July 25, 2011

Hi Gang

Well the 535 folks who we sent to represent us in Washington DC once again have put partisan politics ahead of the people’s business.

Yes, I understand that they have fundamental differences in the way they see America and the role of government they believe best serves the people. But I also understand that like the parent who never says no, they now have to deal with a child (us) that thinks because its shiny and they want it, they should have it. That, is just not sustainable.

We need to have additional revenue, at least temporarily, but we also must fix what is broken, pork barrel spending, fraud and waste in many programs, and a better budgeting mechanism. Many have called for zero based budgeting and have been told, rightly, that it is not practical because it is so voluminous. Computers have come along and now, maybe it is time to rethink that. Perhaps we don’t have to zero base every year, but every five might work. Take 20% of the agencies or other budget segments and zero base them every five years. That way we could at least be assured that every line item is looked at and justified every five years. Pretty sure that would make trend line analysis a useful tool. We could spot any segment of the budget that was out pacing inflation and challenge it. This would allow us to fix the problems a lot sooner.

Default. Is it unthinkable that the USA could be unable to pay its bills? Was it unthinkable for a lot of US citizens to be unable to pay their bills in 2007. Yet look at the foreclosures, the bankruptcies and the pain on Main St. USA. No it is not unthinkable, but it is avoidable. They say there are two competing emotions in human kind. Fear and Greed. We need to back off the greed a notch or two and cut the pandering to fear. There is a reasonable solution out there and we will find it. It is just like elephants mating. It happens at a high level and amid a lot of noise. Congress will work it out and do it in time. But if they don’t, the world as we know it won’t end. Just as CARmageddon in CA was much ado about nothing, this will pass quietly into the night also.

What will happen? The treasury will not be able to redeem some bonds that are due to the Federal Reserve Bank. Woo Woo.  They should have enough cash flow to handle the everyday things like payroll and Social Security. They may be a day or two late with the bloated payment to a defense contractor or they may have to force government workers to take a few days vacation. But Armageddon, I think not.

But what leverage is there is you can’t scare people? If this “default” happens and Social Security checks go out, the average American is going to lose interest. Then it becomes a political liability for both sides. Where does that lead?

So relax, read a good book and don’t worry, be happy.

July 16, 2011

Hi friends,

The headlines are filled with chatter about deficit reduction and tax increases matched with spending cuts. The news is filled with dire prediction about what bills won’t get paid if we can’t borrow more money. Think about that. This country, allegedly the richest country in the world won’t be able to pay its bills if it can’t borrow. Maybe we should send Rep. Boehner, Sen. Reid and President Obama down to the docks to see if they can get a payday loan to tide us over. Maybe we could call one of the many pawn brokers and see if we can get some cash for stuff we may no longer need.

OK, so none of those ideas would fly, we need too much money, but it points out the seriousness of the problem. We can’t pay our bills without borrowing more money. This is crazy. The Congress, both houses and the executive branch as well are responsible for this situation. This has been going on for decades. It is the system that needs to be overhauled.

Enough of that rant. What does it mean to you?

We need to recognize that, scare tactics aside, we really do need to pay our bills so there is no option but to borrow more. However, we need to spend less so that borrowing to pay the bills month in and month out is not necessary. In truth wasteful spending can be cut, over reaching expenses trimmed and we can get control of our finances. But it is unlikely that we can do that without additional borrowing and additional tax income.  Republicans and Democrats both have had a hand in creating the problem and now must have a hand in fixing it.

The President, Mr. Boehner and Mr. Reid must come together and work out a solution that puts the USA back on a sustainable course. To be effective it will have to contain new tax revenue, reduced wasteful spending and long term entitlement program reform. Yes, I said that long term entitlements (which we just expanded in terms of Obama-Care) need to be reformed. Social Security eligibility will have to change. People born after 1955 or so will have to wait longer to retire (early retirement - today 62 - will need to move to 65 or 66 and full retirement will need to move to 70). This can be phased in over time, one year longer for each year past 1955 until we reach birth dates of 1959. Top income earners will also need to contribute more. Income is income, so capital gains and ordinary income rates need to be the same. Warren Buffett is the leader on this and his income is mostly capital gains. Those of us who are living on our capital gains can afford to pay more in taxes. We won’t like it and a few politicians may have their careers shortened but it is a necessary step to regaining our financial footing.

