Ask Uncle Bill

We're Back

Whew!  Been gone a long time and apologize but it's been a bit crazy here.  Got the book done, then two days later the computer had a major heart attack, fatal, took it to a computer guy here (75 years old, the guy not the computer) who fixed it but then wouldn't connect to the internet.  My guy said the internet provider was screwed up and they said the computer was screwed up.  A classic standoff. 

I said the hell with it and went to California.  Went to see a high school buddy who is the webmaster or whatever for this site and played  a little golf and saw the Bay area which, as we all know, nobody can afford.  I mean nobody.  San Francisco is nice but ...

Then back here and the computer guy said maybe it is the computer and built a new one for a very reasonable price.  But not necessary as it didn't work. 

Said the hell with it again and planned a trip, for some reason, to Asheville, North Carolina.  Then got news that my uncle died so my wife, a good person, canceled the trip to NC and we went to Chicago for the funeral.  Don't feel too bad--my uncle was 96.  For those who want to move to Chicago--you can't afford that place either.  Plus it snows.

Back home and finally got somebody at the internet place that knew what she was doing and I'm up, at least for the time being. 

And was looking at the last post which was about the One Armed Economist which was to be continued.  Lost the article but got this from Paul

I'm curious as to your take on where the US is headed with regard to the problems Larry made mention of. I read his book and I have to admit I got suckered by the fera-tactics he employed. I've got a decent net worth and am 37 years old , but have zero invested outside US. I'm definitely conserned with the present and future debt obligations the US is looking at. Would like to hear your thoughts....

Fera-tactics?

First, good for Paul.  Invested in his 401k and saving. 

Then his concern about the US and his lack of investing outside the US.  Well, Paul, you may think you are not invested overseas but you are.  Most multinationals get at least 40% of their revenues internationally so even is you had only P&G, Pepsico, IBM, Apple, Microsoft or any other member of the S&P500 you have at least 40% exposure outside the US. 

Then the concern about the US debt obligations.  When we read about a deficit of trillions of dollars that is bad.  I guess it is bad--it is in the trillions (how much is that anyway?) and deficits, by definition, sound bad.  But are they?  Maybe, maybe not when compared to other countries.  I saw a study once and I'm sure it can be found somewhere that compares deficits to GNP and ranks the countries.  Since we, the US, have the biggest GNP and our debt is not totally out of line, our ranking is pretty reasonable.  Compared to some other countries like Japan, I seem to remember, we look great.  And we spend a huge amount on the military compared to most other countries so their situations are even worse than ours. 

So when should we worry about too much debt?  When the government starts printing money to pay for it.  This probably won't happen here.  I've seen it but it was in Brazil and Argentina and it ain't pretty.  I have a 10,000 peso note that the Argentine Treasury stamped 10 pesos.  When things got out of control, just lop off the last three digits.

The marketplace here is a little more ruthless.  If we start towards too much debt interest rates will climb accordingly, the stock market will plummet and the politicians will be voted out.  If you don't think so, just ask Jimmy Carter. 

But you should still be invested internationally.  Why?  Because their economies are more screwed up than ours.  Why is that a reason to invest there?  Because any improvement, no matter how small, will result in big stock market gains.  If a US company reports a 15% increase in earnings, the market yawns.  If a German company or a French company reported a 15% increase, the stock there would explode.  Just look at the Japanese market which has really taken off. 

So my advice for Paul it to get some 401k money in a Euro/Pacific fund.  How much?  I don't know.  I put 15% of my son's thrift plan into international so that should give a clue but I'm thinking about upping that to at least 20%.

And if anybody can find that study that compares deficits to GNP I would like to take another look.  That should tell us where we are heading.

Technical Blow Up

Sorry about no posts but computer blew last week.  In the shop.  I'm in California on a trip.  Got to go play golf.  Back next week.  I hope.

The One Armed Economist

I was going to talk about retirement calculators but came across a really bad article in Time magazine titled The Time To Plan Is Now.  Got all excited.  Oh, boy, the low down on retiring dumb, rich and happy.

Didn't happen.  Should have read the little author blurb at the bottom first--Laurence J. Kotlikoff, professor of economics at Boston Univsersity and co-author of the book The Coming Generational Storm.  (The reference to one armed economists comes from economic professors that make a point, then add "on the the other hand" causing a friend of mine to wish for a one armed economist that could make a point and stick to it.)

It appears that Professor Kotlifkoff has both arms as he makes a lot of points. 

But first he starts out as all good doomsdayers do with the bleak and cold future.  No Social Security unless the government raises income taxes 70%, payroll taxes 109%, cut Social Security and Medicare 41%, eliminate 79% of government discretionary spending. 

Gosh, Larry, that doesn't make me want to plan, it makes me want to slit my wrists.

Then he goes after the financial services industry (Fidelity, T. Rowe Price) with their retirement calculators as being "too simplistic."  Also calls them "primitive."  But Larry knows better because he and a bunch of economists (this is going to be good) invented "consumption smoothing software" that "does the targeting for you."  Like I'm going to give my money to some egghead economist from Boston.  Sorry to all you Bostonians out there but you know what I mean. 

