Month: July 2013

Many Will Not Retire; What About You?

Many Will Not Retire; What About You?

 

Retirement.? A concept of the late 1800s to the present.? Easy to swallow when the population is growing rapidly.? Tough to do when populations are growing slowly, much less shrinking.? I would point you to two articles I have written:

With stock prices high and interest rates low, many people look at their portfolios and smile: high current market values.? But what would happen if you had to turn?it into income?? Interest rates are low.? Dividend yields, though better than the past, are still pretty low.? This is another place where total return blinds us to economic reality.? If market values have risen solely because people are desperate for yield, earnings, etc., and not because future productivity is likely to be far higher, the rise in asset values does not represent a rise in distributable cash flows, which is what investors truly need.

Think of this a different way, and ignore markets for a moment.? How do we take care of those that do not work in society?? Resources must be diverted from those that do work, directly or indirectly, or, we don’t take care of some that do not work.

Back to?markets: Social Security derives its ways of supporting those that no longer work from the wages of those that do work.? That’s one reason to watch the ratio of workers to retired.? When that ratio gets too low, the system won’t work, no matter what.? The same applies to Medicare.? With a population where growth is slowing, the ratio will get lower. If the working population is shrinking, there is no way that benefits for those retiring will be maintained.

Pensions tap a different sort of funding.? They tap the profit and debt servicing streams of corporations and other entities.? Indirectly, they sometimes tap the taxpayer, because of the Pension Benefit Guaranty Corporation, which guarantees defined benefit pensions up to a limit.? There is no explicit taxpayer backstop, but in this era of bailouts, who can tell what will be guaranteed by the government in a crisis?

Current low interest rates imply that there aren?t a lot of highly productive projects yearning for capital.? This is a product of overly easy monetary policy that never let recessions clear away bad projects.? Low interest rates make future promises more expensive for defined benefit plans, and make it harder to accrue assets for defined contribution plans.

Do you have one million dollars socked away yet?? No?? Under optimistic assumptions, maybe you can earn 4% on your money without touching the principal.? That would give you $40,000/year pre-tax.? Add in Social Security, and maybe you can make things work.

If you want to give up liquidity, and any sort of estate for heirs, you could annuitize all or part of your assets, bringing your yield up 1-2%.? For whose who have less money, that could make things work.

That said, inflation could throw a monkey wrench into all of this.? Buying inflation protection knocks around 0.5% off yields.? But who knows how much the government will encourage or discourage inflation?? That is the leading open question at present.

Summary

So long as interest rates remain low, and asset values high relative to replacement cost, funding retirement will be an expensive proposition.? Not many will be able to do it.? As population growth slows, government entitlements will prove difficult to maintain at current levels.

As such, we should expect older people to work longer than their parents and grandparents did.? In many cases it will be ?Work till you die.?? The idea of retirement as a long vacation at the end of life will only be true for the well-off, a minority of the population.

And compared to prior history, that?s how it should be.? A comfortable retirement is an expensive proposition, and not something that can be given to everyone by government fiat.? The economy only has so much productivity; to the degree that retirees suck off resources, there is that much less to help the economy grow.

I write this as a 52-year old man.? I have opportunities ahead, but for most people in the Western nations, as demographics lead to older populations, economies will decline unless something comes to revive growth in population.

To those who are older, I say ?Be ready to work.?? To those who are younger I say, ?Plan and prepare, save, and figure out how to supplant the oldsters who occupy the positions you want to have.?

It?s not going to be easy over the next forty years.? But if it were easy, everyone could do it.? Instead, those who are prepared will do it.? And so my readers, get ready to do it.

