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  • The Keynesian Depression [View article]
    Actually a monetary system of buying dinner with seashells would be far more credible than the one we have. While the number of seashells is very large, and therefore their individual value very low, that number is at least finite, and not subject to manipulation by politicians and bankers. There is no way to make more seashells overnight; one can grow more mollusks, but the seashells still take time, and one must feed the mollusks while waiting. Such a system acknowledges that there is no free lunch. The one we currently suffer under makes no such concession.
    Dec 5, 2012. 01:34 AM | 7 Likes Like |Link to Comment
  • The all-too-brief, conciliatory effort to find some middle-ground over the "fiscal cliff" issue may be disappearing in Washington already. Stalemate appears to be re-emerging over a big obstacle. Team Obama wants a gargantuan $1.6T tax hike and to eliminate a number of tax deductions over the next ten years in an effort to boost revenue and finance a bigger government. Spending cuts don't even appear on the radar at this juncture, which could well be a deal-breaker. [View news story]
    Mr. Obama needs to be reminded that he's not the only person who just won an election. So too did all 435 members of the House, whose constitutional responsibilities explicitly include appropriations.
    Nov 21, 2012. 07:02 PM | 7 Likes Like |Link to Comment
  • Intel: The No-Nonsense Reason It's Down [View article]
    Senior managers are compensated with options that have extremely long expiration periods, typically 10 years but sometimes 7. They get these options ATM at issue and for free. Then they are given roles in deciding whether the company should issue dividends or buy back shares. And you suggest that I go buy 20 calls a little more than 2 years out for $3 apiece? Why should I? I already own the stock; the money they'd be giving you to get lost so that they can employ their massive leverage to their own benefit is MINE already.

    Again, if you don't want dividends there are plenty of companies out there that don't and won't pay them. Also, just a tip: your broker is ripping you off if you're not getting dividend reinvestment for free. And your tax man is committing malpractice if he has you paying more tax on qualified dividends than on long-term capital gains. They've been the same capped rate for quite a while now. And finally, we working stiffs have IRAs that make the entire tax issue moot; if you've ever worked for a living, I'd suggest looking into them as you may have funds eligible for rollover into one. If the only way for you to think like an investor is to operate on a tax-deferred basis, then you desperately need an IRA. But get a new broker first.
    Nov 15, 2012. 10:10 AM | 7 Likes Like |Link to Comment
  • Why Dividend Champions Of The Past Will Offer Minimal Long-Term Income And Total Returns [View article]
    "corporate bonds and government bonds paying 4-6% when treasury yields are 3-4%, savings accounts paid 5% many times last 10 years"

    Your article is clearly about what one should or should not do right now, not in some hypothetical other universe in which real interest rates are positive and bonds aren't absurdly overvalued. Right now, any savings account paying 5% is for uninsured balances at a bank the FDIC is parked in front of, Treasuries yield less than 3% even at the longest duration, and the corporate bonds paying 4-6% are of very long duration and/or dubious credit quality. And all that overlooks the fact that over the 30 or 40 years I hold the bond, the coupon will never increase, meaning that both my income and the value of the principal payment (assuming I keep getting them at all) will lose a substantial part of their value every year. How much? No one knows, but if you believe it's 2% you're just nuts.

    "Second, high net worth investors want income, but are not overly concerned inflation adjusted returns. 4-6% a year mroe enough to not justify owning overvalued stocks."

    People who care about the nominal market price of their holdings or the number of dollars they own solely because that's how they keep score in a game are a very small minority. Most investors care primarily about the purchasing power of the income their assets produce, because our cost of living is a large fraction of that income. People who are set for life regardless of investment outcomes and just playing a game with one another aren't relevant targets for investment advice. If you're going to recommend something on that basis you need to qualify it explicitly.

    For the rest of us, what matters is what we can buy with the income our assets produce. After inflation. After taxes. Without selling or taking permanent impairment of the assets themselves. Therefore whether a stock (not "stocks") is overvalued must be assessed in that context. You have not even failed to do so; you haven't attempted it.
    Sep 12, 2012. 01:48 PM | 7 Likes Like |Link to Comment
  • The Best Retirement Investing 'Mistake' [View article]
    "Sure it might be great if you had $5 million in cash and didn't have to mess around with all this investing mumbo jumbo."

