Saturday, March 22, 2014

Europe’s hot new export is deflation

Opinion: Falling prices will make global debt crisis explode again


LONDON (MarketWatch) — For all its economic troubles, the euro zone remains a great exporting powerhouse, making a vast range of products that sell well around the world. Germany has its top-of-the-range cars, France its wines and aircraft, and Italy its food and fashion. But now Europe is exporting something that is going to be very damaging to the global economy — deflation. 
Prices have already started to tumble across a range of European countries.
 Stuff getting cheaper — most consumers will think that is just fine. In a healthy economy, it often is. In the euro zone, however, it is not. There are two reasons.
One is that all the peripheral countries within the euro EURUSD +0.1004%  have crippling levels of debt. Deflation makes that much, much worse — the debt stays the same, but the income to service it keeps falling. The second is that all of them also have to claw back competitiveness with Germany by cutting wages. That is painful enough in normal circumstances. With deflation, you have to cut wages even more to ever have a chance of getting back into the game. Falling prices take a bad situation — and make it a lot worse.
DYI Comments:  Until Boomers have exited from the work force in numbers (2020's) but continue to consume creating the seeds of a labor shortage low inflation/deflation will occur.  Continue to expect sub par GDP growth under 2.0%,  low interest rates with some form of stimulus packages coming out of Washington.

It appears that MarketWatch is advocating that the European Central Bank print like mad men in order to create a rise in inflation.  This is only good for the bankers who will receive the bulk of the new money first which at that time will not be inflationary.  As the Euro's move through the economy the general populous will end up with inflated Euro's; they will be stuck with the bill for the bankers reckless behavior.  It is nothing more than a banker bail out.  I'm surprised that MarketWatch is being a shill for European bankers for what is needed is debt restructure by taking haircuts and stretching out of payments.  Printing one's currency until inflation occurs is not only bad economics (reducing middle class net worth) but a form of legalized fraud.

**********************************
DYI Comments:  Below are two articles regarding gold which has sold off significantly.  For those of you who need to rebalance by taking profits from this high flying stock market the mining stocks are good value as they have taken a pounding greater than the physical metal. Gold as measured by the Dow/Gold ratio is pricey at at 12.22 to 1.  However, gold's secular bull market has not completed it's journey to massive overvaluation.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 03/1/14

Active Allocation Bands 10% to 60%
45% - Cash -Short Term Bond Index - VGPMX
25% -Gold- Precious Metals & Mining - VBIRX
20% -Lt. Bonds- Long Term Bond Index - VBLTX
10% -Stocks- Equity Income Fund - VEIPX
[See Disclaimer]

Follow China’s Lead into Gold




DYI

    

Monday, March 17, 2014

The Greatest Retirement Crisis In American History

We are on the precipice of the greatest retirement crisis in the history of the world. In the decades to come, we will witness millions of elderly Americans, the Baby Boomers and others, slipping into poverty. Too frail to work, too poor to retire will become the “new normal” for many elderly Americans. 
That dire prediction, which I wrote two years ago, is already coming true. Our national demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of our elderly population is inevitable. With the average 401(k) balance for 65 year olds estimated at $25,000 by independent experts – $100,000 if you believe the retirement planning industry - the decades many elders will spend in forced or elected “retirement” will be grim. 

Retirement Account Balances by Income: Even the Highest Earners Don't Have Enough

