Saturday, December 31, 2011

High Hopes!

It is time to revisit the most under appreciated investment skill I have learned in these last ten years, what I term the sisters, patience and persistence. In 2011 the market moved sideways. The S&P went from $1,257.64 on December 31, 2010 to $1,257.60 on December 31, 2011. Woo! Hoo! It has not been a bad year, but any year that bonds beat stocks can’t be considered a good year, unless you have been investing with patience and persistence. Then your mix of dividend paying stocks and stinky old bonds combined with a disciplined approach to savings has increased your net worth, even if only a little.

Just what makes that little old ant
Think he'll move that rubber tree plant
Anyone knows an ant, can't
Move a rubber tree plant

But he's got high hopes, he's got high hopes
He's got high apple pie, in the sky hopes

So any time you're gettin' low
'stead of lettin' go
Just remember that ant
Oops there goes another rubber tree plant

The ant is doing things right. First he has a dream, a vision of what could be and the intention to make it happen, but that is not enough. Persistence is the point at which divine will takes shape in human hands. We can say this mountain will be removed from my life, but mountains are large. Rent a bulldozer and start digging. If the rock is worth something, people will pay you for a chance to haul it off. If you believe you have found God’s will for your life, persist in seeing your goal, even as you work towards that goal.

Persistence has a sister, patience. If you set a very large goal, at some point in time you will be tempted to cry out, “The task is too great.”

Patience says, “This is not so. Can you put aside a little money today, even a little pocket change? Can you do that again tomorrow?”

When troubles call, and your back's to the wall
There a lot to be learned, that wall could fall

If you keep doing the right thing in the right way you will get closer and closer to your goal. If God has truly told you, this mountain will be removed. It might take some effort, but enough bulldozers, enough dump trucks, and enough time and that mountain will be removed from your life.

Once there was a silly old ram
Thought he'd punch a hole in a dam
No one could make that ram, scram
He kept buttin' that dam

but he's got high hopes, he's got high hopes
He's got high apple pie, in the sky hopes

So any time you're feelin' bad
'stead of feelin' sad
Just remember that ram
Oops there goes a billion kilowatt dam

With Many Thanks to Frank Sinatra:

Thursday, December 29, 2011

New Year's Resolution--Lose Some Weight!

Every year at this time we make well intentioned New Year’s Resolutions that last for all of a week if we are lucky. One of the most popular for those of us over 40 is, “In this coming year I will lose some weight.” Unfortunately, new year after new year, in about a week or so, my diet plan returns to, “I eat what I eat and I weigh what I weigh.” In spite of my failures let me encourage you to plan on losing some weight in the coming year.

By the way, I am not talking about that kind of weight.

Get rid of some of your debt—Debt slavery is wrecking our nation and our families. Do we really need all that stuff we can’t afford to be happy, to be safe? Resolve to lower your debt burden in 2012.

Cut up some credit cards—How many credit cards do you really need? A case can be made for two credit cards, a primary card and backup card if for some reason the primary is rejected. That has only happened to me once in over 25 years. The telephone lines were down somewhere between Hawaii and my credit card computers located somewhere in Florida. The next morning the problem was corrected.

Work on financial stressors—The lack of an emergency fund is a frequent source of financial stress. Start small. Put aside $1,000 for emergencies. Then you won’t need to use that credit card when your car fails state inspection. The goal here is six months take home salary, but that will take some time to achieve. If you don’t have an emergency fund start one.

Simplify your financial record keeping—How many accounts in how many banks, credit unions, brokerage houses, and mutual fund families do you carry? Is that really necessary? If you have fewer things to track for record keeping, financial planning, and taxes, your life might get a little easier.

Get rid of some stuff—There was a point in time at which I could move everything I owned in a 67 Chevrolet with a roof rack. Twelve years later, a move required two trips in a Ryder rental truck. After 24 years in the same house, it will require a van, even if I manage to downsize some of my mess. Does all this junk make me happier or does it just weigh me down, limiting my options and my freedom? If it has been in a box or a drawer for more than a year, sell it or throw it out.

Over this coming weekend let us spend some time focusing what is really important, what really makes us happy. Maybe, we could find a way to want what we already have rather than that which we do not have. There will always be another “If only.” It will never lead us to happiness only to another, “If only.” My current “If only,” is “If only I could retire, then I would be happy.”

Happiness is found in the moment, not in, “If only.”

Hebrews 1:12 (NAS)

Therefore, since we have so great a cloud of witnesses surrounding us, let us also lay aside every encumbrance and the sin which so easily entangles us, and let us run with endurance the race that is set before us,

Saturday, December 10, 2011

Credit Unions

I haven’t had a bank account for over 26 years. Instead I do business with the Taylor Model Basin Federal Credit Union. I love my Credit Union. It is definitely a desirable fringe benefit for employees of my laboratory and their family members. When I first started working in a textile mill back in the 1970s Credit Unions paid more in interest than banks and charged less when lending their members money but could not offer checking accounts or other services. Today they are full service financial institutions. Credit Unions typically kill commercial banks both on interest rates and on fees. U.S. News and World Report notes, “Credit Union customers saved $6.78 billion in interest and fees compared to bank customers.” Credit Unions are not for profit co-ops not for profit corporations. It makes a difference.

There is more to it than that. My Credit Union is one of those places where everybody knows your name and they are always glad you came. The board of directors are my coworkers. The employees have seen me every week or so in some cases for decades. They know me. They know my quirks. They know my behavior patterns. In one case they even called me when they saw an incoming debit to my account that they did not understand. You simply are not going to get that kind of service from one of the large national banks unless you have several millions on deposit. My mother-in-law had several accounts at the same Wachovia branch for many decades. They treated her well. After the death of my father-in-law they even assigned an employee to keep an eye on her accounts. Then Wachovia went bankrupt and was acquired by Wells Fargo. The transfer process was unnecessarily frightening and complex. Adding my wife’s name to her mother’s safety deposit box proved impossible even though her name is on every single one of her mother’s accounts and she has durable power of attorney for her mother. It wasn’t the employees’ fault. Lord knows they were trying, but they just couldn’t make the computer accept the facts. In the end we had to close down one safety deposit box and open another, ridiculous.

Unlike Wachovia, my Credit Union was never in any danger of bankruptcy. They are in business to lend money to their members, who in this particular case are Government employees. Since our paychecks are direct deposited to our Credit Union accounts, these are pretty safe loans. Credit Unions didn’t get involved in the derivative markets that took down the Bank of America, Citi Group, Wachovia, and others. They just made simple boring loans to boring reliable engineers with secure jobs.

There are some downsides to Credit Union membership. There is only one branch office for my Credit Union. This will complicate things when I retire and leave the area, but since most Credit Unions are part of a network of 28,000 surcharge free ATMs perhaps I will be able to get by with a separate account in a small local bank or a bank account with the Charles Schwab Bank, affiliated with my broker. By the way, Charles Schwab Bank offers some pretty good deals.

Back on November 5 a grass roots protest organization promoted something called Bank Transfer Day. They encouraged everyone to leave their big bank for a smaller bank or a Credit Union. This particular protest was fueled by the big banks’ plan to start charging a monthly fee for debit card use. Although there were enough outcries to put that particular fee on hold, they will be back with more and higher fees. Recent financial reform legislation cut into their profits. The big banks will find a way to make up those losses.

Even in trying to leave their bank customers discovered there were fees as high as $25.00 to close an account. In many cases these customers were forced to talk to a manager before closing their accounts. Some retaliated by leaving one penny or one dollar in their account. “The Credit Union National Association, an industry trade group, estimates that 650,000 consumers joined Credit unions in between Sept. 29 and the first week of November.” (Wall Street Journal), so I guess this can be classified as a successful protest. However, the large banks are awash with Federal bailout money so they probably are not really missing those little accounts.

One more reason why I believe too big to fail = too big to exist.

Friday, December 9, 2011

7 Immutable Laws of Investment from James Montier

I really like James Montier’s 7 Immutable Laws of Investing. The author is a member of the GMO asset allocation team. GMO is a privately held global investment management firm with $93 Billion in assets. Montier believes in a disciplined approach to investment with a particular interest in tail risk. Tail risk is defined by Investopedia as, “A form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution.”

Notice how many successful investors seem to believe in a disciplined approach?

1. Always insist on a margin of safety

There are a lot of rules that apply to this one. Never be “all in” any one investment. Even in poker that only occurs when a player is on the verge of bankruptcy. Diversify across many types and classes of investments. As King Solomon said, “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” Hedge your positions. Do you have some tech stock? Hedge it with some bonds. Do you have some money in a small cap growth stock fund? Hedge it with some gold or dividend paying large cap shares. You get the idea. If you never have more than 2 or 3 percent of your net worth in any single investment, you will sleep better at night. One more thing to think about: be sure to keep some cash on hand just in case.

2. This time is never different

Montier observes, “Sir John Templeton defined “this time is different” as the four most dangerous words in investment. Whenever you hear talk of a new era, you should behave as Circe instructed Ulysses to when he and his crew approached the Sirens: have a friend tie you to a mast.” After the tech bubble of 2000 and the real estate crash of 2008 we shouldn’t need to be reminded that nothing goes up forever.

3. Be patient and wait for the fat pitch

Patience in investment, as in life, is a virtue. Don’t think in terms of annual or quarterly return on your investment. Look at the long term. Buy cheap and hold. Montier mentions Benjamin Graham’s deep value screen as an example of the fat pitch, “In order to pass this screen, stocks are required to have an earnings yield of twice the AAA bond yield, a dividend yield of at least two-thirds of the AAA bond yield, and total debt less then two-thirds of the tangible book value. Think like a catfish. Sit on the bottom and wait. Something tasty will show up.

4. Be contrarian

Your brain is wired to sell when your losses are at their greatest and buy when a market is nearing its peak. Your brain is wrong. Lord Nathan Mayer Rothschild (yes, he was one of those Rothschilds) observed, "Buy to the roar of cannon, sell to the sound of trumpets.” It was sound advice during the Napoleonic Wars and it is sound advice today.