Sorted Weekly Tweets

Sorted Weekly Tweets

Bond Markets

 

  • Pimco Sells Canadian Provinces After Worst Rout Since ?94 http://t.co/POYIjfboYV Fascinating 2c everything hit after shift in Fed Lingo $$ Jul 05, 2013
  • Fund Manager Ducks Mortgage Trouble?at His Peril http://t.co/SX3sFQ0jX5 When Krsnich can’t find mtges worth investing in, he gives $$ back Jul 05, 2013
  • Wealthy Americans Benefit From Banks Hunting Jumbos http://t.co/FJbeZimpim Jumbo 5/1 ARMs 0.09% under prime, 30Y fixed 0.16% over prime $$ Jul 03, 2013
  • Gross Caught in TIPS Trap Gundlach Sidestepped in Tumble http://t.co/aT1cJZv0wh Until 2 months ago, TIPS had expectations 4a rising CPI $$ Jul 03, 2013
  • Bond Market’s Memo To The Fed: This Is Not A Misunderstanding, This Is A Blow-Up http://t.co/jLBbFDT7f1 Expect short rates 2 rise: Boom! $$ Jul 02, 2013
  • Bernanke’s Misfired Shot Heard ‘Round The World http://t.co/AlsbrOpGht The bond market understands the Fed; Fed doesn’t get the bond mkt $$ Jul 02, 2013
  • Who Goes to Cash Shows Extent Bonds Will Become Bear Market http://t.co/atkAmUbJoK Worries over a self-reinforcing rout a la 1994 $$ Jul 01, 2013

 

Rest of the World

 

  • Obama Call for Muslim Brotherhood Role Overtaken in Egypt http://t.co/eJquVIdGED Democracy is only as good as marginal person who votes $$ Jul 05, 2013
  • Few Roads Leading to China Tell Tale of Mongolia Fears http://t.co/O9KIR9lc5i Long article on Mongolia/China frictions & opportunities $$ Jul 05, 2013
  • Mobius Weighs Private Equity as Way to Access African Growth http://t.co/m3D1CKiFeF The world has changed, if Africa is investable $$ Jul 05, 2013
  • Toronto?s soaring condo market ignites fears of a US-style crash http://t.co/LYnhx5dK8l That is what u r facing a US-style crash, sorry $$ Jul 05, 2013
  • Britain’s baby boom will affect our economy more than anything Mark Carney does http://t.co/ti8aiU4jFX Demography is destiny, no doubt $$ Jul 05, 2013
  • Lottery Raided as $115 Billion Hole Filled http://t.co/vvyH4CE6pN Appreciate the growing Argentine Kleptocracy 4 what it is, a failure $$ Jul 05, 2013
  • The US Should End the Cuban Embargo http://t.co/aU6562c3BM The ability 2 trade w/the US will increase demand 4 more freedom in Cuba $$ Jul 03, 2013
  • Emerald Thieves Brave Dogs to Sap Zambia?s Gem Revenue http://t.co/4TKAKutxxP People will take many risks in order 2 take care of family $$ Jul 03, 2013
  • Mursi No Longer Egyptian President After Military Action http://t.co/VuyzxXCU8s Now 2c how much public & Brotherhood supports military $$ Jul 03, 2013
  • Loan Practices of China?s Banks Raising Concern http://t.co/QdOVNNx1q8 Lure depositors into illiquid nonguaranteed products w/high yields $$ Jul 03, 2013
  • Portugal Resignation Rocks European Markets http://t.co/v3bEhcXwrW Foreign minister resigns, Yields Rise Sharply, Stocks Fall in Europe $$ Jul 03, 2013
  • Looking abroad for better investment http://t.co/ayUAUFNU5l Not only investment, but a better place to live. Well-off Chinese try2leave $$ Jul 02, 2013
  • Chinese Malls Waive Rents as Vacancies Loom http://t.co/lpWb0yQV75 How do the malls stay afloat in the long run? Banks will loan 2 them? $$ Jul 02, 2013
  • Unrest Roils Egypt as Army Deadline Moves Markets http://t.co/mddmYI82I7 Stocks rally; in some nations, stability of army rule is prized $$ Jul 02, 2013
  • Give Us Your Real Dollars for Our Fake Dollars: http://t.co/ioBcU1N2U7 Argentine govt attempts to soak up USDs held by citizens 4 itself $$ Jul 02, 2013
  • Syria?s Annual Inflation Hits 200% http://t.co/QsqIPNc52G Wars, especially civil wars r ripe to create inflation, even Sun Tzu knew that $$ Jul 02, 2013
  • EU Leaders Set to Slow Support for Ailing Banks http://t.co/yrwTgNbqor ?Banking union is, to all intents and purposes, dead.” $$ Jul 01, 2013
  • Tempers fray in France as drastic cuts loom http://t.co/l8EPQPKCQ4 Eurozone will end with France withdrawing, it is too big to bail out $$ Jul 01, 2013
  • After the liquidity crunch http://t.co/sAp85eE4GH Keeping inter-bank interest rates stable – a key to $$ policy – is not yet a policy target Jul 01, 2013