SCEPA income chart

How much should people really be saving?
More. Far more. Many people are still assuming that they'll get 10 percent annual returns on their savings; the stock market volatility of recent years would suggest that's overly optimistic. To provide for a retirement lasting 20 years, Vanguard, a major 401(k) administrator, now recommends an annual contribution of 12 to 15 percent of income, including an employer's match. But even that is only enough if you start young: A worker who starts contributing at 35 and earns $43,000 has to sock away more than $10,000 a year, the Center for Retirement Research estimates, to maintain his or her lifestyle after retiring at 65. The Employee Benefit Research Institute says the average earner will need $900,000 upon retirement — a sum few people are on target to reach. 
 Skimming off the top
Future retirees don't have only themselves to blame for paltry retirement savings. Excessive management fees also play a role. Every day, Americans pay about $164 million in 401(k) fees to the financial industry. "There are enormous dollar amounts involved," said Frank Cirullo, a former plan consultant. "Employees are getting ripped off." Fees vary from plan to plan, and can run anywhere from 0.5 to 2 percent of assets per year. An extra 0.5 percent annual fee can cut an employee's savings by 10 percent by the time he's 65, according to Vanguard. Most 401(k) fees have long been hidden, but under new rules taking effect this summer, plan providers have to give detailed breakdowns of all the fees to employers, who in turn have to inform employees. Savers can only hope that transparency kicks off competition that will lower fees.

How to Calculate Your Retirement Number

Save 18 percent. That's the savings rate a medium-earner ($43,084 in 2010) would need if he or she starts saving at age 35 and plans to retire at age 68 (assuming a 4 percent return on investments), according to the Boston College's Center for Retirement Research. The Center issued a brief that provides savings rates need based on a variety of factors, including retirement age, rate of return, income, and age that contributions begin. (The savings rates would allow retirees to replace 80 percent of their working salaries and calculations factor in Social Security income.) The Employee Benefit Research Institute reports that on average, employees contribute just 7.5 percent of their income into their retirement accounts. 
The analysis found that the two most important factors for creating a retirement nest egg are one's savings rate and the age of retirement. "If people could work until they're 70, they would have a much higher chance of having a secure retirement. Social Security is higher if you wait until age 70, and it gives your 401(k) assets a longer chance to grow, and it reduces the number of years you have to support yourself," says Alicia Munnell, the center's director. Less important was the rate of return earned on investments.

How Much Retirement Savings Do You Need?

Simple Targets for a Retirement Nest Egg 
So how much money do you need to retire comfortably? People want a neat and tidy number or formula; unfortunately, not much in life is neat and tidy, particularly when it comes to retirement planning.
If you're thinking about retiring soon, at the very least, you should get into the ballpark with respect to how much retirement savings you'll need. The simplest way is to use some rough rules of thumb. Suppose you need a given amount of annual retirement income to supplement Social Security, pensions, and wages (if you work in your retirement years). To estimate the retirement savings needed to generate this income, multiply your required annual income by:
  • 20 if you're retiring in your mid to late 60s or later
  • 25 if you're retiring in your late 50s or early 60s
  • 33 if you want to be virtually certain you don't outlive your assets and you want to leave money to children or charities when you're gone
For instance, suppose you need to generate a pre-tax annual retirement income of $20,000, in addition to your other retirement income. You'll need retirement savings of:
  • $400,000 using the 20 multiplier
  • $500,000 using the 25 multiplier
  • $660,000 using the 33 multiplier
DYI Comments:  No doubt planning for retirement is an arduous task along with implementing your plan.  I have found that using so called professionals will run from top notch to an almost know nothing.  So it is best to become as educated as possible.  Sounds so simple yet so few will take the time or the effort.  Let's take a look at the last example of 20 times income ($20,000) or $400,000 nest egg for retirement.

Using TimeValue.com  calculator plugging in an after inflation conservative return of 4% what dollar amount per month is needed to amass $400,000.  Assuming he or she gets serious about retirement age 35 and then retires after 30 years.

$576. dollars per month seems very doable.  At $25,000 income that is 28% of their income!  Better hope for lots of pay raises.

At $50,000 income it will be 14% of their income.  A big piece of one's income but very doable.

You can play around with the numbers however I would not advise going higher than an after inflation return (and fees) of 6%.  You could very easily come up short.

Want to know if you are on track use a present value calculator?  Staying with the same example of a required nest egg of $400,000.  Suppose our 40 year now has $100,000 in retirement savings.  He needs $300,000 more to make his goal.  With 25 years to go and sticking with our after fee/inflation return of 4% his pension is underfunded by $12,535.  He will need to boost up his percentage amount of savings.  This can be calculated by going back to the monthly savings goal and adjusting his required savings.

