Wednesday, May 20, 2015

Planning For Your Obsolescence

The ongoing debate over trade policy highlights a major career risk:  the possibility that you could become obsolescent because of cheaper labor elsewhere and/or automation.  For example, in the auto industry, many car parts and some cars are made in other countries and shipped to America because labor and other costs are cheaper elsewhere.  In America's auto assembly plants, robots have replaced large numbers of people because robots are more reliable and cheaper.  This trend will continue as many other tasks become mechanized and/or cost-effective in lower wage nations.  Computer programming, radiology, legal research and legal document review have joined data entry and call center jobs as routinized work that can be done by smart people living in many countries.  What can you do about your potential obsolescence?

Keep up your skills.  Maintain and upgrade your professional skills.  People capable of cutting edge work will often have an advantage over foreign competition and robots.

Be flexible.  Keep an open mind about working in new and different jobs.  Many people have succeeded in fields they didn't plan on entering.  But they were open minded about learning new things and taking on new challenges.  The economy will keep changing, and success can follow if you change with it.  If you're unemployed, be open to taking temporary and part-time work in order to prevent your personal finances from eroding faster than necessary.

Computers and computer science.  Much of the reason for personal obsolescence is computerization.  Computers and related technologies (most importantly, the Internet) make it possible for workers overseas and robots to compete against American workers.  Don't get angry about this because computerization will continue--and most likely at an accelerating pace.  If you can't beat them, join them.  Acquire and maintain computer skills.  Go into a computer-related field.  Become a programmer, technician, data management engineer or something else computer-related that fits your skills.  Computers won't become obsolete, and people who can work with them have a better chance of staying employable.

Build your benefits.  Work as long as possible to build Social Security credits.  If you have the potential to earn a pension, stay in that job long enough to qualify.  Having a stream of payments that doesn't depend on your employability is a major victory over obsolescence.

Save.  Here's an ugly truth:  just as the wages and salaries of the middle class have fallen due to globalization and other reasons, the returns on capital have improved.  People who hold capital are becoming comparatively better off, while people who work are on average becoming comparatively worse off.  Save. Acquire capital and improve your chances for a comfortable life.  Then save some more.  Whatever your views on social issues like the distribution of income and wealth, you are individually better off with a pool of savings to protect you from the riptides of a free enterprise economy.

Sunday, May 17, 2015

Obama's Irrelevance

Barack Obama is becoming irrelevant.  With a Republican-controlled Congress, he cannot implement much of his agenda.  When he tries, he has to ally himself with the Republicans, as he recently did on trade policy.  The result was to aggravate the Democrats in Congress, who used the moment to extract concessions of their own.  Now, the Republicans don't like Obama, because he's a Democrat.  The Democrats don't like Obama, because he's not really a Democrat.  And Obama finds himself without any real friends in Washington.  Not that anyone has real friends in Washington, except maybe their dogs.  

ISIS does its best to give the President opportunities to shine.  With every atrocity, the extremists provide another excuse to drop a smart bomb or authorize a Special Ops raid on the hideaway of some senior nasty guy.  But in the war against terrorism, there is no Omaha Beach, no Bastogne, no bridge at Remagen, no unconditional surrender.  And there won't be much opportunity for a President to build a lasting legacy. 

The President would like very much to pivot toward Asia.  And smaller Asian nations, watching China literally construct territory in the South China Sea, would like America to swivel their way.  But the increasing chaos of the Middle East keeps sucking the President into its vortex.  He dreams of detente with Iran, seemingly unaware that making nice nice with the ayatollahs will probably increase the desire of Saudi and Gulf State Sunnis to support Sunni insurgents in Iraq and Syria (possibly including ISIS) in order to counterbalance growing Iranian power.  A gain in stability could be met with an increase in instability.

But even as Obama recedes into the background, the Republicans can take no comfort.  They will achieve little in Washington without control of the White House.  And they're bogged down by a mosh pit full of Presidential hopefuls, none of whom have captivated the electorate.  Perhaps they, too, are fading into irrelevance.

