April 2009 – Page 2 – The Aleph Blog

To What Degree Were AIG?s Operating Insurance Subsidiaries Sound? (1)

Posted on 28 April 2009 by David Merkel

Hey, friends.? My piece on AIG is done, and I will be posting over the next few days, and resume a more normal posting schedule.? Here it is:

Summary

Aside from the mortgage insurers, the P&C subsidiaries were basically sound, though with some issues such as capital stacking, affiliated assets, etc., as mentioned below.? The non-mortgage P&C subsidiaries didn’t have a great 2008, but they would have survived as standalone entities.

The life and mortgage subsidiaries are another matter.? Without the help of the US Government, many of them would have failed.? Even now, given the levels of affiliated assets, capital stacking, deferred tax assets, etc., they are not in great shape now should there be another surprise.? Profitability is likely to be lower in the future than in the banner years of the middle of the 2000s decade.

Introduction

When the economic history books get written about the crisis at the end of the 2000s decade, the difficult analyses will involve Fannie, Freddie, Lehman, AIG, and the large banks that failed.? The degree of leverage employed, both explicit and implicit, will be quite a tale, as will the abandonment of underwriting standards.

This piece is meant to deal with the company that I view as the most complex, and the most levered – AIG. There have been many attempts to explain the problems at AIG, with most of the attention paid to AIG Financial Products.? This analysis is meant to be complementary to those analyses, because I will focus on AIG’s regulated US Life and P&C subsidiaries.? I have gone through the Statutory books for these subsidiaries, and there is an interesting tale to be told.? (A better story than how I got the Statutory data, even.)

Flashing back

Several incidents shaped my perception of AIG over the years.? Working there in the domestic life companies from 1989-92, I heard the AIG mantras:

15% return on average equity is the golden rule of AIG. Subsidiaries and divisions that cannot meet that will be eliminated.
We exit business lines that cannot meet our return goals.
Keeping the AAA rating is of utmost importance.
Our accounting should be conservative.
Keep expenses low.
Few people make it past five years at AIG, but if you can survive that long, you will be a lifer, and you will be rewarded.
We didn’t take over The Equitable because we couldn’t get to the 15% target. That said, the takeover team scared them away, and into the arms of AXA (another accounting nightmare I suspect).

I took the rules seriously.? I ended up closing two lines of business that could not meet return goals, and found two centimillion-dollar reserve errors.? There were several products that never made it to market because they could not meet the 15% return goal.

But there was the rest of the story:

“Dealing with auditors is bloodsport.”
“I drop my deficiency reserves in the Atlantic Ocean.” (via reinsurance)
“I like the pension and annuity businesses because they give some bulk to our balance sheet.” (Reputedly M.R. Greenberg said this to a colleague of mine. We scratched our heads over that one, because it was so anti-AIG philosophy.)
Heavy reliance on surplus relief reinsurance in order to front statutory earnings into the present, and reduce capital needs.
My boss found two centimillion-dollar reserve errors also.
“Dealing with reinsurers is bloodsport. Never give them an even break.”
Clever use of transfer pricing to get money out of blocked currencies.
Arrogant guys at AIG Financial Products that would hardly acknowledge you as part of the same team at conferences.
And, a $1 billion GAAP reserve understatement at Alico Japan in 1992.

There was AIG in theory, and in practice.? I was a young actuary at the time, and relatively idealistic, but it was easy to get cynical in a highly politicized office environment, where almost everything was a fight.? Thus my view of AIG was always colored by the hidden leverage, the large losses that never seemed to derail the company as a whole, and the bare-knuckled approach to business.

I could not live with my conscience while I worked there, so I sought greener pastures from year one there – it took two long years to get the right position.? Two very hard years.

Fourteen years later, I had dinner with a well-regarded sell side analyst while visiting P&C companies with him in Ohio.? The management teams we talked with thought we were twins separated at birth.? Our views were very similar, except on AIG.? He asked me why I didn’t like AIG – it was so cheap.? I told him the story that I have told you, and one more thing: when I worked for AIG, there was virtually no debt.? By 2006, the degree of financial leverage was four times higher than when I worked there.? The 15% ROE was intact, but the return on assets had dropped like a stone, and leverage from debt made up the difference.