 

Companies & Industries

 

  • Why Are California’s Businesses Disappearing? http://t.co/CdRcmrWZ6s The right Q is “Why Do Any Businesses in California Decide to Stay?” $$ Jul 05, 2013
  • Answer: Clumps of talented people & industries that would b difficult to relocate. Network effects that would b tough 2 duplicate $$ Jul 05, 2013
  • & a bunch of clever people built their biz there, & don’t want to leave their poorly-run home state, same as MD http://t.co/3Bm0REbYGc $$ Jul 05, 2013
  • Inland US refiners hit by collapse in Brent-WTI oil spread http://t.co/79yEHqYvLt Adequate tankcars send gas prices down in CA up Midwest $$ Jul 05, 2013
  • Truckers Are Losing Sleep Over 70-Hour Workweek Limit http://t.co/aXRhVvq6er It pushes trucking costs up, causes industry to complain $$ Jul 03, 2013
  • Samsung Slides Equivalent of Sony as S4 Sales Disappoint http://t.co/aae6GoUdPe Smartphones become a commodity business; multiples drop $$ Jul 01, 2013

 

US Health Insurance

 

  • Health-Law Employer Mandate Delayed by US Until 2015 http://t.co/f4waOST0ax A small boon 2 employers who hire many unskilled workers $$ Jul 03, 2013
  • Long-Term-Care Insurance Gap Hits Seniors http://t.co/QkWlGDfCdA No surprise. Long-term care is not insurable. Companies lose $$ ;prems go ^ Jul 02, 2013
  • Health-Insurance Costs Set for a Jolt http://t.co/C4B8c2FzUj For the Healthy, Rates Will Soar Under New Law; Sicker Consumers 2c Relief $$ Jul 01, 2013
  • Obamacare 1.0: States brace for Web barrage when reform goes live http://t.co/1YU4Bey8ZL Biggest unforced policy error inflates premiums $$ Jul 01, 2013

 

US Politics & Policy

 

  • Elizabeth Warren Tackles Wall Street http://t.co/3HjkAZcuNY Article begins about Warren, ends w/complaints about the unaccountable Fed $$ Jul 03, 2013
  • 10 things Social Security won?t tell you http://t.co/G7JIC1fK68 Small error: SS benefits will be cut in 2026, not 2033, but a good piece $$ Jul 03, 2013
  • Exclusive: Edward Snowden’s father suggests son’s leaks may be protected by Constitution http://t.co/1ZOiwHqKYj Sad 2c a father lose son $$ Jul 02, 2013
  • How Not2Misunderstand Scalia http://t.co/HETEmoM4yd Some ethics r not in Constitution; Congress makes sum unethical laws constitutionally $$ Jul 02, 2013
  • IOW, Scalia looks2 original intent of Constitution; where it is silent, that means Congress has power to act, & can lead 2 unethical laws $$ Jul 02, 2013
  • The Criminal NSA http://t.co/mK1wulNL0t 4th Amendment obliges government 2demonstrate probable cause b4 conducting invasive surveillance $$ Jul 01, 2013
  • FBI?s Data Mining Needs Scrutiny, Too http://t.co/eeuDaL6IYK We need to move back 2 limited government & realize terror is a small threat $$ Jul 01, 2013
  • Simons Strategy to Shield Profit From Taxes Draws IRS Ire http://t.co/vKAKFfbQja Another reason why investors should be taxed as traders $$ Jul 01, 2013
  • Last tweet: it also helps explain y all income should be taxed at the same rate, with no ability to defer income taxes $$ Jul 01, 2013
  • Uninsurable Risks http://t.co/ezcqpSiYmt I’m not worried about climate, that’s cyclical, but abnormal $$ policy is running into the wall Jul 01, 2013
  • US Economy:7 Critical Indicators of Potential Recession Flashing RED http://t.co/sSTItHGd6J YOY declines 4 7 indicators:hi recession odds $$ Jul 01, 2013

 

US Monetary Policy

 

