The Meridian

The Meridian Has Moved

2011-05-24T13:51:00.000-07:00

The Meridian Blog is still around, it just moved from Blogger to WordPress. It can be found Here.

Movie Review: Inside Job

2011-03-24T09:30:00.000-07:00

I finally was able to see the critically acclaimed documentary, Inside Job. The documentary was written, directed and produced by Charles Ferguson and recently won an Academy Award.

I had heard good reviews, but also heard that is was heavily slanted toward a view that Republicans were essentially the main cause of the crisis. I don't believe this too be accurate, the Democrats share just as much blame. In fact, the two parties worked very hard to be non-partisan in one area - Wall Street.

Inside Job does a great job of boiling down many of the root causes of the financial crisis (though not all of them). It was entertaining, educational and rightfully outrageous. Anger is the primary emotion I felt while watching. The one thing Inside Job does NOT leave you with is Hope. As I've stated many times over the past few years, Wall Street has become even more concentrated and powerful than ever, the exact opposite effect the crisis should have had.

We have a crisis in America, and it is only growing larger. That crisis is the control Wall Street has over our nation and its people. This is not a left wing or right wing observation, it's the reality. Until the banking industry is brought to heel, our nation will continue to be held hostage by Too Big Too Fail banksters.

Inside Job demonstrates the rise of the powerful financial industry and how deregulation fueled the fire. But it wasn't just Wall Street, Government failed the people and continues to do so. Both parties share responsibility, yet neither are willing to accept.

Few have been prosecuted, there is no Pecora Commission and financial reform was essentially defeated by the big banks.

I give Inside Job top ratings, its a great documentary that everyone should watch. You don't have to agree with Ferguson's politics to be outraged by what you will see.

While the movie offers little hope of change (how's that for irony), the fact that a movie like this was made at all and has gained so much fame is a positive sign.

Inside Job is available to rent now, I encourage you to watch.

Scott Dauenhauer, CFP, MSFP, AIF

Chart Store: Market Cap as a % of Nominal GDP

2011-03-23T12:16:00.000-07:00

Prior to 1995 this measure of Stock Market Valuation had never been above 88% (this was right before the Crash of 1929). Since 1995 it has been over 100% the entire time with two brief movements below. The average is 62% - today it sits at about 125%, not an all time high (hit 180% in March of 2000), but still a number that should strike caution. Future returns from these levels do not look high.

Naked Capitalism: Regulatory Capture Is Alive & Well (

2011-03-22T17:10:00.000-07:00

So yesterday I skewered Republicans for their lack of support of a Fiduciary Standard among all financial advice providers. Today I give equal time to their friends across the aisle, the Democrats.

Yves Smith over at Naked Capitalism Blog has a great article on Regulatory Capture:

Sleaze Watch: NY Fed Official Responsible for AIG Loans Joins AIG As AIG Pushes Sweetheart Repurchase to NY Fed

You can read the post, but the two doozies are:

Masaccio at FireDogLake was suitably outraged at this spectacle of a regulator getting a job with the biggest lobbying group in the industry he regulates…..and staying in his current oversight role:

The Washington Post reports that David H. Stevens will be taking over as head of the Mortgage Bankers Association. Stevens currently serves as Assistant Secretary for Housing in the Department of Housing and Urban Development, and as the Commissioner of the Federal Housing Administration. He has a conflict of interest so deep that he should be fired at once…

Allowing Stevens to stay on the job, and saying that it comports with ethics rules, is proof that the term “ethics” has lost all meaning. He is working on a settlement that in some news stories calls for a penalty of $20 billion, which only banksters think bears any relationship to the horrifying damage caused by these sharks, through jacked-up fees, fraudulent court filings, dual-track loan modifications and other sleazy tricks played on suffering homeowners. He comes from the industry, and is heading to the group that put out slimy reports condemning any steps that might aid homeowners, including judicial modification of mortgages in bankruptcy.

Why is he not immediately fired for cause? President Obama can’t even use his standard excuse, that we should look forward, not at the past. I’m looking forward, and I see a totally compromised person negotiating the future of millions of Americans.

So, a current official charged with heading the FHA (the main provider of all mortgages in the US right now) is leaving to head the Mortgage Bankers Association (an organization that has worked against consumers and modifications). This is a clear case of Regulatory Capture and a major ethics violation (or at least it should be).

As if that wasn't bad enough...more NY FED/AIG Corruption:

Aside from the hidden bailout, is that the NY Fed official who was responsible for overseeing Fed loans to TARP recipients, including the AIG loan, Brian Peters, joined AIG in late January. See this letter to the Committee on Oversight and Government Reform, based on subpoenaed information from the Fed, p. 8, the e-mail cited in footnote 31, for a sighting of Peters in action. Given the extensive interactions between the Fed and Treasury on the fight with Ken Lewis over his threat to walk from the Merrill purchase (the two were working in tandem here, and pretty much on all the major TARP recipients who got Fed loans), and the continued close cooperation between the Treasury and the NY Fed, it isn’t hard to imagine that Peters has good knowledge of and relationships with the key actors at the Treasury as well as at the NY Fed.

There is more to this Peters story, click the link to read it, but it is directly related to the current bid by AIG to buy assets from Maiden Lane II (owned by the Federal Reserve....The Taxpayers).

Obama promised change - so far all we've gotten is a further deepening of the financial services industry into government. This cannot end well. I guess I'd be more encouraged if there were an alternative, but the financial services industry owns the Republican party as well.

If this post seems to political - take out all references to Dem and Repubs and focus on the issue at hand - Regulatory Capture, the process where the industry being regulated hires those who have power over them and then uses those people to push their own agenda.

If you don't believe this is relevant I suggest you watch the documentary Inside Job, by Charles Ferguson.

Scott Dauenhauer CFP, MSFP, AIF

Does The Fed Even Understand Monetary Policy? Evidently Not

2011-03-22T11:22:00.000-07:00

The United States is on a fiscal path towards insolvency and policymakers are at a "tipping point," a Federal Reserve official said on Tuesday.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when," Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.

Setting aside the massive budget deficits and whether or not fiscal austerity is a good/bad idea - its frightening that someone so powerful doesn't appear to understand our monetary system.

The United States is the sovereign monopoly issuer of its own non-convertible currency, it can not become "insolvent". The US has the ability to spend by crediting accounts (unlike states or european nations on the Euro) and thus is never fiscally restrained. This doesn't mean the US can spend at will with no consequences.

Is it possible Fisher does not know this?

Scott Dauenhauer CFP, MSFP, AIF

Hussman: Stock Not Always A Good Inflation Hedge

2011-03-21T22:00:00.000-07:00

Hussman:

A paragraph from one of his recent missives:

Indeed, outside of the bubble period since the late 1990's, the only historical instance of Shiller P/Es materially above 24 was between August and early-October of 1929. The closest we got to 24 in post-war data was in mid-1965. While prices went on to achieve moderately higher levels (lagging earnings growth, so that the Shiller multiple fell), the mid-1965 valuation peak is widely viewed as the starting point for a 17-year "secular" bear market during which the S&P 500 achieved total returns of less than 5% annually through 1982, despite severe inflation. That's a good reminder that stocks are not a very good inflation hedge during periods when inflation is rising, particularly when stock valuations are already elevated and are priced to achieve poor returns. Stocks only "benefit" from inflation during hyperinflations and during sustained and anticipated inflations. In other cases, the eventual adjustments in economic activity and valuations overwhelm the "beneficial" effect of inflation on earnings.

This paragraph is saying two things - Stocks are valued quite high relative to the past and stocks don't always provide a hedge against inflation.

This is contrary to conventional wisdom.

Scott Dauenhauer CFP, MSFP, AIF

House Republicans to SEC: Halt fiduciary duty rulemaking - Investment News

2011-03-21T21:02:00.000-07:00

House Republicans to SEC: Halt fiduciary duty rulemaking - Investment News

At least the Republican party is consistent. They have consistently sided with the financial services industry over the protection of consumers. During the Bush years when they had full control of Congress they catered to the whims of the financial and insurance industry and worked to allow conflicted advice to consumers. The Democrats haven't been much better in terms of catering to the financial services industry, but at least they are right on the issue of a universal fiduciary standard. House Republicans are not working to undermine the movement to ensure that ALL consumers have their interests put first.

I believe that all advisors should be held to the same standard, one that places the interests of their clients above their own (a fiduciary standard) - this doesn't actually sound controversial. Would you want your mother to work with someone who will work in her best interest or someone who is not required to work in her best interest? Evidently, the Republican party wants the latter. Very disappointing.

Scott Dauenhauer CFP. MSFP, AIF

TARP is NOT Profitable

2011-03-18T09:27:00.000-07:00

Barry Ritholz on his Big Picture Blog (www.ritzholz.com) has some great stuff on TARP and the GSE's and how far in the red the programs are. This is despite news reports that these programs are successful.

If you don't read his blog, its a good one.

Scott Dauenhauer CFP, MSFP, AIF

Sources:

Behind Administration Spin: Bailout Still $123 Billion in the Red
Paul Kiel
ProPublica, March 17, 2011, 10:27 a.m
http://www.propublica.org/article/behind-administration-spin-bailout-still-123-billion-in-the-red

The State of the Bailout
http://projects.propublica.org/bailout/main/summary

Fed Allows Increased Dividends - Continues War on Main Street

2011-03-18T08:56:00.000-07:00

The Fed has decided to allow troubled banks to loot the taxpayers by allowing some to pay dividends and/or share buybacks.

This might sound like a boon and an encouraging sign of economic revitalization, but in reality it is a decision built upon a flawed capital model that ignores massive losses and potential losses sitting on the banks books.

Taxpayers are still on the hook for any bank failures in the future, not share or bondholders of these institutions. So while the banks pay out their large bonuses, big dividends and continue to burn cash that should be used to fix the problems they created, the nation remains mired in an economic drought with no end in sight.

Scott Dauenhauer, CFP, MSFP, AIF

Strategist Price Targets for S &P 500 - Year End

2011-03-10T13:32:00.000-08:00

Groupthink is alive and well on Wall Street:

GMO believes fair value to be around 900.

Scott Dauenhauer CFP, MSFP, AIF

Alt. Energy Update: Green Crude

2011-03-10T11:55:00.000-08:00

OK, So these little Algae won't power the world, but they are more efficient than ethanol and switchgrass!

So far, the 30 or 40 mostly small companies now developing algae fuels in the U.S. have produced thousands of barrels of green crude, a far cry from the 7 billion barrels of oil consumed each year in America. Producers also face the daunting task of scaling from demonstration projects to what amounts to a vast new infrastructure for growing and maintaining algae in either fermentation tanks or in open ponds, and in providing feedstock for the plants, which grow best when fed sugars and other carbons in the form of plant waste or CO-2.

Green crude from algae is not a new idea. The federal government first started researching algae and other plants as alternative fuels at the National Renewable Energy Laboratory (NREL) in Golden, Colorado, after the first oil shocks in the 1970s. The program, however, was shut down in 1996 when oil dropped down below $40 a barrel.

Scott Dauenhauer CFP, MSFP, AIF

More MERS Trouble...Now in Oregon

2011-03-07T16:38:00.000-08:00

Graphic Removed.

The linked to article above is a compilation of a few different articles, but explains in a very succinct fashion what MERS is and why this issue is so important - literally the solvency of our nations banking system is based on the legality of MERS.

I apologize if the above graphic doesn't fit within the window.

Scott Dauenhauer, CFP, MSFP, AIF

From Birinyi to Schiller to Gundlach - What Guru To Follow Makes a Difference

2011-02-21T07:59:00.000-08:00

Robert Shiller sees a 13% total return for stocks.....for the decade, so the S & P ending around 1430.

Laszlo Birinyi sees the S & P at 2854 by.......2013.

Jeffrey Gundlach in Barrons this weekend says the S & P 500 is going to 500....this year.

So which is it? One guru (who has consistently been right, Shiller) see the S & P 500 at half what another sees it at, another sees the S & P 500 down 840 points THIS YEAR or next. Only one of these guys can be right (technically two as the market could go to 500 then 1430 or 2854....or vice versa).

What guru you follow makes a big difference in what returns you earn or how much money you lose. Predicting the future is not so simple, I'm throwing in more with Shiller, but admit anything can happen in this market (up or down).

Scott Dauenhauer CFP, MSFP, AIF

Is the United States Just Like Greece? A Guru Gets It Wrong

2011-02-18T07:08:00.000-08:00

Many years ago I read Fooled By Randomness, by Nassim Taleb - it was an instant classic in my library. I was excited when his next book Black Swan came out, it too was amazing. Both books seemed to predict in some way the financial crisis that eventually unfolded in 2008. If you haven't read either of these books it is my suggestion you pick them up and read and re-read them.

Needless to say, I'm a fan of Taleb. Yet Taleb has made some comments recently that can only be explained as mainstream and wrong - two things that he is rarely accused of.

At a forum in which he spoke recently he commented that "The United States is just like Greece, only without the International Monetary Fund (IMF) to enforce discipline". He goes on to say "The only happy thing that can happen in the U.S. is a bond riot".

Pretty much every mainstream economist, political commentator and politician (from left, right and center) has at some point expressed a similar refrain about the U.S. being Greece.

The reference is to the massive debt problem facing Greece and the dramatic events that led up to massive government (read Euro/IMF) intervention last year.

With the United States National Debt approaching $14 trillion, the comparison would seem to make sense on some level - but the fact is that it is wrong. The U.S. is not Greece and is not like Greece.

The big flaw in Taleb's arguement is a misunderstanding of the monetary system under which each country operates. Greece is a member of the European Union and borrows in Euro's, a currency in which it has no control and little influence. Greece must acquire Euro's by selling something in order to pay their debts, they can't print the Euro. The United States on the other hand issues debt in their own non-convertible currency, they are the monopoly issuer and can print dollars. The U.S. cannot default (ok, they could, but it would be a political decision, not a revenue constraint) as they owe dollars of which they control the printing press.

A more apt, but still not a good comparison would be California and Greece. California spends and borrows in dollars, the state must receive tax revenue or issue debt in dollars. California cannot print dollars, thus they are revenue constrained and could default (note: States cannot currently go bankrupt, nor do I believe that any states will....at this point).

The common belief is that the Federal Reserve is "printing money" via their Quantitative Easing programs, this is not true - they are changing the duration of government liabilities - essentially engaging in Open Market Operations. It is the Federal Government (Both Houses of Congress and the Presidency) that actually print money (out of thin air) when they deficit spend.

When one of the greatest thinkers in the financial markets doesn't understand the global monetary systems, it makes one wonder what hope there is for our financial systems.

Please note I am not saying Taleb is not smart, I think he is a genius, but he has this wrong - as do most mainstream economists.

Scott Dauenhauer CFP, MSFP, AIF

Is MERS dying? NY Judge declares MERS Biz model "Not supported by law"

2011-02-15T07:24:00.000-08:00

Why this story is not frontpage news I'll never know, but this ruling could be another nail in the coffin for the Mortgage recordkeeping system known as MERS. Given what is at stake there are a lot of panicked executives in MERS land and they likely work for the Too Big Too Fail banks.

The market had zero reaction because it knows that the financial system is allowed to carry worthless mortgages at next to 100% of value on their balance sheets, so no real risk to capital exists (this is there thinking).

Another step in the MERS journey is complete, what will be next?

Scott Dauenhauer CFP, MSFP, AIF

Humor Break: Bud Light Clothing Drive

2011-02-09T10:06:00.000-08:00

One of the funniest commercials I think I've seen.

Lack of Imagination or Too Much Imagination?

2011-02-07T08:54:00.001-08:00

The continued full steam ahead bull market in stocks has caught many (including myself) by surprise. Its not that I didn't believe this meteoric rise couldn't happen, just that I thought perhaps the market had learned something from a decade of multiple 50% crashes and bubbles.

At these market levels stocks are priced for perfection and any hiccup could present a large downside. Currently, the market pendulum has swung to an "Imagination" of future, ongoing prosperity for all and has forgotten what happen just a few short year ago. But is this a good thing? For those who invest in stocks I think you must have a different "Imagination" - what can go wrong and what are the downside consequences.