    Actually, that's wrong too, unless you are sure you're going to die very soon. In order to see why, you must get past the Great Lie that everyone plans around even though they know it isn't true:

    Your expenses are not denominated in dollars.

    Any time you're contemplating investment decisions, repeat that to yourself once a minute every minute. It may help you to overcome the pernicious fallacy the government, banks, and others in power have worked so hard to establish. Most people think that because they conduct their transactions in dollars, they can and should plan future expenses based on those same dollar prices they pay today. At best, they then tack on a few percent a year for "inflation", on the basis of the economic theory that prices are "sticky". That is the Great Lie. Prices, in dollar terms, are not sticky at all. The more global the market for a good is, the less sticky its price in any sense. And make no mistake about it, most of what you buy is traded on very deep, very broad global markets. Prices are driven by the supply and demand of the good, and by the supply of the currency in which you're paying for them. There is no stickiness whatsoever. That corn you paid 10 cents an ear for last year is now 40 cents. That's supply and demand for you. The gasoline you paid 90 cents a gallon for in 1996? Try $4.50, thanks to currency devaluation. Stickiness is nowhere to be found. People are taught that prices are anchored based on past levels, but the reality is that they are not anchored to anything whatsoever. Even the price of houses, deeply tied to personal pride and stubbornness, have both climbed and dropped 30% in a matter of months -- just within recent memory! The closest you can find to price stickiness anywhere is when you look at prices quoted in gold over very long periods of time, decades or centuries. By removing the effect of currency devaluation, you can see more clearly the effects of changes in supply and demand, and you'll find that most (but not all) goods float between perhaps 25% and 400% of the central tendency. Small comfort indeed for anyone with nothing but a pile of gold, and utterly terrifying for anyone with nothing but a pile of dollars.

    The reality is that your cost of living is denominated in the goods and services you actually buy, not in any currency unit. With the supply of currency exploding, it's a given that nominal prices in the future will be much higher. How much higher? No one knows. But one thing you can be sure of is that they will not be uniformly higher. And that is where the second fallacy enters the picture: the idea that you should just "adjust for inflation" by multiplying by some small number like 1.03 because that's the apparent central tendency of the CPI figure the government publishes. First, if most people kept better records of their spending habits, they would be able to see very clearly just how big a lie the CPI figures really are. Second, they would also see much more clearly just how much variation there is in price changes from one good to the next.

    So that brings us back to your hypothetical. There is no practical difference between having 5 million dollars and having 5 million autographed posters of Huey Lewis and the News. Neither is of any practical utility to you, and there is no meaningful limit to the creation of more of them by others. Yet for whatever reason people allow themselves to believe that the posters are a risky asset while the dollars are a dependable store of value. Nothing could be further from the truth. In order to survive, you will have to exchange either pile of tree fibres and ink for the things you actually need, and there is absolutely no way for you to know what the market exchange rate will be between what you have and what you want at the time you want it. None. So unless you're planning to exchange that 5 million dollars right now for a cabinet full of canned foods that will last 2 years and a prepaid 2-year lease on an apartment and so on, knowing that you'll live only 2 more years in any case and fixing your costs in that time at today's market prices, having that pile of dollars is not in any sense a substitute for investing. They can and will lose value so rapidly in terms of what you want to buy that by the time you are retired you will wish you had those posters instead.