Larry doesn't go into a lot of detail on the software (which he admits he invented) or the process.  This is code in the book business for "Buy My Book If You Want To Know."  No reason to give out the answer when you've got books to sell.  Way to go, Larry.

But finally Larry gets specific.  Kind of.  Larry says "Given the US fiscal mess, investing abroad is a good idea."  Good idea?  Ok, Larry, how much abroad?  He doesn't say but the inference is ignore the United States, the most advanced, the largest, the strongest, the most efficient economy on the planet.  Thanks Larry.

"Try to avoid inflation sensitive investments, like long term bonds."  I actually did this about three years ago and got clobbered.  Long term bonds have done great, short term bonds have gotten killed.

"Avoid waiting to withdraw your 401(k) balances until after tax rates have risen."  This took awhile to figure out.  I think he is saying that if you can, take out the 401(k) and pay the taxes now because tax rates are going up.  But you can only if you are 59 and one half years old.  Oh, you can take the money out before that but you pay taxes and a 10% penalty if you are under 59 and one half.  I don't think so, Larry.

"You may also want to purchase real estate, commodities, and collectibles that should retain their purchasing power over time."  Larry is saying that inflation is just around the corner.  If Larry really believes that I have some Beanie Babies I would love to unload.

The he recommends borrowing long term money and investing in inflation protected bonds.  Works great if inflation takes off.  A big flop otherwise.  An expensive flop as well.

I can't take anymore of Larry right now.  There is more and I'll deal with it tomorrow.  With some specifics and not the professor's generalizations.   

Free At Last, Free At Last

The box with the book stuff went UPS ground on Friday.  Inside were two hard copy manuscripts and four CD's with different styles and layouts.  I probably misunderstood the instructions but better safe than sorry.  The time consumer was the index copy where you, or should say me, went through the manuscript and had to highlight every reference to an individual.  Example--if you write Davy Crockett, it has to be highlighted as %xDavy Crockett%z so the publishers computer program can note the page and reference for inclusion in the index.  Lastly, for you budding authors, don't put five spaces for the start of a paragraph--tab over.  Only one space between sentences, not two.  One line space between paragraphs but double space the manuscript.  I think.  Like I said, probably screwed it up but it is gone.

Davy Crockett, Sam Houston, Jim Bowie back in the box.  They'll pop up again in editing.  That should be a lot of fun. 

Need some help.  Anybody know anybody at A&E or the History Channel?  For starters, this book is based on a little known incident at a Spanish fortress in Texas three weeks after the Alamo where over 300 Texans were massacred.  Not a lot of fun.  The interesting thing is that the fortress was totally restored in the mid 60s.  Take the Alamo in San Antonio and make it three times bigger.  Would be a great place to film a documentary on the event.  So if anybody knows a creative type at A&E or the History Channel, let me know.

Some financial clean-up.  Got this from Spencer on Pensions-The Not So Good Old Days.

"Your point 3 is internally inconsistent. If your pension is a function of your salary in your final years of work what you made 30 years ago does not matter.

It looks like you deliberately wrote it so as to create a false impression."

Yikes.  Take it easy, Spencer.  Not sure what 'internally inconsistent' means but let's look at point three.

3)  The pension will be a percentage of your last several years salary at the company.  Percentages vary but let's assume 60% which is pretty rich but will work.  So you are 30 and have a pension.  Fast forward to age 65 and you will get 60% of your salary--the salary you made 30 years ago.  Might pay the phone bill.

Got to give Spencer some credit.  Reads a bit rough.  The point was that pensions are a drawback to leaving one job for another.  First, to qualify for a pension you have to be there for a certain period of time.  So let's say you have ten years in and you quit for another job.  The pension is still there when you reach 65 but it will be based on your salary when you left.  If you are now 65 and you left the company with the pension 25 years ago, the pension will be based on your salary 25 years ago which probably isn't a whole lot.  If you stay at the one company until you are 65, the pension will be based on your most recent salaries but the odds of people staying some place for 25 to 30 years is remote.

If all that still doesn't make sense, here is a true life example.  Me.  A long time ago I had been at one company, one with a pension, for 9 and 1/2 years.  The vesting period was 10 years.  Leave one day early, no pension.  Got a job offer.  Went to a smart finance guy (later became CFO) and said "Should I stay or should I go?"  His advice was go assuming the new company had a decent plan of some kind.  If so, and his words exactly, the pension of the old company "has a present value of zero."  And he was right.  The new company had, still does, a company match of $2.12 to every $1 I put in.  Haven't done the numbers but my guess is that the amount in the 401(k) far exceeds the foregone pension payments on my salary of over twenty years ago.

That's the point, Spencer.  But still wondering about that 'internally inconsistent' thing.  As far as your comment "It looks like you deliberately wrote it so as to create a false impression."  Thanks for the compliment but I can usually create a false impression without being deliberate.

Next couple of days will do some retirement planning for different professions.  Will start with those confusing retirement calculators.