There are so many things that can go wrong and there is no or little Margin of Safety left in the market. Just a few things:

Terrorist attack
Pandemic
Superstorms
Oil disruption
Internet attack that cripples communications as we currently know them
American Austerity
Steve Jobs take another leave of absence (wait, that happened! Please come back Steve, get better).

My point is not that you shouldn't invest when bad things can happen - bad things can and DO always happen (too use a way overused term - Black Swans). The threat of bad and unexpected events shouldn't keep one from investing in stocks, however when you do decide to invest there needs to be a margin built into your purchase that accounts for the possibility of bad things happening (an expectation if you will). That way, you know you still have value in your purchase when/if things do go bad and you won't have to panic sell (thus feeding the beast).

For example, when Reagan took office unemployment was sky high, inflation was rampant, the economy was just in big trouble. Yet stocks were trading at only 8 times prior cyclically-adjusted earning. The market suffered from a lack of "Imagination" as to what could go right. But those people who invested in stocks had a huge margin of safety - things didn't have to go very right for them to receive a reasonable return on stocks. This is not the case today - in an economy that is much more difficult than 1980/81 we have stocks bid up to levels that were only seen prior to major stock market tops. The stock market suffers from a lack of imagination of what could go wrong and has priced in perfection and almost zero Margin of Safety.

History has taught us that these exuberant times can continue and for much longer than any of us ever imagine (NASDAQ, Housing, etc).

There is little margin for error, very little imagination and we should be cautious at this juncture.

Scott Dauenhauer CFP, MSFP, AIF

Age of Deleveraging in Pictures

2011-02-03T11:08:00.000-08:00

Age of Deleveraging

Hussman: "We've laid a lovely turf over a toxic waste dump"

2011-01-25T09:46:00.000-08:00

In John Hussman's latest commentary he explains the constraints of Monetary Policy, but he also takes a shot at how the United States has handled our financial crisis:

As for the U.S. financial system - particularly major banks - I am continually perplexed by the juxtaposition of tens of millions of underwater mortgages and millions of delinquent and unforeclosed homes, coupled with a set of FASB accounting rules (revised at the height of the recent crisis) that allows these debts to be carried at face value upon the discretion of the banks that report the data. I'll say one thing - it should take less than two seconds of thought to recognize that allowing dividends, bonuses, and other withdrawals of capital - without the requirement that banks mark their assets to market - is quite literally how Ponzi schemes function. We've laid a lovely turf lawn over a toxic waste dump, and are all too willing to assume that the underlying issues have been solved. The FASB and the Fed have turned the U.S. banking system into the Love Canal.

John's observation that we shouldn't allow banks to pass out money to shareholders and management while an enormous amount of toxic assets remain on the balance sheet is important, we will soon see how far regulatory capture has gone.

Scott Dauenhauer CFP, MSFP, AIF

Mass Supreme Court to Consider Whether Buyers Out of Faulty Foreclosures Actually Own Property

2011-01-21T07:19:00.000-08:00

Mass Supreme Court to Consider Whether Buyers Out of Faulty Foreclosures Actually Own Property

So you bought a home in foreclosure, you own it - right? Not so fast. The Mass Supreme court may make things very uncomfortable for the banks. This is a case that everyone who owns bank stocks (or any stocks) should be following closely.

Scott Dauenhauer

PragCap: Putting the Muni Bond Panic Into Perspective

2011-01-19T08:29:00.000-08:00

Cullen Roche has a well timed, short blog post on the latest Meredith Whitney "call" on the muni markets - the smart money isn't buying it.

First of all, if the USA is willing to save banks and let states fail then the purpose of this country has failed and we should just fold up shop and thank everyone for being a citizen for all these years. Second, we have the mechanism in place to avoid a Euro style crisis. Unlike the Europeans, who lack the proper tools to deal with their own crisis, the USA is fully united and established a central treasury long ago. The funding mechanism for crises is ready to roll should it ever be needed. If ever there was a need for a “Geithner Put” I have little doubt that this administration would utilize it. After all, no one fails in this “capitalist” world anymore. Third, we’re far more likely to see increased austerity measures (such as the tax increases in Illinois) as opposed to defaults. The credit crisis is still causing ripples across the world, but one thing it is not doing is turning the USA into Europe.

The entire piece can be read in three minutes and is worth a read if you own muni's or are looking to.

Scott

Gary Schilling On 2011

2011-01-14T16:37:00.000-08:00

Dongguan Ghost Mall Haunts China's Property Boom

2011-01-12T13:37:00.000-08:00

Goldman Sachs: S & P 500 Will be up 18% in 2011 - Should You Trust Them?

2011-01-12T12:26:00.000-08:00

Can you trust Goldman Sachs? The answer has to be no. But can they forecast? Well, David Kostin is out with his latest forecast and says the S & P 500 will rally 18% in 2011. It very well may, or it may not - but how has Goldman done in the recent past and did they predict the stock market crash (I'm not saying I did, I don't make short term predictions)? Well, below is from wikipedia, it is a short synopsis of their old Chief Prognosticator Abby Joseph Cohen:

A Little Goldman History - Abby Joseph Cohen

She is famous for predicting the bull market of the 1990s early in the decade. However, she failed to predict the dramatic stock market decline of the early 2000s and developed a reputation as a so-called "perma-bull" and was ridiculed for her continuous bullish predictions after March 2000 as market indices fell. Her reputation was further damaged when she failed to foresee the great crash of 2008.

On a CNBC appearance in March 2008, she predicted S&P 500 at 1550 by end 2008.

In an August 10, 2007 appearance on CNBC Abby Joseph Cohen predicted the S&P 500 would rally to 1,600 by December.

In December 2007 Abby Joseph Cohen predicted the S&P 500 index would reach 1,675 in 2008. The S&P 500 traded as low as 741.02 by November 2008.

On March 8, 2008 Goldman Sachs announced that Abby Joseph Cohen was being replaced by David Kostin as the bank's chief forecaster.

I wouldn't put much "stock" in Goldman forecasts (unless of course they are building a financial product they want to short).

Scott Dauenhauer CFP, MSFP

Long Term Stock Charts - From 1871

2011-01-10T09:42:00.000-08:00

Oregon Ducks Power Ballad - Go Duck

2011-01-09T17:41:00.000-08:00

I'm a huge Oregon Ducks fan, tomorrow they play in the BCS! GO DUCKS!!!

Gallup Finds Unemployment at 9.6% in December

2011-01-06T10:10:00.000-08:00

Unemployment should be falling, in fact at this point in time in a "recovery" we should be seeing steady net job creation. Instead the most broad measure of unemployment continues to rise.

Gallup Finds Unemployment at 9.6% in December

Schiller: S & P 500 will be up 13%...between now and 2020

2011-01-05T08:28:00.000-08:00

Famed economist Robert Schiller who was one of the first to call the stock market and real estate bubbles believes that the stock market in general will rise by a total of 13% over the next decade. An extremely bearish forecast, but based on very real analysis of historic valuations. Schiller is not making this determination based upon any view of the current economy, it is a simple historic extrapolation of stock market mean reversion.

Afraid of the "D" Word

2010-12-29T09:05:00.001-08:00

For almost two years now I've stated that the U.S. is in a depression. I've been clear that I don't believe we are in a depression that is as big as the Great Depression was (though have never discounted the possibility). I've taken issue with the term "Great Recession" because it ignores history and tries to spin our actual economic situation. The term depression has not been used since the Great Depression, but was a common term before it. My point is that the evidence is clear we aren't in a garden variety recession, its a depression - but its not the end of the world. It seems that most economists and talking heads believe the term depression can only be used if you are talking about the end of society (ok, perhaps now I'm engaging in a bit of hyperbole, but not much).

Over at the Naked Capitalist blog (www.nakedcapitalist.com) Yves Smith has linked to a Washington Post blog which attempts to compare today's economy to that of the Great Depression. The comparison will likely change your mind as to how this economic environment should be termed, at the very least we should refer to it as a "Depression". Maybe "Silent Depression" should be the moniker.

Hit the topic above for the jump. I've also embedded two of the referenced videos.

Scott Dauenhauer, CFP, MSFP, AIF

PragCap: COMMODITIES & THE 130+ YEAR BEAR MARKET

2010-12-27T12:21:00.000-08:00

The Pragmatic Capitalist (www.pragcap.com) is one of my favorite blogs - even if we don't always agree. Mr. Roche has posted an excellent piece on Commodities which pretty much represents my thinking on the topic (perhaps ex-oil). I encourage you to read the entire piece, it is well worth it and provides an entirely different perspective than Glenn Beck's advertisers.

A few of my favorite portions:

Benjamin Graham Quote:

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” - Benjamin Graham

Seth Klarman Quote:

“Buying anything that is a collectible, has no cash flow, and is based only on a future sale to a greater fool, if you will—even if that purchaser is not a fool—is speculating. The “investment” might work—owing to a limited supply of Monets, for example—but a commodity doesn’t have the same characteristics as a security, characteristics that allow for analysis. Other than a recent sale or appreciation due to inflation, analyzing the current or future worth of a commodity is nearly impossible.
The line I draw in the sand is that if an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependent on what a future buyer might pay, then it’s an investment. If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation. The hardest commodity-like asset to categorize is land, an asset that is valuable to a future buyer because it will deliver cash flow, not because it will be sold to a future speculator.”

From Roche and Klarman:

There’s an interesting counterargument that can be made for a commodity such as gold, however. Doesn’t its currency like characteristics make it unique? Seth Klarman says no:

“Gold is unique because it has the age-old aspect of being viewed as a store of value. Nevertheless, it’s still a commodity and has no tangible value, and so I would say that gold is a speculation. But because of my fear about the potential debasing of paper money and about paper money not being a store of value, I want some exposure to gold.”

Hope you enjoy - you will also find the comment section provides even more learning opportunities.

Scott Dauenhauer CFP, MSFP, AIF

MISH: Chanos on China Bubble

2010-12-15T16:08:00.000-08:00

China seems to be all anyone can talk about these days, is its centrally planned economy the wave of the future as some would like you to believe? My answer is no, the Soviet Union demonstrated that while a centrally planned economy can survive for a long time, it will never allocate resources correctly. Jim Chanos appeared on CNBC with a stunning outlook on China.

Humor Break: Colbert vs. Goldman Sachs

2010-12-15T14:04:00.000-08:00

The Colbert Report

Mon - Thurs 11:30pm / 10:30c

Goldman Sachs Lawyers Want Buckley T. Ratchford's Card Back

www.colbertnation.com

Colbert Report Full Episodes

Political Humor & Satire Blog</a>

March to Keep Fear Alive

Big Ben Explains Things

2010-12-06T13:00:00.000-08:00

A few things that concern me:

Bernanke says that QE is not inflationary, but that he is worried about deflation and won't let it happen....if QE is not inflationary then how can it fight deflation?

I don't believe QE is inflationary, its an asset swap (as Bernanke states). This doesn't mean that others won't believe it is inflationary and push up asset prices as a speculation.

I think the worst quote is when the interviewer asks whether he is able to control things and he said he was "100% confident". Famous last words.

He says the goal is to lower rates, yet doesn't talk about liquidity traps or that QE has not worked in Japan.

Scott Dauenhauer CFP, MSFP, AIF

The Q Ratio and Other Measures Showing Market Overvaluation

2010-12-06T06:56:00.000-08:00

As the markets have raced up this year (close to 20%) I have remained sanguine and continue to believe that the stock market is overvalued. What are the measures that I use to make this determination? The linked to blog above updates a few measures that have proved valuable in determining the long-term return of the markets (in the short-term is has zero predictability). The three measures are:

The relationship of the S&P Composite to a regression trendline
The cyclical P/E ratio using the trailing 10-year earnings as the divisor
The Q Ratio — the total price of the market divided by its replacement cost

All three measures show significant overvaluation in the S & P 500, the Q ratio showing the worst at 49%. The charts are below:

PG: NY Fed Pres "We Are Not Printing Money"

2010-11-16T09:42:00.000-08:00

A brief writeup over at the Pragmatic Capitalist regarding the misunderstanding of Quantitative Easing and the distortion it is causing. The Fed President is correct - the Federal Reserve is not "printing money" and the quicker we help people understand this (note I am not saying the quicker we support the Fed....I don't) the better off we will be.

Scott Dauenhauer CFP, MSFP, AIF

PragCap: Understanding The Mechanics of a QE Transaction

2010-11-09T11:41:00.000-08:00

Want to have your mind blown? The link above demonstrates how the Federal Reserve implements its policy of Quantitative Easing - it is not what those on TV lead you to believe (this is not a defense of Bernanke.....please don't misunderstand).

Here is an excerpt:

Before we begin, it’s important that investors understand exactly what “cash” is. “Cash” is simply a very liquid liability of the U.S. government. You can call it “cash”, Federal Reserve notes, whatever. But it is a liability of the U.S. government. Just like a 13 week treasury bill. What is the major distinction between “cash” and bills? Just the duration and amount of interest the two pay. Think of one like a checking account and the other like a savings account.

This is a crucial point that I think a lot of us are having trouble wrapping our heads around. In school we are taught that “cash” is its own unique asset class. But that’s not really true. “Cash” as it sits in your bank account is really just a very very liquid government liability. What is the difference between your checking and savings account? Do you classify them both as “cash”? Do you consider your savings accounts a slightly less liquid interest bearing form of the same thing a checking account is?

What is a treasury note account? It is a savings account with the government. So now you have to ask yourself why you think cash is so much different than a treasury note? What is the difference between your ETrade cash earning 0.1% and that t note earning 0.2%? NOTHING except the interest rate and the duration. You can’t use your 13 week bill to pay your taxes tomorrow, but that doesn’t mean it isn’t a slightly less liquid form of the exact same thing that we all refer to as “cash”. They are both govt liabilities and assets of yours.

When you own a t note you really just traded your “cash” for a slightly less liquid form of the same exact thing. If the Fed buys those t notes from you they give you back your cash minus the interest rate. That’s all there is to it. No change in the money supply. No change in anything except the rate of interest you were earning. If the government removes t notes then all they’re doing is altering the term structure of their liabilities. They’re not changing the AMOUNT of liabilities.

Scott Dauenhauer, CFP, MSFP, AIF

Stiglitz: Justice for Some

2010-11-09T10:51:00.000-08:00

Some food for thought, hit the link above.

Scott Dauenhauer, CFP, MSFP, AIF

American is Not Greece: Why Glenn Beck and Most Economists/Politicians Are Wrong

2010-11-05T12:18:00.000-07:00

"America is Greece" is the refrain you continue to hear from many politicians (particularly Republican). When searched on Google it comes up over 11,000 times. You also hear from the likes of Glenn Beck that if China stops buying our Treasury Bonds that in literally a few weeks the entire nation will collapse (kind of defeats the point of China's military....and ours I guess).

Is this hyperbole based on reality? Well, the answer is no, but there is some common sense that drives such rhetoric.

Before I go forward, let me just say that the more I learn about economics the less I feel I know. Having said that, I do know a few things.

First - the main point of Beck, Republicans and whomever is that America is spending too much - in this respect I think I can agree. I can also agree that, like Greece, we are likely to see riots in the streets if certain pension and health care benefits are cut. However, what Beck and others don't seem to understand is that the United States Government is nothing like Greece and WE DON'T NEED Chinese money to survive. In fact, interest rates don't HAVE to rise if the Chinese decide to get rid of their treasury bills.

The reality is that Greece is more akin to California than America. California cannot print its way out of budget problems because California can't issue its own currency. Greece doesn't issue its own currency anymore (they are on the EURO) and thus they can't print (read: devalue) their way out of there problems. The United States Government DOES NOT HAVE THIS PROBLEM. The U.S. can print as much money as it wants to pay off its debts. This means that it cannot outright default (they can, they just don't have too). If China stops buying our bonds, someone else will at either a higher interest rate or the Federal Reserve will buy them (please understand that this is not an endorsement of such policy, just the reality).

This doesn't mean that the actions of the Federal Reserve to deal with the very same issues that Greece has won't eventually harm us, I can assure it will. My point is that the America IS different because we have a different monetary regime.