I told him AIG was not the great company that it once was.? It was far more leveraged, and the ratings agencies were behind on their evaluations.

To the Statutory Statements

The statutory statements record the life of an insurance operating subsidiary.? The regulators require insurance companies to publicly disclose far more data than the banks do to their regulators.

Insurance holding companies own their subsidiaries, and survive by receiving dividends from the subsidiaries, or borrowing against them.? Operating subsidiaries receive cash from holding companies when opportunities are good, and dividend back when there aren’t as many opportunities.

The ability to dividend back is controlled by statutory accounting principles, risk-based capital rules, and also by the state regulators.? This places insurance holding companies in a tough spot; they need dividends from some operating subsidiaries to survive, particularly during times when credit is not available on favorable terms, if at all.

The key question I went off to answer is to what degree were AIG’s operating subsidiaries sound? We all know that AIG Financial Products was a basket case, but perhaps the rest of the operating companies were in good shape.? The answer to this question is mixed, and I will attempt to explain where there are weaknesses and strengths.? Sneak Preview: the weaknesses outweigh the strengths.

Given my prior experience with AIG, I expected to find question marks in the area of reinsurance.? I did find some, but it wasn’t the biggest area of problems.? I’ll try to take the problems in order of importance.

Book Review: Trend Following (4)

Posted on 28 April 2009 by David Merkel

While reading the book Trend Following, I was reminded of something that I read in The Intelligent Investor (I have the Fourth Revised Edition.)? These are two very different books.? What could be the same?

Fortunately, you don’t have to have a copy of The Intelligent Investor to see this.? Appendix 1 of the book is, the edited transcript of Warren Buffett’s talk that he gave at Columbia University in 1984 for the 50th anniversary of publication of Security Analysis can be found here.? The PDF version can be found here — it has the tables, but will take a while to load.

Buffett chooses 9 investors in the mold of Ben Graham, all value investors, and shows how they have soundly trounced the market over their tenures.? He uses that correlation to demonstrate that since they all used the same basic theory of investing, it is unlikely that their wonderful performance is due to mere chance.

In appendix B of his book, Michael Covel chooses 14 (or so) investors who are trend followers, and shows how they have soundly trounced the market over their tenures.? He uses that correlation to demonstrate that since they all used the same basic theory of investing, it is unlikely that their wonderful performance is due to mere chance.

See the similarity?? Now, I think that both approaches work to some degree, though not all of the time.? I have known a number of managers that have married the two approaches, usually with some success.? (As Humble Student Cam Hui points out, marrying the two may be more difficult than it seems.? I’m going to have to dig up that copy of the Financial Analysts Journal.)

I would criticize one aspect of Buffett’s logic, and the same would apply to Covel.? I’ve known my share of bad value investors.? Usually they overemphasize cheapness, and forget “margin of safety” as the key intellectual concept of value investing.? It’s easy to come up with a group of great managers following a certain strategy in hindsight.? Where is the grand study of all investors of that class, be it value investing or trend following?? Almost any strategy could be made to look good if one can cherry-pick the investors with the advantage of hindsight.

So, what would qualify as a valid study?? You’d need a relatively complete census of the group following a given strategy, including those that failed and dropped out.? After that, audited returns would help, as Mr. Covel likes to point out.? An alternative would be to follow a smaller closed cohort of managers following a certain management style.? The problem with that is you yourself might have a really good eye for management talent apart from the investment style.

Another alternative would be an academic-style study where the researcher defines the buy and sell criteria and then sees if the method beats the market, whether adjusted for risk or not.? Now, regarding risk, that is one of many places where I agree with Mr. Covel.? Standard deviation does not measure it; beta doesn’t measure it; tracking error doesn’t measure it.? Maximum drawdown, or maybe some obscure statistic from extreme value theory would probably be the best measure.

Why drawdown?? It best measures the ability of a manager to continue his strategy without panicking.? Most of us would question our sanity after a certain level of loss, and give up.? For different investors, the number is different.? For those managing external money, it is more important, because normal investing processes get destroyed when investors pull their money.? Where is that maximum level where investors will stay on board?? It depends on how they were sold on investing their money with the manager.