For most folks retirement will be not be a depicted on TV as a life of leisure, travel, fine dining etc; it will be nervous at best financially and for many very scary.  The biggest fear an elderly person has is running out of money.

Our Ridiculous Approach to Retirement

Not yet convinced that failure is baked into the voluntary, self-directed, commercially run retirement plans system? Consider what would have to happen for it to work for you. First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.
DYI Continues:  Not a very happy note to end on but if you are reading this blog then you are light years ahead of the average person.

DYI
  

Sunday, March 16, 2014



Quantitative Easing and “Cash on the Sidelines”

The Federal Reserve’s policy of quantitative easing has certainly had a massive effect on the form of the IOUs held by individuals and businesses. Following the massive government deficits of recent years, one would expect that the IOUs would be held as Treasury securities. But the Fed has bought trillions of dollars of that debt, and replaced it with currency and bank reserves. Regardless, holding the IOUs in the form of cash does little to provoke individuals or businesses to spend them. What the Fed’s policy has done, however, is to encourage investors to reach for yield in speculative assets in the hope of greater returns than are available on zero-interest cash.
The effect of QE has been to make this potato very hot, encouraging investors to chase one risky security after another, so that now nearly every risky asset has been driven to such rich valuations that their probable future returns match the zero return available on cash. 
Over the short-term, driving risky assets to valuations associated with zero future returns may be an equilibrium in a world where cash presents the same dismal opportunity. But this is also a highly unstable equilibrium. A broad range of historically reliable valuation metrics now imply zero or negative expected nominal total returns on the S&P 500 – with the additional likelihood of deep intervening losses – over every horizon shorter than about 7 years. Over a full decade, we estimate 10-year nominal total returns for the S&P 500 averaging just 2.4% annually. 
DYI Comments:  There is no doubt this is an overblown, overvalued, stock market.  For those who are so inclined a modest short position of 5% to 10% is warranted.  You may want to look into the Prudent Bear Fund or Comstock Capital Value Fund.

DYI  

Wednesday, March 12, 2014

Yellenomics: The Folly of Free Money

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 03/1/14

Active Allocation Bands 10% to 60%
45% - Cash -Short Term Bond Index - VGPMX
25% -Gold- Precious Metals & Mining - VBIRX
20% -Lt. Bonds- Long Term Bond Index - VBLTX
10% -Stocks- Equity Income Fund - VEIPX

The State Pension Time Bomb

Poor accounting rules and flagrant irresponsibility have sped up the states’ day of reckoning.


Nearly every state offers defined-benefit pension plans for public employees. Financed through a mix of employee and employer contributions along with the investment returns on pension funds, a defined-benefit plan represents a contractual obligation to dole out a set amount in annual payments for as long as the recipient lives, regardless of whether there are sufficient assets in the fund at the time of the employee’s retirement. 
One would think this obligation to pay no matter what would have led states to invest conservatively and plan ahead. Instead, they have been following accounting rules that pretty much guarantee the funds will be unsustainable. 
Pension funds need to assume a certain rate of return on their current assets in order to gauge whether or not the assets held today will be enough to pay future benefits. Obviously, the assumed interest rate or rate of return has a major impact on whether a pension plan is adequately funded. Most pension plans would rather play it conservatively and assume a lower rate of return, so that they ensure that the assets they have today will be enough to cover tomorrow’s promised benefits. But the states would rather put less money up front today, so they’re pinning all their hopes of being able to pay benefits tomorrow on an 8.5 percent annual growth rate. If that 8.5 percent growth rate doesn’t come to fruition, either tomorrow’s beneficiaries will see a cut in their benefits or taxpayers will be asked to pick up the tab. It would be much more prudent to assume an adequate risk-adjusted rate of return closer to the rate offered on 15-year Treasury bonds—3.5 percent, say—and fund their plan accordingly. 
How big are the shortfalls? State officials estimated their plans’ unfunded liabilities at $452 billion, with total liabilities of $2.8 trillion. But when economist Andrew Biggs of the American Enterprise Institute calculated the figure with the methods used by private-sector pensions, he found that total liabilities amount to over $5 trillion, with the unfunded liability at $3 trillion.
DYI Comments:  The States will be grappling with this problem for years to come but it will come to a head as Boomers begin to retire in large numbers during the 2020's.  Will the Fed's have to come in with a bail out plan?  Most likely a deal will be made with modest pension payment cuts, States adding in additional money, with the Fed's providing ultra low interest rate loan to the States to fund the remainder.
So far most States are moving to a 401k type of pension for new State employees.  If the Fed's step in, which is highly likely, the deal will accelerate the process of 401k's for new employees along with the remaining State workers as well.  They will receive one time deposit into their 401k  from the State (Fed bail out) equivalent to their defined pension required at that time.  Those who are already retired in the old system would remain and would self dissolve as the plan participants pass away.
In the mean time expect to see more and more headlines (articles) as the one's below.