Our current Federal Reserve leaders are leading us down the path of destruction, though they are of course being led by our politicians (don't be fooled by the last two elections - it really doesn't matter if its a Republican or a Democrat - neither can bring any kind of fiscal sanity about, nor do they want to....save just a few).

The Federal Reserve has embarked upon another round of Quantitative Easing - or printing money to buy assets. I do want to make it clear that while it appears the intention is to create inflation, I'm not positive it will. While it is true that the Fed literally pays for the Treasury Bonds with money that is created out of thin air, it is also true that this money doesn't actually stay in the system. If the Fed buys a Treasury bond and spends $1 billion the Treasury Bonds come onto the balance sheet of the Fed and stay there, the money goes to the people who sold the bond. The net change is that the Fed has $1 billion in bonds (of which interest is flowing to the Fed and is actually taken out of the system) and the entity who had the bond now has cash. There isn't any additional net assets in the system, the entity who had the bond now has cash (which could be used to buy more treasuries or other assets).

This is different than if the Federal Reserve called up the Mint and asked for $1 billion to be printed and then simply GAVE it to someone without receiving something in return. That would be pure money printing as the amount of cash actually in the system increased - that is potentially inflationary, but it isn't happening.

If you really want to research and understand our monetary system I suggest Austrian theory, reading Mike Shedlock and heading over to the Pragmatic Capitalist (he has some mind blowing stuff). I admit that my little explanation above likely places me in the category of Tim Allen's character on Home Improvement after trying to explain what his neighbor Wilson told him - but at least I'm willing to admit it.

Your Tim Allen Economist,

Scott Dauenhauer, CFP, MSFP, AIF

Humor Break: More Foreclosure Crisis Headlines from Charles Hugh Smith

2010-11-05T10:11:00.000-07:00

This is just too funny!

Humor Break: Is Obama A Keynesian? Rally For Sanity, 10/30/10

2010-11-03T14:13:00.000-07:00

This is so funny, especially the one lady who just gets outraged!!

For the record - a Keynesian is a reference to an economic policy put forth by John Maynard Keynes (Government spending during down cycles), not someone from Kenya!!

Scott

Taleb: Ten Principles For A Black Swan Proof World

2010-11-01T10:07:00.000-07:00

I thought I'd start November out with some words of wisdom from Nassim Nicholas Taleb, author of two of my favorite books (Fooled By Randomness and Black Swan).

My favorite story that Taleb tells (which is appropriate for November) is that of the Thanksgiving Turkey.

——

CHARLIE ROSE: And what is the story of the turkey?

NASSIM NICHOLAS TALEB: In the book, I have the story of a turkey that is fed for 1,000 days by a butcher, and every day confirms to the turkey and the turkey’s economics department and the turkey’s risk management department and the turkey’s analytical department that the butcher loves turkeys, and every day brings more confidence to the statement. So it’s fed for 1,000 days…

CHARLIE ROSE: Gets fatter and fatter and fatter.

NASSIM NICHOLAS TALEB: Fatter and fatter. On the day when its comfort will be at its maximum, there is going to be a surprise. There will be a surprise for the turkey.

CHARLIE ROSE: Yes.

NASSIM NICHOLAS TALEB: There will be a surprise for the turkey’s economics department, all those Ph.D.’s. Will it be — after all, there’s maximum (inaudible)…

CHARLIE ROSE: But it’s not a surprise for the butcher, is it?

NASSIM NICHOLAS TALEB: Not a surprise for Charlie Rose as well. Not a surprise for humans. It’s a surprise for the turkey. So the whole idea here is we are not to be a turkey.
——

Who or what might be the next turkey?

And Now Taleb's Ten Principles:

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk- bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.
In other words, a place more resistant to black swans.

Happy November!

Scott Dauenhauer, CFP, MSFP, AIF

Humor Break: Foreclosure Crisis Weekly

2010-10-30T09:09:00.000-07:00

Charles Hugh Smith

Ordos, China: A Modern Ghost Town

2010-10-27T10:00:00.000-07:00

Ordos, China: A Modern Ghost Town

Sorry, Central Planning doesn't work (did you hear that Bernanke).

Scott Dauenhauer, CFP, MSFP, AIF

Nomura's Janjuah Says Global Asset Bubble Is `Building': Video

2010-10-27T08:27:00.000-07:00

Grantham on Gold

2010-10-26T14:24:00.001-07:00

Religious wars (or, Should we buy gold?)

Everyone asks about gold. This is the irony: just as Jim Grant tells us (correctly) that we all have faith-based paper currencies backed by nothing, it is equally fair to say that gold is a faith-based metal. It pays no dividend, cannot be eaten, and is mostly used for nothing more useful than jewelry. I would say that anything of which 75% sits idly and expensively in bank vaults is, as a measure of value, only one step up from the Polynesian islands that attached value to certain well-known large rocks that were traded. But only one step up. I own some personally, but really more for amusement and speculation than for serious investing. It may well work and it may not. In the longer run, I believe that resources in the ground, forestry, agriculture, common stocks, and even real estate are more certain to resist any inflation or paper currency crisis than is gold.

I tend to agree with Jeremy.

Scott Dauenhauer, CFP, MSFP, AIF

FDIC Fiasco: Bair backs "Safe Harbor"...as opposed to Rule of Law

2010-10-25T14:58:00.001-07:00

In a mind-boggling appearance today Sheila Bair attempted to sweep the current foreclosure fiasco under the rug by backing a plan to allow a "safe harbor" for certain loans currently in foreclosure. In other words the banks would be allowed to foreclose if certain conditions are met....NOT if the bank has proven that they have the right to foreclose. The rule-of-law when it comes to foreclosures is being crushed and now the FDIC is all in with their buds over at Fannie and Freddie leading the charge.

Regardless of if a homeowner is able to pay or can afford to pay we have a system of laws that must be followed. We can't start making exceptions for large banks/services out of convenience, especially after the abuse that has been heaped upon this nation by the very same banks.

Bair's comments received almost no immediate press - which is remarkable.

Scott Dauenhauer CFP, MSFP, AIF

Humor Break by Tom Toles via PragCap

2010-10-25T11:03:00.000-07:00

Shilling: Home Prices Will Drop 20% More

2010-10-25T09:19:00.000-07:00

This isn't surprising analysis from Gary Shilling, but it is very contrarian in nature.

Scott Dauenhauer, CFP, MSFP, AIF

PragCap: How To Beat The Market

2010-10-25T09:09:00.000-07:00

Pragmatic Capitalist via Zero Hedge via Goldman Sachs:

“On the interplay between the FED and STOCKS: Since Sept 1 – when QE was becoming a mainstream focus – if you only owned S&P on days when the Fed conducted Open Market Operations (in US Treasuries), your cumulative return is over 11%. in addition, 6 of the 7 times when S&P rallied 1% or more, OMO was conducted that day. this compares to a YTD return of 5.8%. the point: you would have outperformed the market 2x by being long on just the 16 days when – this is the important part – you knew in advance that OMO was to be conducted. The market’s performance on the 19 non-OMO days: +70bps.”

Prag Cap:

The Fed certainly doesn’t help their credibility when this sort of stuff is being thrown in people’s faces. It’s one thing to imply that you’re going to print millions of dollars. It’s a whole other thing to admit that you want to run a ponzi economy (as Brian Sack directly did). Amazing way to run an economy….

Inside Job - Documentary

2010-10-22T08:40:00.001-07:00

Hussman on QE

2010-10-19T07:00:00.000-07:00

From Jon Hussman:

Unfortunately, the likely economic impact of this rapid depreciation is not benign. The Fed might like to believe that a cheaper dollar will improve trade by increasing U.S. exports and reducing imports. However, over the past two decades, and particularly in recent years, U.S. imports have been much more elastic in response to fluctuations in the U.S. dollar than exports have been. This suggests that provoking further dollar depreciation is likely to have negative effects on the global economy, owing to a shift away from imports, but with few positive effects for U.S. economic activity. Indeed, a further depreciation would unnecessarily create a negative wealth effect for U.S. consumers facing higher prices for imported goods and services. Any improvement in the trade deficit would be largely offset by downward pressure on U.S. consumption.

As a side note, some observers have suggested that QE represents nothing more than "printing money." While this might be accurate if the Fed never reverses the transactions, the most useful way to think about QE, in my view, is as an attempt to directly lower interest rates by purchasing Treasury securities. This interest rate effect - not any major inflationary outcome - is the cause of the dollar depreciation we are observing here. There is little doubt that the effect of large continuing fiscal deficits is long-run inflationary, but as I've noted repeatedly over the years, there is little correlation between inflation and temporary - even large - variations in the monetary base. Inflation is ultimately a fiscal phenomenon born of unproductive spending, regardless of how that spending is financed.

Scott Dauenhauer, CFP, MSFP, AIF

3rd Quarter Commentary: Can You Print Your Way To Prosperity?

2010-10-18T14:51:00.000-07:00

Can You Print Your Way To Prosperity?

The economy is not improving. While the NBER may have called the recession over as of last June - the one in five people who would like to have a job would beg to differ (data from Shadow Stats). I’ve stated on my blog and to many of you that I don’t believe we will have a Double-Dip Recession because we never recovered from the first one. The U.S. is stuck in the D gear - depression. Enter the Federal Reserve.

Last year the Federal Reserve embarked upon a program where it printed nearly $2 Trillion to buy Fannie/Freddie Mortgages and U.S. Treasuries. Combined with changes to accounting rules the market and numerous risk assets shot up, in some cases doubling. Since the money printing stopped earlier in the year stock returns haven’t even been up by 1%. In August the Federal Reserve decided to “keep the motor running” or “warm up the car” so to speak by reinvesting interest and mortgage pre-pays into longer-term U.S. Treasuries - effectively keeping the money supply constant (perhaps I should say the Reserves constant). All of this in a prelude to the next big event which many believe will happen at the November FOMC meeting, but could be pushed to the December meeting - Quantitative Easing 2.0. This simply means more money printing to buy Treasury bonds and potentially mortgages.

The belief that more money printing is on the way and that it is a solution to our economic woes has been witnessed on Wall Street. Stocks had their best September in 77 years and there are now economic commentators who believe you cannot lose in stocks - regardless of what the economy does. In fact, it has gotten so bad that now the Street is collectively hoping economic data is bad so that the Federal Reserve will follow through with its plan to print more money. In short, economic improvement is good for stocks - economic depression is even better for stocks. Anybody see anything wrong with this thought process? Less you think the Federal Reserve is the only Central Bank doing this, be forewarned that the Bank of Japan is now printing money to buy Exchange Traded Funds and Real Estate...is the U.S. next?

Stock prices are driven by short-term forces, but over the longer-term they are driven by valuations and stocks are not priced for superior or even average returns going forward. If the economy was devolving and stocks traded for 10 times earnings - I could be excited about the prospects for stocks, even if I wasn’t hopeful about the economy. At 20 times earnings stocks are priced for perfection, if anything goes wrong they will suffer.

The question is no longer whether we should print more money, but how much more should we print? We will likely find out soon, but it is now clear that low interest rates are here to stay - for a long time. The goal of the Fed is to get you to stop saving your money in banks, money markets and short-term instruments that yield next to nothing and instead use that money to speculate on more risky assets such as stocks, long-term bonds and anything that will get asset prices up. The goal is to boost asset prices so they can be sold off bank and other balance sheets - to some greater fool...guess who that fool is?

There is an old phrase - “Don’t fight the Fed” and it appears Wall Street is following it. But should you? The answer is no - you shouldn’t follow the adage - you SHOULD fight the Fed. You cannot print your way to prosperity. If you could, why would anybody produce anything? Why is there still hunger in the world if the solution is simply to fire up the printing press?

I don’t pretend to know the short-term implications of Federal Reserve short-term thinking, but my belief is that we are on the wrong path. The Federal Reserve, led by Ben Bernanke is leading us toward a cliff and instead of building a bridge most of the pundits have decided to strap on bunging gear and pray that the cord is connected...to something. If the term Lemmings comes to mind it is only because it is appropriate.

Investing in this environment will not be easy and returns will likely not be great (though I do not discount a stock boom, but believe if it happens it will bust). My strategy is to create as much flexibility as possible and take risks where appropriate. My advice to those saving for retirement is to continue saving as much as you can, for those in retirement it is to preserve your assets as much as possible.

While my quarterlies don’t appear to be getting any less gloomy, you might be surprised to hear that I am quite an optimist long-term. I believe the world is on the verge of scientific discovery that will literally make the past one-hundred years look like the stone ages. It will take some time, perhaps decades - but the advancements in bio-tech, medicine, technology, energy and education will be leaps - not steps. The one constant will be change (usually that phrase annoys me, but I believe it will be true). The changes that will take place likely won’t be easy and the immediate impact of such changes can’t be accurately gauged. If you think the iPad is cool (and I do) you haven’t seen anything yet - one day the iPad will be akin to an 8-track player. The problem we have now is that there are too many structural issues standing in the way of the global economy and these have to be worked out - but it takes time, lots of time and lots of pain. The future is bright, getting there may not be so.

Scott Dauenhauer, CFP, MSFP, AIF

Alt. Energy Update: Super Soaker Inventer To Revolutionize Solar Power?

2010-10-18T09:24:00.001-07:00

My outlook might be gloomy in the short-intermediate term, but my long, long term via is, well bright. As I've said time and time again I believe we are on the brink of technological and biological developments on par with nothing that mankind has ever witnessed. Unfortunately this will take time, perhaps decades - which we must linger through. But along that theme is this incredible breakthrough for solar power, The Atlantic profiles Lonnie Johnson:

The key to the JTEC is the second law of thermodynamics. Simply put, the law says that temperature differences tend to even out—for instance, when a hot mug of coffee disperses its heat into the cool air of a room. As the heat levels of the mug and the room come into balance, there is a transfer of energy.

Work can be extracted from that transfer. The most common way of doing this is with some form of heat engine. A steam engine, for example, converts heat into electricity by using steam to spin a turbine. Steam engines—powered predominantly by coal, but also by natural gas, nuclear materials, and other fuels—generate 90 percent of all U.S. electricity. But though they have been refined over the centuries, most are still clanking, hissing, exhaust-spewing machines that rely on moving parts, and so are relatively inefficient and prone to mechanical breakdown.

Johnson’s latest JTEC prototype, which looks like a desktop model for a next-generation moonshine still, features two fuel-cell-like stacks, or chambers, filled with hydrogen gas and connected by steel tubes with round pressure gauges. Where a steam engine uses the heat generated by burning coal to create steam pressure and move mechanical elements, the JTEC uses heat (from the sun, for instance) to expand hydrogen atoms in one stack. The expanding atoms, each made up of a proton and an electron, split apart, and the freed electrons travel through an external circuit as electric current, charging a battery or performing some other useful work. Meanwhile the positively charged protons, also known as ions, squeeze through a specially designed proton-exchange membrane (one of the JTEC elements borrowed from fuel cells) and combine with the electrons on the other side, reconstituting the hydrogen, which is compressed and pumped back into the hot stack. As long as heat is supplied, the cycle continues indefinitely.

Oh, and he also invented the Super Soaker!

Scott Dauenhauer CFP, MSFP, AIF

RIP: Genius Mathematician Benoit Mandlebrot

2010-10-18T07:00:00.000-07:00

Benoit Mandlebrot changed the way I think about everything, including Investing. His book "The (Mis)Behavior of Markets" was a clarion call to the investing community to view risk in more than just a single dimension - unfortunately it went unheeded. He is most famous for the theory of Fractal Geometry, which I won't attempt to explain but is a super important discovery. We will all miss Mandlebrot, but his ideas and influence will continue. It is my belief that his influence will continue to lead to incredible discoveries in math and science. RIP Benoit.

Ritzholtz on Foreclosure Paperwork Crisis

2010-10-12T19:22:00.000-07:00

A Money Printing Analogy Courtesy of Art Cashin

2010-10-12T10:35:00.000-07:00

Why Bernanke's Funny Money tricks won't work:

Every year as it begins to get cold in the northeast, oak trees drop acorns. The annual bounty helps countless squirrels, chipmunks, rabbits and other rodents endure the bitter winter months.

