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Joseph L. Shaefer
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Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. Retired senior executive of Charles Schwab and Co. Retired (36 years) active and reserve military service -- six in special operations, the next 30 in the intelligence... More
My company:
Stanford Wealth Management LLC
My blog:
The Investor's Edge
My book:
Bringing Home the Gold
  • The American Economy: Are We Paid to “Be” or Paid to “Do”? 3 comments
    May 27, 2010 2:01 AM | about stocks: VXX, TBT, RWM, EUM, SEF

     

     
    Paid to be or paid to do, that is the question.
     

     

    This may seem an odd choice of topics for a financial site like SA, but it isn’t!  It is, in fact, the crux of the economy and of our future as a nation.  Are we the same Americans who rolled up our sleeves and worked harder and smarter than anyone else when we were down, or have we become a bunch of passive couch potatoes waiting for someone from the federal government to come take care of us?

     

    I’m certain many readers have seen the short video of House Speaker Pelosi speaking to a group of musicians and artists in Washington DC, telling them to pursue their dream and not worry about working, because taxpayers will cover their health care.  (Available here and many other places.)


    Quoting the Madame: “We see it as an entrepreneurial bill, a bill that says to someone, if you want to be creative and be a musician or whatever, you can leave your work, focus on your talent, your skill, your passion, your aspirations because you will have health care. You won’t have to be job locked.”

     

    I must disagree with Ms. Pelosi.  If you are a good musician rather than a wannabe, you will do what it takes to succeed.  You will believe in yourself.  Your manager, if you have one, will believe in you.  Your band-mates will believe in themselves and in you.  Your family will loan you their car to get to a gig, your spouse will take a second job (as, likely, will you,) etc.  In short, you will “work.”  You’ll take jobs as a waiter or a daytime landscaper or whatever you need to do to pursue your dream.

     

    It seems to me that people who quit their job to pursue their Walter Mitty daydreams are precisely the kind of people we don’t want to encourage by telling them we’ll take care of them when they do!  If someone wants something bad enough, they should take responsibility for getting there.  Fighting against the odds is what separates the exceptional from the wannabe.  If they don’t want it enough to work hard for it, then a government that gives them 3 years of unemployment checks, food stamps, no taxes (and in most cases tax credits), and free-to-them (but not to the rest of the citizens who fund it) health care is unlikely to magically make them a successful musician or artist.

     

    I was talking with one of my clients today who was brought on temporarily for a special IT job she was uniquely qualified to do by the state of California.  Her new manager took her aside after her first week and said, “Hey, take it easy.  You need to slow down.  You’re making the rest of us look bad.”  He wasn’t joking, more’s the pity.  People who work at what we in private industry consider a reasonable pace made the rest of them look bad by comparison.  So the approach is: rather than raise your game, pull down the exceptional players.  And everybody gets a trophy, of course...

     

    Government is increasingly becoming the “employer” to the nation.  Whether via government jobs or merely the “social net” that is cast ever wider and with ever more layers, people who depend on government sooner or later devolve into workers who work less and less in exchange for their daily bread from the government store. 

     

    Apologists and those who believe government is the solution, not the problem, will say this is "normal." When people lose their jobs (often due to misguided government policies voraciously taking earnings from private citizens and companies) of course  government's share of GDP will grow and private industry will shrink. However --

    It is people working for themselves who start companies and hire employees. These are also the people who pay both the personal and corporate income taxes that sustains government. The SEC may hire lots of people but they pay no corporate income taxes.  Apple (NASDAQ:AAPL) does.  Google (NASDAQ:GOOG) does.  Dell (NASDAQ:DELL) does.  Etc.  The more government supplants these tax-paying entities, the less income is collected and the more they tax the remaining private workers. With 47% of the populace paying absolutely no income tax already, and with 40 million receiving food stamps, at what point do we tell government: "Enough."

     

     

    Do you want 6 weeks vacation every year, a 35-hour work week, “free” health care that of course isn’t really free, and to be able to retire at age 55 with a pension nearly equal to your working salary?  Well, duh, who wouldn’t?  But it’s been done before – in places like Greece.  And Portugal.  And Spain.  It’s been done – and Europe is at the brink staring into The Abyss as a result.