Thursday, May 7, 2015

The Zen of Investing

How do you allocate your investment funds in times like these?  Stocks bound upwards for a couple of days when statistical data indicates the economy is slowing or a Fed governor smiles.  Then, the market nose dives crazily the next couple of days when oil prices rise or unemployment falls or another Fed governor frowns.  Bonds slump and then surge, or surge and then slump when inflation expectations rise or fall.  One constant in the financial markets is volatility.  Another is unpredictability.  And a third is no net gains--as in, for all the hysteria, stocks have hardly done squat this year.

The financial media is full of conflicting predictions--the market will boom, the market will crash--and conflicting advice--buy this, sell that, short the world and stock up on survivalist gear.  To paraphrase former Fed Chairman Ben Bernanke, things are unusually uncertain.

At times like this, the best option may be to step back from the chaos and cleanse your mind of desire.  At least, of desire for short term gains and avoidance of losses.  It's impossible to make money all the time, or to avoid all loss.  With entropy seemingly on the increase, any effort to make every day a good market day will have you believing six impossible things before breakfast and doing battle with windmills.

There's nothing wrong with holding cash, maybe even a lot of it.  Cash is beautiful.  A goodly amount in a federally insured bank account or U.S. Treasury debt promotes equanimity and sound sleep.  You will smile more.  There may be some who would argue that a fully invested, well-diversified, periodically rebalanced portfolio will provide better returns than a partially invested portfolio with a lot of cash.  This may be true in theory, but an awful lot of investors don't have the nerve to stay the course with a fully invested portfolio through the periodic mania of the markets.  They sell and freeze up, never again to invest, and potentially lose a great deal of future gains.  All the nice theory in the world doesn't amount to diddly if you're too stressed to implement the theory.  To maximize returns in real life, you have to be calm and unemotional.  And if doing that takes having bundle of greenbacks under the mattress, then so be it.  Don't feel the need to allocate every last dollar to something or other right away.  Hold off on betting your last buck until you feel comfortable.  Be zen, and increase your chances of becoming rich.

Tuesday, April 14, 2015

Is the Federal Reserve Wrecking Retirement?

We're now in the 7th year of Federal Reserve induced ultra low interest rates.  The Fed has kept short term rates at zero (actually negative, once you take inflation into account) through monetary policy.  Long term rates fell as well, especially after the Fed devoted years to quantitative easing (i.e., purchasing bonds in the open market).  Those people old-fashioned enough to actually save money have been bedeviled by the near-absence of interest income.  While some have been desperate enough to gamble with risky investments like junk bonds in order to generate more income, many and perhaps most have simply tightened their belts and spent less.  After all, if you're not getting any interest income, the last thing you want to do is spend down your principal.  That's like eating the seed corn--there will be no more harvests once the seed corn is gone.

Insidiously, the years-long pandemic of low long term interest rates has undermined retirements.  Pension funds, insurance companies and other persons and entities trying to provide for America's retirees have historically depended on long term bonds to provide a stable source of predictable income.  Pensions funds, insurance companies offering annuities, and other providers of retirement income tend to have relatively predictable obligations (i.e., the payouts they must make to current and future retirees), and look for predictable sources of funding to ensure that they can meet their obligations.  U.S. Treasury securities, agency bonds and high quality corporates were the bread and butter of retirement funding.  But these same stable long term investments have since the 2008 financial crisis been paying lower and lower interest rates. It's getting harder and harder to finance defined benefits.  While pension funds, insurance companies, municipalities and the like have sometimes turned to stocks and alternative investments, the volatility of these alternatives makes them a poor substitute for the plain vanilla fixed-rate, meat-and-potatoes high quality bond.

Of course, pension providers could contribute more funding to pension plans to make up for the shortfall in interest income.  But how many corporations, states and municipalities do you see leading the charge to put extra profits or taxpayer dollars into pension plans?  Many seem to be looking for spots on the increasing crowded sides of the road to dump current and future pensioners.

