John Hussman, Ph.D. is a well-regarded institutional investment manager. He holds a Ph.D. from Stanford University, and was formerly a professor of economics and international finance at the University of Michigan. He has also published the Hussman Econometrics newsletter since 1988. In his December 13, 2010 newsletter, he cites significant parallels between today's market environment and others during which outcomes were not pleasant.
First, allow me to present some context. From September 1, 2010 to December 16, 2010, the S&P 500 index has soared nearly 18.5%. Yes, that's eighteen and a half percent.
Dr. Hussman identifies five criteria which identify a market characterized as overvalued, overbought, and overly bullish. He further goes on to say that past instances have been associated with such uniformly negative outcomes that the current situation has to be accompanied by the word "warning". These criteria are as follows:
1) S&P 500 more than 8% above its 52 week (exponential) average
2) S&P 500 more than 50% above its 4-year low
3) Shiller Price/Earnings Ratio greater than 18
4) 10-year Treasury yield higher than 6 months earlier
5) Advisory bullishness > 47%, with bearishness < 27% (Investor's Intelligence)
He further provides the historical instances corresponding with these conditions as follows:
December 1972 - January 1973 (followed by a 48% collapse over the next 21 months)
August - September 1987 (followed by a 34% plunge over the following 3 months)
July 1998 (followed abruptly by an 18% loss over the following 3 months)
July 1999 (followed by a 12% market loss over the next 3 months)
January 2000 (followed by a spike 10% loss over the next 6 weeks)
March 2000 (followed by a spike loss of 12% over 3 weeks, and a 49% loss into 2002)
July 2007 (followed by a 57% market plunge over the following 21 months)
January 2010 (followed by a 7% "air pocket" loss over the next 4 weeks)
April 2010 (followed by a 17% market loss over the following 3 months)
December 2010
Whether history repeats itself again remains to be seen. Often a signal that the market may be near or at a "top" is when retail investors take the plunge and buy stocks. Throughout the market rally from the March 2009 lows, notwithstanding impressive gains in stocks, the vast majority of funds invested by retail investors since this time period has been to bonds; not stocks according to the Wall Street Journal and Investors Business Daily. Within the last two to three weeks, the flow of funds invested by non-institutional investors has shifted out of bonds and into stocks. Defense is out, and risk is in. When sentiment changes and soars, and prices rise feeding the sentiment change, it is often a huge warning sign.
This is not to say that I believe we are about to repeat the precipitous decline of 2008. And, I am truly not a pessimist. It is just that mathematical and universal laws dictate a reversion to the mean. For every action, there is an equal and opposite reaction. When things go up or down too quickly, caution must be imposed. When sentiments rise and values soar, it is very scintillating to want to hop aboard for fear of missing out on the "big one". We have some market exposure today, but the exposure has safeguards strategically incorporated. The bottom line is that the issues which created the great world-wide great recession are not all corrected. Debt is a looming problem that will continue to rear its head. Revenue estimates are being revised upwards, which can lead to disappointments. I believe that we are in a sideways market. By this I mean that we will have big upturns followed by dramatic, quick reversals. The Euro is still an experiment. No one knows for sure how it will unfold. I have difficulty understanding how Germany who is meticulous, disciplined, restrained and has been fiscally responsible can share a currency with others on the continent such as the Italians and the Spanish whose cultures are completely different. Is it really fair that all these nationalities have their single currency adjusted uniformly? If the debt has to be unwound and reallocated to different currencies, how will values be determined? In short, we are acting nimbly, making sure we have offense as well as defensive strategies in place. Particularly when retail investors are accepting more risk and are more euphoric, it is essential that we tighten our hedges.
After all, we're in a yellow zone, so we're proceeding with caution.
The opinoions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Past performance is no guarantee of future results.
Thursday, December 23, 2010
Monday, November 1, 2010
Tuesday, October 19, 2010
Alzheimer's: Care, Costs and a Cure
by Lora Gann
Last year my mother passed away after a relatively short battle with Alzheimer's disease. I say that it was relatively short, because in the grand scheme of things from diagnosis to death it was four years. The first two years we dealt with the slowing down of her mind and body, but she still remained the person whom we knew. There were many moments of frustration and fear, but for the most part we were able to deal with living with her new "normal" and enjoy each other.
Then, it got to the point when there was no more hiding. The family was in a constant state of high alert and crisis. We were helping to manage her care and trying to keep her in the house for as long as possible. A big concern was making sure that my father remained healthy, too. A new vocabulary replaced our old one: care givers, elder-care lawyers, shower seats, chair-lifts, ramps, long term care insurance, in-home visits, day care, companions, cognitive assessments, rehab, physical therapy, drug therapy, and more.
This disease is tragic and robs you of your dignity. My mother was a very proud woman who never wanted to live in an incapacitated way. She never wanted to burden her family and she wanted the end of her life to be as she lived - full of spirit, generosity, love and laughter. Unfortunately, that was not to be the case. It was a very sad end to her very vibrant life.
Ours was a very private battle. But, today, this disease affects 35 million people around the world and by the year 2050 it is predicted that 115 million people will have Alzheimer's, making this disease an enormous, world-wide public crisis. According to the World Alzheimer Report 2010* that was just published in September, the costs of caring for people affected by dementia have risen at an alarming rate and have impacted every health and social system in the world. This has dramatically affected the global economy; the total estimated worldwide costs of dementia are $604 billion in 2010 - 1% of world's gross domestic product.
Here are a few findings from this report and other recent research:
The likelihood of developing Alzheimer's doubles about every 5 years after age 65.
About 1 out of every 2 people over the age of 85 has Alzheimer's.
About 70% of the costs occur in Western Europe and North America.
In North America it is estimated that the annual cost of care per person is $48,605. And, in places in Latin America costs are estimated to be around $5,500 per person and in South Asia it is $903.
As population ages and life expectancy increases, we can expect these costs to rise sharply.
Costs include:
1. care giving by family and friends -- time family spend caring and helping with eating, dressing, bathing, toileting and grooming and shopping, preparing food, transporting and managing the household including finances
2. support provided by community care professionals - formal services provided outside the medical care system, including community services such as home care, food supply and transport and residential or nursing care
3. medical care - hospital care, medication and clinical care
Low and middle income countries are expected to have the sharpest increases. By 2050 2/3 of the people who have Alzheimer's will be from low and middle income countries.
In some high income countries between 1/3 and 1/2 of all people with dementia live in residential or nursing care facilities.
The report urges the international community to coordinate research and cost-effective approaches in order to manage these escalating costs, the societal burden and medical advances.
The risk factors of developing Alzheimer's disease are detailed as follows:
Advancing age.
Family history. People who have a parent or sibling that have developed Alzheimer's are 2-3 times more likely to develop Alzheimer's. Risk factor increases if more than one close relative has been affected.
Tobacco usage, poor diet, lack of exercise, alcohol consumption and social isolation all contribute.
High blood pressure, heart disease, stroke, diabetes and high cholesterol.
Head-injury.
Research shows that there is a connection between heart health and brain health. Jean Carper's new book, "100 Simple Things You Can Do To Prevent Alzheimer's" offers the reader a comprehensive "to-do" list backed by medical studies. It is written with a tone that is both helpful and optimistic. She is an active 78 year old writer who, being at higher risk for Alzheimer's because she carries the gene,
ApoE4, decided to teach us all that the cure for Alzheimer's is prevention.
Much of what she reports is common sense and advice we have heard over and over again by our medical practitioners: Don't eat processed foods, cut back on saturated fats, exercise, eat brightly colored fruits and vegetables, watch your sugar in-take, and eat fish a couple of times a week.
But some of what she tells us may be surprising. Among them are: Being lonely can escalate Alzheimer's. Eating a lot of red meat can cause inflammation which can cause Alzheimer's. Lifting weights and strength training can limit loss of muscle mass which can in turn increase cognitive functions. A compound found in olive oil which contains antioxidants can help prevent the destruction of brain cells. Limit your usage of pesticides. Caffeine may actually help reverse some of the damage done by Alzheimer's. Cutting down your calorie intake can reduce factors that promote the disease. By keeping your brain busy your whole life, neuroscientists say your brain can actually ignore the symptoms of Alzheimer's, even though the pathology shows you should have the disease.
She sites research studies and doctors for each item on her list. It is a very interesting and easy read. Incorporating much of what she advises will not only help our mental health, but it will help us fight numerous other diseases as well.
Since some people live up to 15 years after diagnosis with this disease, we can see how families can become financially and emotionally devastated. So, what should we do? We know we can't hide from the threat of this disease, it is all around us. But, we can try to strengthen our heart health and mind health. We can make sure that our resources are protected by having a sound financial plan and long term care insurance. And, we should have very candid and open discussions with our loved ones about our wishes.
Though medical advances are being discovered all the time, it is time to take matters in our own hands and act on the idea that prevention can be a cure.
* World Alzheimer Report 2010, The Global impact of Dementia. Published by Alzheimer's Disease International, September 2010
The opinoions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Last year my mother passed away after a relatively short battle with Alzheimer's disease. I say that it was relatively short, because in the grand scheme of things from diagnosis to death it was four years. The first two years we dealt with the slowing down of her mind and body, but she still remained the person whom we knew. There were many moments of frustration and fear, but for the most part we were able to deal with living with her new "normal" and enjoy each other.
Then, it got to the point when there was no more hiding. The family was in a constant state of high alert and crisis. We were helping to manage her care and trying to keep her in the house for as long as possible. A big concern was making sure that my father remained healthy, too. A new vocabulary replaced our old one: care givers, elder-care lawyers, shower seats, chair-lifts, ramps, long term care insurance, in-home visits, day care, companions, cognitive assessments, rehab, physical therapy, drug therapy, and more.
This disease is tragic and robs you of your dignity. My mother was a very proud woman who never wanted to live in an incapacitated way. She never wanted to burden her family and she wanted the end of her life to be as she lived - full of spirit, generosity, love and laughter. Unfortunately, that was not to be the case. It was a very sad end to her very vibrant life.
Ours was a very private battle. But, today, this disease affects 35 million people around the world and by the year 2050 it is predicted that 115 million people will have Alzheimer's, making this disease an enormous, world-wide public crisis. According to the World Alzheimer Report 2010* that was just published in September, the costs of caring for people affected by dementia have risen at an alarming rate and have impacted every health and social system in the world. This has dramatically affected the global economy; the total estimated worldwide costs of dementia are $604 billion in 2010 - 1% of world's gross domestic product.
Here are a few findings from this report and other recent research:
The likelihood of developing Alzheimer's doubles about every 5 years after age 65.
About 1 out of every 2 people over the age of 85 has Alzheimer's.
About 70% of the costs occur in Western Europe and North America.
In North America it is estimated that the annual cost of care per person is $48,605. And, in places in Latin America costs are estimated to be around $5,500 per person and in South Asia it is $903.
As population ages and life expectancy increases, we can expect these costs to rise sharply.
Costs include:
1. care giving by family and friends -- time family spend caring and helping with eating, dressing, bathing, toileting and grooming and shopping, preparing food, transporting and managing the household including finances
2. support provided by community care professionals - formal services provided outside the medical care system, including community services such as home care, food supply and transport and residential or nursing care
3. medical care - hospital care, medication and clinical care
Low and middle income countries are expected to have the sharpest increases. By 2050 2/3 of the people who have Alzheimer's will be from low and middle income countries.
In some high income countries between 1/3 and 1/2 of all people with dementia live in residential or nursing care facilities.
The report urges the international community to coordinate research and cost-effective approaches in order to manage these escalating costs, the societal burden and medical advances.
The risk factors of developing Alzheimer's disease are detailed as follows:
Advancing age.
Family history. People who have a parent or sibling that have developed Alzheimer's are 2-3 times more likely to develop Alzheimer's. Risk factor increases if more than one close relative has been affected.
Tobacco usage, poor diet, lack of exercise, alcohol consumption and social isolation all contribute.
High blood pressure, heart disease, stroke, diabetes and high cholesterol.
Head-injury.
Research shows that there is a connection between heart health and brain health. Jean Carper's new book, "100 Simple Things You Can Do To Prevent Alzheimer's" offers the reader a comprehensive "to-do" list backed by medical studies. It is written with a tone that is both helpful and optimistic. She is an active 78 year old writer who, being at higher risk for Alzheimer's because she carries the gene,
ApoE4, decided to teach us all that the cure for Alzheimer's is prevention.
Much of what she reports is common sense and advice we have heard over and over again by our medical practitioners: Don't eat processed foods, cut back on saturated fats, exercise, eat brightly colored fruits and vegetables, watch your sugar in-take, and eat fish a couple of times a week.
But some of what she tells us may be surprising. Among them are: Being lonely can escalate Alzheimer's. Eating a lot of red meat can cause inflammation which can cause Alzheimer's. Lifting weights and strength training can limit loss of muscle mass which can in turn increase cognitive functions. A compound found in olive oil which contains antioxidants can help prevent the destruction of brain cells. Limit your usage of pesticides. Caffeine may actually help reverse some of the damage done by Alzheimer's. Cutting down your calorie intake can reduce factors that promote the disease. By keeping your brain busy your whole life, neuroscientists say your brain can actually ignore the symptoms of Alzheimer's, even though the pathology shows you should have the disease.
She sites research studies and doctors for each item on her list. It is a very interesting and easy read. Incorporating much of what she advises will not only help our mental health, but it will help us fight numerous other diseases as well.
Since some people live up to 15 years after diagnosis with this disease, we can see how families can become financially and emotionally devastated. So, what should we do? We know we can't hide from the threat of this disease, it is all around us. But, we can try to strengthen our heart health and mind health. We can make sure that our resources are protected by having a sound financial plan and long term care insurance. And, we should have very candid and open discussions with our loved ones about our wishes.
Though medical advances are being discovered all the time, it is time to take matters in our own hands and act on the idea that prevention can be a cure.
* World Alzheimer Report 2010, The Global impact of Dementia. Published by Alzheimer's Disease International, September 2010
The opinoions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Friday, October 15, 2010
Unsustainable
The word, "unsustainable" is defined as something that cannot be continued or maintained.
James Macdougald is the author of Unsustainable: How Big Government Taxes And Debt Are Wrecking America. It is easy to discredit the messenger, but the points raised in this book, which I will summarize below, are both mind-boggling and essential for all Americans to grasp.
Here are some of the essential details:
A) Facts and Conditions Which Have Created What Is Unsustainable:
There are 89,000 public sector entities employing 22 million people who are supported by taxes, fees and tolls. Macdougald argues that America currently has federal, state, and local governments which have redistributed so much income to themselves that tax revenues are no longer adequate to support the wages, pensions, and other benefits that they have promised themselves. The book points out that there are specific conditions which set the stage for growth and power of government. The first contributor is a serious economic crisis. The second condition is that the portion of the population either employed by or dependent on the government must be growing and vulnerable. Interestingly, approximately 47% of working American tax-filers pay zero income taxes today. That means 53% of working Americans have to fully support aid and services for all non-working citizens as well as all of the non-taxpaying citizens. The third condition is that scapegoats must be identified as the cause of the problems, motivating unification of the majority of voters.
B) Conflicts Between Public and Private Sectors:
Macdougald points out in blunt terms that the private sector is dying while the public sector is thriving. Within the ten years prior to 2009, the private sector lost 1.5 million jobs, and the public sector grew by 2 million within this same time period. While the private sector has been plagued with bankruptcies, lost wages, decreases in benefits and huge unemployment, the public sector has enjoyed job security, high pay, unparalleled health insurance and pensions that are payable as early as age 40, and routinely payable at age 50 or 55. The Bureau of Economic Analysis reported that in the first quarter of 2010, private sector workers earned $300 BILLION less than their counterparts did in the last quarter of 2007.
