work and tax revenue.

The range in which taxes are too high for maximum revenues is called the prohibitive range. When taxes are in the prohibitive range, a tax cut would produce an increase in tax revenues, according to Laffer [source: Laffer]. But the ideal tax isn't necessarily 50 percent; rather, it depends on the taxpayers [source: Wanniski].

Through Laffer's Curve, we can visualize how tax rates could discourage people from producing, which results in fewer jobs and a hurting economy. On the flip side, lowering taxes at the right time can reverse these effects. Laffer points to examples in U.S. history where lowering high tax rates increased not only government revenue, but also increased gross domestic product (GDP) growth and lowered the unemployment rate [source: Laffer].

The first instance of supply-side economics being implemented came even before the trickle-down idea was fully articulated. After World War I, top income tax rates had risen from a modest 7 percent to 77 percent to help pay for the war. This high rate would fall into the prohibitive range of the Laffer Curve, according to the theory. The Harding and Coolidge administrations passed a series of tax cuts to reduce wealthy citizens' tax burden, which had ballooned. Although opponents argue that this kind of policy contributed to the Great Depression, Arthur Laffer points to the resulting increases in tax revenue, gross domestic product (GDP) and employment as evidence that the tax cuts worked by boosting production [source: Laffer].

But this policy soon faced sharp criticism. When the stock market crashed in 1929 and the U.S. economy sank into the Great Depression, the idea of giving tax breaks to the wealthy was an unpopular policy. People blamed Herbert Hoover, who'd shown support for the tax policies of his predecessors. In 1932, voters replaced him with Franklin Roosevelt, who promised the New Deal that would help the economy from the bottom up. Keynesian economics took hold.

Wealthy members of society who'd enjoyed the low marginal tax rates of the 1920s would see a dramatic reversal in the next 20 years. During the Depression and World War II, the top marginal rate rose to more than 90 percent [source: Laffer]. Enter John F. Kennedy, who was sympathetic to the idea behind supply-side economics (recall his "rising tide" comment). He argued that lowering taxes increases tax revenue, creates jobs and increases profits [source: Nugent]. His tax cuts didn't pass until after he was assassinated, but Laffer argues that they had the positive effect on the economy that Kennedy had hoped for. Others say that the cuts hurt the gross national product (GNP) growth and resulted in rising unemployment [source: Friedman].

***

So from all this, I conclude it could work as the Laffer Curve concept makes sense to me.  The question is what tax rate to set and not to just reflexively raise or lower taxes.  And how do you know if it's effective (how long to wait for the results)?  Whatever they're doing it ain't working because it appears the middle class ain't getting richer.  We're just getting more dead money at the top.

It kind of makes sense to me to raise taxes in times of war (to pay for the war).  And lower taxes in times of peace.  Kind of the opposite of what Bush did and what Obama wants to do with the (hopefully) ending of war.

gold standard coming back?

Pundits are pooh-poohing the plank in the GOP platform that calls for a commission to examine “possible ways to set a fixed value for the dollar,” declaring it a sop to Ron Paul supporters. And indeed this was a motivation of hard-core political calculators around Governor Romney. But these self-styled, world-weary cynical types didn’t put this item in of their own volition. They went along with it because it was pushed hard by Tea Party groups and several U.S. senators and representatives, as well as Ron Paul devotees.

Gold won’t be a sizzling issue this fall. The economy, entitlements and, possibly, war in the Middle East will dominate headlines. But the yellow metal will be a hot topic in the next 24 months. The commission is going to take on an importance that will astound today’s political punditry, besotted as they are with stale Keynesian quackeries about money, taxes and spending.

Why? Events economic and political. The ever deepening financial crisis around the world will force the new Romney-Ryan Administration to consider–and quickly, too–dramatic measures to deal with the disaster.

-- Steve Forbes (via pbo)

September is the cruelest month

[9/1/09] September historically has been so bad for the stock market that, even in the absence of a good explanation for why it should be such a poor performer, you may want to pull a few chips off the table.

Consider September's record back to 1896, when the Dow Jones Industrial Average was created. September on average since then has produced a return of minus 1.2%, in contrast to an average gain of 0.7% for all other months. No other month comes even close to such a dismal record.

Making the statistical case against September even stronger is the remarkable consistency of its poor performance. Consider the accompanying table, which shows how September ranks against all other months of the calendar in each of the last 11 decades, as judged by the Dow.

Decade	Sept rank	Sept ave return
1901-1910	12th	-2.6%
1911-1920	2nd	+2.9%
1921-1930	12th	-2.8%
1931-1940	10th	-3.2%
1941-1950	8th	+0.4%
1951-1960	12th	-1.2%
1961-1970	9th	+0.4%
1971-1980	12th	-1.3%
1981-1990	12th	-1.8%
1991-2000	10th	+0.2%
2001-2008	12th	-3.0%

Notice from the table that in all but one of the last 11 decades, September was a below-average performer. In more than half the decades, in fact, the month's rank was dead last.