Corporations have curtailed and terminated defined benefit pension plans.  States and municipalities are in the process of doing the same.  Multi-employer pension plans are going belly up like fish in a toxic waste spill.  Soon, almost all of America's workers will be left with largely self-funded defined-contribution retirement plans, like the 401(k), or with self-funded retirements using IRAs.  Experience teaches that self-funded retirements are usually not as stable or comfortable as retirements funded with defined benefit pensions.  And that's just for the 40% of Americans who have any retirement savings at all.  As for the 60% who have none (as in zero, zilch, nada), the opulence of life on Social Security beckons. 

To be sure, Fed policy isn't the only reason why interest rates are low.  Economic and political instability in many other parts of the world are driving capital into safe dollar-denominated investments.  Low inflation tends to keep interest rates low.  But the Fed, as the single most powerful force in the money markets, has played a crucial role in eradicating high long term rates.

While Wall Street, corporate America, the 1% and many of the unemployed have benefited to varying degrees from the Fed's suppression of positive interest rates, there is, as economics teaches, no free lunch. There are costs to persistently low interest rates, and much of the cost has fallen on those middle and modest income workers who have or hoped for a defined benefit retirement.  Okay, so we already know the wealthy enjoy a heads-we-win, tails-those-little-people-lose advantage.  But we shouldn't buy into the Fed's story that it's creating stability to prevent a Great Depression.  What the Fed has done is transfer losses and instability that could have manifested themselves in another Great Depression, to many of America's current and future retirees, whose golden years may now be more unpredictable and depressed than they had hoped. 

Thursday, April 2, 2015

The Low Euro: Greece's Salvation?

Greece is within a few weeks of running out of money to pay its debts.  Default looms, and it could cause financial disruption in Europe and around the world.  Yet the Greek government and the Euro bloc are at loggerheads in an Alphonse-and-Gaston routine where true compromise is as commonplace as hen's teeth.  Sounds like Congress.  Meanwhile, the rest of us wait for Godot. 

Luck, however, is part of life, and both Greece and the EU are very lucky.  In its current state of economic extremis (and Greece is suffering the equivalent of the U.S. Great Depression of the 1930s),  Greece would want to depreciate its currency.  If it could do so, depreciation would make its export businesses more competitive and bring in tourism.  But Greece, being part of the Euro bloc, has no control over its currency.  The European Central Bank calls the shots for the Euro. 

Serendipity would have it that the ECB decided recently to engage in quantitative easing (i.e., the buying of Euro-denominated bonds in the open market) as a way to stimulate the EU's stagnant economy.  Quantitative easing is one way of printing money, and the Euro has fallen by about 25% as a consequence.  A 25% price move is an elephantine move in the currency markets, and changes all kinds of economic relationships.  European exports just got gussied up in a big way, and European tourism is now a bargain compared to a year ago. 

Greece doesn't export a lot outside of Europe, but it is one heck of a tourist destination.  If given some time, Greece's tourist business will probably pick up.  Some of Greece's exports might be shifted to non-Euro bloc nations.  Greece might have a shot at recovery.

Much of the problem is that neither the EU nor the Greek government trust each other.  Definitive resolution is impossible without trust.  The result has been a steady kicking of the can down the road every time Greece and the EU have to negotiate.  This time, however, if they kick the can down the road (which is one possible outcome of the current impasse), the consequence may be positive.  If Greece has a couple of years to turn itself around using the low Euro, it may have a shot at recovering enough to satisfy the EU's debt collectors.  But will the EU and Greece muddle through one more set of negotiations?  If everyone were rational, they might pull it off.  But then again, if everyone were rational, they wouldn't be in the mess they are now in.

Thursday, March 19, 2015

How the Fed Told the Market What It Wanted to Hear

One of the most human things about humans is that they tend to hear what they want.  It's easy to take advantage of this trait. Politicians do it as a matter of course.  Many, and perhaps most, Congressional districts are gerrymandered to favor one party or the other, so that members of Congress can be elected, and then endlessly re-elected, simply for saying what their constituents want to hear.  Our gridlocked government doesn't actually do anything.  We pay members of Congress nice salaries simply to say what we want to hear--and in the final analysis the shame is on us.