The private sector workers are squeezed because notwithstanding the fact that they are experiencing income deflation, they have to support the expenditure of a growing population and a growing government, whose benefits are richer than their own. This same Bureau conducted a study that showed that as of 2008, the average federal worker received $119,982 in compensation and benefits compared with the private sector average of $59,909. For public employees, the "benefits" component was $40,785, as opposed to the private wage earner whose benefits component only averaged $9881. With a total of 1.9 million federal workers, the difference in annual compensation was $114 Billion a year, and is supported by private sector businesses and their employees. Despite the impact of near record unemployment in the private sector in 2009, and massive increases in government debt, the government workers still received raises in terms of incomes and pensions for the year.
C) Uneven Accounting Standards:
Even more revealing is the fact that federal, state, and local governments and school districts are able to hide the actual costs of benefits that private citizens actually pay to them. For the private sector, the Federal Accounting Standards Board (FASB) recognized in the mid 1980's that corporations had pension plans that carried with them significant liabilities which were not shown on their balance sheets. The concern was that these future liabilities would impose financial strain on these corporations, a fact that was not readily discernable to investors. In reaction, the law was mandated requiring corporations to report these future liabilities on their balance sheets. This makes perfectly good sense to me. The problem and inconsistency is that the federal government is not subject to the FASB accounting and disclosure rules. The Government Accounting Standards Board (GASB) allows for off balance sheet accounting for government pension liabilities. This is a classic example of the golden rule. "He who has the gold rules".
D) Special Public Sector Retirement Goodies:
Many public sector pension plans permit the aggregation of unused sick pay or vacation pay or overtime to be paid during the final year before retirement. This policy known as spiking results in inflated earnings in the last years of employment, causing significantly larger pension payments throughout retirement. In Baltimore, the cost of paying pensions for firefighters and police could more than double in the year 2010 from the prior year. City officials predict an 11% increase in property taxes and cuts in services just to pay the pension bill.
E) The Social Security Crisis:
When Social Security was enacted in 1935, it was never perceived that life expectancy would extend from age 68 to age 80. As a result, it was never contemplated that the number of retirees would exceed the number of workers. In reaction to increased life expectancy and the diminishing population of workers to support the growing population of retirees, since 1983, the government has collected $2.5 trillion more in Social Security taxes than what was required to support current retirees. In essence, workers have paid social security taxes twice since 1983, once to provide benefits to existing retirees and a second time to pre-fund a significant portion of their own retirement benefits. Instead of putting our Social Security taxes in a trust which was to be spent only for future retirement benefits, the government spent the money elsewhere through massive government spending programs. It did this through depositing U.S. Treasuries, not real money, into the Social Security trust fund. Treasuries are IOU's. The government uses Treasuries to borrow from taxpayers and other governments. The government spent our social security savings knowing that there were only IOU's on the other side. This has resulted in the greatest Ponzi scheme of all time. Congress has "stolen" from the trust fund by issuing promises to repay though IOU's, and now after spending recklessly for decades, we learn that there is no money in the trust. Congress' proposed solution is to impose more taxes. Evidently twice was not enough. If these kinds of shenanigans occurred in the private sector, there would definitely be jail time.
F) Unions and the Public Sector:
Public sector employees, hired by taxpayers, have a monopoly on the services that they are paid to provide. Unions collect as dues about 1% of public sector's salaries. The unions use the income derived from these dues to provide financial support to politicians who support their agenda. This is a classic conflict of interest. As taxpayers, we are funding the salaries of public sector employees. And these public sector employees are using the income we paid to them to support their agendas which are in conflict to the interests of us the taxpayers, who are after all their employers. Public sector unions have tremendous clout because they operate in a non-competitive environment. We cannot buy police or fire protection elsewhere even if the costs that the unions negotiate is too high.
G) Unsustainable Realities:
I was so moved by his findings that I telephoned Jim MacDougald. We had a lengthy conversation. His basic position is, as taxpayers, we should know for what we are paying. There is no true accounting for the real unfunded pension liabilities. When we go to the polls and support programs, we don't know what our current expenses are, and therefore the true budgetary impact of legislating programs. I asked Jim about our military spending, and what percentage the military comprises of GDP. Jim informed me that no one really knows because there is no accounting or accountability for weapons or aircraft versus pension costs. Everything is lumped together, and there is very little transparency. What he did say is that the "best guess" is that the federal debt is $120 trillion. This equates to the average worker in the U.S. owing $1.2 million today. If the interest rate to service this debt were just 5%, it would cost each worker $60,000 just to cover interest costs without ever reducing principal. And this is utterly UNSUSTAINABLE.
H) My Takeaways:
Last year Jim helped to found The Free Enterprise Nation to rectify these disparities. The organization has no political affiliation. The unsustainable situation was fostered by both Republicans and Democrats, and the solutions to the plight are education, advocacy, and cooperation of all Americans to end politics as usual and to accept compromises and sacrifices. As a nation, we are at a philosophical crossroads. It is too easy to pigeonhole Democrats as being for the little guy and the underprivileged, and Republicans as heartless and only caring about their wallets. However, I believe that today the debate has moved much deeper than these stereotypes. The real philosophical tug of war is whether we should look towards the government to make lives better, or whether private citizens should be most empowered. I believe that being Republican or a fiscal conservative and having a bleeding heart and caring for the underprivileged are not mutually exclusive. In fact, though I am really an Independent, I have come philosophically to abhor big government. I think its effect is to keep the underprivileged, well, underprivileged. When governments get too much power, historically bad results follow. This has been true for World War Two Germany, Russia, China, African nations, etc., etc., etc. I am not comparing the current U.S. government with any of these regimes. I am just saying that too much power and control, militarily and/or economically, scares me.
I believe in the genius of mankind manifested through true entrepreneurial spirit. Furthermore, our government gets a big "F" for energy policies, public schools, postal service, railway systems and ethics. Therefore, I want them out of healthcare and anywhere else they seek to exert and overextend themselves. This is far deeper and wider than a liberal or conservative sound bite. Governments hired by us have forgotten for whom they work. They have demonstrated absolutely no fiscal responsibility, and I have come to agree with MacDougald that big government has made our nation's optimism for a brighter tomorrow unsustainable.
I) Conclusion:
Last year Jim helped to found The Free Enterprise Nation to rectify these disparities. The organization has no political affiliation. The unsustainable situation was created by both Republicans and Democrats, and the solutions to the plight are education, advocacy, and cooperation of all Americans to end politics as usual and to accept compromises and sacrifices.
I asked Jim if he would consider speaking to a group of our clients and friends. He said that he would. So, if you would be interested in getting more facts on these matters and being able to speak directly with the author, please let us know. These facts are crucial for all Americans to appreciate. Therefore, I encourage you to forward this letter to anyone who should also be in the know.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor
James Macdougald is the author of Unsustainable: How Big Government Taxes And Debt Are Wrecking America. It is easy to discredit the messenger, but the points raised in this book, which I will summarize below, are both mind-boggling and essential for all Americans to grasp.
Here are some of the essential details:
A) Facts and Conditions Which Have Created What Is Unsustainable:
There are 89,000 public sector entities employing 22 million people who are supported by taxes, fees and tolls. Macdougald argues that America currently has federal, state, and local governments which have redistributed so much income to themselves that tax revenues are no longer adequate to support the wages, pensions, and other benefits that they have promised themselves. The book points out that there are specific conditions which set the stage for growth and power of government. The first contributor is a serious economic crisis. The second condition is that the portion of the population either employed by or dependent on the government must be growing and vulnerable. Interestingly, approximately 47% of working American tax-filers pay zero income taxes today. That means 53% of working Americans have to fully support aid and services for all non-working citizens as well as all of the non-taxpaying citizens. The third condition is that scapegoats must be identified as the cause of the problems, motivating unification of the majority of voters.
B) Conflicts Between Public and Private Sectors:
Macdougald points out in blunt terms that the private sector is dying while the public sector is thriving. Within the ten years prior to 2009, the private sector lost 1.5 million jobs, and the public sector grew by 2 million within this same time period. While the private sector has been plagued with bankruptcies, lost wages, decreases in benefits and huge unemployment, the public sector has enjoyed job security, high pay, unparalleled health insurance and pensions that are payable as early as age 40, and routinely payable at age 50 or 55. The Bureau of Economic Analysis reported that in the first quarter of 2010, private sector workers earned $300 BILLION less than their counterparts did in the last quarter of 2007.
The private sector workers are squeezed because notwithstanding the fact that they are experiencing income deflation, they have to support the expenditure of a growing population and a growing government, whose benefits are richer than their own. This same Bureau conducted a study that showed that as of 2008, the average federal worker received $119,982 in compensation and benefits compared with the private sector average of $59,909. For public employees, the "benefits" component was $40,785, as opposed to the private wage earner whose benefits component only averaged $9881. With a total of 1.9 million federal workers, the difference in annual compensation was $114 Billion a year, and is supported by private sector businesses and their employees. Despite the impact of near record unemployment in the private sector in 2009, and massive increases in government debt, the government workers still received raises in terms of incomes and pensions for the year.
C) Uneven Accounting Standards:
Even more revealing is the fact that federal, state, and local governments and school districts are able to hide the actual costs of benefits that private citizens actually pay to them. For the private sector, the Federal Accounting Standards Board (FASB) recognized in the mid 1980's that corporations had pension plans that carried with them significant liabilities which were not shown on their balance sheets. The concern was that these future liabilities would impose financial strain on these corporations, a fact that was not readily discernable to investors. In reaction, the law was mandated requiring corporations to report these future liabilities on their balance sheets. This makes perfectly good sense to me. The problem and inconsistency is that the federal government is not subject to the FASB accounting and disclosure rules. The Government Accounting Standards Board (GASB) allows for off balance sheet accounting for government pension liabilities. This is a classic example of the golden rule. "He who has the gold rules".
D) Special Public Sector Retirement Goodies:
Many public sector pension plans permit the aggregation of unused sick pay or vacation pay or overtime to be paid during the final year before retirement. This policy known as spiking results in inflated earnings in the last years of employment, causing significantly larger pension payments throughout retirement. In Baltimore, the cost of paying pensions for firefighters and police could more than double in the year 2010 from the prior year. City officials predict an 11% increase in property taxes and cuts in services just to pay the pension bill.
E) The Social Security Crisis:
When Social Security was enacted in 1935, it was never perceived that life expectancy would extend from age 68 to age 80. As a result, it was never contemplated that the number of retirees would exceed the number of workers. In reaction to increased life expectancy and the diminishing population of workers to support the growing population of retirees, since 1983, the government has collected $2.5 trillion more in Social Security taxes than what was required to support current retirees. In essence, workers have paid social security taxes twice since 1983, once to provide benefits to existing retirees and a second time to pre-fund a significant portion of their own retirement benefits. Instead of putting our Social Security taxes in a trust which was to be spent only for future retirement benefits, the government spent the money elsewhere through massive government spending programs. It did this through depositing U.S. Treasuries, not real money, into the Social Security trust fund. Treasuries are IOU's. The government uses Treasuries to borrow from taxpayers and other governments. The government spent our social security savings knowing that there were only IOU's on the other side. This has resulted in the greatest Ponzi scheme of all time. Congress has "stolen" from the trust fund by issuing promises to repay though IOU's, and now after spending recklessly for decades, we learn that there is no money in the trust. Congress' proposed solution is to impose more taxes. Evidently twice was not enough. If these kinds of shenanigans occurred in the private sector, there would definitely be jail time.
F) Unions and the Public Sector:
Public sector employees, hired by taxpayers, have a monopoly on the services that they are paid to provide. Unions collect as dues about 1% of public sector's salaries. The unions use the income derived from these dues to provide financial support to politicians who support their agenda. This is a classic conflict of interest. As taxpayers, we are funding the salaries of public sector employees. And these public sector employees are using the income we paid to them to support their agendas which are in conflict to the interests of us the taxpayers, who are after all their employers. Public sector unions have tremendous clout because they operate in a non-competitive environment. We cannot buy police or fire protection elsewhere even if the costs that the unions negotiate is too high.
G) Unsustainable Realities:
I was so moved by his findings that I telephoned Jim MacDougald. We had a lengthy conversation. His basic position is, as taxpayers, we should know for what we are paying. There is no true accounting for the real unfunded pension liabilities. When we go to the polls and support programs, we don't know what our current expenses are, and therefore the true budgetary impact of legislating programs. I asked Jim about our military spending, and what percentage the military comprises of GDP. Jim informed me that no one really knows because there is no accounting or accountability for weapons or aircraft versus pension costs. Everything is lumped together, and there is very little transparency. What he did say is that the "best guess" is that the federal debt is $120 trillion. This equates to the average worker in the U.S. owing $1.2 million today. If the interest rate to service this debt were just 5%, it would cost each worker $60,000 just to cover interest costs without ever reducing principal. And this is utterly UNSUSTAINABLE.
H) My Takeaways:
Last year Jim helped to found The Free Enterprise Nation to rectify these disparities. The organization has no political affiliation. The unsustainable situation was fostered by both Republicans and Democrats, and the solutions to the plight are education, advocacy, and cooperation of all Americans to end politics as usual and to accept compromises and sacrifices. As a nation, we are at a philosophical crossroads. It is too easy to pigeonhole Democrats as being for the little guy and the underprivileged, and Republicans as heartless and only caring about their wallets. However, I believe that today the debate has moved much deeper than these stereotypes. The real philosophical tug of war is whether we should look towards the government to make lives better, or whether private citizens should be most empowered. I believe that being Republican or a fiscal conservative and having a bleeding heart and caring for the underprivileged are not mutually exclusive. In fact, though I am really an Independent, I have come philosophically to abhor big government. I think its effect is to keep the underprivileged, well, underprivileged. When governments get too much power, historically bad results follow. This has been true for World War Two Germany, Russia, China, African nations, etc., etc., etc. I am not comparing the current U.S. government with any of these regimes. I am just saying that too much power and control, militarily and/or economically, scares me.
I believe in the genius of mankind manifested through true entrepreneurial spirit. Furthermore, our government gets a big "F" for energy policies, public schools, postal service, railway systems and ethics. Therefore, I want them out of healthcare and anywhere else they seek to exert and overextend themselves. This is far deeper and wider than a liberal or conservative sound bite. Governments hired by us have forgotten for whom they work. They have demonstrated absolutely no fiscal responsibility, and I have come to agree with MacDougald that big government has made our nation's optimism for a brighter tomorrow unsustainable.
I) Conclusion:
Last year Jim helped to found The Free Enterprise Nation to rectify these disparities. The organization has no political affiliation. The unsustainable situation was created by both Republicans and Democrats, and the solutions to the plight are education, advocacy, and cooperation of all Americans to end politics as usual and to accept compromises and sacrifices.
I asked Jim if he would consider speaking to a group of our clients and friends. He said that he would. So, if you would be interested in getting more facts on these matters and being able to speak directly with the author, please let us know. These facts are crucial for all Americans to appreciate. Therefore, I encourage you to forward this letter to anyone who should also be in the know.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor
Thursday, September 16, 2010
Jobs, Jobs, Jobs: From Where Will They Come?
Contrary to common perceptions, it is not the big companies, such as IBM, or Microsoft, or even Apple or Google that create jobs or even revolutionary technology revolutions. While this may sound suspect, it was proven by the Kauffman Foundation of Entrepreneurship Research Series: Firm Formation and Economic Growth. The Kauffman report cited a relatively new dataset from the U.S. government called Business Dynamics Statistics (BDS), which revealed that firms in their first year of existence add an average of three million jobs per year. Because so many firms go out of business within the first five years of their existence, firms that already exist actually lose more jobs per year than they create. In fact, the report indicated that from 1977 to 2005, existing companies were net job destroyers, losing one million net jobs per year. While the startup company may not survive after the first year or beyond year five, during its startup year, this sector of the economy is responsible for creating one million new jobs. Startups lead the way in terms of job creation. So while the behemoths like Google and IBM acquire small companies who were recent startups, it is important to appreciate that it is the startups which assume the initial risks and prove the viability of their business, and are responsible for the surge in job growth.