Let's say oak trees dropped 1.3 trillion acorns last winter and that an industrious squirrel hunted and gathered far more nuts than he needed. He sought to loan some to others, but the neighboring chipmunks and deer already had plenty. The Nuts, Acorns, and Seeds Administration, surveying the landscape, found the level of acorns unchanged at 1.3 trillion. Worried about another tough winter, it recommends that trees drop another 2 trillion acorns.

Thank you Art Cashin.

Scott Dauenhauer, CFP, MSFP, AIF

Humor Break: Jon Stewart - Mortgage Bankers Association Hypocrisy

2010-10-11T14:39:00.000-07:00

The Daily Show With Jon Stewart

Mon - Thurs 11p / 10c

Mortgage Bankers Association Strategic Default

www.thedailyshow.com

Daily Show Full Episodes

Political Humor

Rally to Restore Sanity

Humor Break: Jon Stewart on the Foreclosure Crisis

2010-10-08T19:29:00.001-07:00

The Daily Show With Jon Stewart

Mon - Thurs 11p / 10c

Foreclosure Crisis

www.thedailyshow.com

Daily Show Full Episodes

Political Humor

Rally to Restore Sanity

Why Are Distressed Homeowners Still Paying Their Mortgage?

2010-10-08T15:56:00.000-07:00

Good Question - Interesting Answers - click above to read the opinion piece.

Scott Dauenhauer CFP, MSFP, AIF

HR 3808 - Throw the Bums Out

2010-10-08T09:23:00.000-07:00

If you ever needed a reason to get rid of an incumbent politician (Republican, Democrat or Otherwise) you now have one (yet another one). I try not to get political on this blog, but what we have witnessed over the past decade (or more) is the abdication of the people's interest for Wall Street/Big Banking's interests.

The finance industry has taken over this country, led by Ben Bernanke at the Federal Reserve and the death grip they have is strangling the poor and the middle class. Nowhere is this more prevalent than in Congress where our beloved (approval rating below 20%) politicians are either in the pockets of the banking industry or just plain stupid (please understand I am not ruling out the possibility that both may apply).

HR 3808 was authored by a Republican and co-sponsored by three Democrats and guess who voted for it? Nobody knows. That's right, there is no record of WHO voted for it as it was a Voice Vote in the House and done by Unanimous Consent in the Senate (a process which I don't fully understand). There was no public debate. This was a deliberate act of Congress to evade detection of a bill that would hurt Main Street and help the Banksters by making it easier to foreclose.

Congress doesn't even have the guts to put there name on the vote and now many members are coming out against it...when it scores them political points.

No politician that I am aware of led the fight to Kill the Bill - which means they implicitly wanted it or simply didn't read the bill - neither of which is acceptable.

This is a complete betrayal of the American people and Obama did the right thing by sending it back to Congress (as if he had a choice).

I'm not going to tell you how to vote - to be perfectly honest I don't know how to vote anymore, but trusting Congress to do the right thing is not something that I have within me.

Scott Dauenhauer, CFP, MSFP, AIF

Schapiro got nearly $9M final payout from Finra - Investment News

2010-10-06T19:59:00.000-07:00

Schapiro got nearly $9M final payout from Finra - Investment News

Current SEC Chairman received $9m in Final pay for leaving FINRA, this is ridiculous.

Scott Dauenhauer CFP, MSFP, AFI

Toxic Titles - The Spawn of Toxic Assets

2010-10-02T09:34:00.000-07:00

First there were subprime loans which turned into Toxic Loans - now these Toxic Loans have spawned a whole new mess that is making national headlines - Toxic Titles. The Bloomberg article I link to above reports:

“A mortgage has to follow the proper trail every step of the way, or you have title problems,” he said.

In some cases, mortgages were conveyed using the Reston, Virginia-based Mortgage Electronic Registration System, or MERS, designed to cover transfers among system members. Promissory notes also often were endorsed as payable to the bearer to avoid the need for multiple transfers. Both practices have been challenged in court.

Copies of documents aren’t enough to establish rights, just as copies of dollar bills wouldn’t be honored by a bank, said Geoff Walsh, an attorney with the National Consumer Law Center in Boston. In cases of lost or mishandled paperwork, attorneys may file affidavits and other evidence to correct omissions and establish a claim, Walsh said.

“Wall Street was very good at packaging loans and making sure the money flowed to the right people, but not so good at keeping track of mortgage documents,” Engel said. As a result, “we have a growing number of toxic titles,” she said.

Essentially, millions of Titles (a title is what represents ownership) and current and prior Title transfers are at-risk because of sloppy paperwork and a system (MERS) that is increasingly being questioned by the courts as to whether or not it has standing.

The avalanche of disclosure this week (BofA, Chase, GMAC) that their foreclosure mills were not being run properly is but a symptom of the overall problem - Toxic Titles. If this situation is not resolved it quite literally threatens to invalidate millions of title transfers and with it, potentially trillions in value - essentially cratering the entire global economy.

Of course the powers that be would never allow this to happen, but a legal decision must be made and the courts are beginning to see the light on this issue. You can bet that the banks and Fannie/Freddie are fighting this hard and are running scared.

Scott Dauenhauer, CFP, MSFP, AIF

Oops! No mortgage and still foreclosed on

2010-10-01T11:51:00.000-07:00

Oops! No mortgage and still foreclosed on

Secrets of the Wirehouse Repost

2010-10-01T11:37:00.000-07:00

It’s been nearly five years since I wrote “Secrets of the Wirehouse” and I feel it is time to update it and add to it and sometimes subtract from it. You can read the original piece by clicking here. I encourage you visit my blog at http://themeridian.blogspot.com for updates on current financial events. Visit Scott’s website at www.meridianwealth.com.

Secrets of the Wirehouse

And How to Protect Your Best Interests

About the Author:

Scott Dauenhauer spent five years working for the “big three” brokerage’s and gained his knowledge first hand. He is now a Certified Financial Planner and has a Masters Degree in Financial Planning. Scott is the Owner and President of Meridian Wealth Management, a firm dedicated to protecting client interests. He believes in focusing on people not products. Though he believes there are some good people at brokerage firms, he thinks the vast majority fall extremely short of what is needed to advise a family on a subject as important as Financial Planning.

To find out more please visit his website: www.meridianwealth.com

Most Brokers Do Not Have Formal Training in Financial Planning

How much training do brokers actually have in financial planning? Major brokerage firms tout intensive training programs almost as much as the stocks they peddle. They brag about the high level of education their “consultants” receive. The truth is the only requirements are that individuals pass the Series 7, and a state insurance exam. The Series 7 is an industry test that requires memorization of facts about the markets and represents a minimum standard of knowledge.

The Series 7 does not teach an individual how to manage personal finances, let alone create a comprehensive financial plan. The Series 7 doesn’t even teach about how to properly diversify a portfolio. The insurance exam is an even bigger farce. While the Series 7 actually requires a bit of studying the state insurance exams only require minimal memorization. In California you are required to attend a 52 hour class in order to sit for your insurance exam. The class I took was excessively boring and did not teach anything about actual insurance policies or how to determine the proper amount of life insurance for an individual or family. Worst of all at the end of the 52 hour class the instructor gave you all the questions that would show up on the exam and the answers, almost word for word (I know, I took the exam and was shocked to see nearly the exact same questions).

The only thing they didn’t give you was what order the questions would be and whether the answer was a,b,c, or d. I would be willing to bet that by the time my son is 7 years old he could pass this exam. I think this is less a securities scandal and more a state governance scandal (the excuse by the state is that an easy test promotes more people in the insurance business and that the insurance companies will train the individuals……and you wonder why there is so much insurance fraud).

Anyway, once a “recruit” passes the Series 7, he/she is sent to company headquarters to go through “intensive training.” The training is definitely intensive, though not in financial planning or investment management. The programs focus solely on sales & product training and lasts anywhere from 1-4 weeks. I attended one such program and 95% of the training focused on cold-calling sales and learning proprietary product. Proprietary products are ones that are sold directly (and typically only) by the brokerage firm and typically have much higher profit margins, though mainly benefit the firm, not the person they are sold too. Brokerage firms want “salespeople,” not highly skilled financial planners.

If the firms hired highly skilled financial planners, the firm wouldn’t be able to sell proprietary products. This is because the planners would know better. When the firm hires somebody with no previous industry knowledge, or experience, they have the opportunity to fill that person’s mind with fairy tales, not fact. The firms’ way of doing business is to focus on proprietary products, high & hidden fees, cold calling, and quotas. The truth is that very few new recruits have any experience in handling another family’s wealth. You end up paying high fees for a service that puts you directly on a recruit’s learning curve. Even brokers who have been at the firm for years may not have any training in financial planning; they are stockbrokers, not trusted advisors.

As the years have gone by firms are moving slowly away from proprietary products, though not entirely. It would not be unusual to be sold a hedge fund, futures fund, or separate account, or variable annuity that is more all intents and purposes proprietary (despite a name that is different than the brokerage firms name).

Your advisor should have prior experience in financial planning and be Certified Financial Planner at a minimum, if not; you are putting your family’s wealth at risk. Please don’t let your finances be somebody else’s training ground.

Your Mutual Funds Are NOT Free

Mutual funds have grown into a huge industry. Once a small subset of money management, they have grown into a product that is now held by a large percentage of American households. There are now more mutual funds in the U.S. than stocks that trade on the NYSE. The proliferation of this medium of investing has empowered the individual investor. However, at the same time it has powered the Mutual Fund and Brokerage industry to record profits. Many of these companies are pulling the wool over your eyes. Most investors do not understand the fees accessed in their mutual fund. Even “no-load” funds have expenses. Though most of the costs are disclosed in the prospectus (good luck deciphering), some are not.

You will never see a bill for your mutual fund because the expenses are hidden. They may be hidden, but believe me, they exist. There are four major expenses involved with mutual funds (and a few minor ones). The first expense is the Expense Ratio; this compensates the manager, analysts, board of directors, and pays printing, mailing, & overhead costs and ranges from .20% to 2.0% annually. The average is about 1.5%. The next cost is what the industry refers to as a 12b-1 fee; this is basically a hidden commission. The 12b-1 fee pays to bring in new shareholders and has zero benefit to you. It varies depending on what share-class is sold to you and runs from .25% to 1.0% annually.

The last two expenses are not actually printed anywhere, you have to calculate them yourself. These expenses are spread/impact costs and transaction expenses. Every time your mutual fund buys and sells stock there are costs. The more a fund trades the more expenses YOU incur. In November of 2004 a study was released by the Zero Alpha Group (click here for the study) that stated “U.S. investors in equity mutual funds are paying $17.3 billion in hidden mutual fund trading costs that are not reported openly in the stated expense ratios of mutual funds.” The study found that on average brokerage commissions add .38% to a funds annual expense and trading costs (spreads & market impact) add another .58%. The study also found that these costs are much higher for small stock funds than large stock funds. On a conservative basis most mutual funds have additional undisclosed costs that total nearly 1% and in many circumstances higher.

Another cost you do not see is what John Bogle refers to as the “cash drag factor,” basically most mutual funds are not fully invested, they keep anywhere from 1-10% cash on hand. This hurts the performance on the upside but cushions it on the downside, since the market has gone up more often than down, the cash in the fund brings down the performance. Bogle estimates it to be about .6% on the high end. Let’s add up all the potential costs of a mutual fund, keeping in mind that brokerage firms are known for being on the high end.
Passive Low End Active Normal
Cash Drag 0% .60%
Expense Ratio .20% 1.33%
12b –1 Fee’s 0% 1.00%
Trading Costs .06% 1.00%

Total Costs .26% - 3.96%

The low end cost represents a person not receiving any advice; a typical fee for a professional advisor is .75% of assets annually bringing the total low end cost to around 1.00%. Not all broker sold funds have costs that are as high as shown above, however the average is somewhere between 2 - 3% annually.

Does your broker have your best interests in mind when he is charging you 2 – 4 times what a professional competent financial planner might charge? I would argue not.

Conflicts of Interest Abound – More Strings Attached Than A Marionette Puppet

Conflicts of interest exist in almost any business, the mere presence of a conflict does not automatically lead to a persons interests being wrongfully represented. However, all conflicts that are known should be disclosed in writing to the potential client before a relationship starts.

When dealing with brokerage firm conflicts of interest abound and for the most part are not disclosed. The following is a few conflicts that you should watch out for.

First, please understand to whom a public company owes their loyalty; it is to their public shareholders. The people who own stock in a company must have their interests protected. A public brokerage firm’s loyalty cannot be 100% to you.

Let’s take a further look at where other strings are attached. A broker gets paid a percentage of the revenues that he/she brings to the firm, typically 25-40%. It is not, however, that simple. Brokerage firms determine the payout percentage for each individual “product.” They control product flow by paying higher amounts to brokers for product they want sold (typically products with higher margins). While this makes sense from a business stand point and from a shareholder standpoint (why wouldn’t you want to incentivise your staff to sell the most profitable products?) it doesn’t work out so well for the end user, the client. Each firm works differently but depending on the product a firm wants to emphasize, they will pay a broker a higher percentage of the revenue to induce him to sell what the company wants him to sell. For example, if the company wants a broker to sell a Separate Account Platform product (individual money managers, more to come on this), they may tell the broker that they will receive a higher percentage of the fees they generate from that particular product and that product may generate more fees than other products.

Let me give you a real life example so that you understand.

Imagine that you had only two products to choose from to sell your client; one is a mutual fund that costs the client 2.25% annually and pays the firm 1% annually. Of the 1% paid to the firm the broker collects 35% of it or .35% annually. On a $1,000,000 account the firm generates $10,000 in revenue and pays the broker $3,500 (you the client pay $22,500). The other product is a Separate Account where you have an individual money manager. This product is sold as the latest, greatest way to have your money managed and costs 2.5% annually. However, this product pays the firm 1.5% annually and the firm will pay the broker 40% of that revenue or .60% annually. On the same $1,000,000 account the firm generates $15,000 in revenue and pays the broker $6,000 (you pay $25,000 annually). Now, in all likelihood both accounts will have similar returns over time and will probably under-perform the market. You the client in either situation are stuck in a lousy product that is expensive; however the firm has an incentive to sell one over the other, even if the other isn’t in your best interest. The separate account sale earns the firm 50% more revenue and the broker 70% more revenue – which product do you think will be presented? Each firm has their own system and they are all different, but the mechanisms are in place to manipulate the broker into selling what makes the firm and/or the broker more money.

In 2000 I wrote the following:

“A more blatant conflict is a practice that people thought was eliminated a long time ago. Some brokerage firms pay their brokers more for selling proprietary (company managed) mutual funds. To be fair, most firms have eliminated this practice, to which I applaud them, however there is still at least one major brokerage firm that sill pays brokers up to 25% more commissions to sell their company managed mutual funds over other competing funds. In addition, the more company managed funds a broker sells, the more perks they receive. Whether it is a trip, an expense account, or personal gifts, they do not receive these perks if they sell other companies funds.”

The firm I was referring to at the time was Morgan Stanley Dean Witter (now Morgan Stanley) and I don’t know if they still pay more for in house funds, but I do know that they got into a lot of trouble with the New York Attorney General and the Securities and Exchange Commission for using the allure of trips and other incentives to sell funds that they had special arrangements with. Morgan Stanley was fined $50 million, though I doubt they’ve learned their lesson. I reported on all of this going on back in 2000 before Eliot Spitzer and his gang tackled Morgan and much of the industry.

The other mutual fund scandal that was uncovered that wasn’t news to me (or anyone in the industry) was the “shelf space” arrangement. This is your basic pay to play arrangement. Certain mutual fund companies receive more access to brokers to sell their funds and more attention is paid to these funds in exchange for a basic kickback on all sales made in that fund forever. The basic system would be that a fund company could get on a brokerage firms “Preferred List” by promising to make certain “revenue-sharing” arrangements with the brokerage firm. These revenue sharing arrangements many times were simply kickbacks paid for being on the preferred list and receiving preferred access. Mutual fund companies didn’t get on a preferred list because they were the best in their class, but because they paid more than another fund company might be willing to pay. Thus the client is more apt to be recommended a fund from the preferred list even if it isn’t the best fund. Despite large fines and penalties and lots of bad press this practice continues, but at least it is now disclosed on brokerage firm websites (though I would venture to guess you’ll never hear about it from your broker). To see Morgan Stanley’s lengthy disclosure click here.