The key going forward will be our ability to not repeat the mistakes of the past. We can no longer be the policeman of the world. We can no longer promise more than we are willing to be taxed. We can no longer put off or, in the presidents words, kick the can down the road. Obama-Care costs will kick in down the road in 2013. We need to be on a pay as you go basis by then and that is not long from now. If we fail to do this our borrowing costs (yes we will still have the existing debt to pay interest on) will rise, inflation will rear its ugly head and we will be far worse off that we are today. I don’t even want to think about that, do you?

Take notes during the next weeks and figure out who you think is a leader and leading in the right direction and more importantly those who are not. When you have an opportunity to vote again in November of 2012 be sure to vote based on their performance not their appearance, propaganda or sound bites, either pro or con.

In the meantime, check your retirement savings plan and take charge because at the end of the day you are responsible for you, now and in the future. Yeah, I know being a grown up isn’t easy nor fun. Get over it.

Car sales are improving, slowly but surely. Retail sales are up year over year by about 3% and manufacturing is actually doing quite well. It is manufacturing that employs technology rather than people, unfortunately. The economy is creeping forward and will continue to grow very slowly. Job creation won’t likely speed up to where it needs to go for a longtime. We need to add 100,000 jobs each month just to absorb the natural growth of the work force, forget bring down unemployment. Unemployment at 9.2% is likely under reported but it is surely not equally felt in all demographic sectors. When young people are affected to a great degree, you have the fuel for civil unrest. Remember the Newark and Watts race riots. I do and I don’t want to see them again.

Housing prices and sales will not recover for probably a decade and maybe longer. Housing is a world class example of unintended consequences of a well meaning government policy trying to make home ownership easier to achieve. We made it easier and easier until it was too easy and the bubble burst. Now young people will have to do what their grandparents or great grandparents did - work hard, postpone marriage and live with parents until they have saved enough to put a down payment on a home, a down payment of 20%. Seems wild but that will be the future. It is sustainable and it will take a long time to absorb the houses on the market today.

Education will be of greater importance than ever because even small business people (plumbers, electricians etc.) will need to know how to run a business as well as just be experts in their trade. New home construction will not recover nationally for a very long time, if ever. However, as immigrants came to the USA for work in years past, we may be going to other places to find work. IBM, I’m told is hiring in India and other locations outside the USA. Maybe going to work for them or other major employer in India will result in a good job in the USA in 10 or 20 years. Young people are going to need to rethink their career plans and adjust. Sorry, kids but our life style is no longer available to all.  The smart, the talented and those willing to do what they have to, will do well. The rest will be stuck scraping along until they can’t work any longer. Doesn’t sound like the America we were taught about but it is the America of the next 35 years.  

If you are young, think long and hard about your future. If you’re in your 30’s, 40’s, and 50’s start saving every dollar you can. You are going to need every one of them. If you are already in your 60’s be thankful that you have the benefits you have and talk with your financial advisor about making it last for the next 30 years.

Sorry to be so negative but I think I’m right and you need to know.

July 2, 2011

Happy Independence Day!!!




Today we celebrate all that is good about the United States. Tomorrow we must go about fixing what is wrong with the United States.

I believe it was Bill Clinton who said “It’s the economy, stupid”. And ours is in the worst shape it has been in since the Great Depression. It may actually be worse.

In 2009 I said recession is psychological. In a consumer driven economy such as ours, how safe and how rich the consumer feels determines how much the consumer spends, thus the direction and speed of the economy. Stable housing prices make consumers feel safe and rising housing prices make us feel rich. That translates into freer spending and a growing economy. “Until the housing problem is fixed we will not grow”. That was in 2009 repeated every so often in 2010 and now we are deep into 2011 and it is still a disaster. It could have been solved in 2010 and we could be leading the world into recovery but the government (House and Senate) was busy worrying about the wrong things and I’m not sure they get it yet.