Vivek Wadhwa is an entrepreneur turned scholar. He is Visiting Scholar at the School of Information at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. In reporting about the Kauffman findings, he concludes that since we cannot count on the Intels or the Microsofts to create employment, business incentives such as tax benefits to remain operational in a state should favor startups over large multi-nationals. His recipe for creating new jobs is to focus attention on helping the small entrepreneur.
There is great debate raging as to whether the U.S. should have bailed out the big banks and automobile manufacturers. Wadhwa provides a thought provoking argument to gear public policy towards startups. Examples of such public policy include patent protection laws, seed financing, tax breaks, education and infrastructure all aimed to help the little guy.
To piggy back arguments to encourage public policies to support the little guy, William Dunkelberg, Chief Economist for the National Federation of Independent Business, takes exception to economic arguments being made to legislate greater policies to encourage more spending. An argument being made by some today is that the “rich” deserve to have their taxes increase, and furthermore, if they pay less in taxes, they will save it, which will not jump-start the economy. The argument is that “poorer” people spend more, and spending greases the wheels of the economy better than savings do. What Dunkelberg points out is that for banks to lend, someone on the other side must be saving and deploying funds into the financial system. Also, most startup businesses are financed through hard-earned savings of the entrepreneur. So, the seeds for job creation which will come from startups and small entrepreneurs, stem from savings.
Let’s hope and vote for public policies that promote savings and fiscal responsibility, especially for the little guy who is the driver of the economy, yet ironically so often and easily overlooked.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Vivek Wadhwa is an entrepreneur turned scholar. He is Visiting Scholar at the School of Information at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. In reporting about the Kauffman findings, he concludes that since we cannot count on the Intels or the Microsofts to create employment, business incentives such as tax benefits to remain operational in a state should favor startups over large multi-nationals. His recipe for creating new jobs is to focus attention on helping the small entrepreneur.
There is great debate raging as to whether the U.S. should have bailed out the big banks and automobile manufacturers. Wadhwa provides a thought provoking argument to gear public policy towards startups. Examples of such public policy include patent protection laws, seed financing, tax breaks, education and infrastructure all aimed to help the little guy.
To piggy back arguments to encourage public policies to support the little guy, William Dunkelberg, Chief Economist for the National Federation of Independent Business, takes exception to economic arguments being made to legislate greater policies to encourage more spending. An argument being made by some today is that the “rich” deserve to have their taxes increase, and furthermore, if they pay less in taxes, they will save it, which will not jump-start the economy. The argument is that “poorer” people spend more, and spending greases the wheels of the economy better than savings do. What Dunkelberg points out is that for banks to lend, someone on the other side must be saving and deploying funds into the financial system. Also, most startup businesses are financed through hard-earned savings of the entrepreneur. So, the seeds for job creation which will come from startups and small entrepreneurs, stem from savings.
Let’s hope and vote for public policies that promote savings and fiscal responsibility, especially for the little guy who is the driver of the economy, yet ironically so often and easily overlooked.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Friday, August 20, 2010
Sobering Statistics
In its August 9, 2010 edition, The Wall Street Journal cited the following facts about the current state of the job market in the United States:
a) The number of 35-44 year old men out of work for at least a year totals 432,000.
b) The number of 45-54 year old men out of work for at least a year totals 608,000.
c) The number of 55-64 year old men out of work for at least a year totals 369,000.
d) The number of 55-64 year old women out of work for at least a year totals 267,000.
e) The median duration of unemployment is 25.4 weeks.
f) If the job openings were being filled as they have traditionally been, the U.S. would have approximately five million more gainfully employed people, according to David Altig, research director at the Federal Reserve Bank of Atlanta.
One other major concern and long term drag on the economy relates to the fact that many of those formerly unemployed are desperate to work that they are accepting positions and wages far below their previous earnings. They are no longer unemployed, but they are financially strapped, and are not in a position to exercise the form of patriotism desired by the federal government known as spending. One of the many examples of this phenomenon is Mary Lou Belmont, who was featured in the article. Mary Lou is a 56 year old married Florida resident who lost her job providing an annual salary of $117,000 as a compliance manager with GMAC Home Services, LLC in November, 2008. She just accepted a part-time job involving clerical work with a non-profit earning slightly better than minimum wage. While it’s great that she is productive and active again, the problem is that during her period of unemployment, she racked up over $100,000 in debt. In addition, she owns a five-bedroom, five-bathroom house which she is trying to sell for $929,000. And, there are many other choices in Florida. How many others are out there just like Mary Lou? She is no longer unemployed; yet she is unable to sustain her lifestyle. In fact, here is her quote: “Looking at what I’ll make per day now, I have to laugh. I used to spend that much in a day without thinking about it. It puts things into perspective.”
The cornerstone of any financial plan is a contingency plan and an emergency cushion and a commitment to live within your means. Too bad Mary Lou and so many others in their wise “golden years” never learned these basic lessons. And, too bad for the many of us who have been responsible and disciplined and have lived within our means who are now expected to rescue the thousands of folks like Mary Lou. Had they heeded these basic lessons, our entire economy might have well healed by now.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
a) The number of 35-44 year old men out of work for at least a year totals 432,000.
b) The number of 45-54 year old men out of work for at least a year totals 608,000.
c) The number of 55-64 year old men out of work for at least a year totals 369,000.
d) The number of 55-64 year old women out of work for at least a year totals 267,000.
e) The median duration of unemployment is 25.4 weeks.
f) If the job openings were being filled as they have traditionally been, the U.S. would have approximately five million more gainfully employed people, according to David Altig, research director at the Federal Reserve Bank of Atlanta.
One other major concern and long term drag on the economy relates to the fact that many of those formerly unemployed are desperate to work that they are accepting positions and wages far below their previous earnings. They are no longer unemployed, but they are financially strapped, and are not in a position to exercise the form of patriotism desired by the federal government known as spending. One of the many examples of this phenomenon is Mary Lou Belmont, who was featured in the article. Mary Lou is a 56 year old married Florida resident who lost her job providing an annual salary of $117,000 as a compliance manager with GMAC Home Services, LLC in November, 2008. She just accepted a part-time job involving clerical work with a non-profit earning slightly better than minimum wage. While it’s great that she is productive and active again, the problem is that during her period of unemployment, she racked up over $100,000 in debt. In addition, she owns a five-bedroom, five-bathroom house which she is trying to sell for $929,000. And, there are many other choices in Florida. How many others are out there just like Mary Lou? She is no longer unemployed; yet she is unable to sustain her lifestyle. In fact, here is her quote: “Looking at what I’ll make per day now, I have to laugh. I used to spend that much in a day without thinking about it. It puts things into perspective.”
The cornerstone of any financial plan is a contingency plan and an emergency cushion and a commitment to live within your means. Too bad Mary Lou and so many others in their wise “golden years” never learned these basic lessons. And, too bad for the many of us who have been responsible and disciplined and have lived within our means who are now expected to rescue the thousands of folks like Mary Lou. Had they heeded these basic lessons, our entire economy might have well healed by now.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Wednesday, July 28, 2010
Get Ready to Issue Staples Tax Form 1099 for Office Supplies
Section 9006 of the 2409 page new health care bill creates mandates for businesses that have nothing to do specifically with health care delivery, but everything to do with ways to pay for it.
Currently, IRS Form 1099 is issued by businesses to freelancers and independent contractors with whom they do business because independent contractors are not on the business’s payroll. As a result of the new law, beginning in 2012, businesses will be required to issue 1099 tax forms from any vendor from whom they purchase more than $ 600 per year. The new law makes two sweeping changes with respect to the issuance of 1099 tax forms. First, it expands their scope to track payments not just for services, as is currently the case, but also for tangible goods. Second, it requires 1099s to be issued not just to individuals, but to corporations as well.
Consequently, beginning January 1, 2012, if we purchase a copy machine and paper from Staples costing $601, we will be required to issue Staples, Inc. a 1099 at the end of the year. For businesses that do a lot of commerce with multiple vendors throughout the year, this will present quite a burden and expense because names and taxpayer identification numbers for each vendor as well as aggregate purchases per vendor will have to be submitted. The National Taxpayers Advocacy Office, which operates independently within the IRS, has expressed concern that these burdens will create incentives for businesses to limit the number of vendors with whom they work. The impact of the law will also create a huge advantage for big business at the expense of small companies. The reason is that larger companies will have better infrastructure to keep track of these payments for their customers as a means for staying compliant with the new IRS rules. Bill Rys, tax counsel for the National Federation of Independent Businesses, said of the new law, “It’s a pretty heavy administrative burden”, and this is particularly the case for small businesses without large in-house accounting staffs.
I think that credit card companies must pay a lot to lobbyists because a provision in the law excludes the burdens of filing 1099s when vendors are paid via credit cards. Wow, that’s a huge incentive for companies to charge more to credit. Parenthetically, I thought debt was the cause for the financial meltdown, and this law encourages more, not less. Also, many business owners can negotiate better finance terms from vendors directly than they can from Visa or Mastercard.
Government bureaucrats who have never run a small business are in charge of creating laws with the guise of helping small business without fully appreciating all the unintended consequences. The bureaucrats will get one thing correct. This new law will undoubtedly create jobs, probably not in the private sector, but most assuredly, it will result in more auditors hired by the IRS. As a small business owner myself, and one of some estimated 30 million sole proprietorships and subchapter S corporations, as well as two million farms and one million charities and other tax-exempt entities affected by this law, I’d like to say to Congress, thanks for your efforts, but no thanks for your so-called help.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Currently, IRS Form 1099 is issued by businesses to freelancers and independent contractors with whom they do business because independent contractors are not on the business’s payroll. As a result of the new law, beginning in 2012, businesses will be required to issue 1099 tax forms from any vendor from whom they purchase more than $ 600 per year. The new law makes two sweeping changes with respect to the issuance of 1099 tax forms. First, it expands their scope to track payments not just for services, as is currently the case, but also for tangible goods. Second, it requires 1099s to be issued not just to individuals, but to corporations as well.
Consequently, beginning January 1, 2012, if we purchase a copy machine and paper from Staples costing $601, we will be required to issue Staples, Inc. a 1099 at the end of the year. For businesses that do a lot of commerce with multiple vendors throughout the year, this will present quite a burden and expense because names and taxpayer identification numbers for each vendor as well as aggregate purchases per vendor will have to be submitted. The National Taxpayers Advocacy Office, which operates independently within the IRS, has expressed concern that these burdens will create incentives for businesses to limit the number of vendors with whom they work. The impact of the law will also create a huge advantage for big business at the expense of small companies. The reason is that larger companies will have better infrastructure to keep track of these payments for their customers as a means for staying compliant with the new IRS rules. Bill Rys, tax counsel for the National Federation of Independent Businesses, said of the new law, “It’s a pretty heavy administrative burden”, and this is particularly the case for small businesses without large in-house accounting staffs.
I think that credit card companies must pay a lot to lobbyists because a provision in the law excludes the burdens of filing 1099s when vendors are paid via credit cards. Wow, that’s a huge incentive for companies to charge more to credit. Parenthetically, I thought debt was the cause for the financial meltdown, and this law encourages more, not less. Also, many business owners can negotiate better finance terms from vendors directly than they can from Visa or Mastercard.
Government bureaucrats who have never run a small business are in charge of creating laws with the guise of helping small business without fully appreciating all the unintended consequences. The bureaucrats will get one thing correct. This new law will undoubtedly create jobs, probably not in the private sector, but most assuredly, it will result in more auditors hired by the IRS. As a small business owner myself, and one of some estimated 30 million sole proprietorships and subchapter S corporations, as well as two million farms and one million charities and other tax-exempt entities affected by this law, I’d like to say to Congress, thanks for your efforts, but no thanks for your so-called help.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Tuesday, June 29, 2010
Summary of Bank Regulation Bill in Plain English
A) Oversight:
Banks which are deemed so big or interconnected that their failures could present systemic risks for the overall economy will be monitored by a ten member council.
B) Credit Rating Agencies:
Agencies such as Moody’s Corp, Standard & Poor’s and Fitch Ratings could be sued if they “recklessly” fail to review key information in establishing a rating.
C) Capital Requirements:
The term “tier one capital” is often referred to in the news, but never defined. It is the core measure of a bank’s financial strength from a regulator’s point of view. It consists primarily of common stock and retained earnings of a bank. The Bill requires large banks to increase the amount of capital that they hold in reserves against possible loan losses. This will of course limit banks’ leverage and potential earnings. This provision however does not become effective for the first five years.
D) Limitations on Derivatives:
After a great deal of bargaining into the wee hours of the morning, a compromise was struck whereby banks get to retain derivative trading in house with respect to interest rates, foreign exchanges, gold and silver. Other types of derivative trades would have to be spun off to a securities broker-dealer division of the bank, separate and distinct from their traditional deposit-taking divisions. FDIC insurance will continue to protect the deposit-taking entity of banks, but it would not protect the broker-dealer affiliates created for the other derivatives trades. Government agencies will have new authority to regulate these trades, which heretofore have been largely unregulated. According to the Office of the Comptroller of the Currency, five banks control 97% of the total derivatives market, and 92% of their derivative trades relate to interest rate or foreign exchange. Therefore, the Bill will have little real impact on derivative trading, which was designed to be a monumental linchpin.
E) Volker Rule:
Paul Volker, the former Federal Reserve chairman, sought to prevent banks from engaging in any proprietary trading, or bets with its own money, including investments made to hedge funds and private equity funds. Bloomberg reports that Goldman Sachs executives estimate that 10% of the firm’s annual revenues come from proprietary trading. The final version of the Bill allows banks to invest in hedge funds and private equity, however, they cannot invest more than 3% of a fund’s equity and only up to 3% of the bank’s tier 1 capital can be invested into hedge funds or private equity. In addition, the Bill prevents firms which underwrite asset-backed securities from placing bets against the investment.
F) Limitations/ Costs/ Results:
The government, which took over Fannie Mae and Freddie Mac in 2008 after they suffered huge loan losses due to the housing crash, has already spent $ 145,000 billion and has pledged to cover unlimited Fannie and Freddie losses through 2012. The Bill does not address these loans at all. Even though auto dealers assemble loans for millions of car buyers, they will continue to be regulated by states or the Federal Trade Commission. They will not fall within the purview of the new consumer bureau.
Banks with assets of more than $50 billion and hedge funds with more than $10 billion in assets will be assessed a fee which is deemed to raise $19 billion over 10 years. Lending will continue to be more restricted and banks will pass on the additional fees to their customers. Wealth may or may not trickle down, but costs and regulations almost always do.
Respectfully submitted,
Greg Gann
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Banks which are deemed so big or interconnected that their failures could present systemic risks for the overall economy will be monitored by a ten member council.
B) Credit Rating Agencies:
Agencies such as Moody’s Corp, Standard & Poor’s and Fitch Ratings could be sued if they “recklessly” fail to review key information in establishing a rating.
C) Capital Requirements:
The term “tier one capital” is often referred to in the news, but never defined. It is the core measure of a bank’s financial strength from a regulator’s point of view. It consists primarily of common stock and retained earnings of a bank. The Bill requires large banks to increase the amount of capital that they hold in reserves against possible loan losses. This will of course limit banks’ leverage and potential earnings. This provision however does not become effective for the first five years.
D) Limitations on Derivatives:
After a great deal of bargaining into the wee hours of the morning, a compromise was struck whereby banks get to retain derivative trading in house with respect to interest rates, foreign exchanges, gold and silver. Other types of derivative trades would have to be spun off to a securities broker-dealer division of the bank, separate and distinct from their traditional deposit-taking divisions. FDIC insurance will continue to protect the deposit-taking entity of banks, but it would not protect the broker-dealer affiliates created for the other derivatives trades. Government agencies will have new authority to regulate these trades, which heretofore have been largely unregulated. According to the Office of the Comptroller of the Currency, five banks control 97% of the total derivatives market, and 92% of their derivative trades relate to interest rate or foreign exchange. Therefore, the Bill will have little real impact on derivative trading, which was designed to be a monumental linchpin.