In addition to higher revenue on proprietary products, the broker many times is under tremendous pressure from management to sell you the latest mutual fund offering from that brokerage. Branch manager compensation is determined in part by the amount of proprietary products his branch sells. His interest is in getting the highest bonus possible, so he in turn puts the pressure on the brokers to “pound the phones,” and sell their “latest offering.” The brokers are enticed by management with trips, dinners, and a host of other items. It goes unspoken that if a broker does not participate in selling the new offering then things will not be easy for him/her. I know of one broker who was told, “I don’t think this firm is the right place for you,” after the broker refused to sell the new fund offering. It turned out that he was the only one to not succumb to the pressure, he eventually left that firm. I can’t begin to tell you how many voice mails & e-mails I received from management to ‘sell’ the “new” offerings, I never succumbed because it was not in my client’s best interest. Be aware that the pressure is on your broker to sell certain products or else he/she risks losing their job.

The Broker Food Chain

Guess how many entities get paid on your mutual fund purchase? You’d be astonished.

O.K., we’ve established that you pay higher costs to work with an advisor at a major brokerage firm. But who actually receives the fees that your mutual funds, and managed accounts generate? You wouldn’t believe all the entities that must be paid from your simple purchase. Most investors believe 100% of the expenses or fees go directly to the broker. Actually a very small percentage actually ends up in your broker’s pocket (which must make you also question the intelligence of your broker). In most cases the portion of the fee that the broker receives is 25-40% of the revenues your account generates for the firm. If this sounds confusing, it is, most brokers don’t even understand their own pay structures (which is exactly what the firm wants).

To help you understand, let’s take a look at a mutual fund. A typical broker sold mutual fund will have total expenses of about 2 - 4%. As I showed you in the earlier example on a mutual fund the firm might generate $10,000 on a $1,000,000 account (annually). Of the $10,000 the broker might get paid $3,500 (.35%). So where does the rest go?

It goes to pay for the fancy office, the mutual fund manager, branch manager, profits, internal departments, performance reporting, analysts, wholesalers, and a myriad of other things. Don’t get me wrong, I don’t believe profit is a dirty word; however there is a difference between profit and gouging. Your costs are high because there are so many people and departments and corporations that must receive a portion of your fees.

Let me break down the food chain for you. A person referred to as a wholesaler supports your broker, the wholesaler is the person who sells products to your broker from his/her mutual fund company. The mutual fund that employs the wholesaler also employs your fund manager and analysts to support him/her. The fund must also pay to transact business (although this cost is passed onto you, though not disclosed). The fund company and the brokerage firm must then pass along profits to it shareholders by either a higher stock price or dividends. As you can see, there are more entities getting paid on your mutual fund than you can count on one hand. I call this the Broker Food Chain. Your mutual fund purchases must make a lot of entities a profit, your broker, your brokerage firm, and the fund company, the question remains whether or not you get any profit? The broker food chain does not work in your best interest.

Insurance costs! What Your Broker Doesn’t Disclose About Their Commissions

Did you know that your stockbroker or advisor at your major brokerage firm now sells insurance? That’s right, everything from Term life to Long Term Care. Most brokers got their insurance license so they could sell you annuities (we will get to that next); they discovered however that commissions are much more lucrative in insurance than anything else. So are you to believe that your broker is now an expert in matters of insurance? Don’t believe it. Unless he/she has been through special programs like the CFP, CLU, or CHFC, they may not be qualified to offer you advice; of course that does not stop them. Of the three the CLU is the by far the strongest mark for insurance. Insurance is a complex world and if purchased incorrectly it can do a lot of harm to you and your estate.

Commissions can run anywhere from 50-120% of your policies first year premium. Surprised, don’t be, they’ve always been that high. Actually, it’s not the commission that really upsets me. If a professional does his/her job correctly and has the knowledge, training, & expertise and makes an unbiased recommendation than the commission can be justified. The problem I have is with disclosure, or rather the lack there of. Very rarely will your broker disclose what he/she is being compensated or about the potential surrender charges. The other problem I have is that many times the broker will see commissions and the appropriateness of the product as separate decisions, giving more weight to the commission than the appropriateness of the product. Many times this is done in haste because the broker simply doesn’t understand what is or isn’t appropriate. Most brokers receive sales & product training, not financial & wealth management training. In most cases your broker is a marketing representative for a large publicly traded company, not a trusted advisor like they claim.

In addition, brokers cannot go out into the marketplace and choose any provider for insurance, they must stick with pre-approved “preferred” insurance providers, well, we already know what it takes to become “preferred” at a brokerage firm, don’t expect your best insurance interest to be looked after at a brokerage firm.

Annuities, Hazardous to Your Wealth?

Annuities are an interesting product. They come in all sizes, shapes, and forms. You have probably heard of both fixed & variable annuities. Fixed annuities pay a fixed interest rate as stated in the contract for a specific time period (similar to a CD). Variable annuities performance is based on an underlying “sub-account,” basically a mutual fund. The major benefit to an annuity is the ability to defer taxes until the money is withdrawn. Another highly touted benefit is that an annuity can pay an income stream for life. Let me lay out a case for why variable annuities may be hazardous to your wealth.

It has always been said that annuities are “sold,” not bought by investors. Over 90% of all annuity sales are through brokers or life agents, a viable no-load Variable annuity industry has not emerged. Why are so many people sold annuities? The answer is simple…. high commissions and great sounding stories. There are some annuities that brokers sell that pay the broker in excess of 10% commission (though this is mainly in reference to Equity Index Annuities, another topic). This leaves you with an expensive policy and surrender charges that may last more than a decade. The expenses inside an annuity are one of the main problems. There are several expenses involved. Today most annuities do not charge you an upfront commission, the fee is charged as an annual fee (which you don’t see). This fee is deducted daily from your balance, there are five possible costs. The costs are: The policy charge, Mortality & Expense, Rider charges, underlying sub-account expenses, & transaction costs associated with those sub-accounts. Below is a range of what these cost can add up to:

Policy Charges - $30-50

M & E - 1.0 – 2.0%

Riders - .25 – 1.25%

Sub-Accounts - .25 – 1.50%

Turnover costs - .06 – 1.00%

Total Costs - 1.56 – 5.75% annually

The average cost runs about 2.5 – 4% a year. These expenses take a toll on the ability of the portfolio to match, or even beat the market. The annuity has to earn 2.5-5% before it breaks even for the year. Add the fact that gains in an annuity are taxed as ordinary income when withdrawn and the chances of your annuity beating your taxable account come close to zero. In addition, if you die with an annuity you do not receive any favorable tax consequences. You lose what the tax code refers to as the “step-up” in basis, meaning that if you die with a taxable account the entire account gets passed on to your heirs with no income or capital gains tax, not so with an annuity. Studies have shown that even low cost annuities do not produce tax benefits big enough to beat an index fund in a taxable account. In a taxable account you receive a tax break if you hold your fund or stock for one year or more, not so with an annuity (plus dividends are now only taxed at 15% on the federal level, though this is set to expire). Lastly, you have very limited choice of investments in the annuities and if you want to take your money out before age 59 ½ you are out of luck, you would owe a 10% tax penalty.

You may ask “what about the guaranteed death benefit?” It is basically worthless in most circumstance. Annuities are long-term investments, they are not meant for periods of less than 10 years. If you end up being one of those poor unfortunate souls that bought at the top of the stock market and still have less money than you started with 10 years ago (extremely unlikely, but it happens, though usually do to idiot broker advice) then your loss exposure is likely minimal. An amount that will be less than what you probably paid for the insurance over that period. In any event, the death benefit is not a logical reason to purchase an annuity. The death benefit in an annuity is also rather inconvenient in that in order to collect you must DIE. I don’t know about you, but that is one “benefit” that doesn’t benefit me. Now, of course, if you have loved ones that you want to provide for a death benefit may offer you some peace of mind. Keep in mind what you pay for that peace of mind and the likelihood of it ever being collected on. If you are insurable purchase insurance, if you are not, perhaps a variable annuity with a death benefit makes sense (though I still highly doubt it). If in the extremely rare circumstance that a death benefit makes sense in a variable annuity my choice would be to purchase a variable annuity from the Vanguard Group, they offer a low cost account with a death benefit.

Let’s recap the problems with Variable Annuities. High expense, high marketing costs, tax penalties if under 59 ½, loss of capital gains status, loss of step-up, limited choice of investment vehicles, & worthless death benefits. So why do people continue to be sold these products? High commissions and high profitability to the companies involved. Profit is the bottom line, not your interests. Variable annuities have become such a problem that the SEC (regulator) has issued a booklet available online through its website www.sec.gov. that lists the pros and cons of annuities. In addition they are in the process of taking legal action against several major companies and brokers over selling tax-deferred annuities to people whom already have tax deferred accounts.

Living Benefits

Variable Annuity providers knew that the death benefit just wasn’t enough to keep the sale of variable annuities going, so they came up with a whole new generation of benefits for variable annuity products dubbed Living Benefits. The four major living benefits that are offered are as follows:

Guaranteed Minimum Withdrawal Benefit (GMWB)

Guaranteed Minimum Withdrawal Benefit For Life

Guaranteed Minimum Income Benefit

Guaranteed Minimum Accumulation Benefit

These living benefits are sold with some really great stories and too good to be true promises. I can’t even begin to get into the inner workings of each of these so called benefits because it would bore you and take up a lot of space. Suffice it to say that these living benefits are expensive (despite what your broker will tell you) and are not all they are cracked up to be. If you are being told that you will be guaranteed 7% on your money, beware and read the small print. If you are being told that regardless of stock market performance you can withdrawal 7% of your account annually, beware. The stories that are used to sell these products are wonderful, they sound like an investors dream, but reality is much different. These products are costly and in most cases fixed against the possibility of a claim being made. Always read the fine print and hire a professional who has nothing to gain to review any variable annuities recommended to you.

The “Bonus” Annuity Scam…

If you are an annuity holder, chances are you have been approached by an insurance agent trying to sell you an annuity that pays you an ‘upfront’ bonus. Whatever you do, do not succumb to the sales pitch for the new “bonus” annuities. This is a new and highly aggressive tactic of the industry, to keep investors “imprisoned” in a high cost product, and generate new and even larger commissions for the sales force. Annuity holders with a few years left in their surrender charge period are approached with the following “typical” story:

“I understand that you are unhappy with your current variable annuity because of poor performance, lack of investment choices & a fading death benefit. I also understand that you have a surrender charge left. We are going to “help” by giving you an up-front “bonus” of 3-6% to cover the surrender charge. It will not cost you anything to switch.”

Unfortunately, the only “bonus” is to the salesperson. The new sale starts the surrender period all over again and the salesperson gets another commission. It is a great deal for the agents, they get two commissions from you.

To pay for the bonus and the commission and any extras, the insurance company raises the expenses on your investments. Since these expenses are buried in the prospectus and hidden from you on your statements, you never know that you are being taken advantage of. When all is said and done, everybody is making money except you! I have actually been in meetings and heard brokers laugh at how they duped another person into a “bonus” annuity. They refer to the extra commission internally as the “Yield to Broker.” It appears that the SEC is coming down hard on this practice. On June 5th, 2000, they issued an “investor alert” and placed a brochure on its website to help investors understand the benefits, costs, and risks of variable annuities, which combine features of mutual funds and insurance.

Insurance companies have been hit with rounds of lawsuits stemming from churning and suitability. It seems that the real “bonus” will be new business for trial lawyers!!!

Equity Indexed Annuities

These annuities are sold mostly by independent insurance agents, but I believe you will see more brokerage firms selling them in the future (along with banks). Equity Index Annuities or EIA’s have a great story to tell, typically it goes like this:

“Would you like an investment that pays gains based on the stock market, yet helps protect your principal when the market declines?”

Wow, market goes up I make money, market goes down I don’t lose money, where do I sign up? This latest derivative of the fixed annuity has grown in popularity over the past few years due to what appeared to most people to be a lackluster or falling market (not true), fear, and high commissions.

First, let’s be clear about what an Equity Indexed Annuity is, it is a fixed annuity. A fixed annuity that credits you interest that is based on some portion of an index’s return, typically the S & P 500. Your money is not invested in the stock market at any time and your returns will not be reflective of the stock market. Over time your returns will be similar to that of a fixed annuity, possibly a little better. However, you will be subjected to long surrender periods, excessive surrender charges (due to excessive commissions) and outright lies about the possible performance. Even though your returns are linked to a market index, the insurance company controls how the link is determined and has the ability to manipulate it so that the interest paid out is nowhere near what the market returns. In the real world there is no free lunch, you can’t experience the returns of the market without experiencing the risk. The insurance companies utilize many methods to ensure that your credited interest rates are not too high over the long term and in most cases the products are structured to benefits the companies and agents selling the products. It would be too lengthy to go into the inner workings of the index annuity here, but if you really want to talk about it give me a call, especially if someone is trying to pitch you one of these lame excuses for a financial product. The commissions and incentives linked to index annuity sales are a scandal much bigger than the Morgan Stanley settlement I spoke of earlier in this piece. While Morgan Stanley was fined $50 million for offering incentives to sell certain funds, insurance marketing companies do the same thing every day and get away with it. Trips to Monte Carlo, the Caribbean, and Mexico are everyday fare in the world of index annuity sales. What is motivating the sale of the index annuity, your best interest or a commission and a trip to the Caribbean?

Bank Insured Money Market Accounts

If you are a brokerage firm customer you may have noticed that over the past couple years the name of your money market fund has changed, or perhaps you didn’t notice. Most people haven’t noticed and that is what the brokerage world wants. As if the brokerage firms weren’t extracting enough income from you they devised a new way to make money on you, bank insured money market accounts. It used to be that you had a normal money market account that invested in short term investments and you received a pretty good return, though the fees were usually higher than say a Vanguard money fund. However, the brokerage firms decided that they using your money to support other entities borrowing habits didn’t make them much money, thus they devised a rather ingenious plan to use your money to support their one borrowing and lending habits. Basically your regular money market fund was replaced by a lower yielding money market fund that is touted to you as “bank insured.” This sounds good to you, insured money sounds better than uninsured money, but in reality the brokerage firms are now making money on your money twice. They make money by charging you an asset management fee to run the money market fund and secondly by directing your money into their own bank. Each brokerage firm sets up their own bank and the money that is deposited to the money market funds is lent to this bank as bank deposits that can be lent out to consumers and business, thus allowing the brokerage firm to earn another spread on your money. Perhaps this would be ok if it was truly disclosed to you and you could be guaranteed not to earn anything lower than a good institutional money market fund, but in reality your yield is much lower than say the yield at Vanguard, or even other money market funds offered by your brokerage firm. You get a new bank insured money market fund, a lower yield and the brokerage firm gets a new revenue source……does this sound like it is in your best interest?

Your Best Interest and the Merrill Lynch Rule – Brokerage Firms Fight Being Labeled a Fiduciary

I’ve spoke a lot about the conflicts of interests that exist at most brokerage firms and these conflicts stem from the fact that there is no requirement at a brokerage firm that your best interest be put first. This means your broker is not required to act as your fiduciary. A Fiduciary is someone who is required to place their client’s interest first, even above their own. Interestingly enough the brokerage firms have been fighting for years to avoid having to become fiduciaries despite the fact that they hold themselves out to be financial planners and advisors (who in most cases are required to be fiduciaries). The fight against being a fiduciary played itself out in what is now known as the Merrill Lynch rule. The Merrill Lynch Rule allows brokerage firms to offer advice for a fee without having to be fiduciaries. It is troubling how far the brokerage firms will go to ensure that they are not called fiduciaries. They are willing to fight because they know that they CANNOT honestly act as a fiduciary and continue to do business as they do now. Ask your broker if he/she is acting as your fiduciary and then get it in writing. Chances are they won’t put it in writing and they won’t put your best interest first.