What are the problems with doing an academic-style study?

Often does not include costs of commisions, market impact, etc.? Liquidity is implicitly free, while in the real world, it is costly, particularly for undervalued oddball securities.
Data-mining may allow anomalous result that are noise to be reported as signal.
Managers using the style being modeled argue that it does not truly represent what they do.
Some studies get skewed by using calendar-year-end dates, where trading is often unusual.

Does that mean doing? definitive studies of trading strategies is impossible?? No, but it is quite expensive to do, so those interested in questions like this often resort to shortcuts, such as academic studies, limited peer group studies, etc.

Now, fairly comprehensive studies for things like growth and value managers exist (tsst… value wins), and some studies for CTAs exist.? But I’m not aware of any comprehensive studies for trend followers.? The academic studies show that price momentum is an important factor in market returns, and many investors with good returns use momentum.

It begs the question, if price momentum, or trend following is a panacea, why is it not more broadly embraced by the money management community?? That is tomorrow’s essay.

Book Review: Trend Following (3)

Posted on 28 April 2009 by David Merkel

What I find interesting about this subject, whether we call it “trend following” or “price momentum,” there has been a confluence of different parties agreeing that price momentum works.? I have reviewed many books recommending momentum strategies (an example), and have usually recommended them (sometimes with reservations).? I will even recommend Trend Following to those who don’t know that positive price momentum aids investment performance about 80% of the time.

What groups of people have come in to support price momentum?

Most quantitative stock screeners/graders use a mix of momentum and valuation factors.
The academics behind behavioral finance support price momentum and valuation factors, in addition to some others.
Many large (and smaller) hedge funds that trade stocks do so using momentum as a positive factor in stock selection, along with valuation, earnings quality, and a host of other factors.

I know, there are still Efficient Markets Hypothesis zealots in the academic community, but they are being outflanked by the behavioral economists who have hard data to support their theories.? The Adaptive Markets Hypothesis describes the way the markets really work.? Rather than using a physics-based analogy, better to use a biological analogy — I view investment strategies through an ecological frame.? Multiple strategies compete to obtain scarce excess investment returns.? The strategies that are least pursued relative to their validity usually have the greatest punch.

Is everyone a fundamentalist?? Momentum strategies win.? Are there a lot of traders chasing momentum?? Value strategies win.? Is there a dominant view to seek dividends?? Growth strategies win.? Is everyone chasing after growth?? Perhaps we should look for dividends.

I don’t know about everyone, but among quantitative investors the opinion is virtually universal that trend following is the right strategy.? Follow price and earnings momentum.? I even put out a small piece weekly on short-term performance of industry groups, which is largely based off of price momentum.

So, if Mr. Covel thinks that trend following is an underfollowed idea, I can simply say that there are a lot of us following it, to the point where the trade might be crowded.? Trend following is a significant part of the total market ecology, and when it becomes dominant, its short-term returns become curtailed, until enough money leaves the trade.

I’ll discuss this more tomorrow, when I discuss how we test the validity of investment strategies.

Book Review: Trend Following (2)

Posted on 25 April 2009 by David Merkel

I had a long debate inside myself before writing my book review last night.? I could have written the review recommending purchase of Trend Following, because it teaches a truth that often gets ignored in the market — following price momentum pays around 80% of the time.? As a value investor, that was a hard lesson for me to learn, but I accepted it once the evidence was clear enough.

Why I did not recommend the purchase of the book was more over tone and style.? Here are two examples: on pages 294-296, he discusses this paper that shows that Commodity Trading Advisor [CTA] performance is little better than T-bills.? There is one substantive complaint, and I agree with it, that the Sharpe ratio is a lousy measure of performance.? Most of the other arguments focus on the author’s affiliations — AIG Financial Products and Vanguard.? It is not valid to dismiss evidence off of the background of the individual.? Deal with his arguments.? So what if he worked for AIGFP?? That doesn’t make him liable for everything done there.? Same for Vanguard.? Merely because you work for Vanguard does not mean that you shill for mutual fund industry in everything that you do.