E) Volker Rule:
Paul Volker, the former Federal Reserve chairman, sought to prevent banks from engaging in any proprietary trading, or bets with its own money, including investments made to hedge funds and private equity funds. Bloomberg reports that Goldman Sachs executives estimate that 10% of the firm’s annual revenues come from proprietary trading. The final version of the Bill allows banks to invest in hedge funds and private equity, however, they cannot invest more than 3% of a fund’s equity and only up to 3% of the bank’s tier 1 capital can be invested into hedge funds or private equity. In addition, the Bill prevents firms which underwrite asset-backed securities from placing bets against the investment.
F) Limitations/ Costs/ Results:
The government, which took over Fannie Mae and Freddie Mac in 2008 after they suffered huge loan losses due to the housing crash, has already spent $ 145,000 billion and has pledged to cover unlimited Fannie and Freddie losses through 2012. The Bill does not address these loans at all. Even though auto dealers assemble loans for millions of car buyers, they will continue to be regulated by states or the Federal Trade Commission. They will not fall within the purview of the new consumer bureau.
Banks with assets of more than $50 billion and hedge funds with more than $10 billion in assets will be assessed a fee which is deemed to raise $19 billion over 10 years. Lending will continue to be more restricted and banks will pass on the additional fees to their customers. Wealth may or may not trickle down, but costs and regulations almost always do.
Respectfully submitted,
Greg Gann
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Friday, May 21, 2010
Sovereign Debt is a Ponzi Scheme .....written by Greg Gann
The outstanding national debt of the United States as of May 2010 is just under $ 13 Trillion. The estimated population of the United States is approximately 300 million. This means that each citizen’s share of the current national debt is about $42,000. Since September 2007, the national debt has increased at an average rate of $4.10 Billion per day. [1]
Author, Martin Bell provides some great visual images to clarify the magnitude of the problem. He finds that the U.S. dollar is 0.10922mm thick. A stack of just $1 trillion would extend one quarter of the way to the moon. The dollar covers an area of 0.01034 square meters. One trillion dollars would cover the combined area of Washington, D.C., Rhode Island, and Delaware. So, to give a realistic image of our existing debt, multiply these images by a factor of 13.
In studying eight centuries of sovereign debt problems, Professors and co-authors Carmen Reinhart and Kenneth Rogoff cite in their book, This Time Is Different, that when the debt of a nation reaches 100% of its GDP, there is a reduction in potential GDP growth of approximately 1%. Today, the existing debt of Greece is 120% of its GDP. Italy’s is approaching 115%. Portugal’s debt is approximately 85% of its GDP. The United States is rapidly approaching a debt level close to 100% of our nation’s GDP. [2]
John Hussman, Ph.D., one of our clients’ investment managers, describes what is happening today in world markets as a Ponzi scheme. He describes that the price of an asset should reflect the future stream of income that the asset will generate, what is known as discounted cash flow. Ponzi schemes are created when assets are assigned greater values than their expected future cash flows can justify. Asset prices continue to rise when the purchaser believes that he will find a subsequent purchaser who will pay an ever higher price for the asset than he did regardless whether cash flows justify the higher price or not. When prices are no longer pegged to value, and value is no longer determined through reasonable expectations of those future cash flow payments, a bubble is created. This is exactly what we experienced in the late 1990’s dot com bubble. Stock prices were divorced from cash flows, and buyers were confident that there would continue to be future purchasers in line to continue to jack up prices. The trend continues until it ends. Everyone makes money in the Ponzi game until there is no one left in line willing to participate. The same thing happened with real estate.
As long as there is an assumption that the assets which support the debt will continue to rise, then no one believes that debt is the problem. Countries like Greece don’t have the luxury of devaluing their currencies. As the perception of sovereign defaults magnifies, investors will demand higher interest payments to justify the risk. An increase in interest rates on trillions of euros or dollars for that matter translates into a spiraling of the crisis. There is a problem when you have to borrow more just to cover the additional debt service costs.
The euro was an experiment. Unifying currencies of different nations with diverse cultures and values and work ethics and liabilities is a recipe for challenge and conflicts. On top of all these issues, Japan, countries in the Eurozone, and the United States are facing aging populations and growing unfunded liabilities. The Greek bailout will cost the U.S. dearly in terms of our contributions to the IMF. The United States and countries around the globe have simultaneously circulated a lot of money to combat systemic problems which have been brewing for years. The U.S. Treasury virtually nationalized our mortgage market. While debt can serve as a temporary band-aid, eventually growth must lead the way. Eventually there reaches a point of no return. You cannot resolve mountains of debt by issuing more debt. Eventually your credit worthiness gets called into question, and when that happens there become less parties interested in taking the risk, and the Ponzi game ends. And the problem is that there is no easy way out of the mess. Plans for greater fiscal responsibility, now termed austerity plans, mean that growth may slow. If there is fear that a currency may be devalued, well then who wants to risk being paid back in that currency.
When states like Pennsylvania and California are bankrupt and major countries around the globe are as well, it is hard for me to believe that we are in a long-term bull market. The problem now, from a trader’s vantage point, is that we are getting big spikes up in the market on certain days which are followed by craters. If we bet against the market, we are hurt during those up days. And, if we bet in favor of growth, we are hurt on those down days. To navigate in these waters, we are deploying additional technical indicators to assess market risk. We are also monitoring holdings with even greater scrutiny, and quite frankly, we are doing a lot of trading on both the buy and sell side. We are also allocating to investments that have cushions to help protect from the downside.
We are one world. And we are truly a small world. What happens in Europe has a direct, even if delayed, impact on the United States. As the euro weakens, the dollar strengthens. A stronger dollar is positive to some extent, but a stronger dollar makes exports collected by American companies more expensive because it costs more for the buyers of those exports to pay for the goods in dollars. In my humble opinion, any investor who feels complacent today because his investments have rebounded to a large extent from losses incurred during 2008, is either naïve or not getting the research to which we are exposed. This is a period where you should work to protect and preserve gains, and to actively monitor your holdings and the market and trade according to what the market dictates rather than what a pre-established, computer-generated asset allocation model outlines.
I am privileged to have earned the confidence of clients to proceed accordingly as a fiduciary on their behalf.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
--------------------------------------------------------------------------------
[1] www.brillig.com/debt_clock
[2] Hedgeye Risk Management
Author, Martin Bell provides some great visual images to clarify the magnitude of the problem. He finds that the U.S. dollar is 0.10922mm thick. A stack of just $1 trillion would extend one quarter of the way to the moon. The dollar covers an area of 0.01034 square meters. One trillion dollars would cover the combined area of Washington, D.C., Rhode Island, and Delaware. So, to give a realistic image of our existing debt, multiply these images by a factor of 13.
In studying eight centuries of sovereign debt problems, Professors and co-authors Carmen Reinhart and Kenneth Rogoff cite in their book, This Time Is Different, that when the debt of a nation reaches 100% of its GDP, there is a reduction in potential GDP growth of approximately 1%. Today, the existing debt of Greece is 120% of its GDP. Italy’s is approaching 115%. Portugal’s debt is approximately 85% of its GDP. The United States is rapidly approaching a debt level close to 100% of our nation’s GDP. [2]
John Hussman, Ph.D., one of our clients’ investment managers, describes what is happening today in world markets as a Ponzi scheme. He describes that the price of an asset should reflect the future stream of income that the asset will generate, what is known as discounted cash flow. Ponzi schemes are created when assets are assigned greater values than their expected future cash flows can justify. Asset prices continue to rise when the purchaser believes that he will find a subsequent purchaser who will pay an ever higher price for the asset than he did regardless whether cash flows justify the higher price or not. When prices are no longer pegged to value, and value is no longer determined through reasonable expectations of those future cash flow payments, a bubble is created. This is exactly what we experienced in the late 1990’s dot com bubble. Stock prices were divorced from cash flows, and buyers were confident that there would continue to be future purchasers in line to continue to jack up prices. The trend continues until it ends. Everyone makes money in the Ponzi game until there is no one left in line willing to participate. The same thing happened with real estate.
As long as there is an assumption that the assets which support the debt will continue to rise, then no one believes that debt is the problem. Countries like Greece don’t have the luxury of devaluing their currencies. As the perception of sovereign defaults magnifies, investors will demand higher interest payments to justify the risk. An increase in interest rates on trillions of euros or dollars for that matter translates into a spiraling of the crisis. There is a problem when you have to borrow more just to cover the additional debt service costs.
The euro was an experiment. Unifying currencies of different nations with diverse cultures and values and work ethics and liabilities is a recipe for challenge and conflicts. On top of all these issues, Japan, countries in the Eurozone, and the United States are facing aging populations and growing unfunded liabilities. The Greek bailout will cost the U.S. dearly in terms of our contributions to the IMF. The United States and countries around the globe have simultaneously circulated a lot of money to combat systemic problems which have been brewing for years. The U.S. Treasury virtually nationalized our mortgage market. While debt can serve as a temporary band-aid, eventually growth must lead the way. Eventually there reaches a point of no return. You cannot resolve mountains of debt by issuing more debt. Eventually your credit worthiness gets called into question, and when that happens there become less parties interested in taking the risk, and the Ponzi game ends. And the problem is that there is no easy way out of the mess. Plans for greater fiscal responsibility, now termed austerity plans, mean that growth may slow. If there is fear that a currency may be devalued, well then who wants to risk being paid back in that currency.
When states like Pennsylvania and California are bankrupt and major countries around the globe are as well, it is hard for me to believe that we are in a long-term bull market. The problem now, from a trader’s vantage point, is that we are getting big spikes up in the market on certain days which are followed by craters. If we bet against the market, we are hurt during those up days. And, if we bet in favor of growth, we are hurt on those down days. To navigate in these waters, we are deploying additional technical indicators to assess market risk. We are also monitoring holdings with even greater scrutiny, and quite frankly, we are doing a lot of trading on both the buy and sell side. We are also allocating to investments that have cushions to help protect from the downside.
We are one world. And we are truly a small world. What happens in Europe has a direct, even if delayed, impact on the United States. As the euro weakens, the dollar strengthens. A stronger dollar is positive to some extent, but a stronger dollar makes exports collected by American companies more expensive because it costs more for the buyers of those exports to pay for the goods in dollars. In my humble opinion, any investor who feels complacent today because his investments have rebounded to a large extent from losses incurred during 2008, is either naïve or not getting the research to which we are exposed. This is a period where you should work to protect and preserve gains, and to actively monitor your holdings and the market and trade according to what the market dictates rather than what a pre-established, computer-generated asset allocation model outlines.
I am privileged to have earned the confidence of clients to proceed accordingly as a fiduciary on their behalf.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
--------------------------------------------------------------------------------
[1] www.brillig.com/debt_clock
[2] Hedgeye Risk Management
Friday, May 7, 2010
Market Update - 5/7/10.....written by Greg Gann
I hate to lose money. And I especially hate to lose money for clients. As you know, my position has been that the market has been overbought and has been ripe for a pullback. What the S&P 500 returned in the last twelve months should have taken a decade. The fundamentals of the economy are still shaky, and unemployment has not improved much at all. The stock market has acted on its own volition, and it has ignored the economic realities. We have had very, very little allocations to stocks in the last year, finding other assets that provided good returns with much less risk and volatility. Because the market has ignored the economy, I decided to acquire some individual equities in specifically targeted areas last week after the initial market pullback. Over the last week, the stock market has been ugly. At one point in the Thursday’s trading day, the Dow was off 9% from its daily high. My computer screen showed the market going down like the Titanic. My first goal is to cause no harm and not lose principal. I frantically reset sell-stops and also sold out of some positions. There was so much trading commerce that the computer was operating extremely slowly and it was difficult to get a trading representative on the phone line. I don’t know where the market is heading. Whoever thinks markets are rational should sit by my computer and read my research. The point is that now I regret making last week’s trades. Hindsight truly is 20/20. However, I’d rather be bruised than burned. I want to make sure that we survive to see another and better trading opportunity.
Being nimble means not being beholden to any position and shifting to a protective, defensive stance when the market changes course. Being nimble also means acknowledging defeat, and realizing that if we step up to the plate with any degree of frequency, we are bound to strike out. It means cutting your losers short and letting your winners run. You will be receiving confirmations of the purchases and sales, and I just wanted to give you a heads up and appreciation for the moves. None of these positions represent a significant percentage of your portfolio, but I still hate losing any money for you.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Being nimble means not being beholden to any position and shifting to a protective, defensive stance when the market changes course. Being nimble also means acknowledging defeat, and realizing that if we step up to the plate with any degree of frequency, we are bound to strike out. It means cutting your losers short and letting your winners run. You will be receiving confirmations of the purchases and sales, and I just wanted to give you a heads up and appreciation for the moves. None of these positions represent a significant percentage of your portfolio, but I still hate losing any money for you.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Tuesday, May 4, 2010
Learning from the Best....written by Greg Gann
For an avid baseball fan, I can now imagine what it would be like to be all together at one time in a stadium with Babe Ruth, Willie Mays, Hank Aaron, Cal Ripken, and Brooks Robinson. I can now imagine this level of excitement and awe because I am intrigued with different economic perspectives and investment models, and last week, I attended an exclusive conference in La Jolle, California where many of the world’s greatest spoke. Normally, a conference will have one or two headline personalities. This one had more than ten. In future emails I may detail their exact viewpoints and predictions, but for now, I merely want to offer the bios of some of the presenters and give a very general overview of their wisdom. In addition to being world-class economists, most are also well- regarded authors. The conference was limited to approximately 300 individuals, and it was very humbling to receive insights in such a personal forum from the very same people whose books have helped me manage clients’ assets over the years, and who are regularly interviewed on CNBC, Bloomberg, Barron’s, The Wall Street Journal, the New York Times and the like. Allow me to welcome:
1) Niall Ferguson
Niall is an Oxford-educated author and world renowned speaker. He has written The World’s Banker: The History of the House of Rothschild and The Ascent of Money: A Financial History of the World. In 2004, he was named by Time Magazine as “one of the world’s hundred most influential people”. He is a professor of history at Harvard University as well as a professor of business administration at Harvard Business School.
2) Claudio Macchetto
Claudio is the Director of Global Platforms for Paulson & Co., the company that was featured in the book, The Greatest Trade Ever describing how Paulson ingeniously defied Wall Street betting against subprime mortgages to earn a spot in financial history.
3) Jason Cummins
Jason is head of economic research for Brevan Howard, one of the world’s largest hedge funds. Prior to joining the company, he was a Senior Economist at the Federal Reserve Board.
4) Dr. Lacy Hunt
Lacy is the author of two books as well as numerous articles in leading magazines, periodicals and scholarly journals. He is an internationally known economist and the Executive Vice President of Hoisington Investment Management Company, a firm that manages $5 billion for pension funds, endowments, insurance companies and others.
5) John Mauldin
John is a New York Times best-selling author and the editor of the highly acclaimed Thoughts from the Frontline e-letter which is read by more than 1.5 million readers weekly.
6) George Friedman, Ph.D.
George is an internationally recognized specialist in security and intelligence issues. He is the author of numerous articles and books on international affairs, warfare and intelligence. His most recent book, The Next 100 Years: A Forecast for the 21st Century is also a New York Times best seller.
7) Dr. A. Gary Shilling
Gary is well regarded for his forecasting record and his numerous books relating to economic themes and investment strategies. Since 1983, he has been a regular columnist for Forbes. He was also an informal economic advisor to President George Bush.
8) Dr. Michael West
Michael is the CEO of BioTime, Inc. and Embryone Sciences, Inc. The companies are focused on developing an array of research and therapeutic products using human embryonic stem cell technology. He has focused his academic and business careers on solutions for age-related degenerative diseases.
9) David Rosenberg
David is Chief Economist and Strategist for the Toronto-based investment firm of Glushkin Sheff. David ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and has been on the U.S. Institutional Investor All American All Star Team for the last four years, and ranked second overall in the 2008 survey.