Separate Accounts

Coming Soon

Active Management

Coming Soon

Talbott: TARP Uncovered -- the Real Cost of the Government Bailout

2010-10-01T11:25:00.000-07:00

John Talbott (a guy who called the housing bubble (wrote two books on it) and the financial crisis is a little upset with the New York Times article this morning that essentially gives TARP a pass. What follows is Talbott's tally of bailouts:

Estimated Total Costs of Bailout

Fannie and Freddie bailout = $700 billion estimated, at least, on their $5 trillion portfolio.

Federal Reserve's increased printing of money to fund purchase of mortgage securities in market and bad assets from banks (which directly leads to an equal amount of inflation, a hidden tax on consumers and savers) = $2 trillion.

Eventual FDIC losses = $500 billion.

Credit union guarantees = $50 billion.

Present value cost of lost interest income to US retirees and other savers due to government's zero interest rate policy = $2 trillion.

Present value cost of additional high unemployment and lost wages caused by government's focusing on bank and Wall Street profitability first, rather than on job creation = $5 trillion.

Total loss in housing values due to inappropriate response to overbuilding and high foreclosure problem = $4 trillion (a fraction of the total housing value loss of10 trillion, much of which was necessary to return to non-bubble levels).

Cost of future bad loans created since 2008 by Fannnie, Freddie and FHA by continuing to lend aggressively into declining real estate markets = $300 billion.

Wasted stimulus money (Where exactly did this money go and what do we have to show for it?) = $300 billion.

Total estimated cost of government bailout = $14.85 trillion.

This is more than an entire year's economic output for the entire country. It is as if we Americans worked an entire year for free to pay for our government's inappropriate response to this crisis.

Jim Grant: The Federal Reserve's Living Will

2010-10-01T09:29:00.000-07:00

If you've never watched,listened or read Jim Grant you are missing out. He is a great satirist, but more importantly a great contrarian. This clip from Bloomberg has more important information in it than you will find on CNBC and Fox Business in a month.

My favorite quote is: "Don't write books, read them"

Scott Dauenhauer CFP, MSFP, AIF

Alt. Energy Update: Solar Panels 2.0 - Excitons

2010-10-01T08:26:00.001-07:00

About a year ago a good friend of mine and I were having lunch up at UCLA. We got onto the topic of alternative energy and I expressed my belief that within the next twenty years today's solar panels would resemble a Commodore 64 computer - in other words, cutting edge at the time but essentially a non-starter.

This new discovery by researchers at the University of Wyoming and Colorado State may be the next evolution in creating the next generation of solar panels. In my opinion there are two endless resources that if we could harness and use for our energy consumption we could quite literally change the world (this is hardly a unique thought) - those resources are of course the Sun and our Oceans. I believe we are now laying the groundwork for an explosion of new energy sources that will set the earth on a prosperity boom unlike anything ever witnessed to date.

Of course we have some real short term issues that could very well drag us into multiple depressions around the globe first. While I am quite gloomy about what we have wrought for our future generations fiscally, I am quite ecstatic about what technology, bio-technology will unleash in the future.

If you'd like to read more about this new technology (which is still in its infancy), click the headline above.

Scott Dauenhauer CFP, MSFP, AIF

The Rise of Funny Money

2010-09-28T11:48:00.001-07:00

As the days drag on and the Federal Reserve continues its program of printing money in order to buy Treasury bills one wonders how this will all end. The past few days have seen economist after economist after financial pontificate alluding to the bright light at the end of the tunnel - Stocks. Its time to buy, buy, buy they say. What gives them the confidence? The Greenspan/Bernanke Put, better known as Quantitative Easing (printing money to buy government debt). These prognosticators are of the belief that that we are in a Heads We Win, Tails We Win economy. They've decided that if the economy gets stronger stocks will do well, but if the economy gets weaker the Federal Reserve will step in and support the market via more printing of money which will help support stocks and potentially even juice them ever higher. No matter the economic situation....stocks go up. In this view more funny money equals higher stock prices, in fact the worse the economy gets, the more funny money is printed and the better stocks will do.......what?

If you are like me you might be thinking to yourself....WTF (for all you Modern Family junkies...Why the Face?). In my view when a country purposely devalues their currency in order to bail itself out from past blunders the consequences shouldn't be a reward, it should be punishment.

My fear is that we are in for a Rope-a-Dope. I'll explain this more in my coming quarterly commentary. The Federal Reserve is trying to lure you into assets that you shouldn't be buying (at least at current prices) in order to bail out their insolvent banking institutions (our banking system is solvent only because of gimmicked accounting). The problem is that you can't simply keep blowing bubbles without consequence. You can't spend (even if you are the reserve currency) without consequence, you can't continue to borrow unlimited amounts of money without consequence. The Fed, however is backed into a corner and they are shooting their last bullets - hoping things work out, even though they know the odds are against them. Its like a hail-mary pass, you have little time on the clock and you are losing, either you go for the long-shot touchdown pass and make it or you throw an interception and the game is over anyway. The Fed is throwing a hail-mary, but the only potential receivers are down with hamstring pulls.

The stock market just might end up gaining heavily in the coming years, which would in turn lure people back into it - all of it is a set-up for the potential ultimate fall. Don't get me wrong, I believe that the market will likely end this decade closer to 16,000 (assuming we don't have another Great Depression), but we just might go to 7,000 or below first. The question remains how many people can put up with that kind of volatility for such a puny return.

The Federal Reserve is playing a dangerous game as it aids and abets our Federal Government, effectively enabling the Government to spend at will - knowing the Fed Reserve will be there to take up the slack if needed. This is the scariest Too Big Too Fail ever created.

Scott Dauenhauer CFP, MSFP, AIF

Taleb: Stimulus Made Things Worse

2010-09-27T10:06:00.000-07:00

In November 2006 I recorded the following podcast after reading a book by Nassim Taleb and another by Benoit Mandelbrot.

http://itunes.apple.com/us/podcast/the-meridian-podcasts/id194112396 click on Misbehaviour.

Listening to this podcast I sound almost prophetic, it is literally scary.....except not even I anticipated what was coming. My advice isn't as good as it could have been, though it was reasonable. Essentially I said if you can't handle the worst historical fluctuation of stocks, you shouldn't be in them. I did say "I don't think we're going to go through another Great Depression".....I might just be wrong on that one.

The article I link to above is interesting because Taleb believes the stimulus and current economic policies are the wrong direction for this country - I tend to agree.

Bottom line - The improbable events....happen. The US is taking a huge risk in the amount of debt we are piling up.

Scott Dauenhauer CFP, MSFP, AIF

Movie Review: Wall Street - Money Never Sleeps

2010-09-26T17:46:00.000-07:00

I took my wife to see "Wall Street: Money Never Sleeps" this weekend (yes, this is payback for that whole Twilight thing!). The original Wall Street movie is a cult classic and a favorite of mine, even though it represents everything I despise about this industry. I was excited to see the movie and can say that I did enjoy it. It was entertaining and had a message - mainly that Wall Street doesn't have your back (though it is likely stabbing you in it).

Shia LeBeouf was okay, but he was no Charlie Sheen (Bud Fox). It was pretty cool though when old Bud made an appearance in the movie....just like old times! Did somebody say "Blue Horse Shoe Loves Anacott Steel"?

What resonated most with me was "It's a victimless crime, nobody gets hurt." This uttered by the Jamie Dimon, Goldman Sachs, AIG, LTCM amalgamation that was played by Josh Brolin. This is the phrase that I hear all that time in the retirement industry. So the guy got paid a commission, so he got a free trip....what's the problem? Its a victimless crime. I don't buy it. Those victimless crimes are in fact robbing our citizens of the dignity they deserve in retirement.

Wall Street exists to transfer your money into their pockets and in case something goes wrong.....for you to pay the consequences and to like it...."Thank you ma'am, may I have another."

I enjoyed the lingo, the Wall Street speak and trying to figure out who was suppose to represent who, but you don't need to know any of the lingo to enjoy the movie - the message was loud and clear - Greed never went away and because of the bail outs we have created a monster even worse than in 2008.

While it is hard to beat the original, this movie doesn't intend to - its intent is to stand on its own and it does. I'm not much of an Oliver Stone fan, but this was a good movie.

Scott Dauenhauer CFP, MSFP, AIF

Yet Another Desperate, Destined To Fail Housing Program

2010-09-08T11:17:00.001-07:00

I have no idea who this latest program is looking to help. Why a lender would participate in this program is beyond me. The program still requires the lender to take the loss, the only benefit might be that the lender might take a smaller loss than they would if they foreclosed....transferring the risks to the taxpayer via the FHA. Yet again, another Dead On Arrival plan - at least the Obama administration is keeping a consistent policy, one carried over from Bush.....that of offering destined to fail plans that help nobody.

Scott Dauenhauer CFP, MSFP, AIF

Dodd Questions Elizabeth Warren's Management Experience -- A Concern He's Never Raised Before

2010-09-02T07:58:00.000-07:00

I'm not saying I want Elizabeth Warren to head the new Consumer Bureau, but I also think she might do a good job (this is based on the work she did with TARP). I find it interesting that the protective powers of Wall Street (Chris Dodd) appear to now be trying to undermine Warren. I know Geithner doesn't like - which is a good sign, now Dodd (and by Fiat, Wall Street) don't like her....I'm beginning to like her more and more (of course this could all be just a rope-a-dope).

Scott Dauenhauer CFP, MSFP, AIF

What is Potash? Why You Should Care

2010-08-30T09:58:00.000-07:00

The Greenspan Put Lives On

2010-08-29T07:26:00.000-07:00

As economic indicators weaken and the stock market drops, the world looked to Fed Chairman Ben Bernanke for relief, and they got it. In a speech on Friday Bernanke channeled Greenspan and let us know that he would do whatever it takes to ensure economic recovery.......the Greenspan Put lives. Given that Big Ben can't lower interest rates anymore, he has no other choice but to print money and buy assets.

Greenspan created this boom-bust cycle by always coming to the rescue of Wall Street (called the Greenspan Put), Bernanke has continued these dangerous policies.

How far will Bernanke go? Will he destroy the currency to save Wall Street? I don't know, but it appears that he will. We have a serious situation on our hands - Wall Street continues to be in charge, financial reform was a joke and our financial system is worse off today than ever.

Some traditions are great, the Greenspan Put is not one of them. It's time to end the Greenspan Put, ousting Congress is not enough, we need to abolish the Federal Reserve.

Scott Dauenhauer CFP, MSFP, AIF

Oil-Eating Bacteria Go To Work

2010-08-26T10:54:00.000-07:00

I'm in the crowd that thinks what happened with the BP oil spill was ridiculous (of course, who doesn't), however I also feel like the whole story has not been told. This piece from Discover Magazine demonstrates how a group of bacteria have arrived on the scene (all on there own by the way) to start eating the oil and making the waters clean again....what? Its true, here is an excerpt:

In the Gulf of Mexico, nature’s janitors are hard at work, mopping up the aftermath of a man-made disaster. On 20 April, 2010, an explosion at the Deepwater Horizon rig unleashed the largest oil spill in US history. Now, a team of American scientists led by Terry Hazen have shown that just a month or so after the incident, a microscopic clean-up crew had already started to digest the mess.

The ocean is home to many groups of bacteria that can break down the chemicals found in crude oil. Some, like Alcanivorax, are oil-eating specialists that are usually found in low numbers, only to bloom when oil spills provide them with a sudden banquet. That’s exactly what has happened in the Gulf of Mexico. Hazen has found that these oil-eaters have swelled in number in the contaminated waters.

Why is this important and why is this story appearing on a finance blog?

Oil is quite simply the lifeblood of our prosperity - think about your life as it exists right now if there were no oil or if oil were $15 per gallon. I'm not much of a fan of the stuff and am in the crowd that believes we MUST find a more attractive option for fueling our prosperity - one that is renewable, clean and cheap. But the fact remains that until we find such a fuel - we need oil to provide a bridge. If you think the economy is bad now, just wait till oil is $5 or $10 or $15 per gallon. Sure, it might force a switchover to something else - but the short-mid term pain would be nightmarish. My point? The oil spill has caused us to think that we can't drill for oil offshore, this leads to less oil discovery and less oil.....which without a corresponding drop in demand means higher oil prices. We need drilling, even if you hate it, we need it. These bacteria might be part of our solution to the problems that we will experience in the future when we drill.

Scott Dauenhauer CFP, MSFP, AIF

Confirmation and Encouragement

2010-08-25T09:14:00.000-07:00

The economic data coming out over the past few weeks is confirming what I've been writing for quite sometime, we never escaped recession and in fact never had a recession - we had and have a depression, albeit one that has been goosed by massive government intervention to make a recovery appear to be happening. We have never dealt with the underlying issues that have caused and continue to cause our weakness, instead we have doubled-down and now we are in a double-dip....

If you are like me though you might be getting tired of all the bad news and negative stories. By no means do I think we should ignore our issues, but as I've stated in previous commentaries, good will eventually come from bad. Just look at the progress we've made SINCE the Great Depression. So....for some encouragement I present to you John Mauldin's "Good News" from his recent "Thoughts From the Frontline," a must read weekly e-newsletter.

Enjoy,

Scott Dauenhauer, CFP, MSFP, AIF

John Mauldin:

So Where's the Good News?

Ok, I could go on for hours, sorting through the problems. Where is the good news I promised?

Here's what I should have said to Tiffani's group: Let's face it. Running a small business is never easy. I am a serial entrepreneur. I have started and run a lot of very different businesses. Some have been very, very good and some went down in spectacular flames. I can remember some near-death experiences when the economy was booming. I have watched a million-dollar income stream dwindle to zero and there was not a damn thing I could do about it, except enjoy the money while it was there and use it to buy the next income stream. I have had to rebuild several times from scratch as markets shifted drastically underneath my feet. And I've changed directions as new opportunities revealed themselves.

In all this I'm like every other small-business entrepreneur out there. It is never easy. But that is what we do. We get up in the morning and figure it out. Some 80% of startups die within ten years. But we pick ourselves up and start over.

I know unemployment is 10%. But that means almost 90% are employed. Consumers are saving more. So adjust. Figure out what your New Normal looks like.

The '70s were a bitch. I woke up many times in the middle of the night with real pains in my stomach wondering whether to pay the rent or make payroll. So did a lot of people. But look at all the new companies that came out of that era and changed everything: Microsoft, Apple, Intel, etc. Cell phones. The internet. The list is long.

Yes, we have to make our way in this Muddle Through World. It will be challenging, but I can almost guarantee you that when we do get through there will be other challenges. If it was easy everybody could do it and there would be no money in it. Embrace the challenge!

I asked one of my really close (36 years) friends and business associates last year how his business was doing. "We are doing great!" he said. That was not the answer I was expecting. "Why? How?" I asked.

"Well, most of our competitors have folded. We survived and got the business."

Ultimately, that is how we get out of this. A hundred million families and millions of businesses figuring it out, learning how to adapt to the New Normal. Sadly, some of them won't make it. But most of us will!

As I said, I am a serial entrepreneur. I have a friend who designs and oversees large teams of programmers of really robust analytic software, very cutting-edge stuff. She is a winner, and I am backing her (I know nothing about software but the rule is, invest in people!). We'll see how it goes, but my bet is that in a few years there will be a lot of people getting jobs because we take on some risk now.

We are adapting our own business here. We will soon have new websites. I will be doing (at first) an audio podcast called the Mauldin Minute and then (hopefully) by the end of the year morphing into video. That's the wave of the future and I need to keep up.

I am addicted to information and reading . We are going to try and make some money from my addiction. What would you pay to look over my shoulder and read the 5-10 most important things I find in a week? I will become your personal reader. Will that be a life-style changer? No, but it will provide some income diversification.

When Tiffani made her presentation to her Vistage group about our business, she had a lot of charts and graphs. I was surprised how our sources of income have varied over time. Some previously large (at least on my scale) sources literally dried up within a few years, completely askew from our original optimistic expectations. It was very apparent that we cannot sit and assume things will be the same year to year. So we adapt.