5. Risk is the permanent loss of capital, never a number

The author sees three types of risk common in investment. To understand his definition of risk, consider, if you lose 50% of your money, you then must double your money to return to your starting point. Doubling your money is hard and takes a long time.

1) Valuation risk – you pay too much for an asset. If you are contrarian, you will avoid this trap.
2) Fundamental risk – there are underlying problems with the asset that you are buying (aka value traps); I bought GE thinking I purchased an undervalued industrial conglomerate. In fact nearly one half of their profits came from GE Capital which collapsed in 2008.
3) Financing risk – leverage: Making bets with borrowed money is great if you win. If you lose, expect a visit from Tony Soprano’s leg breakers.

6. Be leery of leverage

In this section the author expands on what he covers in financing risk. He considers most innovation in investment strategies to be nothing more than the discovery of a new way to use leverage. No money down real estate scams help lead us into the miseries of the housing crash. The author points to the junk bond debacle of the as example of the down side of leverage and quotes J.K. Galbraith on the subject, “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.” If you hear the promotion of a get rich scheme based on borrowed money, Montier suggests that you run away.

7. Never invest in something you don’t understand

One of the most successful investors of the 20th century, John Templeton observed, “If you don’t understand what you’re investing in – don’t invest!” The author believes this is just plain old common sense. He contends that the financial industry intentionally makes things as complicated as possible to increase their commissions and fees.

The author believes American investors are ignoring his advice in a search for juiced returns in a market where bonds are held at artificially low rates of returns by the policies of the central banks of Europe and the Federal Reserve. He advises caution.

So, let’s be careful out there.

Thanks to the Big Picture blog for the link (below) to this excellent article. I encourage you to read it in its entirety at your leisure.

Sunday, December 4, 2011

The Ghost of Jacob Marley

Where I work the term “golden handcuffs” refers to the old Civil Service Retirement System. Management and employee both understood that after 10 or more years of Federal service, an employee was trapped for the rest of his working life. The cost of losing that pension was just too great. Unfortunately I started after the advent of the new FERS system, sometimes referred to as Fools Expecting Retirement Someday. In private industry the term golden handcuffs is used to describe a package of incentives, like stock options, that are timed in such a way as to prevent a key executive from leaving the company.

I would like to expand the meaning of golden handcuffs to the totality of all our decisions, both good and evil, that ultimately form our lives and our legacies in eternity.

In the beginning chapter of A Christmas Carol by Charles Dickens, Ebenezer Scrooge is visited by the ghost of his dead partner, Jacob Marley. Marley has been condemned to wander the earth dragging a heavy chain clasped about his middle, “It was long, and wound about him like a tail; and it was made (for Scrooge observed it closely) of cash-boxes, keys, padlocks, ledgers, deeds, and heavy purses wrought in steel.”

``You are fettered,'' said Scrooge, trembling. ``Tell me why?''

``I wear the chain I forged in life,'' replied the Ghost. ``I made it link by link, and yard by yard; I girded it on of my own free will, and of my own free will I wore it. Is its pattern strange to you?''

We all make decisions that have nearly irreversible consequences. We get married. We have children. Some of us manage to keep on track moving on with the mission of the Kingdom, making wise decisions on how to use our money and our lives. Some of us take out student loans in pursuit of the good life. Some of us take on mortgages we can ill afford. Some of us strive mightily to keep up with the Jones, buying new SUVs and designer clothing. Link by link and yard by yard we form the chains that bind our lives. One morning we wake up with a dream, to become a missionary, to return to school, to pursue a career in the arts, only to discover we can not follow our dreams because we are chained to the consequences of a lifetime of decisions.

This is one of the reasons I preach against debt. Nothing can better chain you to years of servitude, denying you the freedom to pursue your dreams or your desire to serve God in some particular way. It is the reason I encourage my readers to save and invest. As I have said in previous posts, money equals options.

Of course the other side of that coin can be found not only in the lives of Jacob Marley and his partner, Ebenezer Scrooge, but in First Timothy 6:10 “For the love of money is a root of all kinds of evil. Some people, in their eagerness to get rich, have wandered away from the faith and caused themselves a lot of pain.”

Scrooge trembled more and more.

``Or would you know,'' pursued the Ghost, ``the weight and length of the strong coil you bear yourself? It was full as heavy and as long as this, seven Christmas Eves ago. You have laboured on it, since. It is a ponderous chain!''

Saturday, December 3, 2011

More on the Problems with Debit Cards

Debit cards seem to becoming the new cash. For the first time, the number of debit card purchases has exceeded the number of purchases made with cash, checks, or credit cards. In a recent article posted on The Street, “5 Places Never to Use Your Debit Card” by Brian O’Connell, we are reminded there are still problems with these things, beyond the college student who forgets to log all her purchases on a daily basis, thereby triggering all those horrible overdraft fees. For the record I do not have a debit card.

Hopefully it is common knowledge that using a debit card to make a reservation or for anything that requires a security deposit is a bad idea. A car rental charge that might run $125 would not hit your credit card until you returned the vehicle. Using a debit card, the same rental could trigger a $500 deposit charge that would hit your checking account the second they swipe your debit card. Of course they will return those funds when you return the car, but you do not have the use of that money until it is returned. If you carry large balances in your checking account of say, $10,000 or more, you may not view this as a problem. However, I would suggest that if you are carrying that kind of cash in a no interest account perhaps you could find a better use for your money. This also applies to hotel reservations and equipment rentals.

Recently a major identity theft ring in New York City was busted. The bandits were waiters and waitresses in upscale restaurants. They used pocket devices no larger than a tube of lipstick to steal information off their customers’ cards. Typically, if you become the victim of this kind of crime while using a credit card, your losses are limited to $50.00. If your checking account is cleaned out by a fraudulent use of your debit card, it could be much harder to get your money back. Basically, the bank could consider you guilty until proven innocent. While some banks offer debit cards with similar loss limits to their credit cards, this is not required by law. Even if you have a debit card with loss limits, during the adjudication process you have still lost control of all your money. The pendulum of common wisdom seems to be in swing. Once again, “they” are recommending customers use cash in restaurants unless they never loss sight of their cards.

Operations like phone companies, gyms, life insurance companies, and cable TV services that live on monthly fees, love to get their sticky little fingers on your checking account. Automatic debit is convenient but it is also a clever way to slide in small increases without your notice. It also makes it harder to cancel a service. Be suspicious of anything that masks or minimizes actual cost (your pain). This would also include things like “average” billing for utilities.

The article states never use a debit card to make an online purchase at a Wi-Fi hot spot since many of those business use an unsecured wireless connection. Maybe I am just paranoid, but I would be afraid of accessing my facebook account at such a place. The idea of exposing any kind of financial information to hackers and identity theft in any public computer or Wi-Fi service just wouldn’t even enter my mind.

Oh, the last problem mentioned by O’Connell, that would take us back to the first paragraph. If you are not absolutely religious about entering your debit card purchases in your check register the specter of those onerous overdraft fees is just waiting to strike.

Saturday, November 26, 2011


Back in the day, even during recessions, life seemed a lot easier. If you wanted to search for a new job, you typed up a one page (no more) all purpose resume and carried it down to your neighborhood print shop. The printer would set the type and print one hundred copies of your resume on a decent quality cotton bond paper. Then you would compose a specific, targeted cover letter indicating you knew something about the company in your gun sights, drop the two of them into an envelope, and hope for the best. In my first major job search without the help of my university’s Career Services Office, I sent out about 35 resumes with hand written cover letters. I dabbled with calligraphy back in the day. My efforts produced 2 serious interviews and one offer.

By the time I graduated from Engineering School in 1985, the world was already changing. This time I sent out something over 100 resumes and cover letters. The resumes were still professionally printed but the cover letter was produced by a primitive word processing program that resided on the University’s VAX cluster. My efforts at direct mail marketing produced two serious interviews and a job offer I didn’t want. To be fair, my prospective employers looked at my resume thinking plant manager material. I wanted to work in Research and Development. After nine years, I had a belly full of the manufacturing. This effort did produce a marvelous collection of rejection letters that were so similar it was comical. They ran something like this, “While we were thrilled and amazed with your talents and experience, we have no openings at this time that would match your incomparable abilities.”

Serious people from new generation management, like Seth Godin, believe the day of the resume is over. Networking combined with a body of work produces jobs. The old model of filling a defined position from a pool of interested applicants only exists in the Government or large bureaucratic corporations. Both Government and large corporations are downsizing and/or outsourcing.

Who you know has always been more important than what you know.

Even back in 1985 I was able to get my foot in the door of my current employer not with my resume or my academic record, but with photographs of my junior design team project, a small electric powered all terrain vehicle we built for a crippled child. The woman representing my current employer at the career fair was in charge of the handicapped hiring program. She personally saw to it that I was connected with the right people. Interestingly, some six months after I started work at my laboratory I received a rejection notice from our personnel office generated by my resume. It is still one of my most treasured keepsakes.

A resume is still a requirement for a job search.

Today resumes are put into massive electronic databases where programs search for keywords associated with a desired set of job skills. This first cut sends a finite number of resumes with the largest occurrence of keywords to the interested parties in management. If you are lucky, your resume gets 30 seconds. Unless we are talking entry level positions, management already knows who they want to hire. They go through this song and dance because it is required by legal and personnel regulations. Personal reports on the Internet indicate the old fashioned mass mailings of the past are a waste of time and money.

If you want to target a single company, write a specific resume and cover letter for that particular company. Call or visit the personnel office to express your interest in that company. Get at least one name. Then follow up with the resume and cover letter. In the cover letter state that you will make a follow up phone call at a particular time. Make that call. Then write a simple thank you note addressed to a particular person.

Because a resume will only get 30 seconds, professional resume writing services stress the importance of layout and white space tailored to attract the eyes of the reader to the most important material in your resume.

There seems to be some agreement that resumes should be two pages or less.

Tailor your resume to your target. Word processing software and cheap laser printers have changed the world. Still, it is recommended you use high quality paper. A light cream color or a subtle grey cast is considered better for resume paper than white as it will cause the resume to stand out.

