Thursday, December 13, 2012

Guess What? You Are Not In Charge.

The Fiscal Cliff is coming. Or not. Maybe the Mayans knew that Nibiru, planet X is destined to hit the earth on December 21, 2012 ending my hopes for a comfortable retirement. Or not. Whatever may or may not happen, the best I can do are those things that God and common sense dictate as wisdom. Ultimately, man is not in control of his own destiny, much less that of the entire world. Our leaders can not be assured that their plans for the economy will work for even a day, let alone a ridiculously short period of time, like a thousand years.

I asked my broker a simple question. How will my dividends be taxed if we go over the fiscal cliff? I have heard contradictory reports on how dividends will be treated, given my new lower income in retirement. His answer straight from their legislative office, “Nobody knows.”

Later on that afternoon my broker gave me a call. Bottom line, “Nobody knows.” Nobody knows what kind of a deal Congress will negotiate with the President. Nobody knows how the large institutional investors who drive the market will respond to the Congress and the President. He added something that hadn’t occurred to me, lawsuits. Special interest attorneys are already preparing to sue in Federal Court over anything that comes out of the negotiations. I also expect lobbyists are working overtime to prepare for any and all possible contingencies.

I watch the financial press. It seems to vacillate between ostrich like optimism and hysterical panic depending on the purpose of the publication or the show. The big boys are clearly pessimistic. They are even borrowing money, yes borrowing money, at today’s low interest rates to pay their shareholders special dividends before the tax increase hits. I watch the genius investors like Soros and Buffett call for higher taxes on the rich. Interesting, almost all of their “income” is not classified as earned income by the IRS. It is classified as capital gains. Therefore it is taxed at a much lower rate. Anybody hear them calling for a new law to tax capital gains as regular income?

Then there is the law of unintended consequences. Engineers call these reactions, second order effects. The world economy is an incomprehensibly complex interconnected system. An input at one point will change the outcome at every other point in the system, sometimes in dramatically unpredictable ways. Recently Maryland enacted a special millionaire tax on high earners. The result, millionaires left the state. The amount of revenue collected from that tax bracket actually dropped as a result of a tax increase. It is now clear that the restaurant industry is cutting their number of full time employees in preparation for the oncoming impact of the Patient Protection and Affordable Care Act (PPACA). Employees working less than 30 hours a week are not covered by this act. Who knows what effects any budget compromise might cause as its impact ripples through the economy?

So what am I doing? I am at the low end of my range for stock holdings. Last time I checked, about 42% of my holdings (excluding real estate) are in stocks. The rest I have placed in bonds, bond funds, cash, or near cash (money market mutual funds). I have some plans on how to proceed, if things break this way of that. But ultimately it is all in God’s hands.

Quote by Mikhail Bulgakov from the Master and Margarita, one of my favorite novels.

“– But here is a question that is troubling me: if there is no God, then, one may ask, who governs human life and, in general, the whole order of things on earth?
– Man governs it himself, – Homeless angrily hastened to reply to this admittedly none-too-clear question.
– Pardon me, – the stranger responded gently, – but in order to govern, one needs, after all, to have a precise plan for a certain, at least somewhat decent, length of time. Allow me to ask you, then, how can man govern, if he is not only deprived of the opportunity of making a plan for at least some ridiculously short period, well, say, a thousand years , but cannot even vouch for his own tomorrow?

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