Government officials aren't above telling us what we want to hear, either.  The Fed's latest policy statement is a good example.  The word "patient" was removed, indicating that there wouldn't necessarily be much warning of an interest rate hike.  This is hawkish. 

But the statement also tried to make nice-nice with all the skittish investors out there who bet on continued money printing by saying that a rate increase in April is unlikely, and that the timing of future rate increases would be dependent on economic data.  The Fed also continued from the previous statement to say that it anticipated moderate economic growth, lower than average inflation in the near term and a continuation of its practice of re-investing principal payments from its holdings of federal agency and Treasury securities into other agency and Treasury securities (thereby maintaining the size of its balance sheet).  These dovish statements softened expectations for rate hikes in the near future.

The market rallied yesterday (Wednesday, March 18, 2015), with the Dow Jones Industrial Average rising almost 230 points (more than 1%).  Today, the Dow dropped 117 points, or 0.65% (although the Nasdaq rose 0.2%).  What gives?  The market initially read the Fed statement to be dovish and drank deeply of the punch bowl.  But Fed Chair Janet Yellen also has made clear that there are no assurances as to June and a rate increase in June is possible.  The market evident sobered up today and took some money off the table.  The Fed statement didn't change from yesterday to today.  What changed was how the market read the statement.

The Fed is now in the position it wants to be in--it can move rates without giving a lot of notice.  It has much more flexibility to react to changes in economic data.  Investors who are caught leaning the wrong way can't expect a bailout.  We're back to the past, to the Fed of the 1970s, 80s and 90s, which tended to be opaque and liked it that way.  It had room to move.  For example, in 1994, the Fed decided to raise rates, when large swaths of the market didn't expect a rate increase.  Many hedge funds and other investors were seriously discombobulated, but there was no money printing done to make the boo boo go away.  All the losers could do was to reflect on how there's a certain amount of rancid cheese in life and you just have to deal with it.

Now, let the investor beware. 

Friday, March 6, 2015

Dreaming of Higher Interest Rates

Today's employment report, which shows a gain of 295,000 jobs and a lower unemployment level of 5.5%, knocked the wind out of the stock market's sails.  The Dow Jones Industrial Average fell almost 279 points or about 1.5%.  Bonds retreated as well, while the dollar rose.  The new employment data heightens the chances of the Federal Reserve Board raising interest rates as early as June, something that's detrimental to today's rosy asset valuations. 

In the past year, there have been innumerable rumblings from hawks and doves on the Fed about when to raise interest rates and how quickly.  As the economy has improved, the Fed's public signals have morphed from waiting a significant time and being patient, toward saying that their decision on rate increases will be data dependent.  That means rates could increase any time, if the Fed decides that the data warrants an increase.  Fed Chair Janet Yellen is a dove on rate increases, but she also wants to have a free hand without necessarily having to be patient.

There's so much debate and angst over rate increases that the sensible thing for the Fed would be to raise rates a quarter point this summer or fall.  That would give the markets a chance to adjust to a world without zero interest rates, something they haven't experienced in seven years.  After an initial tantrum, the market would probably figure out that 25 basis points is just 25 basis points, not the beginning of a massive depression and the end of civilization as we know it.  Some of the heat in the debate over rate increases would dissipate, and the dialogue could become calmer.  The hawks would have had their way, at least for a first step.  And the doves would realize they don't have much to worry about.

That's because economics would dictate that rates should remain low as long as inflation remains low.  Inflation, even without considering the falling price of petroleum, remains below 2%.  There is no economic justification for rates to rise much.  On or two quarter point rate increases would establish that the Fed is not locked into perpetual pedal-to-the-metal stimulus.  And low inflation rates would give the doves a basis for tightening ever so gently--and patiently.

So, if you're dreaming of higher interest rates, dream on.  When you wake up, you'll find that our low inflation reality means it was just a dream.

Wednesday, February 25, 2015

Fighting ISIS: Are We Ready To Invade Syria?