Don’t use the passive voice. Instead say, “I did this.” Be specific, state things like: I used Microsoft Project to develop schedules and budgets for projects in the $200,000 to $650,000 range. I selected personnel for the Acme Roller Skate project that required a major redesign and extensive field testing. I supervised the project. I wrote the report.

If you have specific quantifiable achievements, trumpet your accomplishments. This is not a place to be shy. State, I reduced rejections in the grinding room by 30% over six months by requiring spot inspections during the shift rather than only at the end of the shift.

For heaven’s sake, please have somebody proofread your resume for spelling and grammatical errors. My wife is a very good proofreader. I am not.

Have your friends, supervisors, and mentors review and comment on your resume. Use every connection you can make with anyone who might be in a position to assist you. Always be on the lookout for that one person who might make the difference.

Proverbs 11:14

Where no counsel is, the people fall: but in the multitude of counsellers there is safety.

Proverbs 15:22

Without counsel purposes are disappointed: but in the multitude of counsellers they are established.

Friday, November 25, 2011

Asking the Wrong Questions

I guess this is a pretty appropriate post for Black Friday, the official beginning of the Christmas shopping season. Anytime you find yourself asking, “Can we afford the payments?” you are asking the wrong question. I mean to apply this statement not only to credit cards, car loans, and mortgage payments but also to things like monthly cell phone bills and cable TV.

When you find something that tempts you to enter into a long term commitment to spend your money on a consumable, like cell phone service or become a victim of the power of compound interest remember what Solomon had to say on the subject, “The rich ruleth over the poor, and the borrower is servant to the lender.” You don’t believe me, just ask the Greeks.

Once you have made such a commitment, you are working some portion of your life to bring profits to someone else. Is that what you really want? What if instead of paying $130 a month or more on premium cell phone service you can find a way to live with a more basic $30 a month plan? What if you invested that additional $100 a month in Verizon (VZ)? It is currently paying a 5.5% dividend. In 20 years that would add up $43,563 even if Verizon stock didn’t increase in value by one cent or ever raise its dividend, a very unlikely scenario. Change the way you think. Start collecting things that pay you to own them instead of bills.

When buying a car, unless you are paying cash, ask yourself, “Can I get by with something cheaper?” If you have diligently saved for a luxury, like a new car, go ahead and reward yourself. You deserve it. Otherwise, look for a way to avoid or minimize those monthly car payments.

Even with a house, don’t ask if we can afford the mortgage. Instead, let the primary bread winner or the spouse with the most secure income, ask, “Can I afford this mortgage?” Given the world’s current financial problems, there is no guarantee that neither spouse will lose a job. Children, of course, greatly complicate the one income or two income decision. Finally, Zillow is reporting nearly 30% of U.S. homes are currently underwater. That means, the owner owes more to the bank that the value of the home. If he sells, he must make up the difference in cash.

If I recommend paying cash for cars and buying a house with payments of less than 30% of the primary bread winner’s income, guess what I have to say about going into debt to finance Christmas presents?

Thursday, November 24, 2011

Hawaiian Rules

Just to help me keep things in perspective

Never Judge A Day By The Weather

The Best Things In Life Aren't Things

Tell The Truth - There's Less To Remember

Speak Softly And Wear A Loud Shirt

Goals Are Deceptive - The Unaimed Arrow Never Misses

He Who Dies With The Most Toys - Still Dies

Age Is Relative - When You're Over The Hill You Pick Up Speed

There Are 2 Ways To Be Rich - Make More Or Desire Less.

Beauty Is Internal - Looks Mean Nothing

No Rain - No Rainbows

Saturday, November 19, 2011

Last Will and Testament (Part I)

My wife and I do not have a will. This is not a problem if one of us dies, as everything but one of our cars is held in joint tenancy or one of us, as in the case of my life insurance policy, is the clearly named sole beneficiary. This is not wise, particularly if you have minor children. In such a case naming a guardian and providing for their care is of paramount importance. That was never an issue with us, because we do not have any children.

However, what happens if we both die at the same time? We have been blessed with enough wealth that I don’t want the state making those decisions for us. Recently, for the first time we met with an estate planner. Surprisingly, my wife and I were able to construct the basic outline of our plans with a minimum of difficulty. The particular details, such as the exact nature of a proposed charitable trust and the possible conversion of a Thrift Savings Plan (401-K) to an annuity at the time of my death are no where near ready for our signatures.

It is obvious, even after one meeting, that whatever comes out of this process is not going to be a simple document. Who will see to it that the terms of our wills come to pass in this material world? Again if one of us dies it is pretty easy. My wife will be my executrix and I will be the executor of her will if she happens to die first. Since our desires are that the surviving spouse gets everything that will be a pretty simple task.

Naming an executor to close out our affairs after we both die is a serious question and not a small job. Papers must be filed with the appropriate Probate Court and taxes will need to be paid. Since we have no debts beyond a single credit card balance that is paid in full every month executing that responsibility will be a minor task. At this particular moment, planning an estate sale would be a very significant task as it would involve preparing our house for market. Also, it is possible that someone might take exception to the terms of our wills. In such a case, the executor would need to act as a diplomat in our absence or deal with the unlikely possibility of a lawsuit contesting our wills. It seems to me we will need to name a primary executor from our generation and a secondary, younger, executor in case the primary executor dies or becomes incompetent before we pass.

All this is very new to me. I am just beginning to learn about many topics that I would just as soon ignore. As I learn, I will try and share my discoveries with the readers of this blog.

James Chapter 4 (NIV):

13 Now listen, you who say, “Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.” 14 Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. 15 Instead, you ought to say, “If it is the Lord’s will, we will live and do this or that.”

Friday, November 11, 2011

The Battle Hymn of the Tiger Mother

This one comes from my file of unused good stuff. Laura Rowley was one of my favorite personal finance authors. She is now retired from her career as a journalist and author to be a full time mother for her three daughters. In “Character Traits and Behaviors that Make You Rich,” she explores what actually contributes to successful money management skills, particularly in raising children. Laura begins with a exploration of a book by Yale law professor Amy Chua, “Battle Hymn of the Tiger Mother.” This author recommends pushing children so hard that most of us would consider it child abuse. For example on one occasion Amy Chua would not let her daughter go to the bathroom until she had mastered a particular piano passage. The author justifies her extreme methods by pointing to her success. One of her daughters performed at Carnegie Hall when she was only 14 years old. Both of them are clearly going to Ivy League Universities. This kind of mother is not all that unusual in Asian Culture. In Japan they are called Dragon Mothers. Sometimes, at least in literature or movies, successful Japanese businessmen curse their Dragon Mothers when deeply into their sake.

Laura Rowley then examines some of the traits that might or might not lead to ability to accumulate wealth throughout a lifetime. She notes the propensity to plan leads to the ability to accumulate wealth. There is no correlation between the ability to plan and earnings. However, people who have a high net worth relative to their age and income are inevitably planners. In fact the correlation is so strong John Ameriks, a Vanguard economist states, "Planning behavior and wealth accumulation is a chicken-and-egg problem: Did people have a lot of wealth and therefore do a lot of planning, or did they do a lot of planning and that led to the creation of wealth?"

How about math confidence? We are always hearing that math skills are an important factor in financial success. Surprisingly, researchers could find no correlation between math skills and financial success. Now to be fair, they asked their subjects to respond to the statement, “I am highly confident in my mathematical skills.” They did not give them a math test. This might seem odd, but read on.

It turns out math skill doesn’t matter until it is combined with financial literacy. Those two attributes contribute greatly to financial success in life, no matter what the income level. Adding the ability to plan (for things like retirement) to math confidence and financial literacy gives you the kind of child, authors Danko and Stanley term a prodigious accumulator of wealth.

Want to know what kind of behavior to discourage in your children? Cigarette smoking is well up the list. According to Jay Zagorsky, a research scientist at Ohio State University, “A typical non-smoker's net worth is roughly 50 percent higher than that of light smokers and about twice the level of that of heavy smokers.” Unbelievable! But I guess at $5.00 a pack over 50 years smoking adds up to a huge number.

Laura Rowley notes that psychologist have found a high correlation between a sense of powerlessness and low net worth. People who feel powerless are more likely to waste money on high status luxuries. They believe that if they wear the right clothes, drive the right car, or perhaps even smoke the right brand of cigarette they will be perceived as successful and important. I have also noted a strong correlation between a sense of powerlessness and the purchase of lottery tickets. Raise your children to believe in themselves and their ability to control their own destiny through effort and responsible behavior.

In conclusion Laura adds conscientiousness to the stew. It is one of the traits psychologists term the “Big Five” They are extroversion, agreeableness, openness, conscientiousness, and emotional stability. Of the big five, conscientiousness (which includes things like industriousness, dependability, and organizational skills) and emotional stability are most likely to lead to higher lifetime earnings and greater wealth. Obviously, conscientiousness leads to better grades in school and better decision making throughout a lifetime. But where is the balance? Only the Germans could have a single word pfhlichtbewurstrsein that means to be conscious of duty. Too much pfhlichtbewurstrsein in one life can be a heavy load. Just ask an adult child of one of those dragon mothers.

If You Meet the Buddha in the Road Kill Him

Now that I have your attention, let me discuss the difference between a consultant and a subcontractor. When I served as a volunteer math tutor at our local high school, I quickly discovered the students were looking for a subcontractor, someone who would do would do their homework for them. I told them I was offering a consulting service that would aid them in completing their homework assignments on their own.

In the course of our life we need both subcontractors and consultants. Which to use or when is your decision. My mother has always done the family taxes. Back in the days when my father owned a farm and a rental property, the family taxes constituted quite an undertaking requiring considerable research into things like scheduled depreciation. My mother would seek out “consultants” in the course of her studies, but she would never think to subcontract out the effort to a Certified Public Accountant. On the other hand, I put all my tax documents into a grocery sack and carry the entire mess over to my wonderful CPA. She tells me what I forgot to include in the bag and takes over. I want a subcontractor. When I first purchased my house, I leased it back to the previous owner until his new house was finished. When I couldn’t figure out how to account for this on my tax forms, I went to a professional who pointed out I had converted a rental property into real property when I moved into my house and was due a sizable deduction. Since then, I have relied on experts to complete my tax forms.