10) Paul McCulley
Paul is Managing Director of PIMCO, one of the world’s largest fixed income managers. He is the author of the monthly research publication Global Central Bank Focus.
There were many other presenters who also provided great economic and investment insights. All but two of the presenters painted a very bleak economic picture in particular for the United States and Europe. There were serious arguments made why this past recession was not a normal recession and why a double dip is certainly within the realm of possibilities. All were concerned about record-breaking world deficits, taxes, increasing debt service expenses and the fact that just like Greece is experiencing today, there is no real easy way to unwind the mess that’s been created. The defensive stance that I have taken was very much affirmed. The bottom line was that markets are not always a gauge of the underlying economy. The economic stimuli have helped to cushion the fall but we are far from out of the woods and we are likely to face many, many headwinds moving forward.
Stay tuned. It will not be boring.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
1) Niall Ferguson
Niall is an Oxford-educated author and world renowned speaker. He has written The World’s Banker: The History of the House of Rothschild and The Ascent of Money: A Financial History of the World. In 2004, he was named by Time Magazine as “one of the world’s hundred most influential people”. He is a professor of history at Harvard University as well as a professor of business administration at Harvard Business School.
2) Claudio Macchetto
Claudio is the Director of Global Platforms for Paulson & Co., the company that was featured in the book, The Greatest Trade Ever describing how Paulson ingeniously defied Wall Street betting against subprime mortgages to earn a spot in financial history.
3) Jason Cummins
Jason is head of economic research for Brevan Howard, one of the world’s largest hedge funds. Prior to joining the company, he was a Senior Economist at the Federal Reserve Board.
4) Dr. Lacy Hunt
Lacy is the author of two books as well as numerous articles in leading magazines, periodicals and scholarly journals. He is an internationally known economist and the Executive Vice President of Hoisington Investment Management Company, a firm that manages $5 billion for pension funds, endowments, insurance companies and others.
5) John Mauldin
John is a New York Times best-selling author and the editor of the highly acclaimed Thoughts from the Frontline e-letter which is read by more than 1.5 million readers weekly.
6) George Friedman, Ph.D.
George is an internationally recognized specialist in security and intelligence issues. He is the author of numerous articles and books on international affairs, warfare and intelligence. His most recent book, The Next 100 Years: A Forecast for the 21st Century is also a New York Times best seller.
7) Dr. A. Gary Shilling
Gary is well regarded for his forecasting record and his numerous books relating to economic themes and investment strategies. Since 1983, he has been a regular columnist for Forbes. He was also an informal economic advisor to President George Bush.
8) Dr. Michael West
Michael is the CEO of BioTime, Inc. and Embryone Sciences, Inc. The companies are focused on developing an array of research and therapeutic products using human embryonic stem cell technology. He has focused his academic and business careers on solutions for age-related degenerative diseases.
9) David Rosenberg
David is Chief Economist and Strategist for the Toronto-based investment firm of Glushkin Sheff. David ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and has been on the U.S. Institutional Investor All American All Star Team for the last four years, and ranked second overall in the 2008 survey.
10) Paul McCulley
Paul is Managing Director of PIMCO, one of the world’s largest fixed income managers. He is the author of the monthly research publication Global Central Bank Focus.
There were many other presenters who also provided great economic and investment insights. All but two of the presenters painted a very bleak economic picture in particular for the United States and Europe. There were serious arguments made why this past recession was not a normal recession and why a double dip is certainly within the realm of possibilities. All were concerned about record-breaking world deficits, taxes, increasing debt service expenses and the fact that just like Greece is experiencing today, there is no real easy way to unwind the mess that’s been created. The defensive stance that I have taken was very much affirmed. The bottom line was that markets are not always a gauge of the underlying economy. The economic stimuli have helped to cushion the fall but we are far from out of the woods and we are likely to face many, many headwinds moving forward.
Stay tuned. It will not be boring.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Tuesday, April 20, 2010
Are Your Expectations Realistic? ...written by Greg Gann
On several occasions, I have heard realtors say that clients lie. Realtors say this because their clients say that they will only buy a home that specifically meets a variety of stipulations, but then they see a house with none of the required features, and they buy it. This got me thinking about investors and what they say and do.
Investors commonly tell me that they are “conservative”, yet their holdings are the complete opposite. Investors say that they want to incorporate defensive strategies to protect and preserve wealth, yet when the market surges, they question why their assets are not appreciating at the same rate as the “market”. Investors say that they don’t want to invest in stocks when the stock market is down, but then they question why their results are less than the stock market when they are not invested in stocks and the stock market is in the stratosphere. Investors say that they want investments that over time have strategies to make positive returns irrespective whether the market is up or down, but some today can’t fully grasp why their portfolio isn’t keeping pace with a stock market that has surged 75% in just one year.
Since March, 2009, the stock market, as measured through the S & P 500, is up 75%. I do not know of another time in history when this index has surged to this extent, especially in light of the fundamentals in the economy being as tenuous as they are and unemployment hovering around 10%. Dorsey Wright & Associates, a leading investment research organization, on April 14, 2010, recorded more new 52-week highs for stocks in that one trading day than in any single trading session since January 2004.
Based on irrefutable measurements of supply and demand, Dorsey Wright showed that the stock market was very much oversold March 2009. A year later, we are experiencing a market which is very much overbought. Markets can continue trends for periods that defy rationality, but when a market becomes overbought, caution and defense should be the call to action. Warren Buffett admonishes investors to be greedy while others are fearful, and fearful while others are greedy. Many investors become greedy when the market surges and becomes overbought. They develop symptoms of FOMO, an acronym and investment diagnosis known as “Fear of Missing Out”. And when we are in the red zone, as we are as of April 15, 2010, FOMO manifests itself by enticing investors to get back in the game at the absolute worst time. Markets are like rubber bands. They are flexible and can stretch and stretch and stretch. But, eventually they can only stretch so far before there is a snap.
For the decade that ended December 31, 2009, the S&P 500 was down over twenty-four percent. Therefore, $10,000 invested January 1, 1999 was only worth $7600, a full ten years later. The 75% surge in the S&P 500 since March 2009 has been a huge gift. It should be treated as a gift, not only because the fragility of the economy, but also because if an investor’s long-range expectation is to generate growth of say 7% per year, then the returns that have been reached actually in less than one year, should have taken ten years to accumulate. Also of significance is that fact that even after this maybe once in a lifetime 75% one year surge, the S&P 500 is still approximately 22% below its value as of March 2000.
I regularly speak with investors who tell me that their investments took a blood bath in 2008. They also referred affectionately to their 401k’s as “201k’s” in 2001 and 2002 because of the losses in that period. In 2008, the 201k was walloped and became a 101k. These same investors today tell me that they are no longer concerned about the status of the portfolios because they are “back”. When someone tells me that he is back, I know two things immediately. I know that he has tremendous exposure to the stock market and I know that he does not have adequate defenses in place to help secure the net worth from the next correction or “snap”. A year ago, there were serious discussions taking place as to how to prevent a second great depression. Unprecedented government involvement and spending has helped to thwart an imminent crisis. Analysts’ earnings expectations last year were so depressed that in hindsight, it has not required too much for corporate America and beyond to exceed those projections. While it is easy to catch a ride on the euphoria train today, the world still has not presented an exit strategy to unwind government spending and correct unprecedented non-global wartime deficits. Nor is unemployment or housing showing real signs of improvement.
As an asset class, bonds are considered safer than stocks because when we acquire a bond, we become a lender, and in the event of failure, lenders get paid before stockholders, who are the owners. Lehman Brothers was a huge guarantor in world markets. When the government allowed Lehman Brothers to fold in 2008, confidence in the entire financial structure was called into question. If you couldn’t trust Lehman to survive, who could you trust? Because of the uncertainty and fear that this and other failures created in the market last year, bond prices got slashed. Bonds provided stock-like returns, but with significantly less risk. Because of this anomaly, I over weighted clients’ portfolios to individual bonds.
After the stock market has zoomed in one year at a rate at which most of us would be very content if it were realized over a decade, it is easy to forget that a year ago, all of us had real concerns just how deep the recession could go. I believe that stimuli of governments around the globe have significantly helped economies and alleviated panic. I also however believe that they have camouflaged the underlying problems and they have not proposed viable exit strategies or safeguards to prevent the next re-occurrence. For all of these reasons and a variety of others about which I have written in the past, I have exercised with caution over the last twelve months. We have used defensive strategies and a host of safeguards. We have very, very little stock exposure. It is impossible to incorporate these safeguards and defensive investment strategies and expect to earn anywhere near what the stock market does in a year during which the market provides a decade-like return in one tenth of the time. Until the fundamentals of the economy show prolonged and consistent signs of improvement and until unemployment is not near a double digit number, I believe that the prudent investor should remain cautious. Wars, deficits, unemployment, wages, deflation, tax increases, and tremendous regulatory uncertainties, all tell me that while fear and panic are no longer THE sentiments of the day, we are nonetheless not out of the woods. A huge part of increasing net worth is maintaining defenses to minimize losses.
The point is that we can’t have it both ways. The investors with whom I speak who tell me that their portfolios are “back” from the losses of 2008 also tell me that their losses in 2008 were 40% and worse. The S&P 500 gave these investors a gift in the past twelve months. I do not think that it is wise investment policy to only have an offense and to rely on “gifts” to grow wealth. And, one last point, just like car buyers always want to brag about the deal they negotiated on their auto to show off their negotiating prowess, investors at cocktail parties notoriously deflate their losses and significantly exaggerate their gains. So, the next time your friend tells you at the party or on the golf course that he is up 75% this year, take solace in the knowledge that he probably had huge losses in 2001 and in 2002 and in 2008 and probably hasn’t realized growth in over a decade.
I am writing this to give you the perspective that there are always periods during which a particular methodology will surpass another, and time periods can always be conveniently established to make one methodology look particularly beneficial. Offense-only, buy-hold strategies while rewarded with stellar performance in the last twelve months, have resulted in huge losses for more than a decade. Returns are temporary, but strategies are resilient. A fifty percent loss still requires a hundred percent gain just to break even. I rely on a number of both fundamental as well as technical research sources to negotiate the market and deal with whatever curve ball it throws. What all of this tells me is that this is not the time to get caught up in the rapture. It is not the time to take our eyes off the ball. It is however the time to take in the entire picture to set and maintain realistic expectations. For any investor who perceives 2008 as a once in a hundred year flood year, well then so too should they recognize the ensuing twelve months which followed.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Investors commonly tell me that they are “conservative”, yet their holdings are the complete opposite. Investors say that they want to incorporate defensive strategies to protect and preserve wealth, yet when the market surges, they question why their assets are not appreciating at the same rate as the “market”. Investors say that they don’t want to invest in stocks when the stock market is down, but then they question why their results are less than the stock market when they are not invested in stocks and the stock market is in the stratosphere. Investors say that they want investments that over time have strategies to make positive returns irrespective whether the market is up or down, but some today can’t fully grasp why their portfolio isn’t keeping pace with a stock market that has surged 75% in just one year.
Since March, 2009, the stock market, as measured through the S & P 500, is up 75%. I do not know of another time in history when this index has surged to this extent, especially in light of the fundamentals in the economy being as tenuous as they are and unemployment hovering around 10%. Dorsey Wright & Associates, a leading investment research organization, on April 14, 2010, recorded more new 52-week highs for stocks in that one trading day than in any single trading session since January 2004.
Based on irrefutable measurements of supply and demand, Dorsey Wright showed that the stock market was very much oversold March 2009. A year later, we are experiencing a market which is very much overbought. Markets can continue trends for periods that defy rationality, but when a market becomes overbought, caution and defense should be the call to action. Warren Buffett admonishes investors to be greedy while others are fearful, and fearful while others are greedy. Many investors become greedy when the market surges and becomes overbought. They develop symptoms of FOMO, an acronym and investment diagnosis known as “Fear of Missing Out”. And when we are in the red zone, as we are as of April 15, 2010, FOMO manifests itself by enticing investors to get back in the game at the absolute worst time. Markets are like rubber bands. They are flexible and can stretch and stretch and stretch. But, eventually they can only stretch so far before there is a snap.
For the decade that ended December 31, 2009, the S&P 500 was down over twenty-four percent. Therefore, $10,000 invested January 1, 1999 was only worth $7600, a full ten years later. The 75% surge in the S&P 500 since March 2009 has been a huge gift. It should be treated as a gift, not only because the fragility of the economy, but also because if an investor’s long-range expectation is to generate growth of say 7% per year, then the returns that have been reached actually in less than one year, should have taken ten years to accumulate. Also of significance is that fact that even after this maybe once in a lifetime 75% one year surge, the S&P 500 is still approximately 22% below its value as of March 2000.
I regularly speak with investors who tell me that their investments took a blood bath in 2008. They also referred affectionately to their 401k’s as “201k’s” in 2001 and 2002 because of the losses in that period. In 2008, the 201k was walloped and became a 101k. These same investors today tell me that they are no longer concerned about the status of the portfolios because they are “back”. When someone tells me that he is back, I know two things immediately. I know that he has tremendous exposure to the stock market and I know that he does not have adequate defenses in place to help secure the net worth from the next correction or “snap”. A year ago, there were serious discussions taking place as to how to prevent a second great depression. Unprecedented government involvement and spending has helped to thwart an imminent crisis. Analysts’ earnings expectations last year were so depressed that in hindsight, it has not required too much for corporate America and beyond to exceed those projections. While it is easy to catch a ride on the euphoria train today, the world still has not presented an exit strategy to unwind government spending and correct unprecedented non-global wartime deficits. Nor is unemployment or housing showing real signs of improvement.
As an asset class, bonds are considered safer than stocks because when we acquire a bond, we become a lender, and in the event of failure, lenders get paid before stockholders, who are the owners. Lehman Brothers was a huge guarantor in world markets. When the government allowed Lehman Brothers to fold in 2008, confidence in the entire financial structure was called into question. If you couldn’t trust Lehman to survive, who could you trust? Because of the uncertainty and fear that this and other failures created in the market last year, bond prices got slashed. Bonds provided stock-like returns, but with significantly less risk. Because of this anomaly, I over weighted clients’ portfolios to individual bonds.
After the stock market has zoomed in one year at a rate at which most of us would be very content if it were realized over a decade, it is easy to forget that a year ago, all of us had real concerns just how deep the recession could go. I believe that stimuli of governments around the globe have significantly helped economies and alleviated panic. I also however believe that they have camouflaged the underlying problems and they have not proposed viable exit strategies or safeguards to prevent the next re-occurrence. For all of these reasons and a variety of others about which I have written in the past, I have exercised with caution over the last twelve months. We have used defensive strategies and a host of safeguards. We have very, very little stock exposure. It is impossible to incorporate these safeguards and defensive investment strategies and expect to earn anywhere near what the stock market does in a year during which the market provides a decade-like return in one tenth of the time. Until the fundamentals of the economy show prolonged and consistent signs of improvement and until unemployment is not near a double digit number, I believe that the prudent investor should remain cautious. Wars, deficits, unemployment, wages, deflation, tax increases, and tremendous regulatory uncertainties, all tell me that while fear and panic are no longer THE sentiments of the day, we are nonetheless not out of the woods. A huge part of increasing net worth is maintaining defenses to minimize losses.
The point is that we can’t have it both ways. The investors with whom I speak who tell me that their portfolios are “back” from the losses of 2008 also tell me that their losses in 2008 were 40% and worse. The S&P 500 gave these investors a gift in the past twelve months. I do not think that it is wise investment policy to only have an offense and to rely on “gifts” to grow wealth. And, one last point, just like car buyers always want to brag about the deal they negotiated on their auto to show off their negotiating prowess, investors at cocktail parties notoriously deflate their losses and significantly exaggerate their gains. So, the next time your friend tells you at the party or on the golf course that he is up 75% this year, take solace in the knowledge that he probably had huge losses in 2001 and in 2002 and in 2008 and probably hasn’t realized growth in over a decade.