    There is no number of dollars you can have that is "safe" or "sufficient" unless you can *and do* use them to prepay your living expenses at today's prices for a sufficiently long time that you cannot possibly outlive your forward contracts. That is not an approach that most people consider when planning retirement, and unfortunately that is because such forward contracts are not generally available. I can purchase a futures contract entitling me to a pork belly in 2014, but I cannot purchase a futures contract entitling me to 2 strips of bacon every morning for the rest of my life (a relief, perhaps, to cardiologists, but unhelpful to the hungry retiree). The closest thing I can get anywhere is a stock that has historically paid out dividends closely correlated with the price of buying 2 strips of bacon each day. And the best retirement plan I can assemble is a portfolio of stocks each of which pays distributions closely correlated with the prices of the specific things I am actually planning to buy when I am retire. The actual number of dollars is completely irrelevant -- it could be 10 cents or 10 trillion dollars. What matters is that my portfolio covers my cost of living. I have vastly more confidence that it will do so if it is filled with equity in well-run companies that make things people cannot live without than if it contained some arbitrarily large number of dollars. Don't allow the fallacy of price stickiness to distract you: dollars lose value shockingly quickly, and a number that seems more than comfortably large today will be panic-inducing in 10 or 20 years.
    Sep 7, 2012. 11:28 AM | 7 Likes Like |Link to Comment
  • Southern Co. (SO) and Verizon (VZ) may be the "poster children" among high dividend-payers as the quest for yield takes the utility (XLU), telecom (IXP), and consumer staples (XLP) sectors to frothy levels. The flip-side are health-care services (XHS), autos (CARZ), housing (IYR), and tech (XLK) - lower payers, but with relative valuations that have rarely been this cheap. [View news story]
    Cheap on what basis? The only relevant metrics are current and future dividends. By definition, something yielding 1% is much more expensive than something yielding 5%. In order for a very low-yielding asset to be undervalued relative to a higher-yielding one, its rate of dividend growth must be both spectacular and likely to be sustained based on fundamentals and board policy. Otherwise the obvious conclusion that the 1% yielder is much more expensive (perhaps about 5x more expensive, in fact) than the 5% yielder is the correct one. Pop quiz: how long would it take an asset yielding 1.5% today to begin paying out the same amount as an asset yielding 5% today, if the lower-yielding asset grows distributions by 8% a year, every year, and the higher-yielding asset by only 2%? Answer: 22 years, and that's not counting the payouts you got during those 22 years nor the effect of reinvesting them, either of which would push us out to timeframes that are large relative to the life span of a human. And a lot can happen in 22 years to damage the growth prospects of either company. It turns out that even if you treat the 5%-paying asset as a bond and assume it will never increase its payouts at all, it still takes 16 years to catch up, not counting the income received. Forgoing all that income is a pretty big risk, so you really need a huge growth story to make it work. Not surprisingly, huge growth stories tend to generate a lot of attention from traders and speculators, who drive up the prices to unrealistic levels.

    Looking for example at XLK, it paid out 42 cents in 2004 and has never paid out the same amount since. Dividends have been erratic and there is no long-term growth trend. Even the short-term growth trend in the last 3 years is not spectacular: 23.67 cents in 2009, 32.28 in 2010, 38.45 in 2011, and 20.50 in the first half of this year. That looks a lot more like a steep recovery followed by decelerating growth than long-term accelerating growth. If you bought at the best price of 2002, your yield is now just under 4%, and in most of those years you collected little. If you bought VZ near its low in 2002, you not only collected many times more income between then and now, you have a yield of about 7.1%, much more if you reinvested.