Pension reform cowardice: James Varney

Investment research firm Morningstar, Inc., conducted a study analyzing state pension data, finding 21 states' retirement systems to not be fiscally sound. 
The report employed two primary measures to assess pension funds. The funded ratios compare a system's total assets to its liabilities. The second measure, unfunded actuarial accrued liability per capita, pegs the amount each state resident would need to pay to fully fund the system. 
Twenty-one states' aggregate funded ratios fell below 70 percent, which Morningstar considers the threshold for fiscally-sound funds. When measuring liability per capita, Alaska, Illinois and Hawaii recorded the highest amounts.

Coming Pension Meltdown: The 10 Most Troubled City Systems
Here are the top 10 cities with the lowest percentage of funding for pension liabilities
CityTotal Liability% Funded
Charleston, W. Va.$270 million24
Omaha, Neb.$1.43 billion43
Portland, Ore.$5.46 billion50
Chicago, Ill.24.97 billion52
Little Rock, Ark.$498 million59
Wilmington, Del.$364 million59
Boston, Mass.$2.54 billion60
Atlanta, Ga.$3.17 billion60
Manchester, N.H.$436 million60
New Orleans, La.$1.99 billion61

DYI

 

Tuesday, March 11, 2014

Markets are headed higher but stick with defensive stocks: Gary Shilling

Gary Shilling, president of A. Gary Shilling and Co., says individuals should stick with a "risk-on" investing strategy because stocks are still a buy. But he warns that are risks that could drag down financial markets and the global economy. 
Shilling still likes Treasuries (he has been bullish on Treasuries for decades) even though he believes deflation is lurking. He has broadened his portfolio to include defense stocks as a hedge against this deflaton risk. 
“You’ve got stocks that are really not supported by fundamentals and...with the uncertainty over Obamacare, with concern about minimum wage and income polarization...I play it defensively," he says. 
For Shilling, playing it defensively means investing in healthcare, utilities and consumer staples.
 DYI Comments: The Aggressive Portfolio's 10% holding is their Equity Income Fund that has a current yield of 2.73% which is almost 100 basis points higher than the S&P 500.  For as long as the market stays "risk on" this is reasonable place to be.  Below is their top 10 holdings and as you can see they are decent dividend payers.

Month-end ten largest holdings
(30.3% of total net assets) as of 01/31/2014 

1 Johnson & Johnson
2 Wells Fargo & Co.
3 Microsoft Corp.
4 Exxon Mobil Corp.
5 Chevron Corp.
6 Merck & Co. Inc.
7 JPMorgan Chase & Co.
8 General Electric Co.
9 Verizon Communications Inc.
10 United Technologies Corp.
The Long Term Bond Index has 35% in Treasury Debt.  During any market smash there will be a flight to quality and Treasuries will rise in value.  Here is what the rest of portfolio looks like.

Portfolio composition

Distribution by credit quality† (% of fund)
 as of 01/31/2014
 Long-Term Bond Index
U.S. Government35.6%
Aaa2.0%
Aa7.1%
A25.3%
Baa30.0%
< Baa0.0%
Total100.0%
All and all I'm in A. Gary Shilling camp with higher yielding stocks and a bevy of treasuries.  The Great Wait continues.