I am writing this to give you the perspective that there are always periods during which a particular methodology will surpass another, and time periods can always be conveniently established to make one methodology look particularly beneficial. Offense-only, buy-hold strategies while rewarded with stellar performance in the last twelve months, have resulted in huge losses for more than a decade. Returns are temporary, but strategies are resilient. A fifty percent loss still requires a hundred percent gain just to break even. I rely on a number of both fundamental as well as technical research sources to negotiate the market and deal with whatever curve ball it throws. What all of this tells me is that this is not the time to get caught up in the rapture. It is not the time to take our eyes off the ball. It is however the time to take in the entire picture to set and maintain realistic expectations. For any investor who perceives 2008 as a once in a hundred year flood year, well then so too should they recognize the ensuing twelve months which followed.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Thursday, April 15, 2010
Realized Versus Unrealized Gains and Losses....written by Greg Gann
A client recently was looking for clarification when reviewing the 1099 for her investment account before presenting it to her accountant. She couldn’t quite comprehend how her account could have had such gains while the 1099 was reporting so many losses. I used a metaphor to explain the difference between realized and unrealized gains and losses that she found helpful. This got me thinking that there are probably plenty other clients who might appreciate and benefit from the same discussion.
As you know, I am an active investment manager. I have no objection to holding onto investments indefinitely. However, if an investment loses value over a stipulated level, I am programmed to sell before the losses become intolerable. This is because to quote the famous economist, John Maynard Keynes, “trends can continue longer than any of us can stay solvent.” I am also not afraid to sell an investment that has had good growth once that growth trend reverses to preserve embedded gains. Most people acknowledge that they have no problems acquiring investments. Their frustration is that they did not have a game plan to sell, and especially during rough market periods, this inertia cost them dearly.
The 1099 documents investments which were sold in a tax year to determine if there was a long-term or short-term gain or loss that would have tax implications. The 1099 does not summarize account values. It only relates to sales of investments within the year. The motto by which prudent investors should live is to let your winners run and to cut your losers short. Just as even the most outstanding baseball player strikes out with greater frequency than he hits home runs, so too investment gains come from singles, doubles, and the occasional home run. Investment gains also come from cutting losers short. When an investment is sold at a loss, that loss is reported on the 1099 tax form. This is a realized loss. When an investment is sold for more than its purchase cost, this is reported as a realized gain. However, investments that have appreciated in value, but have not yet been sold have unrealized gains. Because investments which have unrealized gains have not yet been sold, they do not appear on the 1099 tax form. The analogy I used to clarify this distinction is home equity. Let’s say we own a house for which we originally paid $ 100,000. If the house today is worth $500,000, but we still own it, then we have unrealized earnings (equity) in the house of $ 400,000. However, we do not get a 1099 tax form for that equity, nor do we owe taxes on the gain if we have not sold the house and realized the gain in this tax year. If let’s say there were a dilapidated building on the property that we sold for a loss, then that loss would have tax relevance.
The gains in your investment account are indicated on summary statements, and the value on these statements is net of all losses that may have been realized from selling other investments. The point is that the 1099 shows realized gains and losses, but for account valuation purposes, we really need to pay greater attention to the unrealized gains and losses, similar to home equity. We might have losses reported for tax purposes, but gains that are more relevant, but for which there is no tax consequence in a particular tax year. And, this entire discussion only applies to taxable accounts. It is not pertinent to retirement or other tax-advantaged accounts.
Hopefully that clarifies how we can have “losses” in years in which we have gains.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
As you know, I am an active investment manager. I have no objection to holding onto investments indefinitely. However, if an investment loses value over a stipulated level, I am programmed to sell before the losses become intolerable. This is because to quote the famous economist, John Maynard Keynes, “trends can continue longer than any of us can stay solvent.” I am also not afraid to sell an investment that has had good growth once that growth trend reverses to preserve embedded gains. Most people acknowledge that they have no problems acquiring investments. Their frustration is that they did not have a game plan to sell, and especially during rough market periods, this inertia cost them dearly.
The 1099 documents investments which were sold in a tax year to determine if there was a long-term or short-term gain or loss that would have tax implications. The 1099 does not summarize account values. It only relates to sales of investments within the year. The motto by which prudent investors should live is to let your winners run and to cut your losers short. Just as even the most outstanding baseball player strikes out with greater frequency than he hits home runs, so too investment gains come from singles, doubles, and the occasional home run. Investment gains also come from cutting losers short. When an investment is sold at a loss, that loss is reported on the 1099 tax form. This is a realized loss. When an investment is sold for more than its purchase cost, this is reported as a realized gain. However, investments that have appreciated in value, but have not yet been sold have unrealized gains. Because investments which have unrealized gains have not yet been sold, they do not appear on the 1099 tax form. The analogy I used to clarify this distinction is home equity. Let’s say we own a house for which we originally paid $ 100,000. If the house today is worth $500,000, but we still own it, then we have unrealized earnings (equity) in the house of $ 400,000. However, we do not get a 1099 tax form for that equity, nor do we owe taxes on the gain if we have not sold the house and realized the gain in this tax year. If let’s say there were a dilapidated building on the property that we sold for a loss, then that loss would have tax relevance.
The gains in your investment account are indicated on summary statements, and the value on these statements is net of all losses that may have been realized from selling other investments. The point is that the 1099 shows realized gains and losses, but for account valuation purposes, we really need to pay greater attention to the unrealized gains and losses, similar to home equity. We might have losses reported for tax purposes, but gains that are more relevant, but for which there is no tax consequence in a particular tax year. And, this entire discussion only applies to taxable accounts. It is not pertinent to retirement or other tax-advantaged accounts.
Hopefully that clarifies how we can have “losses” in years in which we have gains.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Wednesday, April 7, 2010
Wonder what might be Driving this market?.....written by Greg Gann
As crazy as it may sound, TrimTabs, a highly regarded investment research company, catering mostly to institutions to which I also subscribe reported that rising mortgage delinquencies are actually providing a boost to the U.S. economy. On March 15, 2010, Lender Processing Services reported that 7.4 million residential mortgages are non-current. This equates to 13.5% of all mortgages. Of these 7.4 million mortgages, only 2.0 million are in foreclosure, leaving 5.4 million owner-occupied residences in which owners are not paying their full mortgages. In fact, there are surely numerous instances where homeowners are paying nothing at all. This means that there are a great number of homeowners who are living for free, which may account for why retail sales figures are as good as they are. Banks can book mortgages which are more than 90 days delinquent as assets that are non-paying but accruing interest until the property is foreclosed. Therefore, although the delinquencies are impacting the cash flow of banks, they are not yet translating into a loss of banks’ retained earnings or net worth. Annual mortgage payments average between $12,000 to $18,000 annually. Multiplying these dollar figures by 5 million, delinquent mortgages result in $60 billion to $80 billion of additional economic “stimulus”.
This is why it’s always critical to appreciate the facts beneath the facts.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This is why it’s always critical to appreciate the facts beneath the facts.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Friday, March 26, 2010
New Health Overhaul: What’s Included and Who Pays....written by Greg Gann
It is certainly a noble goal to provide health coverage to more citizens. And who could argue that no one should be discriminated based on a pre-existing illness. I find it interesting that the details of a law that is being described by legislators on both sides of the aisle as one of the most sweeping changes in more than fifty years is so murkily understood. Hopefully, this will shed light on some of the issues that are most opaque.
1) Who is Affected
The law requires most Americans to have health insurance by January 1, 2014. Failure to procure insurance will result in penalties, unless they are issued an exemption due to financial hardship, religious beliefs or the like. Medicaid, the federal-state health program for the poor and disabled, would provide this insurance for those who fall within the established poverty levels. Individuals whose income falls between $14,400 to $43,320 and for a family of four whose income falls between $29,326 and $88,200, may be eligible for government subsidies to help pay for private insurance that would be sold in new state-based insurance marketplaces called exchanges. Initially, the exchanges will only be available to those who work for companies with 100 or less employees as well as the unemployed, self-insured, or retirees not yet eligible for Medicare. The exchanges are supposed to have four levels of care, each accompanied by a requisite cost.
The legislation does not require companies with fewer than 50 employees to offer insurance. However, they may be eligible for tax credits if they do offer the insurance, depending on average wages of the employees. Companies with more than 50 employees that fail to offer health coverage will be subject to a fee of up to $2000 per full-time employee if any employee opts for the government subsidized insurance options through the exchanges. The first 30 employees are waived in terms of calculating this penalty.
The law also enriches the Medicare Part D prescription drug benefit program that was enacted under President George W. Bush by providing richer prescription benefits through reducing the doughnut hole. However, in exchange for this addition, government payments to Medicare Advantage, the private plan part of Medicare, will be cut substantially. This means that the 10 million enrollees could lose eyeglass and hearing aid benefits.
Another provision of the law which has been glossed over relates to long term health care. Details definitely have to be spelled out, but the law establishes different tiers of long term care, and all employees will be covered unless they opt out. Yet, there are no mandates that employers, regardless of size, have to provide this coverage. The law requires the insured to pay into the system for at least five years, otherwise, she will receive no benefits. The government is hoping that by making it an opt-out, younger employees will participate, thereby offsetting the costs for the older participants covered under the plan. I still do not know what will happen to the individual who gets ill within the first five years because the law says there are no benefits for period. I also don’t understand how the government is going to protect itself from adverse selection, namely only the old who are more likely to collect having paid in for less time. In addition, there are provisions allowing the government to raise rates if it would otherwise be insolvent. Medicare and Social Security are on the brink of bankruptcy, so I would tread very, very cautiously before I would rely on a government “permanent” benefit that can always be enacted away by a future Congress.
2) Who Pays
The short answer to the question who pays for this quasi-universal health care are the people from whom the federal government can collect more taxes. In particular, the money will come from significantly higher Medicare taxes for individuals whose incomes are $200,000 and greater and for couples whose incomes are $250,000 and over. The Medicare tax will increase from the current 1.45% to 2.35%. This will affect approximately 1 million individuals and 4 million couples who file jointly. This legislation is sweeping in one other way. It represents the first time ever that Medicare taxes will be imposed on unearned income such as capital gains, dividends, interest, rents and withdrawals from IRA’s and 401k plans and the like. The rate of this tax will be 3.8%, and this will affect everyone regardless of income levels. The Obama budget also proposes allowing the current 15% tax rate on dividends and capital gains to rise to 20% as of January 1, 2011. This means that the new effective tax on these funds will rise to 23.8% come January.
The Medicare taxes superseded the tax on “Cadillac” plans. That 40% excise tax was delayed until 2018 when it will apply to benefits over $10,200 for individuals and $27,500 for couples. These thresholds will be indexed to inflation, which grows at a much slower pace than the cost of health care, meaning the tax will escalate more substantially over time.
The law also imposes significant restrictions on health savings accounts. Furthermore, beginning in 2013, the threshold to deduct medical expenses will change from 7.5% of adjusted gross income to 10%. And as crazy as it might sound, the cost of frequenting tanning salons will increase due to the 10% excise tax placed on the industry. While I don’t mind the tanning tax, the law also imposes a 2.9% excise tax on the purchase of wheelchairs.
3) Economic Ramifications
Christina Romer, Professor of Economics of University of California, Berkley, and Chair of Council of Economic Advisors in the Obama Administration, work shows that for every new dollar raised in taxes, it reduces economic growth three-fold. Markets generally do not respond favorably to increases in taxes. They certainly do not encourage job growth. Markets also do not generally respond favorably to uncertainties, and there are tons of issues that are unclear. While private industry has scaled back considerably, the government has grown. This is a critical time in the markets to have strategies to help preserve wealth because things can change quickly and catch many people who are unprepared in their wake. I’d like to believe that we could cover all Americans with adequate healthcare while growing the economy and stimulating job formation. Maybe Obamacare will work, and I wish for nothing more. But now is the time to make sure your financial house is in order. Now is the time to work towards financial goals irrespective of rules and regulations and tax changes. Although it is growing massively, now is not anymore appropriate a time to rely on the government because he who giveth can just as easily taketh away. I guess this is all part of the new normal.
Because U.S. Treasuries are backed by the full faith and credit of the U.S. government, they should and most commonly do provide a lower yield than corporate bonds, Bloomberg recently reported that bonds issued by Proctor & Gamble, Berkshire Hathaway, Johnson & Johnson, and Lowe’s Cos. provided lower interest than federal government bonds of comparable maturities. This indicates that the market considers bonds issued by these companies less risky than similar bonds issued by the USA. Maybe this is because, as predicted by Moody’s Investors Service, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7% of tax revenues for debt service in 2010 and almost 11% in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.
We are in a new normal. That which was once unusual is becoming common. This market is not your dad’s Oldsmobile. It requires more proactive attention and a strong arsenal of defensive strategies.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
1) Who is Affected
The law requires most Americans to have health insurance by January 1, 2014. Failure to procure insurance will result in penalties, unless they are issued an exemption due to financial hardship, religious beliefs or the like. Medicaid, the federal-state health program for the poor and disabled, would provide this insurance for those who fall within the established poverty levels. Individuals whose income falls between $14,400 to $43,320 and for a family of four whose income falls between $29,326 and $88,200, may be eligible for government subsidies to help pay for private insurance that would be sold in new state-based insurance marketplaces called exchanges. Initially, the exchanges will only be available to those who work for companies with 100 or less employees as well as the unemployed, self-insured, or retirees not yet eligible for Medicare. The exchanges are supposed to have four levels of care, each accompanied by a requisite cost.
The legislation does not require companies with fewer than 50 employees to offer insurance. However, they may be eligible for tax credits if they do offer the insurance, depending on average wages of the employees. Companies with more than 50 employees that fail to offer health coverage will be subject to a fee of up to $2000 per full-time employee if any employee opts for the government subsidized insurance options through the exchanges. The first 30 employees are waived in terms of calculating this penalty.
The law also enriches the Medicare Part D prescription drug benefit program that was enacted under President George W. Bush by providing richer prescription benefits through reducing the doughnut hole. However, in exchange for this addition, government payments to Medicare Advantage, the private plan part of Medicare, will be cut substantially. This means that the 10 million enrollees could lose eyeglass and hearing aid benefits.
Another provision of the law which has been glossed over relates to long term health care. Details definitely have to be spelled out, but the law establishes different tiers of long term care, and all employees will be covered unless they opt out. Yet, there are no mandates that employers, regardless of size, have to provide this coverage. The law requires the insured to pay into the system for at least five years, otherwise, she will receive no benefits. The government is hoping that by making it an opt-out, younger employees will participate, thereby offsetting the costs for the older participants covered under the plan. I still do not know what will happen to the individual who gets ill within the first five years because the law says there are no benefits for period. I also don’t understand how the government is going to protect itself from adverse selection, namely only the old who are more likely to collect having paid in for less time. In addition, there are provisions allowing the government to raise rates if it would otherwise be insolvent. Medicare and Social Security are on the brink of bankruptcy, so I would tread very, very cautiously before I would rely on a government “permanent” benefit that can always be enacted away by a future Congress.
2) Who Pays
The short answer to the question who pays for this quasi-universal health care are the people from whom the federal government can collect more taxes. In particular, the money will come from significantly higher Medicare taxes for individuals whose incomes are $200,000 and greater and for couples whose incomes are $250,000 and over. The Medicare tax will increase from the current 1.45% to 2.35%. This will affect approximately 1 million individuals and 4 million couples who file jointly. This legislation is sweeping in one other way. It represents the first time ever that Medicare taxes will be imposed on unearned income such as capital gains, dividends, interest, rents and withdrawals from IRA’s and 401k plans and the like. The rate of this tax will be 3.8%, and this will affect everyone regardless of income levels. The Obama budget also proposes allowing the current 15% tax rate on dividends and capital gains to rise to 20% as of January 1, 2011. This means that the new effective tax on these funds will rise to 23.8% come January.