Humble Student of the Markets Cam Hui raises these objections in his comments to my piece last night.? I object to the ad hominem arguments of Mr. Covel.? If we must argue, let us argue on the basis of principle, and may the best side win.

Now, when Mr. Covel responded to me, it was also an ad hominem argument, tying me to Jim Cramer.? Now note, the first piece has disappeared from the internet, and I know not why.? Perhaps he gets that I am not a Jim Cramer clone.? To my readers I ask, how many of you think that I am like Jim Cramer in the way I advise?? I wrote a long series of articles on using investment advice to inoculate people against using stock tips from the media, partially because as Jim Cramer became more of a media phenomenon, his recommendations became worse.? He is at his best when he writes/says less, and gives you his considered opinion.? Investing and doing something sensational for the media do not mix.? That’s the conundrum of the value proposition for TSCM.

That said, Cramer does use price momentum as one of the factors in his stock selections.? He is generally a “trend follower.”? Cramer also is not a value investor.? Much as I appreciate him giving me a chance to write, we aren’t very similar.? That’s consistent with TSCM philosophy — they want a large range of views.? I wrote there for four years, and was one of their leading writers.? I rarely interacted directly with Cramer, instead, putting forth my own views, which did better (in my opinion).

I’m not Cramer, and he’s not me.? He just gave me a chance to write, for which many are grateful.? (I would tell you that he taught me how to trade corporate bonds, even though he has never traded corporates, but that would be a long story.)

Pressing on

This is not my last article on this topic.? I intend on continuing this discussion, to flesh out where I agree with Mr. Covel, because at many points I do agree, but there are complexities that need further elucidation.

The main areas I will cover in the future include:

When does trend following fail?
What other factors should we consider?
What constitutes adequate proof that a strategy is superior?

I credit Michael Covel for commenting at my blog, and I will answer his question, but not today.? It is a valid question, but there are other questions that can be posed to him as well.? Let the debate commence on a fair basis.

Book Review: Trend Following

Posted on 25 April 2009 by David Merkel

This review is unlikely to make me friends, and likely to generate some negative mail.? Let me start with the conclusion: don’t buy the book.? That said, my reasons for stating this are different from those who typically criticize Michael Covel.? I agree with much of what he says; I disagree with much of his rhetoric.? Let me give you my thoughts:

1) Momentum is a pervasive factor in the markets.? It works about 80% of the time and produces significant excess returns on average.? Behavioral finance points out that people are slow to adapt to new information, so momentum tends to work because the initial moves on new information aren’t sufficient.? That said, when too many are chasing momentum, the market becomes extremely volatile, and the strategy ceases to work, until it shakes out enough momentum-followers.

What is hard, is distinguishing trend following from technical analysis from momentum.? Personally, I think momentum explains the other two.? It’s a much simpler theory, and much as Covel appeals to Occam’s Razor, I apply it back to him here.

2) He draws on a series of investors that have done well in the past, and touts them as proof of his theories.? Hindsight is 20/20.? What of those that have tried to apply trend following and failed?? Is it many or few?? Keeping a tight stop loss for some means the death of a thousand cuts.? The studies that I have seen show that frequency of trading tends to decrease returns.? Now, trend following does not necessarily mean a lot of trading, but for many it ends up being that way.

It is easy to locate a bunch of trend followers in hindsight, and tout their abilities.? What would be harder would be to find the whole universe of people following trends, and see how they do as a whole.

3) Mean reversion is a weaker factor, but still significant in making money.? Value investors typically do well with it, but only reliably when they insist on strong balance sheets.? I’ve studied mean reversion for years, and it exists in almost all markets as a weak factor.? Over enough time, that weak factor has punch, but in the short run, momentum rules on average.

4) Covel spends a lot of time trashing fundamental analysis, without much meat behind it.? Fundamental analysis works well, but doesn’t have so much value because so many are applying it.? It’s not like the situation Ben Graham found, where few were doing it.

Aside from that, technicians implicitly rely on fundamental analysis, because their support and resistance levels stem from the decisions of fundamental investors.? Same for those that follow trends.? The trends exist because fundamental investors react slowly to changes in the fundamentals, and trend followers exploit them.