As Congress mulls the issue of authorizing the President to wage war against the Islamic State, there is a lot of discussion of how much involvement U.S. troops should have.  Should they be involved in training, advisory roles during combat, or actual combat?  But these may put the cart before the horse.  Before talking about where on the battlefield U.S. troops should be located, we should talk about what it would take to win the war. 

The Islamic State's attractiveness to its young, disaffected recruits is that, more than anything else, it is a caliphate--an actual geographic location where Islam in its supposed purest form can prevail.  ISIS offers a promised land to go to, a place where you can not only go yourself, but take your family and raise your children (as some jihadists have done).  You aren't just fighting for a cause.  You and your family can live a life of holiness and purity. 

The caliphate is a safe haven for ISIS jihadists.  Defeating ISIS requires conquering its territory--all of its territory, in Iraq and in Syria.  There is no debate over whether U.S. troops should operate in Iraq--they already are, and nobody argues they shouldn't.  But the elephant in the discussion is what to do if the U.S. and its allies succeed in pushing ISIS out of Iraq and back to its lair in Syria.  America currently has no proxy troops to attack and seize the ISIS heartland in Syria.  No other forces in Syria--the Assad regime, the moderate rebels, non-ISIS Islamic extremists, the Kurds, or anyone else--can defeat ISIS in Syria.  But if ISIS is able to maintain its safe haven in Syria, it can persist and even renew its conquering ways if and when America tires of endless troop commitments in the Middle East.  The only way to suppress ISIS is to seize control of its safe haven in Syria.

Simply authorizing the President to wage war against ISIS for three years, as he has requested, only tells ISIS that it needs to hold the fort in Syria for the next three years.  Under present circumstances, it may well be able to do that.  One reason the U.S. lost the Vietnam War was it had no way to effectively control Communist safe havens in Laos and Cambodia.  Not having a strategy for eliminating ISIS in Syria precludes victory.  We need to hear from the President and other proponents of waging war against ISIS how the war will be won in Syria.


Friday, February 20, 2015

Better Science, Please

There's nothing wrong with cholesterol in your diet.  After four decades of admonitions to the contrary, federal authorities are reportedly about to withdraw recommended limitations on cholesterol in the diet.  Lovers of eggs, shrimp and shrimp omelettes can rejoice. 

But, if dietary cholesterol isn't bad for you, why were we badgered for decades about eating more than two egg yolks a year?  The answer is bad science.  Researchers weren't careful enough to separate the consequences of high cholesterol in the blood (which can be a real medical issue) from the consequences of a lot of cholesterol in food (which is not proven to be a risk factor). 

This isn't the only instance in recent years of bad science.  Three decades ago, it was often claimed (although not by federal authorities) that high doses of antioxidant supplements would be beneficial to health.  Now, we know that some antioxidants, like Vitamin A, can increase cancer risks if you take large doses of supplements. It's nice that the truth finally emerged, but what about the people who might have increased their cancer risks through mistaken reliance on this advice?  How do you explain to a man dying of prostate cancer that he shouldn't have taken Vitamin A supplements even though various supposedly knowledgeable medical researchers said that Vitamin A in large doses was a good thing?

Then there were the lobotomies.  Some decades ago, there were physicians who believed that a crude and imprecise surgical procedure that involved pushing a surgical instrument into the brain and making various cuts was an appropriate way to treat mental illness.  If this sounds horrendous, well, it was.  There were often some reductions of the symptoms of mental illness, but many patients were left with intellectual and personality deficits and some had to be institutionalized.  Lobotomies produced change, but it was debatable in many cases whether they made the patient truly better off.  Lobotomies haven't been done in 40 years and today are generally regarded as abhorrent.  Yet, the 1949 Nobel Prize for Medicine was awarded to a doctor for helping to develop lobotomies. 

And, before World War II, there were many scientists who seriously claimed that science could prove that some peoples were superior or inferior to other peoples.  These claims contributed to the ethnic and religious cleansing of millions, a scale that would seem beyond contemplation in any civilized nation--except that it wasn't.