I have been presented with a very different opportunity in a non-finance field that is right in my wheelhouse, as they say. Tiffani and Ryan and I are going to pursue it. Will it thrive? Be a real business in five years? We will see, but I have the ability to take that risk and I am going to do so.

And so will hundreds of thousands of other visionaries and dreamers. That is how we get through this. We work through the ugly and then we get to the 2020s, and I think we will once again be talking about the Roaring 20s! Whole new industries will come into existence. Pay attention to the advancements in robotics. Biotech will be HUGE this decade, but we need to change the rules so we don't lose the intellectual property and the jobs. Electric cars will boom as we replace our fleet all over the world. Nanotech later in the '20s. Green energy and nuclear. Artificial intelligence (finally!). Really cheap (I mean really cheap!) wireless high-speed broadband all over the world will open the door to all kinds of possibilities. I met last night with very credible scientists who have developed a way to filter water very cheaply. A desalinization module that fits in a cargo container. Yes, they need a lot of money to finish, but they will figure it out. And on and on. The opportunities are going to be huge. Trillions will be made.

So, we get through this. We Muddle Through. We figure it out, one business and family at a time. And as a culture, a world, we get to a better place. My bet is that in 2020 no one is going to want to go back to the good old days of 2010. We will be excited about the future and all the cool stuff that is happening.

Recessions and tough times are God's way of telling you that you need to adjust a few things, both on a personal and business level - also nationally and globally. I am an optimist. I believe we will adjust and grow, not just in the US but as an emerging world. There are just so many opportunities.

So, don't let the problems I write about in this letter make you crawl into a cave. Just be realistic and figure out where your opportunities are. And then go make them happen! You are responsible for creating your own future. And I hope it is a good one. I plan on making mine one.

Rosenberg: There Was Never A Recovery

2010-08-20T16:03:00.000-07:00

Here is a link to David Rosenberg on Fox Business talking about the possibility of a double dip. Like myself, I don't believe we are going into a double dip, I believe we never actually recovered. When the number of unemployed continues to grow....that is not a recovery. I don't necessarily agree with David on Gold, but so far he has been right on about Deflation and interest rates as well as his economic calls.

Scott Dauenhauer CFP, MSFP, AIF

Federal Reserve: More Money Printing To Prevent Deflation

2010-08-10T12:34:00.000-07:00

On July 2, 2010 I wrote the following:

Interest Rates

So where are interest rates heading? Your guess is as good as mine, but here are my thoughts.

I believe interest rates are headed down and may stat there - unless we get an oil shock. If you have been reading my blog you will have noticed that I’ve tilted more toward the Deflation camp and have been warning that interest rates may fall further. In fact, that is what has happened. Could they fall even further? It is possible. Just look at Japan. For this reason, I don’t expect the Federal Reserve to raise interest rates until 2011 (or longer), meaning more pain for investors looking for income. Income investors are paying the price for the bailouts. Having said all that, I cannot rule out an Oil price shock. War and more fallout from oil leaks could put a crimp on supply or expected supply which could lead to high oil prices (right now prices are falling due to unexpected lower demand globally) and those higher oil prices could have inflationary effects on the economy (please note that this is not true inflation).

Longer term I believe there is a high probability the Federal Reserve will resort to another round of Quantative Easing or money printing. While many believe this will lead to inflation or a hyper-inflation (hence the Gold-bugs) I am not yet convinced. If all the printing simply ends up back on bank balance sheets and thus not in the economy it may have no affect (other than to take bad assets off the balance sheets of Too Big Too Fail banks). For money printing to work the money must circulate in the economy (referred to as the Multiplier), as of now it is not. While this does present an opportunity to be in high-grade intermediate bonds, I’m not convinced there are not risks there as well, but you can be assured I will continue my quest for appropriately priced income-risk assets (note, “income-risk assets” is a term I just made up).

Today the Fed announced another round of Quantative Easing, though with the goal of maintaing the balance sheet not expanding it. Essentially the interest and and principal payments coming in from the Mortgage Back Securities was retiring the securities, this money will be reinvested into longer term treasuries instead of allowing to disappear.

Scott Dauenhauer CFP, MSFP, AIF

Trial Balloon of Mortgage Forgiveness Buzzes

2010-08-05T09:49:00.000-07:00

As I've stated for almost two years now, the only way to deal with the ongoing housing crisis (and yes, there still is one) and banking crisis is a program to eliminate those mortgages that substantially underwater. While I might be biased as I am one of those people, the Obama administration may in fact be readying a plan to begin forgiving some principal (something that should have been done a long time ago) on some mortgages.

The issue I have with this is that it will cost taxpayers - though my position is also that it will cost taxpayers much more NOT to forgive some principal. I think the banks need to feel the pain of their mistakes in order not to make them again, but I also believe that Wall Street has received so much bailout money while Main Street has been stuck with the pain of this depression.

Had the government implemented this type of program initially it would have bailed out the banks by bailing out Main Street - thereby solving two issues at once. I am still not for a blanket bailout, I believe people should be held responsible for their decisions (including myself), but I also believe that the document mass fraud perpetrated on the American homeowner must be rectified. Housing has the potential to drag the economy into a Great Depression and the administration knows this.

Its too late for housing to solve our issues, but it could be a good step forward. I favor a program that John Hussman has put forward - essentially an equity sharing program where the government shares in any appreciation after forgiveness. The other option is simply let a massive number of homes foreclose and further drag down the balance sheets of the nation's banks, making them more insolvent. Please understand - this is a BANK BAILOUT wrapped in the blanket of a Main Street bailout. Wall Street knows they won't get any more help (even though they know in a crisis they will be bailed out again), this is there plan to remove bad assets from their balance sheets quickly and unload them onto the governments. The fact that they can help out Main Street is just icing - this is a last ditch effort by those who know the real issues that exist.

I want to make it clear that I am not endorsing this program, which doesn't even exist yet. If it happens, I'll review and let you know my opinions. I can tell you this, few Republicans would oppose (after all it was John McCain's idea).

Scott Dauenhauer CFP, MSFP, AIF

Did Investors Learn Anything From 2008's Crash?

2010-07-27T14:15:00.001-07:00

Lou Harvey of DALBAR takes on the Gods of Modern Portfolio Theory in a recent Barron's article and lays waste to them:

"Nothing's wrong with MPT. It's how people use it. What is needed is a back-up plan to protect investors when the theory fails. And it will most likely happen again. Just look at the current situation. One could argue that the risks are even greater now than in 2008 because of other potential failures out there. We have changed so little from the 2008 failure. Risks have, if anything, increased because of our unwillingness to face up to our problems. We keep talking about a huge increase in federal debt and how, if this trajectory continues, we could even face a downgrade on Treasuries—something many people still believe to be unthinkable

The pushback to our latest report has been strong. Who are we to criticize MPT, devised by a Nobel Prize winner? But this is our research and we stand by what we've found. I have lots of scars on my back to prove it. And I'm sure that after talking to you I'm going to get more. Investment results in 2008 showed clearly that correlation of asset classes varied unpredictably and with no warning. This brings into question the very basis for MPT and its ability to forecast an efficient frontier. MPT simply cannot be used in isolation. Instead it should be thought of as only one reference point for modeling the behavior of a potential portfolio. It is only one dimension of a more comprehensive investment-management process."

As a recovering MPT and EMH'er myself I understand the backlash Harvey may generate, his bold stance is refreshing in this industry that has kept a closed mind for a long time.

Scott Dauenhauer, CFP, MSFP, AIF

New Feature: What I'm Reading

2010-07-27T14:10:00.000-07:00

Recently I bought an iPad and it has completely changed the way I consume research. Instead of reading articles as they appear or as I find them I use my iPad along with a great little app call InstapaperPro. Instapaper allows me to save the articles to read later, as I please.

One cool feature is that Instapaper logs all the articles that I've read and allows me to categorize them and it then provides an RSS feed. What I've done is added two new "blog feeds" to the left in My Blog List - one is called What Scott Has Read and the other Meridian Must Reads. Since I consume an inordinate amount of information and can't post all of it, this will give you a glimpse into what I've been reading (What Scott Has Read) and the articles that I think would benefit you the most (Meridian Must Reads). I will continue to post important articles to this blog, but the feeds to the left in My Blog List give you even more insight as to what I've been up to.

Scott Dauenhauer CFP, MSFP, AIF

Then There Is This Route To Retirement......

2010-07-27T14:02:00.000-07:00

One day you are at a garage sale and negotiate to buy some negatives for $45 - ten years later you discover they are negatives shot by Ansel Adams that were thought to be lost in a fire.......and they are worth $200 million. That's one way to plan for retirement!

Scott Dauenhauer, CFP, MSFP, AIF

Pissing Match: Is the World Ready for the Waterless Urinal?

2010-07-23T09:59:00.000-07:00

I love this story. This may not seem like the typical Meridian blog post, but bear with me.

For my regular readers (both of you!) you know that my belief is that we are in a depression (not a Great Depression....yet), but I also am an eternal optimist and this story is one of those reasons. I believe that the human race is on the verge of technical and biological breakthroughs that will forever change the way we live and approach life. This little invention is just one item of innovation that will save our precious resources. Its a great story and one of many innovations I've posted over the past few years. Times are tough (with 20%+ unemployment there is no other term than depression), but our children and grandchildren will live in a world unlike anything we ever dreamed of.

Scott Dauenhauer CFP, MSFP, AIF

Q2 Meridian Quarterly Commentary (Written July 2, 2010)

2010-07-16T13:56:00.000-07:00

Please note - this commentary is on the way in paper form to clients this weekend.

A Will Rogers Market

Volatility Returns to the Market

About a year ago as the Standard and Poors 500 (commonly referred to as “The Market”) crossed the 900 and 950 threshold after hitting a low in March 2009 of 666 I began to call my clients and urge them to prepare for rougher times ahead. Generally, I advised that we reduce “Risky” allocations and change the Risky allocation to become less risky (in my last quarterly commentary I explained each strategy). My reasoning for this was I did not believe the recovery was real and that the probabilities of another crash or prolonged decline were high. As it turned out, the markets and most prognosticators disagreed with me, and stocks continued to soar, hitting a high of 1,186 in late April 2010. While we did capture some of this move we didn’t capture all of it, but capturing the upside of the stock market while limiting the downside is not possible and it isn’t our goal (but don’t get me wrong, if I could do it I would!). Will Rogers once said “I am more concerned with the return OF my money, than the return ON my money” (actually Mark Twain was the first to say this), this is a Will Rogers market.

My analysis led me and leads me to believe that stocks are still overvalued significantly, which of course did not stop them from hitting higher and higher levels. My belief was that if housing wasn’t dealt with in a meaningful fashion and when the stimulus ran out that the party would be over - essentially that thesis is playing out right now. The S & P has since slipped below 1,030 and may be headed back below 1,000 and the market has been very volatile - losing 10% in the 2nd quarter of 2010. The goal of the portfolios I’ve been building has been to reduce the day-to-day fluctuation without missing out entirely on higher returns. This has meant missing out on some market gains in the short-term, but I believe the downside protection has been more valuable. Having said that, one of the funds that I utilized to replace “market exposure” actually beat the market over the past twelve months with considerably less fluctuation.

Cash is King

I also believe that Deflation is a big risk, though longer term as the government prints more and more money to deal with deflation the risks will turn instead to Inflation. So far the data has proven this out. Money Supply has been falling and as of late, interest rates have fallen below key levels. My approach of holding cash or cash-like securities has caused some pain and generated not a few protests, but I believe this is the best route for right now. Holding cash and equivalents in a low interest-rate environment hurts and the government does this (keeps rates low) purposely to make you feel pain and to move your money out of lower-risk securities into higher-risk securities, essentially in order to bail out the more risky securities (find buyers for them). The more the government can get you to move up the risk spectrum, the more support risky assets will find and the less support the government has to provide and the less likelihood of risky assets collapsing. While the government believes this is good, it isn’t necessarily good for you - you should not be bearing the risk of over-indulged entities.

What Have I Been Up To?

As you know I take my job managing your money very seriously. I also am responsible for helping you with your financial planning needs. The last two years I have spent more time on economic and financial analysis than ever before and it consumes much more of my time than it ever has. This is due to several reasons, but primarily because I no longer believe that simply buying and holding the market is appropriate for most individuals. My point being is that I recognize we haven’t met as often as I or perhaps you would prefer. This isn’t lost on me and I want to assure you that I will make myself available for meetings and conference calls whenever you want to meet in addition to our regular meetings. I don’t want you to think I’ve forgotten about you if you don’t get a call from me for a few months. This is why I write my blog (please follow it at http://themeridian.blogspot.com) and this quarterly commentary - to keep you updated on my latest thinking. The amount of research I consume on a daily basis is truly extraordinary and I couldn’t do it without my new iPad (yes, I had to put a plug in for it!). My hope is that this additional work and research will allow me to make better decisions with your money. I believe it has paid off so far, but only time will tell.

What Can We Expect Going Forward In The World Economy

I am still not convinced that what we experienced (or are experiencing) is not a Depression. The term that has stuck with most news organizations and pundits is Great Recession, but I think they are using that term in order to avoid what has actually occurred, a Depression.

The problem with this thinking is that if we deal with the current economic environment as if it’s a garden variety Recession we end up not dealing with the fundamental issues that face our economy- we spend money we don’t have and bail out everybody except those on Main Street. This thinking makes the situation worse and prolongs it. Instead of intense pain that ends in a short-time period, we have opted for a less, but constant pain over a long time period.

I don’t know what the future holds for stocks, bonds or commodities. I have ideas and I try to build your portfolio around those ideas, but I am not convinced we have dealt with our economic problems sufficiently. If stocks were priced much lower and we had the same issues I could justify adding more risk to the portfolio, but not at these prices. Please understand as much as I WANT to be right, I might not be. Our economy could pick right back up and begin cruising along again with stocks hitting new highs, but I believe it would be artificial. The question remains for your retirement money - do you want to take extra risk to squeeze out a little extra return or would you be more comfortable taking less risk and ensuring that you retain most of your capital? My job is to attempt to align risk and returns, it is not easy and I won’t be right all the time, but my hope is that I am not so wrong as to cause unnecessary losses.

Interest Rates

So where are interest rates heading? Your guess is as good as mine, but here are my thoughts.

I believe interest rates are headed down and may stat there - unless we get an oil shock. If you have been reading my blog you will have noticed that I’ve tilted more toward the Deflation camp and have been warning that interest rates may fall further. In fact, that is what has happened. Could they fall even further? It is possible. Just look at Japan. For this reason, I don’t expect the Federal Reserve to raise interest rates until 2011 (or longer), meaning more pain for investors looking for income. Income investors are paying the price for the bailouts. Having said all that, I cannot rule out an Oil price shock. War and more fallout from oil leaks could put a crimp on supply or expected supply which could lead to high oil prices (right now prices are falling due to unexpected lower demand globally) and those higher oil prices could have inflationary effects on the economy (please note that this is not true inflation).

Longer term I believe there is a high probability the Federal Reserve will resort to another round of Quantative Easing or money printing. While many believe this will lead to inflation or a hyper-inflation (hence the Gold-bugs) I am not yet convinced. If all the printing simply ends up back on bank balance sheets and thus not in the economy it may have no affect (other than to take bad assets off the balance sheets of Too Big Too Fail banks). For money printing to work the money must circulate in the economy (referred to as the Multiplier), as of now it is not. While this does present an opportunity to be in high-grade intermediate bonds, I’m not convinced there are not risks there as well, but you can be assured I will continue my quest for appropriately priced income-risk assets (note, “income-risk assets” is a term I just made up).

Optimism: The Case For It (and a teeny bit of cynicism)

I don’t believe we will have a double-dip recession for two reasons:

1. I don’t believe we ever got out of the first recession, this is just a continuation
2. I don’t believe we are in a recession, I believe it is a depression

There is your cynicism! Like I’ve said in the past, I believe we are in a depression. When one fifth of the work force is unemployed or underemployed it is a depression. It just is.