I absolutely would never trust someone else to make my investment decisions for me. I am not looking subcontract my decision making authority to a mutual fund salesman or a hedge fund manager. If I am going to lose my money, I am not going to pay someone else to do it for me. It will be the result of my own short comings. In this instance, I am constantly on the lookout for good consultants. I read the research provided by my brokerage account, I read articles on reliable Internet sites like The Motley Fool, and Seeking Alpha. I read wild Macroeconomic rants on sites like Mish’s Global Economic Trend Analysis, oftwominds, and Paul Krugman’s Conscience of a Liberal. I even pay for subscription newsletters that reinforce my prejudices in favor of a balanced portfolio of cash, bonds, gold, and dividend paying stocks. I have discovered that I can learn something of value from almost everyone, but on this road I want to take responsibility for my own decisions.

Oh, “If you meet the Buddha in the road kill him,” where did that come from? In Zen Buddhism the master would sometimes present a student with a “thought experiment” called a koan that could not be solved using normal methods of understanding. Either it was a question that could not be answered using logic, "Two hands clap and there is a sound; what is the sound of one hand clapping?" Or it was a statement that the student would find culturally shocking, such as “If you meet the Buddha in the road kill him.” Of course the master is not instructing his student to kill a literal Buddha. The road is the path of understanding and the Buddha represent a great teacher. If the student stops walking the path, believing that he has found own enlightenment in the teachings another he has blown it. The great teacher can be nothing more than a consultant on the student’s personal journey. In this case the student should be looking for consultants not a subcontractor.

One more thing before you go, “Let’s be careful out there.”

Saturday, November 5, 2011

The Rule of 72 and You

The Rule of 72 is a handy little tool for evaluating risk. If you want to know how long it will take to double your money at some given interest rate, just divide that rate into 72. For example a 2% interest rate takes 72/2=36 years to double your investment. With a 5% rate it only takes 72/5=14.4 years to double your money.

Right now the Federal Reserve Bank has driven the interest rate on bonds and savings accounts down to nearly zero. They are punishing savers in an attempt to get them to do something more risky with their money in hope of juicing the economy and lowering unemployment, especially in the building trades. The Federal Reserve also hopes with interest rates at historic lows, you will not only spend your savings but borrow some 30 year mortgage money at the unheard of rate of 4.74%.

Unfortunately, the Federal Reserve Bank also likes controlled inflation in the 2%-3% range. The Rule of 72 also applies to that side of the problem. If inflation runs at 2% in 72/2=36 years, it will cut the value of your money in half. If 3%, it only takes 72/3=24 years to cut the value of your money in half. In the 1970s inflation was running at 10%. At that rate it only takes 7 years to cut the purchasing power of a dollar to 50 cents.

I wondered what applying the Rule of 72 to one of my more unusual, perhaps riskier, investments might tell me. Back in May of 2007, I purchased 650 shares of GE Capital Corporation 6.45% notes, ticker symbol (GER), with the sole intent of generating $1,000 of annual income, actually $1,048.12. GER is an example of a preferred stock, sometimes called preferred shares. It is neither this nor that. It is not a bond which is essentially a loan with a fixed principal and interest rate. It is not a share of common stock that represents a small portion of ownership in a great corporation. It is something in between. It has no inherent value beyond the interest it generates. If the company goes belly up or even just suspends the dividend payment on a preferred share, its value rapidly drops to zero. Companies issue these things when they need some quick cash and they are pretty certain they can beat the interest rate they are paying the investor. In this case the money was probably used in their credit card program or some similarly lucrative activity. Following the crash of 2008, Warren Buffet bought $3 Billion of GE Preferred. He got a better deal than I did, 10%. Of course I only had $17,000 to help bail out GE Capital. Preferred shares have an expiration date, at which time the company will return the initial value of the shares to the owner and call it quits. The company also has the option of redeeming the shares whenever they think they can get a better deal. Recently GE redeemed Warren Buffet’s $3 Billion special issue shares. Mine are good to 2046 or when GE gets tired of me, which ever comes first.

Given the Rule of 72, my shares pay a current rate of 6.28%. Over the years the share price has dropped a miniscule amount so the actual interest rate is actually closer to 6.25%. Lets apply the Rule of 72. 72/6.25=11.5 years. I have held these shares for 4.5 years, so only 7 years to go before all my initial investment is off the table. I think I can live with that risk. I don’t think GE is going out of business any time soon. The real calculation is more complicated than I want to fiddle around with. It involves logarithms and calculations based on what I actually did with dividends (that went into other investments because I can’t use my favored Dividend Reinvestment Plan with a preferred stock). I am content that this is a pretty good guess. I offer it to the reader as one of many such tools to help quantify risk.

Now, Let’s be careful out there.


Martin Lindstrom, the author of “Brandwashed” went to visit the Whole Foods grocery store located on Columbus Circle in New York City. Whole Foods is a high end grocery chain that promotes itself as selling, “The highest quality, freshest, and most environmentally sound produce.” How companies present themselves is a meticulously studied problem. Everything you see in a successful store, like Whole Foods, is the result of careful planning and sound psychological research designed to part you from your money.

The first thing that greets a shopper at Whole Foods is freshly cut flowers. Lindstrom notes, “These are what advertisers call "symbolics"--unconscious suggestions.” Nothing in the world is fresher than a freshly cut flower, planting the seed in your mind that nothing is fresher than anything you buy at Whole Foods. Lindstrom asks, “Consider the opposite--what if we entered the store and were greeted with stacks of canned tuna and plastic flowers?” Guess he doesn’t do much grocery shopping at Walmart.

In Whole Foods stores the price for all fruits and vegetables appears to be hand written on artfully broken pieces of black slate, “A tradition of outdoor European marketplaces,” just as though the display was set up by a farmer who had just unloaded his locally grown produce. Ha! Like every other grocery chain, Whole Foods buys its produce in huge quantities from wholesalers, distributes it to the individual stores and sets the price at its corporate headquarters in Texas. Lindstrom notes, “Not only do the prices stay fixed, but what might look like chalk on the board is actually indelible; the signs have been mass-produced in a factory.”

Grocery stores put ice everywhere, not because it is necessary, at least not in every case but to convince you they are making superhuman efforts to preserve the freshness of your food experience. Another marketing ploy is spraying the produce with a mister. Research in Demark determined, we perceive fruits and vegetables covered with drops of water as fresher and purer than a dry product. Lindstrom observes, “Ironically, that same dewy mist makes the vegetables rot more quickly than they would otherwise. So much for perception versus reality.”

One of the problems I have with one of my local grocery store is green bananas. I don’t want green bananas. I want to buy yellow bananas. Dole and the other producers of bananas know this and have raised “banana perception” to a science. They have even issued banana color guides to retailers so that they will know when to put the bananas on sale, really! Lindstrom’s comment, “Each color represents the sales potential for the banana in question. For example, sales records show that bananas with Pantone color 13-0858 (otherwise known as Vibrant Yellow) are less likely to sell than bananas with Pantone color 12-0752 (also called Buttercup), which is one grade warmer, visually, and seems to imply a riper, fresher fruit.” Dole even selects locations with soil and growing conditions most likely to produce the right color bananas.

Everything, and I do mean everything you experience in a well run retail store is carefully designed by experts to seduce you into spending your money on their product. They are masters at their craft. That is why they are so successful when in many cases their competitors are selling the exact same products. Be aware of your own vulnerabilities and be skeptical, very skeptical, anytime anyone tries to separate you from your money.

Friday, November 4, 2011

Hard Words from Seth

I really enjoy Seth Godin’s blog. I have even purchased one of his books, Tribes. By the way, that book is well worth reading. Occasionally he writes on how to find a job in this wretched economy. When he does, I almost always don’t like what he has to say, probably because it is true. Generally, his pitch runs along the lines of, you are not entitled to a job or anything else in this world, get up, do something to differentiate yourself in this new high tech universe, and go out and make it happen—yourself. This is the kind of advice one would expect from a self made Internet millionaire, published author, and marketing guru. However, it doesn’t make us 20th century industrial men all that comfortable. I was conditioned and educated to go out and find a good job with a big company that made widgets in a factory. Unfortunately, those jobs are gone and unlikely to ever return.

In “How to Get a Job With a Small Company,” Seth suggests, become a salesman. He contends we are all salesmen all the time anyway so; just do it. I not only feel as though I a not a salesman but I find the stereotype of a salesman kind of creepy. Seth points out that salesmen are the only kind of employee that by definition is not a liability. Since he is only paid when he makes a sale, there is no risk to the employer. Secondly, Seth recommends that his readers learn how to write. Learning to write ad copy, marketing brochures, and other types of similar business correspondence is almost as valuable as learning how to sell. Finally, Seth suggests that the reader learn how to make amazing video, multimedia presentations, and web sites.

All these skills can be practiced and learned for free or for a very small financial investment. However, they all require a very large investment in time and emotional energy. It isn’t easy to become artistic as well as sufficiently computer literate enough to create amazing marketing presentations. How many times can the neophyte salesman hear, “NO! Go Away!” before giving up?

Seth suggests offering the small businessman something for nothing. Remember, he isn’t looking to hire anyone. That constitutes a major risk. A $40,000 a year employee costs a small businessman on the order of $75,000 a year. If the employee does not add more than that to the bottom line, he is a loss. Find out what the small businessman is up to and make him an offer he can’t refuse. Learn how to create a website. Then if a local business wants to promote their weekly specials, offer to set up a web page for free. If the businessman wants to pitch a new account but doesn’t have the time, offer to do it on your own time. Maybe, just make up some add copy on your own and give it to the guy, for free.

Seth contends that if you prove your value the only thing left to establish is how much you will be paid. He ends his article by stating, “This is probably far more uncertainty and personal branding than most job seekers are comfortable with. Which is precisely why it works.”

By the way, in 20th century big company supervisory training we were taught not to take something for nothing from prospective employees, as this could lead to lawsuits under the fair labor standards act. I am afraid that my world is rapidly crumbling into dust.

Saturday, October 29, 2011

Are Beer, Ramen Noodles, and Canned Tuna the Secret to Happiness?