  • How Fed?s 7% Jobless Avoids Deterring Bondholders Is Mystery http://t.co/tcqXDr1KBt It confuses & it raises the path of forward rates $$ Jul 02, 2013
  • How Sensitive we are to Interest Rates: A Scary Picture? http://t.co/Re8aDixkFf Central banks will do all they can to keep rates low $$ #FTL Jul 02, 2013
  • Sizing Up Bank Risk Using VAR Is a Stab in the Dark http://t.co/wi3ZJsod1u Only long-term stress testing is adequate 2 manage risk $$ Jul 02, 2013
  • Fed Voting to Bring US Capital Rules in Line With Basel http://t.co/BiCBh3Y4MR Basel offers 2much flexibility 2mgmt teams 2 shape result $$ Jul 02, 2013

 

Other

 

  • Doug Engelbart Delivered the Mouse and Other Large Inventions http://t.co/jxo6H50Xk2 Died @ 88, made a lot of $$ 4 others, changed computers Jul 05, 2013
  • Confessions of a Stay-at-Home Mom http://t.co/Sc3J3oj1QX True 4 men 2; employers pay less to those who won’t sacrifice home 4 work $$ Jul 03, 2013
  • Single-Father Households Are Growing Much Faster Than Single-Mother Ones http://t.co/B1kUluZxxt Still, the real problem is female poverty $$ Jul 02, 2013
  • Cheating Wives Narrowed Infidelity Gap Over Two Decades http://t.co/6VhGcyBDPl We can make women bad, but we can’t make men good $$ #sad Jul 02, 2013
  • Ellison Speeds Up America?s Cup With Flying Cats in Spectacle http://t.co/uqD71IjSkU He has remade the America’s Cup, & made it hi-tech $$ Jul 02, 2013
  • Gold Traders Seeking Floor After $66B Rout http://t.co/s0xwQdqtx2 Not much different than any market fallen hard: where’s the bottom? $$ Jul 02, 2013
  • Of course, what’s new with gold is all of the derivative activity going on around ETPs, the facility of trading paper gold, etc. $$ Jul 02, 2013
  • The Cost of Cashing Out Your Life Insurance Policy http://t.co/4hra2qGlMK Selling a policy 2a third party has tax and other implications $$ Jul 01, 2013

 

Wrong

 

  • Wrong: Odds you?ll save enough to retire? 50/50 http://t.co/cMPTzPiESe Sorry, but the odds are lower. The writer does not understand. $$ Jul 05, 2013
  • Wrong: Warren Buffett: More myth than legend http://t.co/SJZEmEc9MW Buffett runs so much money he can’t run it like a value index fund $$ Jul 03, 2013
  • Wrong: Fed Ready for September Taper After Shocking Market, Meyer Says http://t.co/M70XlUXbNP Fed will find it very difficult 2 taper $$ Jul 03, 2013

 

Replies, Retweets & Comments

 

  • RT @JamesGRickards: Just in case you think the #Fed has any idea what they are doing, this graph will cure you of that delusion. http://t.c? Jul 05, 2013
  • @OccupyWallSt @JamesGRickards Given that most babies born @ 20 weeks, aided by technology would survive, abortion after that is infanticide Jul 04, 2013
  • . @davidmanheim I’ve known too many truckers & I would b loath 2 take bread from them; bankers r another matter & should b regulated tightly Jul 03, 2013
  • . @davidmanheim Could b… 1 of the few professions that works as long & hard as investment bankers (w/externalities). Hey Comparable Worth! Jul 03, 2013
  • . @ProForexCourse Nothing has intrinsic value; it’s all a question of how much u r willing to exchange of A for B at a given moment in time Jul 03, 2013
  • @wggm Macro plays a role in my bond investing, not so much with stocks Jul 03, 2013
  • @wggm I think the Fed will find that it can’t reduce the flow of policy accomodation without violent reactions like this w/weak economy Jul 03, 2013
  • @marcmakingsense @ballenmo Still, the amount of gold used 4 industrial purposes is piddly compared to uses 4 jewelry, bars & coins Jul 01, 2013
  • . @stockbets I am sorry but I have seen many cases where arithmetic averages r put into simulations as if they r geometric averages $$ Jun 30, 2013
  • . @davidmanheim BP’s sloppy safety record is the main issue, but this article is about grifters wanting to score when they weren’t hurt $$ Jun 30, 2013
  • . @ballenmo You are right, gold does nothing, & that is why it is valuable http://t.co/pojnNG1fkE Gold is anti-financial repression $$ Jun 30, 2013
What NOT to do in Job Interviews

What NOT to do in Job Interviews

I have made my share of mistakes in interviewing.? I?d like to share them with you.? I have many faults, but the one that applies here is overconfidence.? Confidence is a huge part of interviewing.? They want to see a strong candidate confident in his skills.