You need to realize a few things about a depression, first, they are not new to Americans (but they are new to most current Americans) and two, they are not all “Great”. The Great Depression was considered “Great” because it was so bad in comparison to previous depressions. Unemployment was double what it is today. We are NOT in a Great Depression or a Second Great Depression or a Greater Depression. Great is a modifier of the word “depression” and Americans experienced many Depressions in our 234 years of existence. You must also understand that not everyone experiences a depression. Some thrive or simply don’t get hurt as much – hence Gershwin’s famous line “Nice work if you can get it”. Finally, this depression is, so far, very different from the Great Depression in turns of living standards and government safety nets. It should not be lost on us, however, that it is these safety nets that form part of the reason for our current economic malaise.

Now. for some good news. I know many of you have expressed your concerns to me that my commentaries can be a bit....depressing. I understand, but my obligation is to tell you what I see and not sugar coat it. In my heart I am an eternal optimist and I do see things that make me believe there is still.....pardon the overused expression....Hope.

First, as with the Great Depression, American’s attitudes toward spending, savings and family changed. Americans turned more inward and focused on taking care of one another. Americans also rediscovered the lost virtue of savings. My hope is that these lost virtues are found again (though the evidence on savings is not good right now). It is hard to save when you don’t have a job and you are over-leveraged and over-taxed. Further optimism is based on the continued technological and biological developments that are being made daily and the continued spread of the internet (and hopefully with it - knowledge), which unites people and ideas. If you think about the changes our world was on the verge of during the Great Depression that were positive, we are positioned in an even better manner now.

I’m convinced we can avoid another Great Depression (though not convinced we won’t avoid another World War), but not convinced we won’t. Regardless of how the next ten years play out, the next fifty will likely witness the greatest leaps forward ever witnessed by the human race. Things we never thought possible today will be commonplace for our children, grandchildren and great-grand children. Lessons learned today will hopefully not be forgotten easily (even though it feels like we learned nothing from 2008).

We continue to face major headwinds and currently face a lack of leadership to effectively deal with the structural issues our nation and much of the world face (please don’t think I am only referring to Democratic leadership, there is a leadership vacuum in general). My goal is to navigate you through these treacherous waters, knowing full well that we will float off course sometimes and will not always be correct, but with perseverance we will make it through.

Warm regards,

Scott Dauenhauer CFP, MSFP, AIF

ECRI Growth Rate falls to -9.8% - Bad Sign

2010-07-16T08:32:00.000-07:00

In the 42 years of data we have for the ECRI (Economic Cycle Research Institute) which tracks leading economic indicators there have been ZERO times where the US did not fall into recession when the index growth rate hit -10%, a point that we are .2% away from. As my readers know, I don't believe this signals another recession - I believe it signals the strengthening of the current recession/depression the United States (and much of the globe) is mired in.

Scott Dauenhauer CFP, MSFP, AIF

Quick Thoughts on Double Dip

2010-07-09T07:52:00.000-07:00

I'll be posting my 2nd quarter commentary shortly, but wanted to say something about all the Double Dip recession talk.

Many economists are forecasting another recession in the very near future, they are nuts. This whole concept of a double dip recession right now is almost a slap in the face. There can be no Double Dip as we never left the first Dip - we are still in recession.

Unemployment has not recovered and we are not adding enough jobs just to cover new entrants, nearly one in five Americans who can work - are not (or are not doing it full time) - that is not a recovery.

So, my quick thoughts are: We are not going to Double Dip because we never left the first recession - the first recession will continue to drag on (and, oh yes, its a depression, not a recession).

Scott Dauenhauer CFP, MSFP, AIF

Russian Spy Was (is?) A Certified Financial Planner!!

2010-07-02T12:55:00.000-07:00

You can't make this stuff up...or can you? 35 year old accused Russian spy Cynthia Murphy was a financial advisor. Not only that, she was a Certified Financial Planner to boot. Now, in addition to being worried about whether your advisor is running a Ponzi scheme you have to be worried they might be a spy!!

What is funny is that a few years ago I was talking to a television producer (okay, wannabe television producer) and I was explaining my idea for a show centered around a financial planner (I figured I could play the part) who also doubled as a CIA agent. Not exactly the same thing, but close. For the record, I am not a CIA agent...of course if I was I wouldn't tell you and I'd probably write a blog saying something like "For the record, I am not a CIA agent."!

I just couldn't resist posting this story.

Scott Dauenhauer CFP, MSFP, AIF

Pile On: Hussman & Pragmatic Capitalist - Recession/Depression On

2010-06-29T07:54:00.000-07:00

Prag Cap - The Third Depression

I was going to post these two links yesterday, but I wasn't feeling well (perhaps because I read them). I believe Hussman's post is a must read for everyone.

Whether these individuals are right is not really the point, the point is to be prepared because the probability they are right is very high. Whether the markets recover from this point or continue to crash, what is clear is that the US and the world have not chosen wisely and they will be forced to pay the price at some point. We failed to bite the bullet last time around and endure the short term pain necessary to correct the excess, thus we will have to do so at some point in the future and it will hurt more.

Sorry if this feels like piling on, I swear I'm not a pessimist. I'd still be willing to buy stocks even during market turmoil if they were priced right (of course its not exactly easy to know when they are priced right).

I think one fear that is in the market now is that of another hedge fund/bank blow up from unexpected lower interest rates (which is not unexpected but predicted by many, including myself). You see, many big investors have been betting on inflation and thus a run-up in interest rates, this hasn't happen and is probably causing big losses which could lead to short squeezes or illiquidity.

Fun times.

Scott Dauenhauer CFP, MSFP, AIF

There Is Hope: Krugman Predicts Third Depression

2010-06-28T08:13:00.001-07:00

For those of you who read me regularly (both of you) you'll know that I have an aversion to NY Times and Nobel Prize winner Paul Krugman's economics. Today he called for a third Depression, which I tend to agree with. He believes we are in a deflationary spiral that will lead us into another Depression. This prognostication does give me a bit of hope as if he believes it, there is a higher probability than not that it won't happen.

Krugman is of the Keynesian school of economics - a school which worships at the feet of government and credits FDR with getting us out of the Great Depression (which is baloney). The basic premise is that the government should step in and spend if consumers and business stop - we must grow at all costs and this means massive deficits (Keynes also said deficits should be paid down in good times....but nobody listens to that). Krugman believes that because the world and US governments are not spending enough or are not committing to spend more that this will end in a deflationary spiral.

This is of course fundamentally incorrect and an example of how economists who approach problems from different viewpoints can also come to the same conclusions.

I share the same fears of Krugman (but don't consider myself an economist) but for different reasons.

One thing I'd like to point out in Krugman's piece that surprised me is how he characterizes depressions, I don't know if he just doesn't know his history or if he chooses to follow his own rechristened history:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

This statement is not true. Recessions are a construct of the Great Depression. When the US economy was headed back into Depression (rather it was still in one) FDR didn't have it in him to call it a depression, thus he created a new term "recession". Before the Great Depression the US experienced only depressions. So yes, after the the Great Depression Recessions were common and depressions rare - but historically this is inaccurate.

Regardless, when Krugman and I agree than things are either really bad or I am wrong. Guess its time to study some more.

Scott Dauenhauer CFP, MSFP, AIF

RBS: "Monster" Money Printing

2010-06-28T07:21:00.000-07:00

Ambrose Evans-Pritchard continues with another column on deflation and what he sees as essentially a spiral which will end with the US Federal Reserve printing an enormous amount of money to prevent deflation. He cites a new an RBS letter to clients that talks of "Monster" money printing.

From the article:

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".

A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.

I've been saying this now for months.

The question is whether you should take this seriously or brush it off as another doomsday perma-bear trying to gain headlines (Pritchard is not a perma-bear)?

My old self would have brushed it off and told you to stay invested, even if things fall they will come back - however that theory has not proven itself out. I'm not saying get out of stocks, I am saying that you should get out of risk assets if you can't handle significant fluctuation. Yes, you may miss out on some upside, but preservation of capital is of the utmost concern now. A bird in the hand......

Does this mean you shouldn't ever own stocks? No, I still hold an allocation to stocks but have lowered it significantly and will increase this allocation if we get a significant fall. However, realize that we don't know exactly how the government will act in the future - if the Fed embarks upon another round of Quantitative Easing (i.e. Money Printing) we could actually see an eventual rally of stocks to heights we never thought possible. Of course this QE induced melt-up will eventually crash as well.

Unfortunately the path to prosperity does not lie with an ever increasing debt-load.

My gut tells me to be very, very cautious in this market - for me this means not holding too much in the way of risk assets, but being aware that some great deals may come down the pipe. If we have another deflationary scare and if TIPS (Treasury Inflation Protected Securities) react the way they did in 2008 (late) we might have another opportunity to buy these at very good prices.

I realize that many economists are calling for inflation, massive inflation and hyper-inflation, in fact many of these economists are individuals that I have a high degree of respect for, which makes things all the more difficult for me in determining how to design client portfolios. I do believe we are in a deflationary episode, but also believe it could lead to significant inflation. Let me emphasize that I could be wrong, very wrong. This is why I haven't advised people to buy commodities, specifically gold and silver - though I have advised how to buy if they want and said that I don't believe its a bad idea to have some precious metals on hand along with paper money (outside of the bank).

Where I might have dismissed these bearish prognosticators in the past, I feel I was wrong to do so. They may not be right, but they are reflecting information that should be incorporated into your financial plan.

My stance may prove to be imprudent from a growth perspective, but I can live with myself if my clients earn only a few percent if the markets return 20% better than I can live with myself if my clients earn a few percent and the market falls by 50%. This is a Will Rogers market.

Scott Dauenhauer CFP, MSFP, AIF

Quoted in Forbes: Teachers Facing New Financial Pains

2010-06-26T12:46:00.000-07:00

Quotes:

"They have no faith in the stock market and feel they've been misled that stocks produce a higher return [than bonds] or that they'll be rewarded for stock market risk if they just hold on long enough," he says.

Many school districts are also barred from giving financial advice or restricting vendors selling high-cost annuities from campuses, Dauenhauer said. That makes some teachers easy pickings.

"The insurance agents prey on the teachers fears," he said.

What's to be done? For starters, expect that your 403(b) will be as large a part of your retirement as your pension plan, and invest it accordingly. While some teachers may think that their non-pension retirement savings can be invested more aggressively because there is a backstop, Danhauer argues that teachers may find themselves on the hook for more of their health care costs down the line because of the shaky state of government finances.

"The 403(b) has been thought of as supplemental," he said. "My mission is to convince teachers that it is essential to a healthy retirement."

Scott Dauenhauer CFP, MSFP, AIF

Hall of Idiots: Krugman - Now and Later

2010-06-21T20:35:00.000-07:00

Nobel prize winner & NY Times columnist continues to espouse ideas that have led and will continue to lead America down the path to financial ruin.

Krugman continues to push for more and higher spending with the idea that it will lead to a recovery - a Hoover/FDR position that extended the Great Depression by up to seven years.

Keynesianism is dead and proven to be a dud of an economic theory, yet it continues to be a popular theory - it is leading us to failure.

Scott Dauenhauer CFP, MSFP, AIF

Borrowers exit troubled Obama mortgage program

2010-06-21T19:56:00.000-07:00

As I predicted when the program began, it is a disastrous failure.

Scott Dauenhauer CFP, MSFP, AIF

More Than 90 Banks Miss TARP Payments

2010-06-17T08:54:00.000-07:00

Homeowners can't make their payments and now the banks can't either - unless of course you are part of the big five. Unemployment numbers are terrible and the BP oil spill is likely to bankrupt BP and cost our treasury hundreds of billions over the next decade. The May inflation numbers came in and we have...deflation for the second month in a row. While I'm sure I could find some good news it doesn't really matter - we have done nothing to restructure our financial system or to reform our out of control spending. As I wrote several weeks ago - get ready for a new stimulus - to bail out the states........and of course the details of such a stimulus started to dribble out last week.

The market may continue to zoom, but the news is not confirming it, we have major structural issues and we aren't dealing with them (get ready for housing bust II) - which will ultimately lead to a financial crisis that will make 2008 look like a toga party.

Scott Dauenhauer CFP, MSFP, AIF

Scientists Warn Gulf Of Mexico Sea Floor Fractured Beyond Repair | Before It's News

2010-06-14T07:34:00.000-07:00

Scientists Warn Gulf Of Mexico Sea Floor Fractured Beyond Repair | Before It's News

A client of mine sent me this article, which, if true have huge implications for just about everything - our economy, our environment, future energy and our political bodies. The scariest part of this article is that they quote from experts that have real credibility.

Scott Dauenhauer

Bob Janjuah - S & P to hit 800, Massive QE Predicted

2010-06-04T14:39:00.000-07:00

Bob Janjuah - if he's right......look out below. We should not discount what he has to say.

NY Times Opinion|Einhorn: Easy Money, Hard Truths

2010-05-27T07:46:00.000-07:00

From David Einhorn in the NY Times Opinion Today:

"Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.

EASY money has negative consequences in addition to the risk of inflation and devaluing the dollar. It can also feed asset bubbles. In recent years, we have gone from one bubble and bailout to the next. Each bailout has rewarded those who acted imprudently. This has encouraged additional risky behavior, feeding the creation of new, larger bubbles.

The Fed bailed out the equity markets after the crash of 1987, which fed a boom ending with the Mexican crisis and bailout. That Treasury-financed bailout started a bubble in emerging market debt, which ended with the Asian currency crisis and Russian default. The resulting organized rescue of Long-Term Capital Management’s counterparties spurred the Internet bubble. After that popped, the rescue led to the housing and credit bubble. The deflationary aspects of that bubble popping created a bubble in sovereign debt, despite the fiscal strains created by the bailouts. The Greek crisis may be the first sign of the sovereign debt bubble bursting."

Scott Dauenhauer CFP, MSFP, AIF

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

2010-05-27T07:20:00.000-07:00

The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said.

As I've stated before, Deflation is a real possibility at this point and this is a major indicator. Get ready for more money printing and more "stimulus" packages (there is already a new state bailout bill pending, of course it is called something else).

Scott Dauenhauer CFP, MSFP, AIF

Simon Johnson: The Financial Reform Sham

2010-05-26T11:52:00.000-07:00

Former economist for the IMF and author of 13 Bankers (or should we say Banksters) Simon Johnson writes:

By now you have probably realized – correctly – that “financial reform” has turned into a victory lap for Wall Street.

When they saved the big banks, with massive unconditional support (both explicit and implicit) over a year ago, top administration officials promised they would be back later to fix the underlying problems. This they – and Congress – manifestly have failed to do.

Our banking structure remains unchanged, the rules will be tweaked at the margins, and the incentive and belief system that lies behind reckless risk-taking has only become more dangerous. (The back story, if you can still stomach it, is in 13 Bankers).

If you think this is scary, read on:

No doubt the administration feels good about what it has “achieved” on financial reform. The public aura of mutual congratulation will last for about three weeks.

At one point in early 1998, Larry Summers called Brooksley Born – the last person who really tried to rein in the dangers posed by derivatives (and it was a much lower level of danger then compared with now). Summers reportedly said, “I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.”

We now seem to have come full circle to exactly the same people saying exactly the same things – no doubt top people in the administration are now calling Senator Lincoln and impressing upon her a version of the same point made by Summers to Born.

The 13 bankers have won, completely. Here we go again.

We are setting ourselves up for something that is entirely without precedent.....unless you consider history.

Scott Dauenhauer CFP, MSFP, AIF

Zweig: Legendary Investor Is More Worried Than Ever

2010-05-25T16:02:00.000-07:00

Sorry to do this to you, this is another Wall Street Journal article by Jason Zweig.

Zweig got the chance to interview the legend you've probably never heard about, Seth Klarman, it was one of the most important interviews you will ever read. You can click the link above to read the article (hopefully its not behind the subscription log-in) or you can read the entire interview below:

Notes from Seth Klarman's discussion at the CFA Institute's Annual Conference

You will not read more important words of financial wisdom.

Scott Dauenhauer CFP, MSFP, AIF