Recently Yahoo Finance and a number of other websites have featured a series on living well on $40,000 a year, $20,000 a year, and $11,000 a year. I did not find them all that interesting nor do they contain anything all that surprising, but they do reinforce the virtues of frugality, deferred gratification, and a disciplined method of setting priorities. As I am fond of saying, important things are simple and simple things are hard.

They also remind me how complicated we Americans make our lives. There was a time, for some of us the college years, when a jug of wine, a loaf of bread, and thou were truly sufficient. I recently heard a sports show radio host, now in his early forties married with children, long for his undergraduate days. There was a time when all he asked of life was a girlfriend and money for beer and concerts. He wondered how everything had become so complicated. His co-hosts, who knew him in those days, reminded him of his rat trap apartment, his nasty (really nasty) sofa, and his diet that consisted mostly of beer, ramen noodles, and tuna eaten directly from the can. Those memories didn’t matter to one of the most successful radio personalities in sports journalism. He only remembered skipping class, picking up girls on the quad, and late night pick-up ball games with his drinking buddies.

I am approaching that point when I will begin to simplify and discard some of the trappings of the so called good life I have accumulated over the years. In one last frenzied burst of energy I am driving towards retirement, trying very hard to accumulate enough money for the remainder of our lives. Then what? Then if I am like most Americans, I will sell the big house in the expensive neighborhood. We don’t live in a very big house, but the Washington, DC area is certainly very expensive. Then we will probably move somewhere warmer and less expensive. Before the move, we will probably have a yard sale or perhaps pay somebody to put a big dumpster in our driveway so that we might fill it with all the junk we have accumulated while living in the same house for 24 years. Even if the market does well, like most retired Americans, for the first time in many years, we will learn to live on less rather than learning to live on more.

In the “Energy of Money” Maria Nemeth suggests a number of exercises to help you understand what underlies your financial behavior and how to find your way to what really matters. One of them, discovering your standards of integrity, will help you understand what is really important, to you, no matter what your financial condition. Take a sheet of paper and list everyone you really admire, alive, dead, real, or characters from fiction. Then take each name and list the qualities you admire in that person. Then list all the qualities that appear under all the names. Put a check next to the quality each time in occurs in one of your most admired. You will discover there are certain values that appear over and over again in the people you most admire. Those are the values that are really important—to you. The author also contends that those are the values that will lead you to enlightenment. My list? Authenticity (I don’t think I’ve done all that well with that one), courage, command presence (several military leaders in my list), loyalty, spiritual depth, wisdom, compassion, perseverance, creativity, and equanimity (oh well, blew that one). Try it. It is an interesting exercise.

Philippians 4 (NIV)

10 I rejoiced greatly in the Lord that at last you renewed your concern for me. Indeed, you were concerned, but you had no opportunity to show it.
11 I am not saying this because I am in need, for I have learned to be content whatever the circumstances.
12 I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want.
13 I can do all this through him who gives me strength.

Your Credit Score

While looking through some old emails, I came across one sent by a friend of this blog. I am not sure why I never used it, but now seems like a pretty good occasion to revisit the subject. We live in a nation obsessed with easy credit. It should be no surprise that many Americans find their credit score an important topic. I guess the best answer to the question, “What is your credit score?” would be, “It doesn’t matter.” Avoiding debt wherever possible is still the best course.

Credit scores should not be a major issue in our financial life but they are. Of course your mortgage rate is driven by your credit score. That is the big one. Car loans, credit card rates, and other loans are also affected by credit scores. Unfortunately, that is not where it ends. Your car insurance rate, your ability to find employment, and even getting a security clearance are all affected by your credit score. Finally, every marketer in America wants to get that information to better target you.

The most common score is the so called FICO score produced and sold by the Fair Isaac Company. Wikipedia defines a credit score as, “A numerical expression based on a statistical analysis of a person’s credit files to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.” In the U.S. there are three such credit bureaus TransUnion, Equifax and Experian. The consumer is allowed to request a free report from each of these organizations once a year. This is a good idea, as it allows us to correct mistakes on our reports (I have found two mistakes on my reports over the years) and it can tip us off to identity theft activities. The bureaus are not required to provide a free credit score. That will cost you about $10.00 a pop.

Stay away from It isn’t free. Is the only authorized site for your free annual credit report.

Again from Wikipedia, “In the United States, FICO risk scores range from 300-850, with 723 being the median FICO score of Americans in 2010.” Good and bad scores are somewhat difficult to define and are constantly changing with the economic climate, as lenders are alternatively driven by greed or fear.

Some important trigger levels:

620 Historic dividing line between prime and subprime

640 Current dividing line between prime and subprime

660 Some companies will not provide mortgage insurance below this number

740 Fannie Mae and Freddie Mac charge extra for loans with less than a 25% down payment if below this number.

The actual algorithm that produces your credit score is a carefully guarded secret. However, MSN.Money reports the following breakdown is used by the credit reporting companies.

35% - Payment History

30% - Amount of Debt

15% - Credit History (length)

10% - New Lines of Credit /Credit Mix (installment loans, credit cards, Amex, etc.)

10% - Credit Inquires/ Length of Employment /etc.

Lenders are looking for reliable debt serfs who have a long credit history, who apply for credit frequently but not too frequently, who borrow a lot but not too much, and always pay on time.

Here is a short list from Wealth Builders detailing the kind of things you can do that will quickly increase your credit score. I suspect the increase might be quick, but not all that great.

Pay all bills on time

Be aware that delinquent utilities, traffic tickets and library fines can show on your credit reports

Based on the new information, don't close accounts with a long history

Don't close credit cards that will result in a higher debt to income until you can pay the balances down

Avoid opening several new accounts at the same time

It is hard to remember if you are just starting out in life with nothing, or fighting your way out of a terrible debt trap, but the goal here is to reach a point where your credit score does not matter because you never have to borrow any money.

My prayer is freedom from debt for all my readers.

Sunday, October 23, 2011

The 1%

I have some misgivings about attempting to write this post. I make a very strenuous effort to keep my politics out of this blog. The goal here is to increase my financial wisdom and share anything I have learned that works (or that doesn’t work) with my readers. Then as I outlined this post in my mind, it became so complex I was not sure I was up to the task, but the issue is important and it is current, so here is my attempt to address the 1% protest movement.

First of all, who are these 1% villains inspiring the protest. Turns out they are not Wall Street Bankers with long black mustaches and diamond cufflinks. According to the IRS it takes $343,927 a year to make the cut. That is a whole lot more than my household income, but really it isn’t that large a number. A lot of highly productive professionals (like medical doctors) and small businessmen who are creating most of this country’s pitiful number of new jobs earn that much. The average salary of this group is bit higher, $960,000. Now we are talking real money, but is it always undeserved?

Yahoo finance reports there are just under 1.4 million household in the top 1%. They earn 17% of the nation’s income and pay 37% of its income tax. For the self employed the total tax burden including the double bite for Social Security is 50.3%. This does not include state taxes, local taxes, or a variety or licensing fees required by various jurisdictions. Really, the facts are not what the protestors would like us to believe.

How about those evil Wall Street bankers? The average salary of the top onepercenters (is that a word?) working in the security industry is $311,000 a year. Good pay to be certain, but not really rich for New York City. If someone earns that salary in Travelers Rest, SC, he is really rich.

Again from Yahoo Finance, in 2005 14% of the top onepercenters worked in the finance industry, executive and managers in other industries made up 31% of the top 1%, medical doctors contributed 15.7% to the top 1%, and lawyers made up 8.4%.

That said, there are some real issues here with serious merit. The same issues that energize the 1% protestors, created the Tea Party. The first is the issue of tax fairness. Let’s look at an example from the oftwominds blog. “The most egregious example of this is hedge fund managers who bought a loophole which enables their $600 million annual income each to be treated as capital gains, a rate of 15%.” Our tax code is littered with exemptions, loopholes, and subsidies that are totally unfair and unmerited. People, like the small businessman paying more than 50% in taxes, are justifiably outraged.

There is an inherent ever changing imbalance in our country between democracy that tends to redistribute wealth and freedom that inherently creates imbalances in incomes. It is the job of our elected officials in this Republic to see that neither part of the equation gets seriously out of whack. However, I fear too many of our representatives are bought and paid for by special interests that range from the Wall Street investment houses to thoroughly corrupt union officials.

The second is a very dangerous socially destabilizing trend in income distribution. As corporate profits increase CEOs should become richer. Unfortunately, they should also share in the pain when their corporations tank. Many of the men that brought the world’s financial system to the brink in 2008 should be in prison. Instead they walked with golden parachutes exceeding $60 million and were allowed to keep their ill gotten gains from CDOs, SIV, Credit Default Swaps, and a host of other essentially fraudulent instruments. No matter the economic condition of Wall Street, the CEOs are claiming an ever larger piece of the pie. In 1980 the average CEO earned 42 times the salary of his average employee. Today he earns 343 times the average workers salary. This is dangerous. Historically, extreme imbalances in wealth distribution leads to civil wars, revolutions, and dirty wars like the one that occurred in Argentina.

The real problem is not that the average CEO is earning $8,048,000 in 2010. The real problem is that the median household income in the United States was stagnant for a decade and now is headed down. Unskilled and semiskilled workers were the first to take the hit, as the great American corporations moved their manufacturing operations offshore. Now the same companies are discovering that computer programmers living in India will accept much lower pay than their American counterparts. Even patents are written by lawyers living in India and X-rays are being read by radiologists in the third world. Maybe we the shareholders of these companies should look into outsourcing our CEOs. Nah, just kidding, but I really believe we should all remember we are Americans and we are all in this together.

Saturday, October 22, 2011

More on Student Loans

When the facts change, I change my mind. What do you do, sir?
John Maynard Keynes

Six or seven years ago, I still thought student loans were OK if and only if the student had a plan. A plan sounds something like this: “I will earn a BS-RN in nursing so that I might specialize in the field geriatric medicine. Given the large number of Boomers approaching or already in their 60s, this should be a lucrative field for a very long time.” Over recent years, my opinion of student loans, which was never all that good for the average somewhat immature undergraduate, has been steadily dropping. Today, I still would never say never, but I would advise almost every student at any level to avoid the loan office. In the current economy, unless you are getting a MD or a MS in Petroleum Engineering, I would consider the danger of not finding a job just too great.