I remember when I interviewed with a prominent mutual insurer, and the interviewer asked what I knew about the company.? I have a good voice, so I sang the theme song from the company as I remembered it.? He looked at me and said, ?That theme song was discarded 20 years ago; it is astounding that people still remember it.?? (Note: they should have kept the theme song; it worked.? Marketers get tired of their advertising long before clients do.)

With another large mutual insurer, I regaled them with tales of what I did at a smaller stock life insurer.? I spent a lot of time talking about the company as a whole, also.? What was going right, wrong, etc. ?It convinced them that I would not fit their culture, because no one had that kind of authority in their large firm.? I seemed to be a ?wild man? to them.? They wanted someone to be ?another brick in the wall,? whereas I was more of a businessman, liking big projects that were multidisciplinary.

Avoid musing about novel ways to modify the industry ? I remember suggesting to a credit card company that it should provide additional services to those that pay in full each month, such as a high yield money market fund, or other sorts of investments.? Why not make more money off of those who have more money?? After all, that?s valuable client information.

Then there was the time that I had recently discovered the game ?Set.?? The game has three attributes in four dimensions ? a great game for the mathematically minded.? So I showed to another actuary at lunch during an interview, that couldn?t have harmed my chances, right?

At another interview, an older guy asked me what I would find interesting in investing.? I gave him an honest answer, ?Buying broken insurance companies, fixing them, and selling them for a profit.?? He said, ?Ah, merchant banking.?? In hindsight, I know he dismissed me at that point.

That brings me to another point, beware big guys.? I often impressed the guy who would have been my boss, but ended up losing on his boss, who was looking for a conventional hire.

What can I say?? I?ve always been a threat to badly run hierarchies.

One more note: in the early days, I always had a bright tie color; this worked against me, as insurance companies generally did not like those who were certain in their views.? I was visually too bold.

Last point: when I knew I didn?t want the job, I would give them free consulting.? I would tell them where their strategy was wrong, and what they needed to change.? That never got me a job, but it scored points for me regarding honesty.

Conclusion

I am glad I did not get many of the jobs to which I applied.? I would have been smothered by the bureaucracy, and would not have liked it.? My weaknesses helped to expose the culture of the firms to which I applied.

And so I would say, unless you are desperate for work, be yourself.? Inquire into the culture of the firm to which you are applying to see if there is a good fit.? Don?t work somewhere that will be? constant pain for you unless you have no good alternatives.

On Long-Term Care Insurance

On Long-Term Care Insurance

I’ve said this before, but it bears repeating: be careful in any transaction where the other parties know the deal better than you do.? In most insurance transactions, the company knows more about the transaction than the individuals or firms seeking coverage.? There are exceptions, though, when the model for policyholder claims behavior is not well-understood.? This exists in life and annuity coverages in small ways, and in health, disability, and long-term care coverages in greater ways.

The main advantage that a potential life/disability/health insurance buyer has is that he knows the details of his health far better than the insurer does.? Underwriting standards vary across companies, and not all companies are as thorough at checking the health of the insured as the others do.

With life and annuity coverages, outside of life settlements, this risk to the insurance companies is small, because the actuaries expect the potential losses from the hidden knowledge of the insureds, and build it into pricing.? Death is a tough way to make money, and those using it to make money off insurers must pay a heavy price to do so.? When death stares you in the face, it seems kind of callous to say, “How can I make money off this for my heirs?”? Most people realize that there is something more serious going on than making money, when death is near.

But when we deal with health matters, things get more murky, particularly the older we get.? Again, insurers will attempt to determine those that have the greater probability of making significant claims, but the ability to do so is more limited, because people know when they are not well beyond when they have sought medical help in the past.