Why, given such an overwhelming record, would anyone question September's bad record? Because there is no good theory for why the month should be such an awful month for the stock market. And, without such an explanation, there's the distinct possibility that the statistical pattern is just a fluke.

[iluvbabyb]

[9/7/12] So the real question facing these investors who are having cold feet: Is there some reason to expect this coming September to buck the trend of Septembers past?

The analysis I presented in one of my columns earlier this week, you may recall, failed to find any historical statistical support for such an expectation — even given the market’s strength in recent months. ( Read my Sep. 4 column, “September is a downer.” )

Naturally, this hasn’t completely persuaded everyone, especially in light of Thursday’s very strong market. So let me present more evidence: The remarkable consistency with which September has been a poor performer.

In fact, as you can see from the accompanying table, September on average has been the worst month of the calendar in nearly half the decades of the last century — and a below-average performer in all but one of them. The chances that this record is the result of random chance are extremely low.

The bottom line? Even if you didn’t know or appreciate it at the time, September is the month you were really trying to avoid by selling in May and going away.                                   

Paul Ryan's investments

The report shows that Ryan has spread his wealth among a wide variety of investments.  Ryan reported partnership income from an Oklahoma mining business, Ava O Limited Co., and royalties from the Oklahoma gravel rights of Blondie & Brownie. He also reported interests in mineral rights, vacant land, a cabin and a timber business in Oklahoma.

Ryan’s stock holdings include Apple, Bristol Myers Squibb, Exxon Mobil, General Electric, Home Depot, IBM, Procter & Gamble, Wells Fargo, Google, McDonald’s, Kraft Foods, Nike and Berkshire Hathaway.

Not to mention Fidelity Contrafund.

All this makes him the 128th richest congressman.

The 15 richest? (No. 15 is worth $23.8 million, 9 of the 15 are Democrats.)

***

How Obama made his fortune

Three economic misperceptions

1. Lower taxes lead to faster economic growth

2. We need to pay off the national debt

3. It matters who wins the presidency.

- by Morgan Housel

stock market performance under Democrats

Thanks to their pro-business approach and the anemic recovery, Republicans would seem to have a clear path to grab the economic mantle heading into the 2012 race for the White House.

However, history actually shows that the U.S. economy, stock prices and corporate profits have generated stronger growth under Democratic administrations than Republican ones.

According to McGraw-Hill’s (MHP: 51.48, +0.28, +0.55%) S&P Capital IQ, the S&P 500 has rallied an average of 12.1% per year since 1901 when Democrats occupy the White House, compared with just 5.1% for the GOP.

Likewise, gross domestic product has increased 4.2% each year since 1949 when Democrats run the executive branch, versus 2.6% under Republicans.

Buffett's Alpha

While much has been said and written about Warren Buffett and his investment style, there has been little rigorous empirical analysis that explains his performance. Every investor has a view on how Buffett has done it, but we seek the answer via a thorough empirical analysis in light of some of the latest research on the drivers of stock market returns.

Buffett’s record is remarkable in many ways, but just how spectacular has the performance of Berkshire Hathaway been compared to other stocks or mutual funds? Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30years, we find that Berkshire Hathaway has the highest Sharpe ratio among all. Similarly, Berkshire has a higher Sharpe ratio than all U.S. mutual funds that have been around formore than 30 years.

We find that the Sharpe ratio of Berkshire Hathaway is 0.76 over the period 1976-2011. While nearly double the Sharpe ratio of the overall stock market, this is lower than many investors imagine. Adjusting for the market exposure, Berkshire’s information ratio is even lower, 0.66. This Sharpe ratio reflects high average returns, but also significant risk and periods of losses and significant drawdowns.

If his Sharpe ratio is very good but not unachievably good, then how did Buffett become one of the most successful investors in the world? The answer is that Buffett has boosted his returns with leverage, and that he has stuck to a good strategy for a very long time period, surviving rough periods where others might have been forced into a fire sale or a career shift. We estimate that Buffett applies a leverage of about 1.6-to-1, boosting both his risk and excess return in that proportion. Thus, his many accomplishments include having the conviction, wherewithal, and skill to operate with leverage and its risk over multiple decades.

This leaves the key question: How does Buffett pick stocks to achieve a relatively attractive return stream that can be leveraged? We identify several features of his portfolio: He buys stocks that are “safe” (with low beta and low volatility), “cheap” (i.e.,value stocks with low price-to-book ratios), and high-quality (meaning stocks that [are] profitable, stable, growing, and with high payout ratios). This statistical finding is certainly with Buffett’s writings, e.g.:

Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down – Warren Buffett, Berkshire Hathaway Inc., Annual Report, 2008.

energy independence

As it turns out, we have found so much natural gas and oil in this country, with the new procedures and the new technology, that we can become energy independent in less than ten years, maybe even by the end of the decade.