The vaccination deniers have it wrong.  Vaccines are a good thing and kids should be vaccinated.  The climate change deniers are being pressed hard by the recent and ongoing snowmageddon in New England and the record cold now sweeping the Southeast and Midwest.  But scientists--and those that evaluate their work--need to do better.  If you do a little channel surfing on cable TV, you might find people who would prosecute teachers for teaching evolution.  The dietary cholesterol goofup involves much more than what you should have for breakfast or an hors d'oeuvre.  It undermines belief in science, which is one of the foundations of modern society.  Science is the reason we have the comfortable lives and wondrous technological conveniences we now enjoy.  We don't want to go back to a world without electricity where people are prosecuted for contending that the Earth is round.  Ignorance is an everpresent threat, even in the most techologically advanced nations.  If science loses its credibility, it will be replaced by far worse alternatives.  Scientists should be careful, cautious, and above all, accurate.  Pride goeth before the fall.  The incautious scientist can do more harm than good.

Sunday, January 25, 2015

Obama's 529 Mistakes

President Obama's proposal to tax earnings distributed from 529 college plans derived from future contributions is one of the worst ideas he's had in tax policy.  He would make withdrawals derived from earnings on new contributions taxable to the student (although withdrawals derived from earnings on funds already contributed would remain tax-free).  Let us count the ways this makes no sense.

Defies Tax Logic.  The redistribution of income through a progressive tax structure is a concept that virtually all Americans agree on, including many who are very wealthy.  However, Obama's 529 proposal creates a much smaller redistribution loop consisting of college students (and perhaps indirectly their families).  Students from more prosperous families will pay taxes that will subsidize students from less well-off families.  Why have a redistribution loop consisting of only the student community?  If that makes sense, why not have wealthier farmers subsidize less wealthy ones?  And why not have higher earning servers and bartenders (e.g., those at high end restaurants and hotels)  subsidizing the employees at Mickey D's.  Since college educations are so important to America's future, subsidies for middle-class and less fortunate students shouldn't come at the expense of other students who, through no choice of their own, were born into more prosperous families.  If redistribution of income is a societal goal, it shouldn't be done in a distorted way like this. 

Bad Social Policy.  Having children and raising them well is beneficial for America as a nation.  A healthy birth rate is crucial to America's future success as a nation.  More prosperous families are better able to afford to have children and raise them well.  The extremely low birth rates in Japan and Europe have seriously impaired the economies--and futures--of those nations.  Disincentives to have and educate children shouldn't be built into the tax code.

Bad Trickle Down.  Obama's 529 proposal effectively raises the cost of college for students from more prosperous families.  It defies economic logic to believe that won't have consequences.  Some students might lose opportunities when this happens.  Let's take this hypothetical example to see how that could work.  Valedictoria, a brilliant high school student from a well-off but not rich family, might barely be able to afford the unconscionably high costs of an Ivy League school if 529 plans remain unchanged.  But she would opt for a less expensive school (the well-regarded University of Home State) with the Obama changes because she doesn't want to or can't take on the additional debt required for the Ivy League (and wants to spare her parents that burden).  She opts for the less expensive school.  Her enrollment there could bump out a student who was marginally able to gain admission to the University of Home State.  The marginal applicant then goes to a less-well regarded school, perhaps losing educational quality and opportunities he might have had at the University of Home State.  Is the nation somehow better off if this happens?

Punishes Self-Sufficiency.  The people who fund 529 plans are the kind of people who, in past generations, would have been viewed as good citizens prudently saving for the future education and improvement of their children.  They hope not to rely on handouts or loans or governments to finance their childrens' educations.  They'd like do it themselves, thank you.  Indeed, self-sufficiency was once regarded as one of the most golden of American virtues.  In a land where there were many opportunities, but also many hazards, the self-sufficient were the bedrock and pillars of a growing nation that wanted to keep growing.  To be self-sufficient, you necessarily have to build your wealth.  Why penalize self-sufficiency by taxing college savings?   We have become a nation obsessed with instant gratification, the faux celebrity status offered by social networking, easy credit for all, and bailouts for almost every need imaginable.  Will discouraging self-sufficiency improve things?