5) There is no mention of the Adaptive Markets Hypothesis, and little discussion of Behavioral Finance.? These are much richer theories that encompass “trend following.”

6) Covel takes “pot shots” at Buffett over issues that are unrelated to his main point in an effort to discredit him.? Buffett is a bright guy who can criticize derivatives in aggregate, while still using them in specific to his advantage.? (Cough, cough.? Please ignore his put option trades.)

7) There was not enough time spent on “how to trend follow.”? After reading the book, if I didn’t have prior background knowledge, I would be scratching my head to figure out how I could reliably pick investments in a trend following mode in order to make significant excess profits, as well as know where to sell them.

I don’t recommend it, but you can buy it here: Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets

Final note — Covel needs to grow up and learn that there are other factors in the market aside from momentum.? He has become a fundamentalist about “trend following” and does not seem to have the open mind that he harps about.

PS ? Remember, I don?t have a tip jar, but I do do book reviews.? If you enter Amazon through a link on my site and buy things from them, I get a small commission, and you don?t pay anything extra.? Such a deal if you wanted to get it anyway?

Book Review: Two Books on Options by Anthony Saliba

Posted on 23 April 2009 by David Merkel

I’m usually pretty open to reviewing books.? Sometimes I get books that I can’t do justice to in reviewing.? The following two books may be examples of that:

Option Spread Strategies: Trading Up, Down, and Sideways Markets

Option Strategies for Directionless Markets: Trading with Butterflies, Iron Butterflies, and Condors

I’m not an options trader.? Do I understand the math? Largely, yes.? Do I understand how they can benefit investors?? Also yes.? I occasionally use options to enhance income, but for the most part, I avoid using them for personality reasons.? I fear that I would make bad decisions while working at a higher level of leverage.? I don’t trust myself.

As for the books, they are clear and well-written, giving both the common view of options, and the view using the “greeks” a la Black-Scholes.? The chapters explain, and then offer tests at the end to see how well you have understood.? These could be textbooks in a business school.

The books explain how you can make money in any environment if your view of the world is correct.? That’s the catch, though.? Few of us get it right within the length of time before an option expires.? Be wary of the correctness of your opinions.

Now, my opinion is not of the highest value here.? Better to consult Adam Warner or Bill Luby, who have far more practical experience on a retail level.? My experience is largely institutional with respect to options.

Book Review: When Giants Fall

Posted on 22 April 2009 by David Merkel

I’m behind on my book reviews.? You should see two more in the near term.

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I try to resist doom-and-gloom literature.? Some of it finds its way to my door anyway.? When Giants Fall covers many of the issues that I have covered at my blog with an even more dour slant.? It contemplates the demise of American hegemony in the world.

Though I’m not crazy about the US Dollar, and the US in this economic environment, I’m not sure what can replace the US and its flexbile economy, which allows the rest of the world to shed its excesses here in exchange for buying our debts.? Yes, it is not sustainable.? But something not being sustainable does not tell us when it will end.? Nations like China following non-economic goals typically have to go through an experience where they eat so much of something bad for them and then they throw up.

Um, that’s not scientific-sounding, but I think it is a fair way to describe how a large unstable equilibrium gets destroyed.? The non-economic provider of liquidity (China) to the parasite in question (the US) must choke.

Who Would Benefit from this Book

Hmm… back to the book.? If you get easily dismayed, this is not the book for you.? Michael Panzner paints an “end of the era” picture for America, with the nation as a whole less well off.

For those that are willing to look at the pessimistic side of what is possible, When Giants Fall is a reasonable account of what could happen.? Warning: the book is long on description, and short on solutions, both personal and national.

You can buy it here: When Giants Fall: An Economic Roadmap for the End of the American Era.

PS ? Not many book reviewers read the books that they review.? They read the summary that the PR flacks send, and rely heavily on that.? I throw away those summaries, and read the books.? That takes time, but I like reading books, and when I wrote for RealMoney, I often missed reading books.? Now I read them more, and you can benefit from that, because I don?t always endorse the books that I review.