If we start exporting natural gas, which we will in less than four years, from McAllen Texas there will be the first LNG terminal, just the one in McAllen is going to produce $70 to $80 billion a year of positive trade balance.

If we start exporting value-added natural gas, in the form of fertilizers and plastics and other products that you make from natural gas, we could have a positive trade balance in less than ten years.  That would be a shock to the world.  Nobody sees that coming.

massive economic catastrophe

Once again, it's time for our daily dose of morning cheer..

In a newly released documentary that went viral last month, a team of influential economic experts say they have discovered a "frightening pattern" they believe points to a massive economic catastrophe unlike anything ever seen in the history of the world.

And according to these experts - who have presented their findings to the United Nations, the UK Parliament and a long list of world governments - the catastrophe may happen well before Americans hit the polls in November.

"What this pattern represents is a dangerous countdown clock that's quickly approaching zero," said Keith Fitz-Gerald, the Chief Investment Strategist for the Money Map Press, who predicted the 2008 oil shock, the credit default swap crisis that helped bring about the recession, and the Greek and European fiscal catastrophe that is still wreaking havoc until this day.

"The resulting chaos is going to crush Americans." 

fading affect bias

There's a theory in behavioral psychology called the fading affect bias. In simple terms, it states that negative emotions leave our memories much faster than positive ones -- a sort of natural aversion to unpleasant thoughts.

In 1948, psychologist Sam Waldfogel gave a group of participants 85 minutes to write down every event they could remember from the first eight years of their life, and rank them as pleasant, unpleasant, or neutral. Logically, events should have been spread evenly between the three. But they weren't. Pleasant memories outweighed negative ones by almost twofold. People had a distinct positive bias when recalling their past.

So, what's this mean for your investments? People worry and the economy slows down. Then they get over it and it recovers. Same story again and again. John Maynard Keynes called these shifts animal spirits -- "a spontaneous urge to action rather than inaction." The important thing is that they happen consistently and predictably. You get to choose whether you want to stop worrying before the crowd, or wait and follow the crowd. It's the epitome of being fearful when others are greedy, and greedy when others are fearful. And it may be the single largest factor in determining whether you'll be a successful investor or not.

Echo Boomers

Liz Ann Sonders writes:

In history, few forces have been as strong behind stock returns as demographic trends: movements in population, age, gender and employment status, among others. Much focus has been on Baby Boomers, especially as they begin to retire, and their effect on markets in the future. Yes, they're now more risk-averse than ever, and this is not likely to change. But what about a key generation behind them?

Those born after 1980 are generally considered "Millennials," but I prefer the description "Echo Boomers," as they represent many of the children of Baby Boomers. Millennials are often characterized as having less financial savvy and weaker job prospects than their Boomer parents. The result is an impression of a generation equally as disenfranchised from the stock market as the Baby Boomers.

However, I think many may be underestimating the positive impact this generation may have on investing trends. I recently read an interesting report on the subject by Turner Investments in which it noted that the Millennials are "digital natives"—the first generation raised with technologies such as personal computers, the Internet and smartphones that prior generations had to adapt to later in life.

My two children (ages 12 and 16) can't fathom that I had to rely on libraries, books, encyclopedias and a typewriter when I was a college student. But they're part of a generation that's become completely reliant on "new" technologies. Eight of 10 of Millennials sleep with their cell phones in reach (count my kids in the 20% that don’t, though they would if we let them).

The Millennials are highly educated: About 40% of college-age Millennials are enrolled in higher education—the greatest percentage in US history. Yes, some of that's a result of the rough economic ride they've been on over the past decade or so. They've had to suffer two economic/market crises since 2000, starting with the bursting of the technology bubble and followed by the bursting of the housing bubble and the attendant financial crisis. The dearth of jobs has hit the generation particularly hard. About a third of 18-29 year olds are unemployed, under-employed or simply out of the work force.

Don't underestimate the Millennials

Turner offers seven reasons why the financial prospects of Millennials may be much better than is popularly supposed and why Millennials may "bring about a Great Bull Market of the 21st Century":

1. The Millennial generation is huge at more than 85 million—even larger than the Baby Boomers' 81 million. It wasn't until Boomers were in their 30s that they began to truly make their presence felt in the stock market. The great bull market of the last century was the result. My additional perspective: vehicles like 401(k)s make it easier and more "automatic" for this cohort to invest.

2. Millennials' financial struggles thus far are actually fairly typical of early adult life: paying for education, finding a first job, relocating, buying a first house and learning the vocational ropes.