The Medicare taxes superseded the tax on “Cadillac” plans. That 40% excise tax was delayed until 2018 when it will apply to benefits over $10,200 for individuals and $27,500 for couples. These thresholds will be indexed to inflation, which grows at a much slower pace than the cost of health care, meaning the tax will escalate more substantially over time.
The law also imposes significant restrictions on health savings accounts. Furthermore, beginning in 2013, the threshold to deduct medical expenses will change from 7.5% of adjusted gross income to 10%. And as crazy as it might sound, the cost of frequenting tanning salons will increase due to the 10% excise tax placed on the industry. While I don’t mind the tanning tax, the law also imposes a 2.9% excise tax on the purchase of wheelchairs.
3) Economic Ramifications
Christina Romer, Professor of Economics of University of California, Berkley, and Chair of Council of Economic Advisors in the Obama Administration, work shows that for every new dollar raised in taxes, it reduces economic growth three-fold. Markets generally do not respond favorably to increases in taxes. They certainly do not encourage job growth. Markets also do not generally respond favorably to uncertainties, and there are tons of issues that are unclear. While private industry has scaled back considerably, the government has grown. This is a critical time in the markets to have strategies to help preserve wealth because things can change quickly and catch many people who are unprepared in their wake. I’d like to believe that we could cover all Americans with adequate healthcare while growing the economy and stimulating job formation. Maybe Obamacare will work, and I wish for nothing more. But now is the time to make sure your financial house is in order. Now is the time to work towards financial goals irrespective of rules and regulations and tax changes. Although it is growing massively, now is not anymore appropriate a time to rely on the government because he who giveth can just as easily taketh away. I guess this is all part of the new normal.
Because U.S. Treasuries are backed by the full faith and credit of the U.S. government, they should and most commonly do provide a lower yield than corporate bonds, Bloomberg recently reported that bonds issued by Proctor & Gamble, Berkshire Hathaway, Johnson & Johnson, and Lowe’s Cos. provided lower interest than federal government bonds of comparable maturities. This indicates that the market considers bonds issued by these companies less risky than similar bonds issued by the USA. Maybe this is because, as predicted by Moody’s Investors Service, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7% of tax revenues for debt service in 2010 and almost 11% in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.
We are in a new normal. That which was once unusual is becoming common. This market is not your dad’s Oldsmobile. It requires more proactive attention and a strong arsenal of defensive strategies.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Wednesday, February 17, 2010
Important Tax Changes for 2010 -- Part Two.....written by Greg Gann
A) Federal Estate Taxes:
The big news is that for the 2010 tax year, there are no estate taxes; well that is unless the law is repealed and made retroactive. This is a repeal with a one year term limit. Estate taxes are only applicable for “wealthy” estates. Certain members of Congress have politicized the tax by branding it as a “death” tax, and encouraging a large percentage of the population for whom estate taxes have no relevance to fight the battle for permanent repeal. In reality, by and large, only one to two percent of the entire American population is subject to these taxes, yet clever marketers have incited people of average means to join the tea party. The amount of an estate that can be left to beneficiaries exempt from federal estate taxes has been increasing since the enactment of the 2001Tax Act. In fact, the exemption has escalated from $ 1 million in 2001 to $ 3.5 million in 2009. The Byrd Rule is legislation which limits the duration of laws with a negative fiscal impact to ten years. It was anticipated back in 2001 that Congress would re-enact the terms of the estate tax law prior to 2009 and disqualify the one year suspension of any federal estate tax. However, that never happened. Therefore, under present law, there is no tax in 2010; however, due to the Byrd Rule, the tax reappears in 2011 back to the 2001 level of $ 1 million.
At first blush, as a beneficiary, it would appear that 2010 might be a really good year for your loved one to pass away, speaking only fiscally of course. However, there were other parts of the 2001 Tax Act that have not been sufficiently publicized or politicized, and these provisions will in reality negatively impact far more estates than the estate tax would have.
The provision in the law about which I refer relates to what is commonly known as a “step-up” in cost basis. The step-up allows beneficiaries to value the assets that they inherit based on the market value at the date of the donor’s death. Here’s the kicker. Although the estate tax has been eliminated for 2010, the step-up in cost basis has been significantly altered to the detriment of taxpayers. Under present law, the estate of a decedent who dies in 2010 can allocate a maximum of $1.3 million as an aggregate step-up. Beyond that, the beneficiary will step into the “shoes” of the decedent and receive his/her cost basis in the assets. Therefore, when the beneficiary in turn sells those inherited assets, he/she will pay tax on the gains over and above what the donor paid originally for the asset, over the $ 1.3 exemption. If the asset happens to be property that the donor owned for a great number of years, the gains could very well be very substantial. Assets left outright to a spouse receive an additional $3 million “spousal property basis increase”.
Unless the law is modified, 2010 may very well turn out to be a windfall year for a super-wealthy person to die, from solely a tax perspective. However, it may be a disaster for a middle class estate. The following example will elucidate the dilemma. Let’s say two widows at the date of death each owned the same numbers of shares of stock purchased on the same day. And, let’s say the cost basis of that stock was $10,000, and that the market value at the date of death was $100,000. Let’s also assume that the wealthy widow’s estate was valued at $20 million and that the middle class widow ‘s estate was valued at $1 million. In this example, the wealthy widow gets a big advantage in 2010 because she will incur no federal estate tax, which in 2009 and other prior years would have resulted in roughly $50,000 in estate tax. Her beneficiary will have to pay capital gains tax on the $90,000 gain resulting from the sale of the stock. With the capital gains tax rate of 15% through 2010, the beneficiary will incur a capital gains tax of approximately $13,500, approximately $36,500 better than had the estate been subject to federal estate taxes. In contrast, the middle class widow in 2009 would still have fallen within the federal estate tax exemption, and hence had a zero estate tax. In 2009 and prior years, her beneficiaries would have received the step-up in cost basis for the stock and therefore, they would have incurred zero capital gains taxes. In reality, in 2010, the beneficiaries of the wealthy and the middle class widows incur identical capital gains taxes on the gains from the stock sale. Consequently, the middle class heirs owe the $13,500 in capital gains taxes, thereby reducing their net inheritance by this amount. The bottom line is that the super-wealthy may turn out to be the big winners in 2010, and the middle class may be incurring even greater proportions of the tax burden in the U.S.
B) Other Significant Tax Changes:
1) The maximum amount of equipment placed in service that a business can expense as a deduction is cut by nearly 50% from $250,000 to $135,000.
2) Taxpayers age 70.5 and older can no longer make a charitable contribution directly from their IRA’s, and thereby avoid income taxation on the amount donated. This could have a huge negative impact on a non-profit’s budget.
3) 2010 represents the last year during which capital gains will be taxed at the rate of 15% and 0% for taxpayers in the 10% and 15% tax brackets. Next year, the rate goes to 20% for most taxpayers and 10% for taxpayers in the lower brackets. However, gains on assets held for five years or longer, beginning in 2011 will be taxed at 18% and 8% respectively.
4) For taxpayers in tax brackets of 15% or higher, 2010 represents the last year in which dividends will be taxed like capital gains at a significantly reduced rate of 15%. After 2010, dividends will be taxed at the highest earned income rate. Ouch.
C) Important Take-Aways:
1) It is important to appreciate that there is no federal estate tax in 2010; however, significant gift taxes which affect the majority of taxpayers remain, making it equally as expensive to gift in 2010 as it was in 2009. A donor can gift up to $1 million as a lifetime exemption as well as $13,000 per year as an annual gift exclusion amount, but gifts in excess of these exemptions remain taxable transactions.
2) The estate tax in Maryland remains unaffected by changes to the federal system. As such, estates whose values exceed $1 million are still subject to Maryland estate taxes.
3) Because the federal estate tax exemptions have been changing regularly over the last several years, it is common language in wills and trusts to leave assets to non-spouse beneficiaries up to the federal exemption amount with the residual to go to the spouse. As an unintended consequence of your estate planning documents, your estate plan may leave everything to children or other relatives, unintentionally disinheriting your spouse.
Clearly 2010 is a year of significant tax and estate planning review. Feel free to contact me regarding any specific situation where you have concern or just seek clarity. We are also well suited to recommend accountants and estate planning attorneys who specialize in these areas. In law school, I remember references in several business and tax classes to a famous United States judge and judicial philosopher by the name of Learned Hand. Judge Hand professed, “Anyone may arrange his affairs so that his taxes shall be as low as possible. And, there is not even a patriot duty to increase one’s taxes. Nobody owes any public duty to pay more than the law demands”. In a year where we will all be affected by rising tax rates, it is important to heed the advice of Judge Hand and plan accordingly.
Sincerely,
Greg Gann
Please talk to your financial advisor and tax advisor for advice on your specific situation prior to executing any strategy as individual situations may vary.
The big news is that for the 2010 tax year, there are no estate taxes; well that is unless the law is repealed and made retroactive. This is a repeal with a one year term limit. Estate taxes are only applicable for “wealthy” estates. Certain members of Congress have politicized the tax by branding it as a “death” tax, and encouraging a large percentage of the population for whom estate taxes have no relevance to fight the battle for permanent repeal. In reality, by and large, only one to two percent of the entire American population is subject to these taxes, yet clever marketers have incited people of average means to join the tea party. The amount of an estate that can be left to beneficiaries exempt from federal estate taxes has been increasing since the enactment of the 2001Tax Act. In fact, the exemption has escalated from $ 1 million in 2001 to $ 3.5 million in 2009. The Byrd Rule is legislation which limits the duration of laws with a negative fiscal impact to ten years. It was anticipated back in 2001 that Congress would re-enact the terms of the estate tax law prior to 2009 and disqualify the one year suspension of any federal estate tax. However, that never happened. Therefore, under present law, there is no tax in 2010; however, due to the Byrd Rule, the tax reappears in 2011 back to the 2001 level of $ 1 million.
At first blush, as a beneficiary, it would appear that 2010 might be a really good year for your loved one to pass away, speaking only fiscally of course. However, there were other parts of the 2001 Tax Act that have not been sufficiently publicized or politicized, and these provisions will in reality negatively impact far more estates than the estate tax would have.
The provision in the law about which I refer relates to what is commonly known as a “step-up” in cost basis. The step-up allows beneficiaries to value the assets that they inherit based on the market value at the date of the donor’s death. Here’s the kicker. Although the estate tax has been eliminated for 2010, the step-up in cost basis has been significantly altered to the detriment of taxpayers. Under present law, the estate of a decedent who dies in 2010 can allocate a maximum of $1.3 million as an aggregate step-up. Beyond that, the beneficiary will step into the “shoes” of the decedent and receive his/her cost basis in the assets. Therefore, when the beneficiary in turn sells those inherited assets, he/she will pay tax on the gains over and above what the donor paid originally for the asset, over the $ 1.3 exemption. If the asset happens to be property that the donor owned for a great number of years, the gains could very well be very substantial. Assets left outright to a spouse receive an additional $3 million “spousal property basis increase”.
Unless the law is modified, 2010 may very well turn out to be a windfall year for a super-wealthy person to die, from solely a tax perspective. However, it may be a disaster for a middle class estate. The following example will elucidate the dilemma. Let’s say two widows at the date of death each owned the same numbers of shares of stock purchased on the same day. And, let’s say the cost basis of that stock was $10,000, and that the market value at the date of death was $100,000. Let’s also assume that the wealthy widow’s estate was valued at $20 million and that the middle class widow ‘s estate was valued at $1 million. In this example, the wealthy widow gets a big advantage in 2010 because she will incur no federal estate tax, which in 2009 and other prior years would have resulted in roughly $50,000 in estate tax. Her beneficiary will have to pay capital gains tax on the $90,000 gain resulting from the sale of the stock. With the capital gains tax rate of 15% through 2010, the beneficiary will incur a capital gains tax of approximately $13,500, approximately $36,500 better than had the estate been subject to federal estate taxes. In contrast, the middle class widow in 2009 would still have fallen within the federal estate tax exemption, and hence had a zero estate tax. In 2009 and prior years, her beneficiaries would have received the step-up in cost basis for the stock and therefore, they would have incurred zero capital gains taxes. In reality, in 2010, the beneficiaries of the wealthy and the middle class widows incur identical capital gains taxes on the gains from the stock sale. Consequently, the middle class heirs owe the $13,500 in capital gains taxes, thereby reducing their net inheritance by this amount. The bottom line is that the super-wealthy may turn out to be the big winners in 2010, and the middle class may be incurring even greater proportions of the tax burden in the U.S.
B) Other Significant Tax Changes:
1) The maximum amount of equipment placed in service that a business can expense as a deduction is cut by nearly 50% from $250,000 to $135,000.
2) Taxpayers age 70.5 and older can no longer make a charitable contribution directly from their IRA’s, and thereby avoid income taxation on the amount donated. This could have a huge negative impact on a non-profit’s budget.
3) 2010 represents the last year during which capital gains will be taxed at the rate of 15% and 0% for taxpayers in the 10% and 15% tax brackets. Next year, the rate goes to 20% for most taxpayers and 10% for taxpayers in the lower brackets. However, gains on assets held for five years or longer, beginning in 2011 will be taxed at 18% and 8% respectively.
4) For taxpayers in tax brackets of 15% or higher, 2010 represents the last year in which dividends will be taxed like capital gains at a significantly reduced rate of 15%. After 2010, dividends will be taxed at the highest earned income rate. Ouch.
C) Important Take-Aways:
1) It is important to appreciate that there is no federal estate tax in 2010; however, significant gift taxes which affect the majority of taxpayers remain, making it equally as expensive to gift in 2010 as it was in 2009. A donor can gift up to $1 million as a lifetime exemption as well as $13,000 per year as an annual gift exclusion amount, but gifts in excess of these exemptions remain taxable transactions.
2) The estate tax in Maryland remains unaffected by changes to the federal system. As such, estates whose values exceed $1 million are still subject to Maryland estate taxes.
3) Because the federal estate tax exemptions have been changing regularly over the last several years, it is common language in wills and trusts to leave assets to non-spouse beneficiaries up to the federal exemption amount with the residual to go to the spouse. As an unintended consequence of your estate planning documents, your estate plan may leave everything to children or other relatives, unintentionally disinheriting your spouse.
Clearly 2010 is a year of significant tax and estate planning review. Feel free to contact me regarding any specific situation where you have concern or just seek clarity. We are also well suited to recommend accountants and estate planning attorneys who specialize in these areas. In law school, I remember references in several business and tax classes to a famous United States judge and judicial philosopher by the name of Learned Hand. Judge Hand professed, “Anyone may arrange his affairs so that his taxes shall be as low as possible. And, there is not even a patriot duty to increase one’s taxes. Nobody owes any public duty to pay more than the law demands”. In a year where we will all be affected by rising tax rates, it is important to heed the advice of Judge Hand and plan accordingly.
Sincerely,
Greg Gann
Please talk to your financial advisor and tax advisor for advice on your specific situation prior to executing any strategy as individual situations may vary.
Monday, January 25, 2010
Important Tax Changes for 2010.....written by Greg Gann
There are two very important tax differences which distinguish Roth IRA’s from traditional IRA’s. The first is that distributions taken from a Roth are not taxed, provided the Roth has been funded for a minimum of five years and the distributions commence after the recipient reaches age 59.5. The second benefit is that a Roth does not require taking minimum distributions beginning at age 70.5 as do traditional IRA’s. They also can be left for a beneficiary without the beneficiary having to deplete from her inheritance the applicable income taxes, as would be the case for a beneficiary who is left a traditional IRA. A Roth allows annual contribution amounts of up to $5000 or $6000 for folks age fifty and over provided adjusted gross income falls between $105,000- $120,000 for single filers and $167,000-$177,000 for joint filers. Prior to January 1, 2010, in order to convert a traditional IRA into a Roth, adjusted gross income could not exceed $100,000.