If we’d have taken some of the $Trillions that we spent on ‘stimulus’ and bought up defaulted mortgages, took title to those homes and tore them down we would have stable housing values today. There would be no glut of distresses sales gutting the prices of nearby houses. Stable housing values would give a psychological boost to consumers who would have spent more freely, creating jobs and more demand for housing, resulting in rising values and still more consumer confidence.

We’re like the Army that wasted its ammunition shooting at mirages then when they had the opportunity to engage the enemy they were out of bullets. Our inept handling of the economy has left us with very few bullets. We now must use them carefully or risk being captured by the enemy.

We have spent $trillions to stimulate the economy trying for a quick fix. ‘Shovel ready projects’ were funded to create construction jobs. Unfortunately in this country even ‘shovel ready’ means months if not years away. A lot of money committed, not a lot of bang. Hence first time jobless claims are hovering around 425,000 each week. Better than 2009, but much higher (30% or so) from the levels of 2006.

G.W. Bush takes a lot of blame for two wars which cost us a fortune in money and lives but the current administration has done little to reduce that spending and has added Trillions in a misguided attempt to improve health care (which needs/needed improvement) while not focusing its energy on the economy until it had degenerated to the crisis level. The Obama administration owns that one. The real culprit was Speaker Pelosi and the real mistake by the current administration was letting her run loose. She led the health care charge on a partisan basis either not understanding the economic situation or, worse, not caring.

The American voter seems to have dealt with her, but the administration must lead us out of the crisis. At this point President Obama and his administration does not seem to have the skill or the credibility to do that. In retrospect, Hilary is looking good. Who will replace her as Secretary of State when she leaves in 2012? Who will be willing to risk taking over what could be a six month job if the Republicans unseat Barrack Obama in November 2012.

This is a real issue for all of us to consider. What will we do interms of paying down the deficit? How will we raise the money? Will we be brave enough to slowly raise taxes (to avoid dumping the economy back into recession) while recognizing that we must reduce spending, even when it hurts.

I’m no longer young and I look at Social Security differently than when I was younger, but we cannot afford to payout benefits for 20, 30 or 40 years. Retirement benefits must be tied to life expectancy. Retirement age has to rise. The government is talking about 67. Realistically, they probably need to be talking about 70 or even higher for people who are just being born today. They will live into their 80’s and 90’s. Benefits for 10 or 15 years is affordable, while 30 or 40 years is not. Ask your financial planner how much money you will need to equal Social Security payments (and its cost of living increases) based on retirement at age 65 and your life expectancy. My best guess is he’ll tell you that you need about $1 million. You may need more. On that basis, with a large portion of our population in the ‘boomer’ group, think about the government having to provide each one of us with a $1million. A Billion is 1000 million. A Trillion is 1000 Billion. So about $1Trillion for each 1 Million baby boomers. And there are 39 million people already over 65 and more coming each day. How much money do we need to support Social Security? I don’t know, but it seems like a lot. Medicare is another issue. Older folks, I am learning first hand, require more and more medical attention. Just like an old car requires more and more maintenance. As we live longer, we cost more to maintain. So Medicare expenses are going to rise as those in the system age and as the boomers enter the system in large numbers the base cost grows and the future cost grows exponentially.

So enjoy the Holiday and then get to work next week looking carefully at all candidate, local, state and nationally to find those who you believe have the best plan. But be sure to look for specifics. Generalizations and platitudes aren’t going to get it done. Neither is great skill as a speaker. For all our sakes, look at the substance, not just the package. Skin color, hair color, age, gender nor any of those sorts of things are important. Skill, intelligence and experience coupled with honesty and integrity are important.

Taxes are likely to increase in 2013, they have to. Spending cuts will be with us for the next decade, they have to as well. Accept that and evaluate candidates based on what they are saying relative to the reality you know. If they don’t recognize that both must happen, then they lack integrity and either honesty or knowledge, in which case I hope that you would disregard them and try to find a better candidate to support.

New economic stats are out next week and I’ll bring them to you with the usual attempt to explain what they mean.

Happy Independence Day!!!