DYI 

Monday, March 10, 2014

Five years from U.S. stock market's low, it's joy versus worry

On this day in 2009, the S&P 500 hit its nadir, closing at 676.53. That low marked a climax of a 16-month selloff that took more than half the S&P 500's value. 
Since that day, the Standard & Poor's 500 index has gained more than 177 percent, the best rolling five-year performance since the June 1996 to June 2000 period that covers the dot-com bubble.

Building boom signals stock market bust

Commentary: Do skyscrapers foreshadow market troubles?


According to a study recently published in the Journal of Financial Research, not long after construction begins on a number of large buildings or they are actually finished, the stock market goes into the dumpster.
 In 1929, the Chrysler Building was under construction, while work was about to begin on the Empire State Building. This was an era that Real Estate Weekly considers to be “the greatest skyscraper boom in history.”
 In 1993, construction began on the world’s tallest building, the Petronas Towers located in Kuala Lampur, Malaysia. Before its doors were opened, this super skyscraper was engulfed in the Asian Financial Crisis that sent stocks sinking around the world. 
Fourteen years later, in 2007, construction began on what was slated to be the tallest building in the Western Hemisphere, the Chicago Spire. Like in the past, this was just one of the many towers being erected at that time. Indeed, the total square footage underway in 2007 was more than twice the average of the previous 20 years, writes Prof. Loffler.
 That brings us to the present. In the words of Real Estate Weekly, today there is “a flurry of towers under construction or planned.” By Loffler’s theory, the stock market could be heading for a header.
DYI Comments:  The new World Trade Center is now open with their tenants moving in.  Time Magazine has a fantastic article and pictures of the center.  The world over 2013 was a great year for tall buildings.

2013 Was A Remarkable Year For Skyscrapers


In terms of sheer height, however, it should come as no surprise that Dubai was, once again, a dominant force. The tallest building completed in 2013 was the JW Marriott Marquis Hotel Dubai Tower 2, topping out at 355 meters, or 1,165 feet, tall. But the JW Marriott wasn't the only super-tall building to debut in the glitzy Persian Gulf country last year. For the second year in a row, three of the top five tallest buildings to be completed were in the United Arab Emirates. 
Despite all of the media attention surrounding One World Trade Center and its spire, only one building over 650 feet was completed in the United States in 2013, New York's 1717 Broadway. Europe, on the other hand, debuted two of the year's 10 tallest buildings for the first time since 1953, including the controversial Shard building in London. 
DYI Comments:  Will the pin that burst this stock market come for overseas?  If this idea of skyscrapers as a sell indicator holds true then an overseas event is most likely the case.  Since very little building is going on in America.  Never the less the stock market is poised for poor returns going forward.

DYI 

 

Complacency is the New Speculation....S&P 500 Dividend Yield 1.86%...Shiller PE10 is 25.95...With Rising Interest Rates and an Economy that is Long in the Tooth...All Point to an Over Blown Stock Market....



John P. Hussman, Ph.D.
The depressed level of short-term interest rates does not change the arithmetic here. It simply offers investors additional discomfort – the choice of accepting risk in equities that are already intolerably overvalued, or to instead accept the certain prospect of near-zero near-term returns. For our part, we expect dramatically better investment opportunities to emerge over the completion of the present market cycle. It is optimism, not pessimism, about those future opportunities that leads us to avoid reaching for low-return, high-risk equity exposure here. Investors should only expect meaningful total returns to the extent that they wish to speculate that long-term prospective returns will be driven even lower than 2.2% annually (on a 10-year horizon).
It is the series of extreme instances over the past year that give investors the hope and delusion that historically reckless market conditions will lead only to further gains and greater highs. This is a mistake born of complacency in the face of a nearly uninterrupted, Fed-enabled 5-year market advance, and is the same mistake that was made in 2000 and again in 2007. By the time the present market cycle is completed, we expect the S&P 500 to be at least 40% lower than present levels. Only the reliance on historically unreliable valuation metrics, and what Galbraith called the “extreme brevity of financial memory” makes that assertion seem the least bit controversial.
DYI Comments:  John Hussman's article is hard hitting for almost every paragraph; well worth your time to read in its entirety.