    That's all backward-looking, so maybe we'll see tech and some of these other sectors start to dramatically accelerate distributions in coming years. If that happens, then those sectors are indeed historically cheap. But there's simply no track record of growing or even sustaining distributions from most companies in these sectors, and therefore no compelling argument that they are indeed cheap. A better case might be made that a particular stock is cheap; then we can examine the business and the board's view on providing a return to shareholders and weigh those along with the current payout against the market price. One cannot simply look at some non-dividend metric and conclude that an entire sector is historically cheap when it is yielding next to nothing.
    Aug 25, 2012. 12:13 PM | 7 Likes Like |Link to Comment
  • The Real Picture Behind AT&T's Stock Price [View article]
    What I was hoping to see here is something like The actual explanation for the levitation of T's share price is Fed manipulation, not speculation. Speculation about what, anyway? The mobile revolution? That's not speculation, it's fact, and it comes with a lot of risk and change for companies like AT&T for whom it will also mean shrinking and increasingly unprofitable wireline businesses. Again, all this is known. What's obvious from the chart is that T is a private-sector substitute for long-term bonds, period. It's being bid up because there aren't a lot of ways to get a reliable 4% return. That's really all there is to it. If the Fed were to suddenly replace its income-crushing monetary regime with something sane (like 4% short rates and no manipulation of long rates), you'd see T's share price 40% lower by the end of the week. Any other explanation is just silly.
    Aug 10, 2012. 02:18 PM | 7 Likes Like |Link to Comment
  • Never one to miss an opportunity to voice his opinion on a subject - any subject - "The Donald" weighs in on the looming fiscal cliff issue: "I’ve never seen a mess like it,” Trump says. We have absolutely no leadership on the subject. A deal needs to be made now, or this country's in big trouble.  [View news story]
    People seem confused about the spatial orientation of the so-called fiscal cliff. The popular media is using it as if we were atop a plateau and about to "fall off" the cliff and splatter at its base. The reality is that we are at the bottom of a very deep fiscal hole, and the cliff is one we must climb *up*, to reach fiscal discipline and a balanced budget at the top. It's telling that people seem to equate blatantly unsustainable spending, handouts, vote-buying, crony capitalism, and union coddling amounting to 30% of our national annual income with being "at the top" of anything. Nothing could possibly be further from the truth.

    A deal is needed, all right: a deal to make damned sure we climb the cliff. Digging deeper will only make it that much more difficult to climb later. The strength in our arms, legs, ropes, biners, and other equipment is called political will. May we be so fortunate as to find that will now, when we need it most.
    Jul 19, 2012. 07:59 PM | 7 Likes Like |Link to Comment
  • The big news isn't the €100B, tweets Pawel Morski, it's that the eurozone (Germany) for the first time passed on imposing more austerity as a condition of the bailout.  [View news story]
    1. Cancel all existing common and preferred stock.

    2. Fire the directors and officers and cancel all severance packages, shares, and options (all of which should be rendered worthless anyway, but just in case).

    3. Install a new board of directors tasked with selling off or shutting down all non-banking operations (e.g., prop trading, hedging, market-making, mutual and hedge funds, analysis) and selling any nonperforming assets from which the board believes the bank cannot economically obtain recovery.

    4. Issue the bailing-out entity 8% perpetual cumulative preferred shares with par value equal to the bailout funds. These shares should come with the right to prohibit or limit issuance of debt and should not be callable under any circumstances.

    5. Convert subordinated debt into restricted common equity until the bank is sufficiently capitalised that it would have 10% common equity under a scenario in which an extremely severe depression were to begin immediately and last 20 years. This equity cannot vote, receive dividends, or be traded until the process in (3) is completed to the satisfaction of the board and the total losses known.

    If I were Germany, I would consider these the absolute minimum conditions for bailing out a foreign bank. Tough but fair, and allows the bank to continue functioning as a proper financial intermediary.
    Jun 9, 2012. 06:11 PM | 7 Likes Like |Link to Comment
  • George Soros' remarkable speech on the "political bubble" of the EU: "The (current) political dynamic makes the disintegration of the EU just as self-reinforcing as its creation has been ... (however) the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery, but also for Germany." He gives the Germans 90 days to come around. Worth the full read.  [View news story]
    You are free to define words and use them however you like, but these definitions are arbitrary and significantly different from both common usage and generally accepted economics terminology. The way most people use the terms, socialism is any economic system in which a large portion of the capital base is commonly owned, typically by the government, and Communism is a political system that features socialism and central planning as key economic planks. In neither case is the fraction of GDP consumed by the central government a relevant consideration; indeed, in a socialist system it is fairly meaningless. It's also worth noting that socialism is not a point but a spectrum. The larger the share of capital base held in common, and the more important the parts of the capital base held in common, the more socialist an economy is. In every economy there are some productive assets held in common, so any declaration of a crisp boundary between socialism and capitalism is arbitrary.