Student loans do not go away, not even in bankruptcy. Thank my generation for that one. Too many students my age discovered it was easier to file for bankruptcy than repay their student loans. Since these loans are typically guaranteed by the taxpayer, our Congress decided to change the law. These loans have to be repaid even if the student never graduates. Imagine, flunking out of school, unable to find employment, and saddled with student debt that never goes away. These loans have to be repaid even if the money was not used for education. Recently banks and universities devised a scheme whereby students were given their loan money in a live debit card. In fact, the use of that particular debit card was required for those receiving student loans by the university billing office. What this meant in practice was an 18 year old kid could use that debit card to pay for tuition, books, or buy beer for a road trip to Atlanta. The outcry from the effected parents ended that scheme in a hurry. However, it does give one some insight into the morals of both the banking and the education industry.

This week, USA Today reports that student loans have exceeded the $1 Trillion mark. Americans owe more on student loans than they do on credit cards (really)! That number is increasing at the alarming rate of $100 Billion a year. Students are borrowing twice as much as they did just a decade ago. They are graduating with a debt burden that is so large that even with a good job and a good degree they are unable to move on with the normal progression of a middle class life, marriage, mortgage, family. In an economy with a realistic (U-6) unemployment rate of 16%, a good job is not a guarantee.

As with any well intentioned Federal program, the availability of limitless government funds has produced a dramatic increase in costs. The universities have no reason to control their overhead, when their customers can easily obtain low cost loans guaranteed by the Federal Government. Why not raise the cost of our product faster than the rate of inflation? Since 1985, the Consumer Price Index is up 107.05%. In the same time period the cost of a college education has increased 466.8%. Starting around 2002 the rate of increase in this line jumped pretty dramatically.

There are no brakes on this train and we are headed down the Great Saluda Grade.

Monday, October 17, 2011

Just Hang on And Scream

Since Standard & Poor’s downgraded U.S. debt back in early August, the market has just gone insane. The most terrifying roller coasters can’t compete with the Dow which, in just in the two weeks of my current vacation, dropped something like 700 points and then jumped back over 1,000. These kinds of changes in the stodgy old Dow don’t happen in a typical year. Yet on one day, the Dow dropped close to 100 in the time it takes to drink a can of Diet Coke. The rise of Exchange Traded Funds has the potential of turning the last 20 minutes of any given trading day into a ride on the Zipper. If you have never seen a Zipper in action, check it out on Youtube. Only a lunatic would get on a carnival ride that looked like that.

I never quite understood why S&P downgraded U.S. debt at this time. As long as our debt is denominated in U.S. dollars and we own the presses that print the bills, our debt will be paid in U.S. dollars. The value of the dollar has been dropping steadily since F.D.R. confiscated gold coins back in 1933. If the downgrade was tied to the drop in the value of the dollar it should have started during the Carter or even the Nixon administration. The other stuff going on in the world is old news. Everybody knows there is going to be some kind of default on Greek debt. The only question left to be answered is who is going to pick up the bill. The answer to that question could trash a sector or a country, but all sectors in the entire world?

So, why the crazy gyrations? Who knows? As the football players say, “It is what it is.”

I have concluded this is a very good time to be a trader (which readers of this blog know I am not). A market that hops up and down in triple digit jumps should send every technical trader, both machine and human, into wild spasms of adrenaline fueled ecstasy. How about the rest of us, the value investor? The only thing I see that I can do that makes any sense is to just hang on and scream. If I have made wise investment decisions and own good companies that pay a righteous dividend, time is on my side. I don’t think people are going to stop buying Coca Cola, Band Aids, gasoline, or Tide laundry detergent. If the share prices get artificially low, the dividend reinvestment program buys more shares at a lower price. As long as those dividends keep rolling in I should be OK.

It is a very great temptation to join the crowd and sell in terror when the market is at a bottom and jump aboard a soaring stock just when it is at a peak. Retaining perspective and discipline when you are losing or making outrageous amounts of money in a single day isn’t easy, but history indicates this is what separates winners from losers. I hope history can be trusted. I want to retire 15 months and two weeks from today, but who’s counting?

At the recent bottom, I once again faced the question, “When to cut my losses and run?” I have three holdings that I find particularly annoying. I have written about GE on previous occasions. I stepped into a classic value trap on that one. I still believe in the company, they seem to be doing all the right things, but the stock remains at historic low levels. I would sell it but all the research reports give it good ratings. We shall see? I bought Apache at a bad time, when oil was near $150 a barrel. Obviously an oil exploration company is not going to be valued as highly when oil is selling around $90 a barrel. They also own considerable natural gas holdings. I still want a piece of that action so I am holding on. Hong Kong and Shanghai Banking Corporation is the last of my three embarrassments. They, like all European banks, are taking a bad beat down even though as far as the public knows they are well capitalized and one of the most liquid of the European banks. I originally bought this stock to gain exposure to China without the risk of corruption and fraud rampant in that country as they evolve towards something like a more mature form of capitalism. I still like it and it pays a 4.3% dividend that seems safe, at least for the moment, so I will hold on. Just to be honest, I seem to be better at deciding when to buy a stock than I am at deciding when to sell a stock.

And Please! Let’s be careful out there.

The Six Killer Apps of Prosperity

TED (Technology Entertainment and Design) is a global set of conferences owned by the private non-profit Sapling Foundation, formed to disseminate "ideas worth spreading." (Wikipedia)

If you haven’t already discovered the TED lecture series, I strongly encourage you explore this remarkable collection of contemporary human thought. The speakers come from many disciplines and viewpoints. No matter whom you might be or what you might believe, you will find speakers who will annoy you and speakers who will inspire you. They are limited to 18 minutes, less time than it takes to watch a second rate sitcom. The lectures are free and you don’t even have to listen to any commercials.

Several weeks ago, I discovered Niall Ferguson’s TED presentation on the Six Killer Apps of Prosperity (linked from the Simple Dollar Blog also well worth your time). It has been bumping about my head ever since, so here is a little synopsis and review.

Ferguson asks the question, “What are the common characteristics of a prosperous or rapidly improving economy?” He proposes six that span time, nationality, religious belief, and culture.

1)Competition --Economies that encourage competition inevitably do better than those that centralize economy control. This is true of modern centrally planned economies such as the Soviet Union or the medieval economies in which the king granted monopolies to his favorite and most generous courtiers.

2)Scientific Revolution--Ferguson defines this term as applying the discoveries of “pure” science to practical problems. One of the examples he presents is an early study that applied the then recent discovery of Newtonian mechanics to artillery. Now your cannons can hit their target. Talk about a killer app.

3)Property Rights--I would have termed this rule of law and included property rights as a part of a larger whole. Economies in which the rules are fair, clearly spelled out, and systematically followed do better than economies in which the rules of the game are constantly changed to benefit the rich or politically well connected.

4)Modern Medicine--Ferguson believes this subset of the Scientific Revolution is so important it merits a separate line item in his list. He points out modern medicine has more than doubled life expectancies in every economy that has made it a cultural priority.

5)Consumer Society--Ferguson believes the consumer society triggered the industrial revolution. Does a woman really need 40 pairs of shoes? No, probably 4 or 5 would suffice even in the most extreme four season climates. Ferguson observes that today most Indians are delighted their country chooses not to follow the path of self sufficient poverty promoted by Mahatma Gandhi. Even somebody with my taste in clothing wants to own more than two loin cloths.

6)Work Ethic--For an economy to prosper, people have to believe there is a direct connection between effort and reward. This encourages behaviors like deferred gratification that encourages savings that allow for investments that produce more wealth. This is what economists term the virtuous circle.

There you have it. If it is really as Bill Clinton famously observed, “It’s about the economy stupid!” perhaps we should consider the six killer apps when we vote in the next election.

Saturday, September 24, 2011

Happy, Sad, Angry, Afraid, and Ashamed

I am not exactly sure what sequence of events led me to try and help myself and others address life’s common financial issues. Perhaps this started ten years ago, when I found it so difficult to find someone to teach me the basics of systematic investment. Along this path, I was surprised to learn that people are just about as likely to talk about financial problems as they are incidents of sexual dysfunction. This reluctance is not going to help the situation. Psychologists tell us that we can only feel five emotions, happy, sad, angry, afraid, and ashamed. I am not sure I believe that last statement, but for the sake of my argument, OK. I expect the two reasons that most people don’t talk is fear or shame. We are all ignorant about something. Believe me, we all make mistakes, lots of them.

If you have had a problem for any length of time it isn’t likely that it will solve itself. Admitting the problem exists is the first step in finding a solution. Locating someone who knows more about solving the problem than you is the second step. We are a tribal species. We were not constructed to solve problems alone. In finding a helper, first look for technical competence. Then look for someone who likes you but is not too emotionally invested in your success or failure. Typically, for this reason, teenage daughters do not seek fashion advice from their mothers. Finally, avoid commission sales people if the subject touches their livelihood. Anyone who stands to profit from your misfortune is not a good candidate as a counselor. There is an old saying, “Never ask a barber if you need a haircut.”

You are not looking for a guru, a manager, or a parental substitute. You are looking for a friend who is better at one thing than you. That’s all. Would you feel any shame asking an automobile mechanic who attends your church about that weird clunking noise coming out of your transmission? Why do we feel shame when we ask another about that weird clunking noise coming out of our credit card?

Proverbs 11:14

Where no counsel is, the people fall: but in the multitude of counselors there is safety.

What is better than one counselor? Two counselors. Collect as much information from as many sources as practical. This includes both face to face conversations and structured learning from books or canned courses. Share with your friends and support one another as together we progress through this valley of tears.

Consider the proverb, “When a blind man carries a lame man, both go forward.”

