Budgeting skills are as important as what your portfolio is doing—probably, more important really, because budgeting is an everyday issue. If a person can scale back appropriately so that they can actually survive on a 4 percent withdrawal rate, they’re good. Any reasonably designed retirement portfolio will last with a 4 percent withdrawal rate. Eight percent? You’re going to have to get really lucky in your investments.

We love reading his work and he’s a very sharp, knowledgeable finance maven. But his claim about the 4 percent withdrawal rate seems a tad glib–there are many assumptions built-in to this claim that need explanation. Would you really like to bet on such a simple number for your retirement? We think not.

Intuitively, at 4% withdrawal rate,  if your return is 4%/YR and inflation is nil, then in fact you can simply withdraw the gain each year and never deplete the principal. But if, for example, inflation is 2%/YR and your return is 4%/YR, then we can show 4% withdrawal rate would last you 34 years. Not bad. But if your return is 3%/YR and inflation is 4%/YR, then this account will deplete after 22 years if withdrawals are at 4%/YR.  That’s probably a big difference. We show you how to handle all these “What Ifs”.

This post introduces the idea of the Safe Withdrawal Rate (SWR), a concept that has recently captured the attention of many investment advisors and publications. We introduce our own focus on this topic now. We announce two initiatives. First, we published a descriptive piece in Advisor Perspectives, a highly respected and popular website for investment professionals. This piece explains SWR ideas without math for the average investor. Second, we published our full research results in detail here, in our permanent pages (see Investing Tools drop-menu above, or click this link):

Investing Tools> Safe Withdrawal Rate

This page introduces our technical analysis and methodology to determinine your own, personal SWR. Our innovation: we capture each individual’s beliefs about his own future returns and inflation to find the expected value of his SWR, irrespective of market history. Ultimately, your personal beliefs about how future returns and inflation evolve is all that matters for your planning purposes.

I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.

He generally warned us that

The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate.

Do you believe the curent regime has any political courage, let alone sufficient to change course?

Today, Bloomberg News makes a very strong and creatively presented case for deflation. We now have some serious validation….but no joy.

• Extrmely low probability
• Extremely high impact
• Unimaginable a priori

Given this BSE, we have had a massive “pivot” from the health care fiasco in the making to focus on USA economy and jobs. The reason for this change is simply the one new Republican vote that can stop disastrous congressional economic policies.

OK, so how can this BSE save us? Bear with us for a bit.

We recently came upon this quote and find it quite descriptive:

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy…”

by Alexander Fraser Tytler, Scottish lawyer and writer, 1770.

Now, consider this fact:

~50% of USA workers pay $0 taxes, while the rest of the workers (the “rich”) pay all the taxes.

We think it fair to conclude:

Half the population has incentive to free-ride on the others and will cheerfully vote for increasing burdens on those “rich”.

Our country is in peril from financial catastrophes and very poor political decisions. Most pertinently, the Scott Brown BSE may enable the inevitable lunge by Democrats for more taxation and thus massive class warfare to be avoided.

“Investing and speculating are widely confused. Investing is “to allocate capital into productive activities with the anticipation of operating profit.” Speculation is “to allocate capital in order to profit from politically caused distortions in the market place.”

If you can think of any counter-examples, please let us know!

Not really. Consider this excerpt from the article:

Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie.

And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

Remember the 1970s-era price ceiling on gasoline? By causing prices at the pump to lie about the scarcity of oil, that price ceiling led Americans to waste untold hours waiting in lines to fuel their cars. Similar wastes occur when corporate assets are mispriced.

Suppose that unscrupulous management drives Acme Inc. to the verge of bankruptcy. Being unscrupulous, Acme’s managers succeed for a time in hiding its perilous financial condition from the public. During this lying time, Acme’s share price will be too high. Investors will buy Acme shares at prices that conceal the company’s imminent doom. Creditors will extend financing to Acme on terms that do not compensate those creditors for the true risks that they are unknowingly undertaking. Perhaps some of Acme’s employees will turn down good job offers at other firms in order to remain at what they are misled to believe is a financially solid Acme Inc.

Eventually, of course, those misled investors, creditors and workers will suffer financial losses. But the economy as a whole loses, too. Capital that would otherwise have been invested in firms more productive than Acme Inc. never gets to those firms. So compared with what would have happened had people not been misled by Acme’s deceitfully high share price, those better-run firms don’t enhance their efficiencies as much. They don’t expand their operations as much. They don’t create as many good jobs. Consumers don’t enjoy the increased outputs, improved product qualities and lower prices that would otherwise have resulted.

In short, overall economic efficiency is reduced.