3. Macroeconomic headwinds facing Millennials—notably high unemployment and depressed housing—are likely to be temporary. My additional perspective: housing has likely already found its bottom and household formation has jumped significantly since its lows.

4. Baby Boomers once faced similar macroeconomic headwinds (during the late 1970s and early 1980s), but were still able to subsequently invest in stocks and drive the market to new highs during their peak earning years.

5. Despite all of their financial troubles, Millennials are savers and are already investing in stocks. Twenty-something investors have more stocks in their 401(k) accounts today than their counterparts did a decade ago, according to the Investment Company Institute. About 80% of 20-somethings had devoted at least 60% of their 401(k)s to stocks in 2010 (the latest year of data) versus 70% in 2000.

6. Millennials tend to be optimists and are more willing to take risks relative to their parents' generation. About 29% of all entrepreneurs are Millennials, according to the Kaufman Foundation, suggesting an appetite for risk.

7. Millennials are putting emerging nations in a demographic sweet spot. The ratio of workers to the total populace in East Asia rose from 47% in 1975 to 64% in 2010. In Latin America the ratio rose from 44% to 56%, and in South Asia it rose from 45% to 55%. A sizable new class of investors is surfacing around the globe.

Food for thought.

Kass bearish

“It is time to say good bye to the bullish days of summer,” says Doug Kass, a hedge-fund manager at Seebreaze Partners. “We might now be approaching a crucial inflection point in the world’s equity markets.”

Kass says he is “more bearish” now than he has been in quite some time, largely due to several metrics pointing toward extreme levels of complacency. He notes sentiment polls, fund-flow data and a low VIX as well as troubling economic fundamentals as evidence to be cautious.

“I am very concerned about the potential for a disappointing downturn in corporate profits, the likely deterioration in China’s economy and a more rapid decline in the eurozone’s economy than is generally expected in the months ahead,” Kass says. I will move back into a long position when conditions dictate, but, for now, with extreme levels of complacency, I am more bearish than I have been in a while.”

the history of tax rates

Contrary to what many think, tax rates have generally been decreasing since the 1970s.  The top rate in the 1970s used to be 50%, declined to as low as 28%, and is now 35%.  The top long-term capital gain rates used to be 39.9% and is now 15%.  The top dividend rate used to be 70% (!) and is now down to 15%.

[Now, I see the top tax rate used to be 7% in 1913, then more than doubled to 15% in 1916, then zoomed to 67% in 1917.  It reached as high as 92% in 1952. [The capital gain tax rate  has ranged from 7% to 49.88% (in 1977). And the dividend tax rate has ranged from zero to fully taxable (100% of the ordinary income rate).]

Should you sell some securities now, before long-term capital gains rates go up? Currently, profits on long-term investments (those held more than one year) are taxed at a top rate of 15%. The Obama Administration has proposed raising the top rate back to 20% for families making over $250,000 and keeping it at 15% for everyone else. If Congress takes no action, the top rate is scheduled to return to 20% for securities held between one and five years, and 18% for those held more than five years for everyone (23.8% and 21.8% respectively including the new healthcare law surtax for high earners).

Bloomberg Billionaires Index

I was familiar with the Forbes 400, but not this index of billionaires worldwide.

Carlos Slim tops the list with 72.7 billion
Bill Gates is second at 63.5 billion
Warren Buffett is third at 45.5 billion
Barely ahead of Amancio Ortega Gaona at 45.1 billion
Surprisingly Larry Ellison is not far behind at 40.0 billion and could easily overtake Buffett should ORCL continue to outperform BRK.A.

Looking at the 2010 Forbes 400 list, Buffett was comfortably ahead of Ellison 45 to 27.  Then again, in 2000, it was Ellison 58, Buffett 28.

And now I see that Forbes has their own list of billionaires and lists Bernard Arnault fourth at 41B.  Arnault is 15th on the Bloomberg list at 25.0 billion.

how important is turnover?

Overall, turnover proved to have a smidgen of predictive power, but it was not as strong or consistent as the best predictors. While fees, stars, and manager tenure produced a nice stair-step down, the turnover results were lumpier. So while the cheapest quintile beats the next-cheapest quintile and so on, turnover didn't work that way.

Instead, we had rather flat results up until the highest-turnover quintile, where results really plummeted. So, put turnover behind stars, expenses, and manager returns, but put it ahead of active share. Along asset-class lines, turnover had some predictive power for equity funds. Shopping for low-turnover balanced funds would have actually hurt performance, and turnover had no effect--positive or negative--in bond funds. No big surprise there.

The results are pretty close to what other studies have found. For example, Roger Edelen, Richard Evans, and Greg Kadlec found a small impact for turnover in their paper, "Scale Effects in Mutual Fund Performance: The Role of Trading Costs." However, in their study it wasn't as powerful as expense ratios or their estimate of trading costs.

[see also]