(This is one reason why Obamacare (PPACA) will end up increasing costs for most healthy people.? By attempting to cover everyone, and limiting the ratio of premiums from the sick to the healthy to a factor of three, those who are healthy will pay a lot more, or find some clever way to drop out.)

As an aside, before the modern health insurers found their footing around 1988, cumulative profits for the industry as a whole was negative.? Since then, they got better at discriminating on what groups/individuals they would cover, and those they would not.

But with long-term care insurance, the insurance industry has not made money to date. Why?? Insurers have consistently underestimated the willingness of people to file claims on their policies.? Thee is no incentive not to do so, unlike death.

Thus the insurers have been in a battle involving raising premiums on new and old business, with healthier business leaving.? The model doesn’t work, I don’t care what the largest writer Genworth thinks, when the article says:

Genworth Financial Inc., with about a 33% market share of long-term-care policies sold to individuals, said in May that it is seeking premium increases averaging more than 50% to stave off more losses in its oldest policies.

Genworth also halted sales June 1 through AARP, the older-Americans’ group with a huge pool of potential customers.

“We’ve learned a lot over the last 30 years, and we now believe we have a better ability and more knowledge” to issue policies that “provide significant financial protection to Genworth,” Genworth Chief Executive Thomas McInerney said in an interview.

The insurer started requiring blood tests and other medical screening, which the industry generally hadn’t done before. And it is charging women who apply individually more than men for the first time because women tend to live longer and require more years of care.

That brings me to this summary: don’t own companies that are deep into long term care, like Genworth.? Think of Penn Treaty, and other companies that went bankrupt as a result of long term care.? Long-term care? is not insurable; those insured have too much control over when they make claims.

As for those with long-term care policies, if they are old, keep paying on them, you will likely do well on them when you finally need to draw on the policies.? You have benefits that benefits that can no longer be purchased.? Enjoy the exclusive club you are in.

Improve Your Skills

Improve Your Skills

We live in a world where we no longer have to grow our own food, spin our own cloth, drive away predators, and much more.? There was a time, 100+ years ago where most people had to do the same thing, and? there were a few specialists.? Today, we are all specialists, aside from some who live in desperately poor countries.

But specialists have a problem.? What if their specialty is being changed because of technology?? Or, what if their specialty is being eliminated by the internet?? It’s not as if you can go back to being a farmer; now you have to compete by updating your skills if your skills are in less demand than previously.

It is incumbent on specialists that they fend for themselves, and be aware whether their skills are decreasing in value.? Because improving skills is not generic, I can’t tell you what to do, aside from the idea of improving your knowledge of how the company makes profits, or even better, finding a new area, usually adjacent to existing businesses, where the firm can make money.

If your specialty is dying, you might have to look to areas near yours, and show competence, or get retrained.? If you sell something, you can sell something like it.? If you operate or service something, you can do it for something similar.? For those the manage cash flow or the whole of the company, you can find similar j0bs in companies like yours, though you might have to take a step down.

As I see it, taking a step down is getting your foot in the door.? It is far better to be working at a lesser job than to be idle.? The longer you are idle, the less employable you are seen to be.? Once you have a job there are abilities to advance inside and outside the firm.? If you are employed, it is a signal to other employers that you are valuable.

But beyond that, you have to be vigilant.? Is there a way for technology or cheap labor to eliminate your position?

That’s the problem and glory of the division of labor.? The division of labor makes us all better off as a whole, but not necessarily each one.? There are often those that lose, and I would argue, it is their fault because they did not adapt.? No one is entitled to their living.? If family farms can’t earn their keep, it is better that they should sell.

That is why I say clever workers need to understand their core skills intensely, but need to know the adjacent skills to a decent degree.? Beyond that, do you understand:

  • how the business makes money?
  • the strategy of the company within the industry?
  • how suppliers view the industry?
  • how consumers view the industry?
  • how to manage subordinates well?
  • non-economic problems that are holding the company back?? (I.e., a squabbling management team.)
  • the effects that changing economic policy have on the industry and company.

You are your own best guardian, in human terms.? No one else has as concentrated an interest in your career as you do.? Therefore, take the opportunity to improve your skills.? It will likely pay off.

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