You can read the whole article here.

Want to hear a real laugher? Despite the current disharmony in politics, there’s one policy on which all of Washington agrees. Republicans and Democrats, House and Senate, president and Congress all agree that after last fall’s financial crisis, the federal government has to regulate the financial industry more closely to protect our economy from risk of systemic financial collapse.

Here’s the joke. As boom- and bust-prone as high finance always has been and remains, the greatest systemic risk to our economy is not Wall Street. It’s the growing federal debt (and weakening dollar) being enacted by those Washington politicians — the ones who want to protect us from Wall Street.

The piece was written by Tony Blankley and you can read it here.

Our financial situation is breathtakingly unsustainable. You really need to pay attention to preserve and grow your capital.

]]> http://www.rocketcap.com/the-largest-systemic-risk-to-usa-economy-our-federal-debt/feed/ 0 http://www.rocketcap.com/only-inflation-will-save-usa-since-politicians-wont/ http://www.rocketcap.com/only-inflation-will-save-usa-since-politicians-wont/#comments Tue, 06 Oct 2009 03:18:39 +0000 admin http://www.rocketcap.com/?p=1614 We have written about the stupendous obligation Medicare owes future retirees. The amount ($90T) truly dominates all US policy, even if the current crop of politicians indulges in denial. A brief analysis reveals the situation is even worse and inflation is inevitable.

{ See our last post on Medicare dwarfing all other economic problems }

Let’s take a look at the over-arching debt and obligations owed by the US. We can get get a meaningful overview from the few numbers below.

US Assets and Obligations

The source for these numbers is the US Treasury and National Center for Policy Analysis (NCPA). They were conveniently pulled together here. The last line in the table is taken from our post above, and the source is Kent Smetters, Wharton School insurance and risk management professor.

Let’s get some perspective. According to the US Treasury, the average interest rate paid by Treasury is 3.36%/YR. Thus, the interest paid on the debt is about $400B/YR, which is a fraction of the annual revenues to the Treasury. On the other hand, if we applied the entire revenue stream to the US government to interest, we could pay down only $2.2T/.036=$65.5T . Thus, the enormity of the amounts of debt and obligation are loosely bounded.

Even more striking: if the US literally sold itself for the amount estimated by Prof. Smetters, the revenue still would be dwarfed by the outstanding obligations. The US cannot even hope for a hostile takeover to save itself!

So what will the end game from this situation be? Here are the possibilities, as summarized by Sprott, and the very likely outcomes:

• Default on Medicare promises. (Unlikely given the current debate in Washington to expand medical coverage.)
• Default on Social Security promises. (Unlikely given the increasing average age of the voting public.)
• Put forward a credible plan to balance the budget. (Unlikely given the most recent budget projections.)
• Default on outstanding debt. (Unthinkable)

The only remaining solution is to inflate the obligations and debt. QED.

Geo-politics assumes two things: first, that human beings organise themselves into units larger than families and that they have a natural loyalty to the things they were born into, the people and the places; second, that the character of a nation is determined to a great extent by geography, as is the relationship between nations. We use the term “geography” broadly. It includes the physical characteristics of a location, but it goes beyond that to look at the effects of a place on individuals and communities. These are the foundation of geopolitical forecasting.

Opinion and reputation have little to do with national power. Whether the US president is loathed or admired is of some minor immediate import, but the fundamentals of power are overarching. Nor do passing events have much to do with national power, no matter how significant they appear at that moment. The recent financial crisis mattered, but it did not change the basic geometry of international power. The concept of American decline is casually tossed about, but for America to decline, some other power must surpass it. There are no candidates.

Friedman is CEO of Stratfor, Inc., a commercial intelligence operation based in Austin, TX. His article in the New Statesman on 27 AUG 09 is fascinating and  illuminating. It briefly describes how geo-political constraints can bring about a strong partnership between Poland and USA.

We also read his book, “The Next 100 Years” which gives more details and intellectual backup for his ideas. One of the more interesting claims Friedman makes is that Turkey will become a real economic powerhouse. Now, Turkey has the #17 ranked GDP, while Poland has #18. Interesting, yes? The ETF for trading Turkey’s economy is TUR. Note how it has risen over this summer….

Scenario Planning is an important component of strategic planning for any corporate or government organization that intends to prosper and succeed over time. It applies to individuals, too. Of course, it applies to investing as well.

Wired magazine published a clear, concise description of how to do Scenario Planning for yourself. The author, Peter Schwartz, is one of the pioneers in the field. He uses an example of an aerospace engineer planning for his career in quite uncertain times.

Read the Wired Magazine Article