    As for what people want, it's pretty obvious: everyone wants a free lunch. Many of the problems we face right now are the result of too many people being allowed or encouraged by politicians to believe they can have one, or worse still that they're entitled to it. Soros's speech actually recognises this, but as one of the politically-motivated liars he demands that only the productive, the successful, and the prudent stop lying to themselves about getting something for nothing. The weak, the useless, and the profligate are encouraged to continue believing in their right to a free lunch. In other words, the Germans must accept the need to relinquish their savings to the Greeks, Spanish, and Italians in one form or another in order to preserve their ability to produce and export, while the Greeks, Spanish, and Italians need do nothing except spend the Germans' money on whatever they like. This is a very popular mainstream view, and while Soros has a fancy-sounding set of underpinnings to justify it, it's really just the same old tripe. The insightful portions of the speech were in the descriptive background, and it was worth reading for that. The prescriptive portion is, in its essence, the same garbage you can get from any stoned sophomore on your local college campus. If you read carefully, you'll see that there's no real connection between the two.
    Jun 3, 2012. 03:00 PM | 7 Likes Like |Link to Comment
  • Forcing Frannie to write down principal on troubled mortgages they own is just another bank bailout, writes Gretchen Morgenson. Many of these mortgages have 2nd liens held by banks. Lowered principal on the first note all of a sudden gives value to essentially worthless 2nd lien paper, and all at the expense of taxpayers.  [View news story]
    "Experts have said that principal reductions are one of the best tools for helping homeowners stay in their homes."

    Even if we all agreed this were true, shouldn't we start by deciding whether this is an appropriate public policy objective? And only if we agree that it is, any scheme implemented to further it needs to pass a number of key tests in order to be viable, even if a scheme that fails the tests would likely be more effective. Specifically, the proposed solution must not be a vote-buying scheme (i.e., a short-term or one-time handout to a minority), it must not force the prudent to subsidise the profligate, and it must minimise distortion of market behaviour. These constraints must then guide the choice of solution. Technocrats seem to jump straight to discussions of effectiveness without bothering to acknowledge, much less answer, the more fundamental questions. Perhaps the assumption these days is that every public policy objective is a good one simply because having more of them increases the number and power of the technocrats themselves.
    Mar 25, 2012. 05:10 PM | 7 Likes Like |Link to Comment
  • Who Is Buying This Market? [View article]
    It doesn't trouble me in the slightest. Why should it? What my stock will pay me in the future has nothing to do with how many times it changed hands before I bought it.

    If I were a trader, it would trouble me greatly. It's become much more difficult for a human trader to make a living against the massive robot army, no question about it. I rarely trade any more. But trading and investing are unrelated; trading is a business that attempts to generate income internally, while investing is the purchase of income-generating securities issued by other businesses.

    If that places me on fantasy island, I guess I must be playing the part of Roarke. I'll take it.
    Feb 12, 2012. 06:03 PM | 7 Likes Like |Link to Comment
  • Goldbugs Play the 'Slower Fool' [View article]
    I own gold. I do not consider myself a "gold bug". And I have absolutely no intention of exchanging my gold for dollars or any other paper currency, now or ever, regardless of the going rate.

    Why? Because gold is money, and the dollar is not. You can talk all you like about "pullbacks" and "bear markets" but all such talk really does is expose you as someone who does not think about this market correctly. The reality is that gold is the unit of account, and these interludes, which can last for anywhere from a few days to several years, are dead cat bounces by the dollar off one of the steps in the staircase that leads down into the infinite abyss. The dollar could triple in price from here, and it would still be worth just 4.1% of what it was worth in 1912 (and for that matter, just 8% of what it was worth in 1970). Let me emphasise that again for anyone skimming: those figures assume the dollar TRIPLES in price from its current level (for those of you who can't understand this, it would mean you can exchange $525 for an ounce of gold or vice versa, something you have not been able to do for many years).