I don?t have a tip jar, but if you buy anything through Amazon, after entering through a link on my site, I get a small commission, and your costs don?t go up.? I like taking? the fees out of Amazon, and not out of my readers.

“Do Half”

Posted on 21 April 2009 by David Merkel

Before I start my piece for the evening, I want to explain why my AIG piece is slow in coming.? Short answer: It’s big, and I am still writing it.? There is a lot there, and I am trying to get it right, realizing that I am just a generalist dealing with complex issues and not enough data.? I hope to have the piece finished on Wednesday for Finacorp clients, and out be the end of the week here.

“Do Half”

What I am going to talk about here is annoying to some who always feel that investing is about taking bold actions.? I had one boss that would go nuts when I would talk about this strategy.? Other friends, akin to deep value investors, would get perturbed as well.

I used this strategy extensively when trading corporate bonds 2001-2003.? I was a fairly active trader, unlike what I do with equities today.? Yet, even with equities, my rebalancing trades which have aided me in this volatile market, mimic some of the benefits of this strategy.? Here are some examples:

1) Say you bought a stock and it rapidly rallies, yet not to the point where you think it is at fair value.? Perhaps recent events have made you re-estimate fair value upward.? What to do?? Sell half of the position, and wait.? If the price falls, buy back the position.? If it rallies further, sell the rest.

2) Say you want to buy a stock, but it is plunging like a stone.? You’ve done our homework — the balance sheet is strong enough to self-finance the company for three years, estimated earnings for the next indicate the company is cheap, what to do?? Buy half of a full position, and wait.? If the companies rallies sharply, sell the position.? If it continues to fall, wait until it stabilizes, confirm your fundamental research and buy up to a full position.

3) Say you like a stock, but it has rallied past your buy point.? What to do?? Buy half.? If the stock comes back to the buy point, buy a full position.? If it rallies further, sell the position.

4) Same as number 3, but reversed for shorting.

I would almost always scale in and out of positions as an institutional investor, rather than doing it all at once.? I credit Jim Cramer for teaching me this.? The real Jim Cramer is not the “lightning round, ” but the guy who scales in and scales out.? The lightning round is binary — buy/sell.? The real world is more nuanced — how much to buy and when?

But the real benefit of doing half is the psychology of the situation.? Many investors suffer from fear, greed, and regret.? Doing half short-circuits those responses.? When the stock price moves in favor of profits, be glad of those profits.? When the stock price moves against profits, reanalyze and either a) go flat, recognizing your mistake, and being grateful that it was small, or b) increase the bet to a full position, and be grateful that you didn’t put a full position on initially.

Scaling in and scaling out gives freedom to investors, and removing many of the psychological burdens that they bear.? It doesn’t mean there won’t be losses.? There will always be losses but they will be easier to bear, with no panic that leads to selling off at the lows, or buying at the highs.

“Throw it into the Crack!”

Posted on 16 April 2009 by David Merkel

Twice in my career, I have worked in financial reporting in an insurance company where an accounting change would happen because of an acquisition, or some other type of corporate event, such that there would be a change in the accounting periods.? It did not have to be like Goldman Sachs, where they moved their yearend from November to December.

At such a time, there would be an inclination to clean up the balance sheet, because no one would see the income statement effect from adjusting values closer to economic reality.

American investors focus on the income statement, but they would be better to focus on the balance sheet, particularly on the change period-to-period.? Why?

Twice I have seen the ethic of “throw it into the crack,” where no income statement damage occurs, but losses are quietly recognized.? The income statement shows little effect, though the balance sheet takes a whack.

There are always weaknesses in accounting, and the temptation is to make adjustments while out of the spotlight.? Thus the temptation tothrow accounting adjustments into the “crack,” when the opportunity is there.

Recommendation to readers: look at the change in the balance sheets, and ignore earnings.