There is no end to our ignorance or our need for one another. I have put off writing a will for many years even though I know I need to begin the process of learning about estate planning. My wife and I hold everything in joint tenancy or we are clearly defined as each others’ sole beneficiary. If one of us dies, our financial life is set up to continue without the other. What if we both die at the same time? Then the State of Maryland decides what to do with our possessions after they skim their percentage. I don’t like that solution. For many years we didn’t have enough for this to be all that much of an issue. However, in 1996 I paid off my house. Even back then, I really didn’t want the State of Maryland deciding what to do with my property. Now, fifteen years later, I am finally starting to address that problem in a systematic manner.

Hopefully, you will not waste 15 years pretending that your 800 pound gorilla is not sitting there in your living room waiting to be fed.

Friday, September 16, 2011

How Much Do You Need to Retire?

How much do you need to retire? The old rule of thumb was 75% of your preretirement income. Where do these rules come from? Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics at Duke University contends, no one knows where such rules of thumb originate. Once created, if financial advisors and the financial press pick them up, they become conventional wisdom. If someone seeking advice has read much of anything she will ask a financial advisor this question as a sort of a test already knowing the answer she expects to hear. The financial advisor, hopefully better informed that her potential client, knows the answer she is expected to give. Ariely concludes this psychological drama adds little value to answering a very serious question.

He decided to approach the question from a psychological point of view. His surveys asked questions like, “Where do you want to live in retirement? In what sort of activities do you want to participate?” The people who told him they would need 75% of their preretirement income to achieve their goals in retirement in fact would need 135% of their preretirement income to achieve their stated retirement goals. Ariely is not surprised by the results of his survey. Most people do not expect to sit in front of their television for 16 hours a day after a lifetime of working at a job that over 80% of them found unfulfilling. They want to live in Margaritaville. They want to go sailing on cruises in the Caribbean with their grandchildren. They want to play golf every day. They want to go on the adventures they could have taken in their twenties but didn’t because they had responsibilities like car payments and children.

The amount of money required to provide a 135% retirement is so enormous that only the most diligent or fortunate could ever imagine achieving such a goal. Yet people pay for financial counsel that won’t achieve their goals (real 75%? or imaginary 135%?). Ariely notes these same financial counselors give their clients risk tolerance questionnaires to help determine the makeup of portfolios designed to achieve their goals (gold coins buried in Mason jars? or Zimbabwean currency futures?) I just filled out one of these questionnaires after opening a new account. By looking at the questions, I knew the results before they were tabulated. I expected that I would come out with a slightly above average risk tolerance. That was the result. The survey stated that people like me hold about 60% in stocks. I have a little less than that but more than the old conventional wisdom would recommend for someone of my age and situation.

Ariely notes, “Money, it turns out, is incredibly hard to reason about in a systematic and rational way (even for highly educated individuals). Risk is even harder.”

“Knowing others is wisdom. Knowing yourself is enlightenment.” Is an old Chinese saying sometimes attributed to Lao Tzu. Start by examining your life. Ask yourself how you are using money today. Ask yourself how that is likely to change once you no longer have a regular full time job. I would like to buy Robin Master’s estate in Honolulu and drive about Oahu in a beautifully restored Ferrari 308 GTB. However, that is unlikely given my projected retirement income. Perhaps I could buy a modest brick ranch style home on a secluded lot somewhere near the shadow of Paris Mountain and drive about Greenville County in 2010 Acura TSX.

Next, construct a plan to achieve that goal. Implement your plan. As the song says, just wishing and hoping and thinking and praying, planning and dreaming alone in the dark will not help you reach your goal. As you study the results, modify your plan to better match reality. Someday that goal will be yours.

Oh, by the way, one recent survey (I don’t have the reference) found that people actually spend about 80% of their preretirement income after they retire. They drive fewer miles, spend less on clothing, and lunch at the company cafeteria. Of course the kids are gone now and most of them have paid off their mortgage. Some of them move to low tax, low cost of living states, leaving them more than enough money for that famous margarita they serve at Dirty Mary’s Tiki Bar located on Florida A1A somewhere south of Miami.

Monday, September 12, 2011

Who Do You Trust?

In the former USSR during the days of Stalin, teachers would instruct their grade school class to close their eyes and ask God for candy. Of course none appeared. Then they would ask their students to close their eyes and ask Stalin for candy. Of course there would be a piece of candy on each student's desk. Then the teacher would reinforce the notion that they could trust their great leader and the savior state, but that a belief in God was foolishness. Over the last 50 years we, as a nation, have been learning the same lessons. However, I think some of us (even people who are not Christians) are beginning to realize we have already passed the limits of what the savior state can accomplish.

As I move toward retirement I am beginning to understand that with the passage of time I will become more dependent on others. I won’t be earning a salary connected to what I can do, but rather a salary connected to what I have done that will be highly influenced by the vagarities of American politics. Do I really trust God, or do I trust some combination of health science, the savior state and my own cunning?
As I write this blog, hoping to help others even as I am learn how to better manage my personal finances, I hear something whispering in my ear, “If you are such a good Christian, command this stone that it be made bread.” Unlike my Savior, I do not have any such power and I know it. In financial matters, I have been blessed. I also know it could all disappear in a moment. Could I then in honesty say, “The LORD gave, and the LORD hath taken away; blessed be the name of the LORD?” I doubt it.

In times when the kingdoms of this World are in trouble we hear a voice saying, “I will give you all their authority and splendor; it has been given to me, and I can give it to anyone I want to. If you worship me, it will all be yours.” For the charismatic few, the temptation to believe their own rhetoric is very real. Throughout history many great leaders demanded worship from their subjects. I expect many more believed they were worthy of such worship. For the rest of us, the temptation is following one of these false messiahs into the wilderness of our own damnation and destruction. We should remember that the next time we hear politicians promising answers to all our problems. We should also remember that whenever we start to believe in our own infallibility.

Common sense has its role in Faith. While an overabundance of faith has never been my problem, I have seen too many Christians teetering on the edge of some financial decision listen to a voice saying, “If you are such a good Christian, cast yourself off this ledge, for it is written, He shall give his angles charge over thee, to keep thee.” When are our decisions, tempting the Lord? When are they radical Faith? Still, at some point I will leap into retirement. My prayer is that those angels will bear me up in their hands, lest at any time I could dash my foot against a stone.

At some point we are all going to face a situation that requires trust in something beyond our own resources. This morning I read that Hugo Chavez, the Leader of Venezuela, has enlisted the services of shamans from the Yekuana, Jivi and Wayuu tribes to assist in his battle against cancer. It is reported that they danced, sang and prayed as they invoked their ancestors to protect the Venezuelan leader. I suppose, in moments like that we will know who or what it is that we really trust.

[1] And Jesus being full of the Holy Ghost returned from Jordan, and was led by the Spirit into the wilderness,
[2] Being forty days tempted of the devil. And in those days he did eat nothing: and when they were ended, he afterward hungered.
[3] And the devil said unto him, If thou be the Son of God, command this stone that it be made bread.
[4] And Jesus answered him, saying, It is written, That man shall not live by bread alone, but by every word of God.
[5] And the devil, taking him up into an high mountain, shewed unto him all the kingdoms of the world in a moment of time.
[6] And the devil said unto him, All this power will I give thee, and the glory of them: for that is delivered unto me; and to whomsoever I will I give it.
[7] If thou therefore wilt worship me, all shall be thine.
[8] And Jesus answered and said unto him, Get thee behind me, Satan: for it is written, Thou shalt worship the Lord thy God, and him only shalt thou serve.
[9] And he brought him to Jerusalem, and set him on a pinnacle of the temple, and said unto him, If thou be the Son of God, cast thyself down from hence:
[10] For it is written, He shall give his angels charge over thee, to keep thee:
[11] And in their hands they shall bear thee up, lest at any time thou dash thy foot against a stone.
[12] And Jesus answering said unto him, It is said, Thou shalt not tempt the Lord thy God.
[13] And when the devil had ended all the temptation, he departed from him for a season.

Friday, September 9, 2011

What to Do When Things Come to a Stop

The drive home last night was quite the adventure. It took two hours to cover 10.5 miles that would normally take 15 or maybe even 20 minutes depending on the traffic. I inched along through a torrential downpour behind hundreds of other distressed motorists. In quite a number of places we went through fast moving water that was six inches deep or deeper. We had to wait for oncoming traffic to clear so we could drive up the wrong side of the road to avoid the deepest parts of these temporary streams. After about an hour of this I reached the turnoff to my little town. The police were blocking the road. I went up to the next cutoff and turned onto the road home. Where I entered the road the water was probably deeper than was appropriate for my automobile, but I made it. Then things were much better until I was about ¼ of a mile from town. Once again the police were blocking the road. Everything came to a dead stop. We all turned off our cars. When the rain let up we would get out of our cars and exchange information and rumors. Then when the rain started up again we would scurry back to the shelter of our vehicles. After about an hour of this the police began to let cars through the water that was now about six inches deep.

Most everyone was in pretty good spirits. I believe if we had some beer and barbeque we could have had a party. Together we devised potential methods for avoiding the police barricades. Then someone called the nearest police station on their cell phone and we discovered all the roads into my little town were temporarily closed by local flooding. A few people were angry, wanting to blame someone for their inconvenience. Others were frightened by the prospect of spending the night out on the road. Generally the good cheer of the majority calmed the angry and comforted the frightened. One driver, sputtering with rage, turned his car around and headed back up the road into more flooding.

Sometimes your plans just come to halt, then what? In this case, when the rain let up, I talked to my neighbors, not something I do very often. Then when the rain returned I scurried back to my comfortable car and listened to peaceful “massage music” on XM radio. Things could be worse. Accepting the truth of where you are in the present moment with equanimity is a good first step on the road to freedom.

Like the one enraged driver that headed off back into more flooding, we could shake our fist at God or blame the police for our problems. Really it is pretty easy to forgive the police for keeping us from harming ourselves. Sometimes in life forgiving others for what they have done is hard, but it is the beginning of wisdom.

In such situations, extending compassion to others is pretty easy and natural. Sharing information and just listening to others worry makes everything better for everybody. Can you extend compassion in other instances where your best just isn’t working? In such situations, can you extend compassion to your own fears and anger? Compassion can be hard work, particularly extending compassion to your self.

