Investing in America

Something to think about. According to the Federal Reserve, as of May 10 money in bank and money market accounts has increased to about $9.36 trillion. In May, 2007 this amount was $7.44 trillion!

American's aren't broke, but they are fearful. A substantial part of this money was pulled from the stock market. Take that, Goldman Sachs! People may be fearful, but they aren't stupid.

To give you an idea of how much moolah this is, consider that all of the employer sponsored retirement plans in the U.S. currently total "only" about $2.7 trillion.

China Does it Right

China announced a $586 Billion stimulus package, this will be spent on infrastructure by 2010. According to the New York Times, the money will include "constructing new railways, subways, airports and rebuilding communities".

Meanwhile, here in the US, we have a nearly trillion dollar "bailout package" for Wall Street and the Banks!

So the Chinese will be getting buildings, roads, public transportation and cities. All of that good stuff that creates jobs and produces something. What will we get? We'll get bankers buying other bankers, bonuses and dividends to stockholders. No infrastructure, no jobs.

So who is in action? That's a rhetorical question. Over the same period, our politicians are talking about a few hundred billion in stimulus checks, perhaps $30 billion or so to energy infrastructure. According to the "Obama-Biden Energy Plan", they will be "strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future". It is important to note that this plan permits the new administration and congress to earmark energy monies for bailing out the automotive manufacturers. This will be done to reward the UAW and other unions who strongly supported the Obama-Biden campaign. However, unless the transportation system in the US is transformed, this money will be wasted. Unfortunately, insufficient funds have been allocated by the Obamam-Biden team to do such a thing.

Do you think we have a problem here?

The article: China Unveils Sweeping Plan for Economy

The Obama-Biden Energy Plan: http://my.barackobama.com/page/content/newenergy

Ask me in 20 Years!

I was asked recently if I am invested in the stock market. That question was prompted by our recent financial "crisis" and the current aftermath. The answer is YES! Here are my reasons:

1. Both my spouse and I are employed. We do save a portion of our earnings each month and a substantial portion of these savings goes into retirement accounts.
2. We are of an age where it is likely one of us will still be on this planet in 40 years. Look at it this way. Consider that today it is the year 1968 and that one of us will probably still be on the planet in the year 2008! From the perspective of 1968, that's a long, long way into the future. A lot can happen in 40 years, and probably will. For example, there were seven (7) bear or near bear markets in that period, including the "bear market of 2008-2009". So we need a financial plan which can accomodate that unknowable, somewhat distant future.
3. Inflation is a long term concern.
4. There is evidence that the stock market is a good hedge against inflation, over the long term.
5. That portion of the funds we do have "invested" are in a diversified portfolio. That portfolio is somewhat conservative and includes dividend paying stocks, mutual funds and bonds.
6. We are applying the principle of dividend reinvestment. Dividend yields are highest when the stock market is at the bottom, and dividend reinvestment ensures that new shares are purchased at these lower prices. In the super- or mega-bear market of 1773-74 and during the ensuing malaise when stock market indexes were flat for nearly 10 years, there were dividend yields of up to 5%. Those yields enabled substantially better total returns than the market indexes would suggest.
7. We have some funds, including an "emergency fund" which are not invested in the stock market and we can tolerate waiting 10 years for a market return.
8. We are doing our best to maintain a long term focus.
9. We are aware there are risks. There is always the unknowable. It is possible neither of us will be alive in 5 years. It is also possible that we will both be alive in 40 years. So we do our best to plan for both possibilities.

So that is our rationale. On the other hand, it isn't easy watching the government hand over $$ of our taxes to the banks and investment bankers who contributed to this mess. Nor is it easy listening to the whining of those who want to help the "poor homeowners". Many of those "poor homeowners" were as greedy as the bankers who got us into this mess. I suppose some sort of intervention will be necessary. There are rational arguments both for and against. I suspect that the financial turmoil will not end until the housing market is stabilized. One good thing, "Wall Street" has finally gotten the "black eye" it has deserved! No matter who is elected as President in 2008, there will be some change in the way that Wall Street is treated in America.