As compared to DYI John is the optimist for my forecast is 45% to 60% decline.  Be as that may be for those who desire a bit of short hand cutting this market in half (50% decline) I would have no disagreement.

If stocks drop by more than 50% this would effectively more than double the current dividend to a 4.0% yield.  Future estimated 10 year returns would be enhanced significantly to the 9.4% return level.  Surprisingly despite a drop off of this magnitude stocks as measured by dividend yield would be at or slightly below its median yield of 4.36%.


Estimated 10yr return on Stocks

Using 5.4% as the historical growth rate of dividends and 4.0% as the ending yield.

Starting Yield*---------return**
1.0%-----------------------(-5.7%)
1.5%-----------------------(-1.7%) 
2.0%---------------1.3% You are Here
2.5%------------------------3.8%

3.0%------------------------5.9%
3.5%------------------------7.8%
4.0%---------------9.4% 
4.5%-----------------------10.9%

5.0%-----------------------12.3%
5.5%-----------------------13.6%
6.0%-----------------------14.8%
6.5%-----------------------15.9%

7.0%-----------------------17.0%
7.5%-----------------------18.0%
8.0%-----------------------19.0%

*Starting dividend yield of the S&P500-**10yr estimated average annual rate of return.

Keep your powder dry better values lie ahead for the patient value driven investor.  For the speculators this wait will seem like eternity for the real long term investor only a blink of an eye.


AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 03/1/14

Active Allocation Bands 10% to 60%
45% - Cash -Short Term Bond Index - VGPMX
25% -Gold- Precious Metals & Mining - VBIRX
20% -Lt. Bonds- Long Term Bond Index - VBLTX
10% -Stocks- Equity Income Fund - VEIPX
[See Disclaimer]

 
DYI
 

Sunday, March 9, 2014

China February exports tumble unexpectedly


(Reuters) - China's exports unexpectedly tumbled in February, swinging the trade balance into deficit and adding to fears of a slowdown in the world's second-largest economy despite the Lunar New Year holidays being blamed for the slide.
DYI Comments:  One month does not make a trend but for the China juggernaut to go negative as opposed to a simple slowdown does raise eyebrows.  To say the least DYI will be watching the China situation closely.  It is well known their massive private sector debt is a bubble ready to burst. The exact timing will be impossible to predict.  The malinvestment is impossible to hide with all of the vacant cities, excess manufacturing, roads, bridges etc.  The seeds are there for a 1930's style depression lasting 10 or more years.

DYI


Saturday, March 8, 2014


They and all of their friends are on Facebook. They don't think twice about posting a selfie on Instagram. They support marijuana legalization, and they have trust issues. 
You probably already recognize some, if not all, of those characteristics as hallmarks of the average millennial — the generation that is now between 18 to 33 years of age. 
But how about this: the typical millennial does not have a college degree, and if they do, they also have about $27,000 in student loan debt. They don't think Social Security will be around for them, but they are nevertheless optimistic about their financial future.
One of the most striking findings in the report was the overwhelming optimism of Millennials about their financial prospects. 
Even though seven in 10 think people their age face more economic challenges than their parents' generation, 86 percent say they either make enough money for their current needs or think they will in the future.
DYI Comments:  As Boomer's enter Elderhood, Generation X'er's enter Midlife, the Millennial's have now all left behind their youth and have entered into Adulthood.  This 80 million strong generation is going to be a huge footprint that will be felt for decades to come.  Investors and business people who followed the Boomers to their financial delight so it will be with the Millennials. They will be known for pro government and pro labor for the majority of this group.  The only thing holding them back in the short term is the student loan debt as this will hamper household formation for a few more years.  When Boomers begin leaving the work force in serious numbers a labor shortage will occur.  DYI forecasts this to begin in the early 2020's and last for a decade or more ending as the Boomers pass on in numbers.

Until the 2020's arrive low inflation/deflation will continue to reign supreme along with sub par economic growth with low interest rates.

DYI