I could have been envious of those who started the trek early enough to make it home safely before the police closed the roads, but what sense would that make? It didn’t occur to me to think envious thoughts about those who through foresight or luck reached a goal that was, for the moment, beyond my reach. Why do we spend so much time and effort envying the success or gifts of others? Wouldn’t it make more sense to smile at the happiness of others, and pray that we too might be blessed even as we bless others?

Of course there are applications here for other, more important, life issues. The road home always begins with the heart.

Monday, September 5, 2011

Labor Day 2011

The numbers are well know, U-3 unemployment 9.1%, the more accurate U-6 measure stands at 16.2%, roughly 22.8 million Americans are unemployed, discouraged and no longer seeking work, or forced to work at a part time job, 45.8 million Americans currently receive food stamps. This is the third time I have written a Labor Day post for this blog. In my mind it is becoming my most important post of the year.

“The harvest is past, the summer is ended, and we are not saved.”

The so called recovery following the Great Recession of 2008 has been called the Jobless Recovery. I do not call it a recovery at all. Employment numbers started down 43 months ago. In that time over 8 million jobs have been lost, less than 2 million have returned. I contend this is not a recession but a depression. It doesn’t feel like a depression because 45.8 million Americans are receiving food stamps. The most recent number I could find (not referenced to an original source) indicates 13.8 million Americans are receiving unemployment benefits. These benefits have been extended to 99 weeks, essentially becoming a new form of welfare. Finally, a lot of people are taking Social Security at 62 because they can not find employment. While I am glad this social service net still exists, we are paying for it with borrowed money we have no way of repaying.

I fear we are facing something new, the beginning of the end. The United States experienced an extraordinary run. At the end of World War II we were the only industrialized nation in the world with an infrastructure not bombed into ruin. The run from 1945 to 1965 was completely unprecedented. For the first time in history, unskilled labor earned a solid comfortable middle class wage. Then hubris began to take its toll. We attempted to put a man on the moon, fight an extended mid-sized war in Vietnam, and end poverty in this country all at the same time. To paraphrase the song, “One out of three ain’t good.”

Ronald Regan, Paul Volcker, the PC and Internet revolution, and most importantly historically unprecedented numbers of women in the workforce gave the American Dream a good 15 year run from 1985 to 2000. Since then, as a nation, we have been headed down.

The following is a work in progress. I have shared a couple different versions with a couple of different people. I am not yet completely happy with it but it captures the spirit of my fears. All of it is true, but it did not all happen at the same time. Imagine that it was written by a Roman Officer on his reassignment from Britain to Gaul.

I feel deeply ashamed that we are leaving our British allies to the mercies of the barbarians who live north of Hadrian’s Wall, but the truth is we can no longer afford to field the 35 legions necessary to defend our empire and still provide bread and circuses for the unemployed masses in Rome. Our leaders pretend that they can solve the problem by just adding a little copper to our gold coins or shaving a bit off their edges. They think no one will notice. However, even out here on the frontier the old money has gone out of circulation and the prices of necessities purchased with the new coins are rising quickly.

I am sorry to hear so many of our neighbors are losing their farms, but with such high taxes they can no longer compete with cheap imported Egyptian wheat tended by slave labor. It is disturbing that such good people are being driven into the capital to live on the Emperor’s (May he live forever) bread. I have always believed the freeman on his own land was the backbone of our Empire. Now they are wards of the state.

Perhaps with our legion reassigned to Gaul we can stop the flow of German tribesmen into our heartland. I know members of our senate view these aliens as cheap labor and a good source of new recruits for our army, but I fear if we do not stop this invasion soon the light of Rome will be extinguished. We in the West could be facing a 1,000 years of darkness.

The way I see it, our biggest problem is too much bad debt. Our national debt is following a predictable pattern. As it approaches 100% of GDP the increase is becoming less linear and more parabolic. If we do not get a handle on it soon, our economy is doomed. Only one country in history, Maggie Thatcher’s England, ever returned from a 150% debt to GDP ratio without a revolution and/or a major economic collapse. The individual American family is carrying almost an identical debt load as the Federal Government, about 14 trillion dollars. All this debt is strangling potential productive economic activity, as interest payments are bleeding our nation and our families dry.

I fear our leaders from both parties have run out of ideas. We have tried over 3 Trillion dollars of various kinds of stimuli. The bank bailout was going to generate a huge increase in investment and spending through the magic of fractional reserve lending. It hasn’t happened. The banks are finally afraid of lending money to people who can’t repay. Sensible individuals and corporations are refinancing at lower rates and paying down their debt totals. They don’t want to borrow any new money.

Infrastructure projects are not the answer. I am all in favor of filling pot holes and repairing bridges, but then what? They are temporary jobs paid for with borrowed money. Given the current demographics of the construction trades, it is reasonable to expect some of the wages paid will be handed off untaxed under the table at less than minimum wage. Undoubtedly some of those funds will be repatriated by electronic transfer to other countries.

While increasing taxes almost certainly will result in more lost jobs, cutting taxes does not guarantee an increase in employment. Companies large or small only hire new employees when they are certain that the potential profit that could be generated by these individuals exceeds the cost of such a commitment.

We are often told new technology is the answer. What new technology? There is nothing on the horizon to replace the 20,000,000 factory jobs we have lost in the last 20 years. In our current situation, the only thing that matters is the creation of wealth producing (as opposed to service sector) jobs in the private sector. These are the kind of jobs that can pay our debts and build a surplus of wealth to invest in more wealth producing activities.

20,000,000 additional taxpayers would solve a lot of problems.

Sadly attempts by the Government to cherry pick technologies in the alternative energy field have been a disaster. Recently a solar energy company that received over $500 million in Federal largesse declared bankruptcy. Fraud is suspected. Our Government’s attempt to encourage the development of a wind energy industry was somewhat more successful. As a result there are now several new wind energy factories -- in China.

Education is not the answer. First of all, most people are just average. It is extremely unlikely that education can turn an assembly line worker or a roofer into a chemical engineer or a medical doctor. I went back to college in mechanical engineering when I was 30 years old. I was married and extremely motivated. Engineering school damn near killed me. I thought I was pretty smart until I ran into integral calculus. I literally studied some of that material until I was in tears. There were concepts I never understood. I simply memorized the derivations and moved on. Even if successful, who is going to hire a 50 year old computer programmer with no experience when 4.5 perfectly healthy young computer programmers with 5 years of relevant experience are available at a lower cost? Who is going to pay for all this education? If the taxpayer, we have increased the nation debt. If the individual, we have increased the very serious problem of student loans that cannot be repaid.

We are past the point of fixing blame. We need to fix the problem. It won’t happen in a year or even ten years. It took us roughly 50 years to get ourselves into this mess. There are things I believe we could do to help turn around the situation if it is not already too late.

Offering tax credits for corporate research conducted by American citizens in this country might trigger the discovery of the next big thing. Comprehensive tax reform that eliminates loopholes and subsidies in exchange for a lower overall corporate tax rate seems like a no brainer, except to the beneficiaries of those loopholes. A tax code that rewards good behavior, like bringing corporate profits back to this country to create jobs in this country seems like a good idea. Currently we reward companies for exporting profits and jobs through the tax code. Insanity.

Carefully, ratcheting down safety and environmental regulations will help encourage a return of industry to this country. When I worked in the textile mills of South Carolina in the 1970s I watched the destruction of about 250,000 American jobs by a single regulation. Brown lung was a real problem in the greige mills that wove cotton cloth. Cotton dust really caused lung cancer and emphysema. Taking out 90% of the cotton dust was accomplished with inexpensive simple technology. Misters placed over the looms that knocked the dust out of the air. Charged plates in sheet metal ducts pulled the dust out of the air as it was sucked through these contraptions by a fan. When OSHA demanded a 95% reduction of airborne cotton dust, expensive new technologies, like enclosed looms were required for compliance. At the time the return on investment for textile equipment was about 3.5%. A pass book account at a savings and loan was paying 5%. The textile companies just threw up their hands in despair, shut down their factories, and sold their surplus equipment to places like Korea and Pakistan where it was operated by 14 year old girls working 12 hour shifts for near slave wages with very little in the way of safety or environmental regulation.

Most importantly, we need some kind of reform in the current free trade laws. They haven’t worked, they aren’t working, and they aren’t going to work. In the early 1980s our country was threatened with an invasion of high quality, low cost Japanese cars, subsidized by a government intent on exporting its unemployment problem to other countries. The Regan administration threatened the Japanese with extremely high tariffs unless some of those automobiles were produced in this country. Today every major automobile manufacturer with exception of Volkswagen has an assembly plant in this country, more of that kind of thinking in necessary if we are to have a future.

Our situation has been compared to a family earning $40,000 a year, spending $70,000 a year, and carrying $300,000 in uncollateralized debt. We are in deep trouble. The only bright spot is that family has a press in the basement that can print money. However, some of their creditors are growing suspicious of their paper. It isn’t my little holding of gold in an exchange traded fund that is driving the price of precious metals. The price of gold is being driven primarily by the Chinese and Indian governments hedging their position in US Government securities. Now even the European Central Banks are net buyers of Gold.

Hopefully, there are enough men and women of good will in our Government who are not bought and paid for by special interests to begin to turn the tide. At this point we can only pray and support these men and women if we can find them.

Let me end this post with the same words found at the conclusion of my column for Labor Day 2010. To me, they are more meaningful than ever.

On this Labor Day, let us take at least a moment, look into our own hearts, confess our sins, and ask God to extend his hands in mercy to our Nation. Let us try and understand that when we stand with Christ we can not separate ourselves from our neighbors.

Psalm 70

[1] Make haste, O God, to deliver me; make haste to help me, O LORD.
[2] Let them be ashamed and confounded that seek after my soul: let them be turned backward, and put to confusion, that desire my hurt.
[3] Let them be turned back for a reward of their shame that say, Aha, aha.
[4] Let all those that seek thee rejoice and be glad in thee: and let such as love thy salvation say continually, Let God be magnified.
[5] But I am poor and needy: make haste unto me, O God: thou art my help and my deliverer; O LORD, make no tarrying.