     

    There is no such thing as a free lunch!  Somebody pays, one way or the other.  If we think we can be a nation that is paid to “be” – just “be” a musician if that’s your muse, man – rather than a nation that is paid to “do” – you produce something of value, the world will buy it and that may give you the money to pursue your muse, then we are headed down the same path that Greece walked down, and face the same abyss at its end.

     

    It bothers me that paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year.  While, at the same time, government programs taking from a taxpayer to give to (mostly) non-taxpayers via Social Security, unemployment insurance, Medicare, Medicaid, food stamps, credits for buying houses, cars or appliances, or having children --  rose to a record high  during this same time.


    One of the many problems with this, second only to the erosion of the American work ethic, is that the
    government depends on private wages to pay income taxes to pay for all these programs.  Private industry is revenue, government is overhead. 

     

    What are the investment implications of all this?

     

    In the short term, I would say simply, “Look out below.”  In fairness, I believe we are so oversold now that it is likely we will see an anemic rally of maybe 70 or 80 points on the S&P.  Enough to play if I am correct and nimble, a combination not always readily retrievable.  But I believe the next major move will be down, and down more than most anticipate.  I plan to use the rally to liquidate most of our positions that aren’t in the precious metals arena or aren’t spelled “c-a-s-h.”  I imagine that, once we have shaken out all individual and institutional confidence – October?  January? – that we will see the normal market recovery that seems to precede every Presidential election.  You don’t suppose they could be manipulating key statistics and pumping out fraudulent good news just to get re-elected, do you?

     

    This correction, and the politics and economics that accompany it, won’t be easy for any of us.  It’s been a long time since consumers, companies, and governments had to lower their spending rather than buy votes with government largess.  It will be painful.  But I believe the American people have more sense than their elected leaders (I hope that isn’t damning with faint praise…) and will do what they always do: return to the center of the political spectrum, roll up their sleeves, and go to work.  For which they will be paid to “do” something, not to “be” wannabe Walter Mittys.

     

    Our plan now is to take the profits from the VXX we bought and take some of our lumps in the TBT we also bought – but not all; the US government will be forced to raise rates.  The only question is when.  We are hunkering down to avoid potentially big losses , but hoarding cash to be able to buy when everyone else is selling to us at bargain prices.  It’s worked enough times before to have given us the outsize returns we’ve enjoyed over the long term.  We think it will work for us this year as well.

     

    Author's Disclosure: We are long lots of good stuff I’ve discussed in previous articles, though we closed most of our VXX positions for very nice profits today.  From this point on, we’ll be liquidating our long positions – except for precious metals --  and moving mostly into cash, with smaller positions in some inverse ETFs like RWM, SEF and EUM.

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

    Past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but we are flat in 2010. We plan to be back on track as the year progresses and we put our cash to work but “past performance is no guarantee of future results”!

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. There are three possible ways you see our work at this site: by your choosing as a result of seeing an article, by taking the recommendation of another reader or, possibly in the future, by being pre-assigned to us because our articles match the interest areas you selected when signing up. In all cases, we take our responsibility seriously to proffer intelligent commentary, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

     

     

     


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Comments (3)
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  • buyitcheap
    , contributor
    Comments (1901) | Send Message
     
    General, this is what we should be teaching our kids in school. You have to serve and produce, you don't get paid for sitting on your keister. Great post.
    27 May 2010, 07:29 AM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    Please reimburse all the trillions wasted on stupid military adventures - it's even worse than overpaying benefits to people who actually spend the money in the economy. I resent equally the trillions wasted in Iraq while BP picks up the contracts and all associated profits. (Oh but this is now OK that we can blame everything on Europe). USA is equally close to the financial abyss (USA has major denial issues), the main difference is that it has 1) enriched private corporations, 2) destabilized the world, 3) encouraged terrorism (as if there wasn't enough already). So USA has as many if not more disincentives to work than anywhere else in the developed world.
    27 May 2010, 08:05 AM Reply Like
  • atlasman
    , contributor
    Comments (394) | Send Message
     
    Barak - I am surprised you have time to visit SA with all of the issues on your plate.
    3 Jun 2010, 02:46 PM Reply Like
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