I think it is important to seperate the housing problems from the economy at large. I don't know how people will adjust to the reality of the new credit landscape. The worst could be over in 6 months. However, I do think it will take years to sort some of this out, and that home prices will fall for perhaps 5 years or until 2013. That will not necessarily be universal, as "all real estate is local" as the saying goes. However, California in particular will have many single-family homes priced below their peak levels of 2006-2007. Home valuations in the hardest hit areas will probably be 50% of their peak value. This is not my SWAG here, I am presenting numbers I have distilled from many sources.

As the economy stabilizes and panic recedes, many people will realize that things aren't as bad as they thought they would be. The stock market will recover. In particular, there will be a need to invest and as housing will no longer be the rock star it once was, the stock market may be considered a reasonable place for such investments. I base this optimism on the recent past, most notably the aftermath of the internet boom and bust of 2002.

When I was asked "why am I invested in the stock market", the question could as easily have been "why am I invested in America?", for that is what I am doing. I have always had a faith in the ability of this amazing country to transcend certain problems and idiosyncrasies of human beings. However, the past 10 years have been trying, and have tested that faith. Should I be concerned? Yes, I think I should be! Should I panic? No, and to help me in that I will attempt to watch as little financial news as possible. (Note: keeping these blogs going and minimizing exposure is going to be a task; I'll definitely be avoiding most of the "popular" media and as many of the "talking heads" as possible).

One other thing I keep in mind. A lot of the financial news is generated in New York and as we know, that town is tightening it's belt and looking toward gloomier times. I am of the opinion that this will cloud the news emanating from that city. Consider it an internal bias to the news. I will be listening for that bias.

The bottom line: Have I made good decisions? How will it turn out? Ask me in 10 to 20 years!

PS: I know that the conventional wisdom is oil and other consumables will tank in a recession, or a serious recession. However, I couldn't pass up the opportunity to pick up some National Oilwell Varco (NOV)

Myths About the Financial Crisis of 2008

The Research Department of the Federal Reserve Bank of Minneapolis has published a paper with the title above:

http://www.minneapolisfed.org/research/WP/WP666.pdf

This is an 18 page document, consisting substantially of charts and diagrams. It states the following:

"The financial press and policymakers have made four claims about the nature of the crisis.

1. Bank Lending to nonfinancial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
4. Banks play a large role in channeling funds from savers to borrowers.

Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false."

The Non-Science of Campaign Economics

The New York Times had an article today entitled "On Health Plans, the Numbers Fly". The article began with "Economics, it is said, is the dismal science. Anyone paying close attention to the campaign debate over the economics of health care might wonder about the science part."

http://www.nytimes.com/2008/10/22/us/politics/22health.html?_r=1&pagewanted=print&oref=slogin

It is no sup rise to find that "economics as practiced in the political arena is often “just ideology marketed in the guise of science.”" to quote Dr. Uwe E. Reinhardt, a health economist at Princeton. To quote Dr. Reinhardt further, "It’s garbage in, garbage out....Every econometric study is an effort in persuasion. I have to persuade the other guy that my assumptions are responsible. Depending on what I feed into the model, I get totally different answers....I give a lecture on whether you can trust economists, and I tell them no,” Dr. Reinhardt said. “I tell them that if at the end of the year I tell you the time of day and you trust me, I have failed.”

It has been apparent for some time, that politicians work diligently to "cherry pick" the facts that support their position. Given their penchant for short term thinking, and the overwhelming desire to be elected, I am certain that they can and do say anything necessary to get the vote. Pandering in politics is an art form.

I have found it to be a lot of work to check the facts of the various candidates. That's probably why the vast majority of Americans prefer to go for the candidate that promises the most. It's the easiest and shortest route. Besides, one feels good in selecting a polished candidate. After voting for him or her, I can go back home and feel like I did my patriotic duty and saved the country, again! However, there is ample evidence that these people cannot deliver. They haven't delivered in my life time so what makes one so certain they can or will this time? Perhaps that is the incentive to register all of those 18 year olds out there. They haven't been listening to this for 40 years as I have, and they have the optimism of youth. Unfortunately, that's the same misguided, biologically based optimism which also drives many of them to practice unsafe sex, as well as take undue risks on the highway.

So when we listen to the McCain and Obama political camps spouting health care plans, alternative energy scenarios and budgets, I think it is wise to keep the advice of Dr. Reinhardt in mind.