    I do not invest in gold, because it is not an investment. As you point out, it generates no income. Nor does gold form all of my assets; in fact the majority of my assets are invested. But gold does form nearly all my savings. Savings exist to accommodate unusual events in life that cost big money but can't be adequately or cost-effectively insured against. They also exist to protect one against the prospect of having to leave one's home for another under unfortunate circumstances. In recent, nearby history that need has been extremely rare, but in the fullness of history it has been much less so. As an asset that I need to hold its value across a wide range of possible conditions at some unknown but likely distant future time, gold can't be beaten. The dollar is not even in the conversation as it simply cannot fulfill my requirements. It's useful enough for buying a loaf of bread this morning, but to escape a war-torn America in 2041 or to replace my belongings after an earthquake that may never come, it's useless. The dollar is a wasting asset, and therefore useless for expenditures that are unlikely to be made any time soon. And of course, the circumstances that are most likely to demand tapping one's savings are also likely to make the dollar worthless or, if held in a bank, inaccessible.

    Unlike a lot of the people you describe, who are nothing but currency traders, I don't deceive myself about gold. I do not expect to turn a profit or increase my wealth by owning it. What I do expect is to store value for an extended and unknown time interval until it is needed. That day may never come, but if it does I am comfortable knowing that my savings will not have become worthless during the time I did not need them. That's all I expect from gold, and I am certain I will get it. The people expecting or hoping for something else are simply further evidence of the financialisation of the world economy. They treat gold as one more thing to purchase with borrowings from the endless supply of free dollars out there, in the hope that someone tomorrow will be willing to borrow even more of those free dollars to own it. It's nothing but a game of chicken, played with the sure knowledge that if you're late getting off the tracks, the government will push you out of the way and leave the taxpayers and dollar savers staring into the locomotive's headlight in your place. What the outcome will be for those people, I neither know nor care. My responsibility is to look after myself so that I am not a burden on others, and gold is one of the assets I use to do that.
    Dec 15, 2011. 12:40 PM | 7 Likes Like |Link to Comment
  • In a strongly worded letter to Switzerland, U.S. Deputy AG James Cole demands - by Tuesday - detailed information on citizens using Swiss bank accounts to dodge taxes, or possibly see Credit Suisse (CS) and 9 other banks face criminal charges.  [View news story]
    If I had the kind of money those accounts are set up to hold, you can bet I wouldn't be working for a living, posting on Internet message boards, or worrying about US taxes (mine or otherwise). I would be living somewhere warm, green, and sandy in Latin America with a cheap passport of convenience and a nice local girl. And I'd never look back. Sadly, I think I probably have just enough money to pay the Swiss banks' fees for a year or two before going broke. Maybe someday.

    What you overlook is that if the US can enforce US law in Switzerland today, it can enforce US law in Mexico tomorrow. So after a lifetime of working and paying outrageous US taxes on my earnings, I finally retire to my nice little beach, taking my money with me and leaving my US passport in the trash can. But I won't be safe! Because the US could decide, constitutionally or not, that my money is the government's property even though I'm no longer a citizen and the money is no longer in its jurisdiction (see HEROES Act; it's just a warmup for this kind of thing). Hey, they're gonna have to do something to pay their bills, right? The US government is a mafia capo who owes another capo a whole bunch of money. His choices are to try to kill the other capo and his goons or go on a major crime spree to raise cash. Neither scenario is good for the neighbourhood, so I'd like to get out, and I'd like to be able to keep my life savings, already 40% smaller than they should be thanks to rapacious taxation. That requires that there be somewhere to get out TO, which there isn't if other nations allow the US to disregard their sovereignty.

    Make more sense now?
    Sep 5, 2011. 10:30 AM | 7 Likes Like |Link to Comment
  • Chart of the day: The so-called congressional effect - where stocks tend to rise more whenever Congress is out of session - is taken a step further. Whereas, Congress doing nothing at all is considered good for the markets, the chart implies Congress actually doing anything at all - is bad.  [View news story]
    I'm glad to see that Captain Obvious has finally found a steady job here at SA.
    Aug 26, 2011. 09:24 PM | 7 Likes Like |Link to Comment