Today, however, there are no income limitations as to who is and who is not eligible to convert. In addition, there was an added change provided by the IRS, which only exists for the 2010 tax year. The change is that the IRS has granted the option to claim 50% of the conversion amount as income in 2011 and the remaining half in 2012. If one elects to defer and pay the tax over the two year period, he or she will pay the tax based on his or her tax bracket for that year. This could be more costly and therefore less advantageous if say the taxpayer expected a bonus or other qualifying event that would make 2012 a higher tax year. Because money in a traditional IRA has never been taxed, any distribution from a traditional IRA is considered income in the year in which it is received. Converting from a traditional IRA to a Roth IRA is considered a distribution, and therefore can substantially impact income taxes due in the year of conversion. It can even throw a taxpayer into a much higher tax bracket. This part of a conversion for tax purposes is very clear. Where it gets a little more complicated is for those tax payers who maxed out on deductible retirement plan contributions, but nonetheless funded a traditional IRA with after-tax contributions in order for the proceeds to grow tax deferred.
Unfortunately, we are not permitted to segregate the pre and post-tax contributions thereby allowing the post-tax contributions exclusively to be withdrawn to avoid income taxation when making a conversion, and a specific three step formula must be followed. Step one is to divide the total after tax contribution by the total IRA account balance to come up with a non-taxable percentage. Step two requires multiplying that percentage by the total amount that is desired to be converted. The quotient reached in step two is subtracted in step three from the total amount desired to be converted.
Example: Let’s say we contributed total after-tax contributions to a traditional IRA over the years of $50,000. And, let’s also establish that the total value of the traditional IRA, (including both pre and post tax contributions totals $300,000). And let’s say that we desire to convert $100,000 of the IRA.
Step 1: Total after-tax contributions / Total IRA account balance: ($50,000/ $300,000 = 16.67%)
Step 2: 16.67% x 100,000 = $16,667
Step 3: $100,000 - $16,667= $83,333.
The example illustrates that converting $100,000 from a traditional IRA to a Roth IRA will result in our having to pay additional income tax on 83,333 of income in that tax year. However, there may be a way around this aggregation rule. If an employee’s company retirement plan such as a 401k plan allows rollovers into that company-sponsored plan, then the employee could roll just the pre-tax contributions into that company plan, leaving the IRA with only the post-tax contributions.* This would result in the IRA holding only contributions that have already been taxed, and therefore, a rollover of this amount could avoid the above pro-rata aggregation rules. For self-employed individuals or even part-time independent contractors, it may make sense to open an individual 401k plan for that full or part-time business, particularly if they have made fairly significant non-deductible IRA contributions over the years. In any event, as you can see, there are complex rules relating to Roth IRA conversions, and there is no easy one size fits all answer for all individuals. But, with the present bonus of the option to pay the additional taxes spread over two years as well as the income restrictions being lifted in the 2010 tax year, it may make sense to know all your options. It is also important to note that the decision to convert can be circumvented after the fact through what is called a re-characterization. The re-characterization effectively makes the prior transfer null and void, but the decision must be made by October 15th of the calendar year after the year of conversion. If there were large gains in the IRA account which would result in large taxes, then it might make sense to re-characterize.
Stay tuned. Part two will highlight other significant tax changes for the year.
*Depends on your 401(k) plan. Please see your plan administrator for information on your particular plan. Please talk to your financial advisor and tax advisor for advice on your specific situation prior to executing any strategy as individual situations may vary.
Today, however, there are no income limitations as to who is and who is not eligible to convert. In addition, there was an added change provided by the IRS, which only exists for the 2010 tax year. The change is that the IRS has granted the option to claim 50% of the conversion amount as income in 2011 and the remaining half in 2012. If one elects to defer and pay the tax over the two year period, he or she will pay the tax based on his or her tax bracket for that year. This could be more costly and therefore less advantageous if say the taxpayer expected a bonus or other qualifying event that would make 2012 a higher tax year. Because money in a traditional IRA has never been taxed, any distribution from a traditional IRA is considered income in the year in which it is received. Converting from a traditional IRA to a Roth IRA is considered a distribution, and therefore can substantially impact income taxes due in the year of conversion. It can even throw a taxpayer into a much higher tax bracket. This part of a conversion for tax purposes is very clear. Where it gets a little more complicated is for those tax payers who maxed out on deductible retirement plan contributions, but nonetheless funded a traditional IRA with after-tax contributions in order for the proceeds to grow tax deferred.
Unfortunately, we are not permitted to segregate the pre and post-tax contributions thereby allowing the post-tax contributions exclusively to be withdrawn to avoid income taxation when making a conversion, and a specific three step formula must be followed. Step one is to divide the total after tax contribution by the total IRA account balance to come up with a non-taxable percentage. Step two requires multiplying that percentage by the total amount that is desired to be converted. The quotient reached in step two is subtracted in step three from the total amount desired to be converted.
Example: Let’s say we contributed total after-tax contributions to a traditional IRA over the years of $50,000. And, let’s also establish that the total value of the traditional IRA, (including both pre and post tax contributions totals $300,000). And let’s say that we desire to convert $100,000 of the IRA.
Step 1: Total after-tax contributions / Total IRA account balance: ($50,000/ $300,000 = 16.67%)
Step 2: 16.67% x 100,000 = $16,667
Step 3: $100,000 - $16,667= $83,333.
The example illustrates that converting $100,000 from a traditional IRA to a Roth IRA will result in our having to pay additional income tax on 83,333 of income in that tax year. However, there may be a way around this aggregation rule. If an employee’s company retirement plan such as a 401k plan allows rollovers into that company-sponsored plan, then the employee could roll just the pre-tax contributions into that company plan, leaving the IRA with only the post-tax contributions.* This would result in the IRA holding only contributions that have already been taxed, and therefore, a rollover of this amount could avoid the above pro-rata aggregation rules. For self-employed individuals or even part-time independent contractors, it may make sense to open an individual 401k plan for that full or part-time business, particularly if they have made fairly significant non-deductible IRA contributions over the years. In any event, as you can see, there are complex rules relating to Roth IRA conversions, and there is no easy one size fits all answer for all individuals. But, with the present bonus of the option to pay the additional taxes spread over two years as well as the income restrictions being lifted in the 2010 tax year, it may make sense to know all your options. It is also important to note that the decision to convert can be circumvented after the fact through what is called a re-characterization. The re-characterization effectively makes the prior transfer null and void, but the decision must be made by October 15th of the calendar year after the year of conversion. If there were large gains in the IRA account which would result in large taxes, then it might make sense to re-characterize.
Stay tuned. Part two will highlight other significant tax changes for the year.
*Depends on your 401(k) plan. Please see your plan administrator for information on your particular plan. Please talk to your financial advisor and tax advisor for advice on your specific situation prior to executing any strategy as individual situations may vary.
Friday, January 22, 2010
What is Not Being Addressed in the Health Care Debate....written by Greg Gann
I remember the days when you intimately knew your family doctor, and the same doctor treated you for many, many years. There is great contention and debate today in the U.S. and the rest of the world over how to fix healthcare. Unfortunately, much of the focus and strategies have been based on political ideology and party affiliation. Whether this country shifts from a private pay system to a government sponsored or quasi-government health coverage, there are real healthcare crises that are not even making the radar, but are clearly affecting me personally and most likely you as well. The crisis deals with the tremendous challenges associated with finding a family care practitioner today. Two years ago, my internist left private practice to join as a staff member of a hospital. He could no longer practice medicine the way he wanted and to be able to provide basic support for his family. It wasn’t that he wasn’t “successful”. He already had such abundance that he stopped accepting new patients. He complained that lawyers get paid anytime a client calls seeking professional advice. Yet his time spent in this way remained completely uncompensated. Also, the reimbursements from private health insurance companies and Medicare were so astoundingly low that they literally would not cover his overhead. Malpractice insurance, staff, rent and other office expenses don’t adjust lower just because the reimbursements continually get cut each year. While the medical specialists complain about income cuts put on them from the health insurance industry and the government, they at least can still cover their overhead and maintain a relatively high lifestyle. Having said that, the one specialty that is having a hard time making ends meet is obstetrics, where malpractice insurance alone can cost well over $100,000 per year.
I’m grateful we had our kids when we did because I don’t know who would deliver them if they were being born today. And this is my point. The real health crisis that is not making the debate, and to me is the most fundamental, is that at the rate we are going, few of us are going to have the privilege of selecting our own doctor because there just aren’t enough family doctors or certain specialty doctors left.
When my family doctor quit his practice to join the hospital medical staff, I called about six or seven internists, only to learn that none of them was accepting new patients. I felt like I was seeking membership to an exclusive country club into which I just could not break. On the eighth office rejection, I happened to mention in passing to the doctor’s assistant how disappointed I was that the doctor would not take me as a new patient because I knew from my father who is his patient how good a doctor he was. To this comment, she responded by saying that since I had an in through my father that she was sure that the doctor would relax his stated policy and let me in. Wow! I had made it to the country club at last. I have enjoyed this doctor very much and have a lot of confidence in him. This week the form letter from his office arrived that he was converting his practice to a model known as “VIP” or sometimes referred to as “concierge” medicine. With this model, the doctor who today most likely treats more than 2500 patients will be limiting his practice to the first 500 who sign on. For the privilege of maintaining him as my family doctor, I would have to fork over $2000 per year per family member who he’d treat. This is on top of my exorbitant medical insurance premiums, co-pays, and deductibles. Interestingly enough, his partner is not switching to this new model. However, he is not willing to treat any of his partner’s patients. Additionally, he is no longer willing to participate with insurance plans. So, he will collect from patients the full amount and not just the reimbursement amount of say Blue Cross / Blue Shield. He is shifting the burden of collection to his patients as well as the non-reimbursable amounts. The point is that while Washington is battling over who will pay for medical care, I’m finding it difficult just to find a doctor to whom I can pay because the ones I know have either given up on the entire concept of private practice and work for an institution, or they are not taking new patients, or they are now VIP only, or they will no longer participate with insurance plans. Are we already living in a time period where adequate healthcare is only available for the rich? Baltimore is no doubt one of the medical meccas in the world, so I’m thinking if it’s this difficult here, what’s it like in other parts of the country? I asked this very question of a colleague based in Seattle, and he said that the VIP model hadn’t made it to his coast yet, but knew it would be inevitable.
Spending on doctors, hospitals, drugs, and the like now consumes more than one of every six dollars that we earn. Atul Gawande in his June 1, 2009 New Yorker article entitled, ”The Cost Conundrum” reported that in 2006, doctors performed at least sixty million surgical procedures, which equates to one for every five Americans. No other country comes close to this statistic. And complications from surgery kill some hundred thousand people annually, which is far more than the number of car crash fatalities. Katherine Baicker and Amitabh Chandra, two economists working at Dartmouth, found that contrary to common sense, the more money spent per person on Medicare in a given state, the lower that state’s quality ranking was. Gawande goes on to compare traditional medical models to those of places such as the Mayo Clinic. At Mayo, the core tenet is “the needs of the patient come first”. In a traditional practice or hospital, payment is received based on the numbers of procedures ordered. He goes on to say that if a general contractor were paid based on the number of electrical outlets installed versus overseeing and coordinating the job, then due to that economic incentive, there would most likely be a lot of electrical outlets making their way to the jobsite through a myriad of justifications. Compensation at the Mayo Clinic has nothing to do with the number of procedures ordered. The quality of medical care is the mission, and this is not measured through quantity. An example is given about an internist at the Clinic escorting the patient personally to the cardiologist and consulting as a team. Gwande points out that the greatest challenges for the healthcare industry is modifying the orientation of physicians away from profit and quantity to payment based on quality, which to the author requires collaborative medicine practiced in a way like the Mayo Clinic. I agree with his concerns over procedural based compensation, but I truly believe that the greatest initial obstacle is finding a way for the family doctor, who after all is the first line of defense, to be able to make a living by just being the old-time family doctor that he or she set out to be. Irrespective of whether we are Democrats, Republicans, or Independents, this is where the healthcare debate needs to initiate if we are to cover more people more efficiently, and have a healthier nation as a result.
I’m grateful we had our kids when we did because I don’t know who would deliver them if they were being born today. And this is my point. The real health crisis that is not making the debate, and to me is the most fundamental, is that at the rate we are going, few of us are going to have the privilege of selecting our own doctor because there just aren’t enough family doctors or certain specialty doctors left.
When my family doctor quit his practice to join the hospital medical staff, I called about six or seven internists, only to learn that none of them was accepting new patients. I felt like I was seeking membership to an exclusive country club into which I just could not break. On the eighth office rejection, I happened to mention in passing to the doctor’s assistant how disappointed I was that the doctor would not take me as a new patient because I knew from my father who is his patient how good a doctor he was. To this comment, she responded by saying that since I had an in through my father that she was sure that the doctor would relax his stated policy and let me in. Wow! I had made it to the country club at last. I have enjoyed this doctor very much and have a lot of confidence in him. This week the form letter from his office arrived that he was converting his practice to a model known as “VIP” or sometimes referred to as “concierge” medicine. With this model, the doctor who today most likely treats more than 2500 patients will be limiting his practice to the first 500 who sign on. For the privilege of maintaining him as my family doctor, I would have to fork over $2000 per year per family member who he’d treat. This is on top of my exorbitant medical insurance premiums, co-pays, and deductibles. Interestingly enough, his partner is not switching to this new model. However, he is not willing to treat any of his partner’s patients. Additionally, he is no longer willing to participate with insurance plans. So, he will collect from patients the full amount and not just the reimbursement amount of say Blue Cross / Blue Shield. He is shifting the burden of collection to his patients as well as the non-reimbursable amounts. The point is that while Washington is battling over who will pay for medical care, I’m finding it difficult just to find a doctor to whom I can pay because the ones I know have either given up on the entire concept of private practice and work for an institution, or they are not taking new patients, or they are now VIP only, or they will no longer participate with insurance plans. Are we already living in a time period where adequate healthcare is only available for the rich? Baltimore is no doubt one of the medical meccas in the world, so I’m thinking if it’s this difficult here, what’s it like in other parts of the country? I asked this very question of a colleague based in Seattle, and he said that the VIP model hadn’t made it to his coast yet, but knew it would be inevitable.
Spending on doctors, hospitals, drugs, and the like now consumes more than one of every six dollars that we earn. Atul Gawande in his June 1, 2009 New Yorker article entitled, ”The Cost Conundrum” reported that in 2006, doctors performed at least sixty million surgical procedures, which equates to one for every five Americans. No other country comes close to this statistic. And complications from surgery kill some hundred thousand people annually, which is far more than the number of car crash fatalities. Katherine Baicker and Amitabh Chandra, two economists working at Dartmouth, found that contrary to common sense, the more money spent per person on Medicare in a given state, the lower that state’s quality ranking was. Gawande goes on to compare traditional medical models to those of places such as the Mayo Clinic. At Mayo, the core tenet is “the needs of the patient come first”. In a traditional practice or hospital, payment is received based on the numbers of procedures ordered. He goes on to say that if a general contractor were paid based on the number of electrical outlets installed versus overseeing and coordinating the job, then due to that economic incentive, there would most likely be a lot of electrical outlets making their way to the jobsite through a myriad of justifications. Compensation at the Mayo Clinic has nothing to do with the number of procedures ordered. The quality of medical care is the mission, and this is not measured through quantity. An example is given about an internist at the Clinic escorting the patient personally to the cardiologist and consulting as a team. Gwande points out that the greatest challenges for the healthcare industry is modifying the orientation of physicians away from profit and quantity to payment based on quality, which to the author requires collaborative medicine practiced in a way like the Mayo Clinic. I agree with his concerns over procedural based compensation, but I truly believe that the greatest initial obstacle is finding a way for the family doctor, who after all is the first line of defense, to be able to make a living by just being the old-time family doctor that he or she set out to be. Irrespective of whether we are Democrats, Republicans, or Independents, this is where the healthcare debate needs to initiate if we are to cover more people more efficiently, and have a healthier nation as a result.
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