Ancient and Modern: The Retirement Tripod

Posted on 16 April 2009 by David Merkel

Note to readers — I have fallen behind.? Sigh.? I want to write more, but business, church and friends dig into my time.? My apologies for not having written much recently.? Does it help that I may have saved organizations/businesses in the process? 😉

I have always viewed the modern retirement tripod with skepticism.? What makes modern man so different from his ancient great-great-grandfathers?? There are a few things:

We live longer.? Most of this is due to improvements in sanitation and nutrition, and some of it due to health care improvements, particularly with the young and the old.
We marry less frequently (not counting marriages after divorce), and have fewer children in marriage.? That said, a greater percentage of children survive to adulthood, balancing out the fewer children.? (Note: this might be true in the US, but not in Europe and Japan.)
The government is a larger factor in the economy.? Say what you will about democracy, it tends to produce a bigger government than the old days of having Kings.
Currency debasement is easier.? The treasury of the King no longer has to file and clip coins in order to steal value from the masses; now it can be done by computer.
Global trade is a much larger portion of total economic activity than ever.? If the global division of labor breaks down through trade wars, it could get really ugly, especially for deficit nations like the US.

But what is similar?

Those that are old and cannot work largely rely on those that can work to survive.? Perhaps they greet at WalMart today — it’s not much different from watching the little ones while everyone else is out in the fields.
The pressure to produce and save during the most productive years is still there, with the tension that exists in the middle years between producing, training children to become productive, and caring for the elderly.
With saving, there is the question of what will produce value over the long run.? In ancient times, land or an animal could be useful.? Today, stocks and bonds… there are no guarantees.
When times are good, everyone benefits.? Vice-versa when things are bad.? The boom-bust cycle is a constant in human affairs.

The modern retirement tripod is Social Security, pensions, and private savings.? Let’s call it government prudence, employer prudence, and personal prudence.? Given the shift from defined benefit to defined contribution plans, even pensions boil down for many to personal prudence.

What of government prudence?? The US government is running huge deficits at a time that it should be retiring debt (or even saving) to enable it to meet the promises made for Medicare and Social Security.? There is no prudence here, only politicians playing for advantage in the short run.

Personal prudence?? Well, we are saving now in the US, but only out of fear.? The US has always been a debtor-friendly place.? Perhaps 5% of the US has truly prepared for retirement, given the faulty assumption that portfolios can grow much faster than nominal GDP growth plus 2%.? Ask your financial planner to run his asset earnings projections at 6%, with inflation at 4%.? If you can retire on that assumption, you are in decent shape.

Corporate prudence?? Corporations have been terminating defined benefit plans (as I predicted 15 years ago) because they can’t afford them.? Now, blame the IRS for a large part of this, because they didn’t let companies prefund in the good years, because? it cut down on their tax take.? That said, many corporations could have made contributions, but did not, because it would have hurt earnings.

Okay, so we haven’t been very prudent.? What’s the alternative?? The alternative is the ancient retirement tripod: continued work at a slower pace, help from children, and savings/assets.

The only commonality is the savings/assets component.? The types of assets vary, but the idea is the same — what can produce income annually.

Continued work at a slower pace is? a good thing for many people.? Not only does it give them money; it gives them a purpose in life.? Older people are often more thoughtful than younger people, and are willing to spend more time on customer problems.? There is real value in being connected to the current problems of the day, rather than the idleness of “retirement.”

Children are problematic.? Some succeed, some don’t.? Some are loyal; some aren’t.? In general in the US, we encourage individualism, not loyalty to parents.? That makes any aid in old age problematic; the consumer ethic is selfish, versus an ethic that cares for those that have cared for you.? All that said, those with more children are likely to do better, even if it is only that you will have advocates in old age.? Health care systems can be cruel to old folks that have no one watching out for them.

What if we go through an era where government systems fail, and people? must rely on local resources?? I suspect that will happen; there is no way that the US can support its obligations in current purchasing power terms.

Those with strong social arrangements (often, loyal children) will survive well, as will those that have saved/invested well.? Additional help will come from continued work — personally, I hope to be doing investments until I die and go to be with Jesus.? But work is a benefit to anyone; it connects us with the realities of our world.

A final note, and one that is slightly controversial: you can tell that I favor the ancient retirement tripod.? But why?? The modern tripod stemmed from an unusual demographic bulge which made it easy for oldsters to ride on the backs of the Baby Boomers.? The Baby Boomers will have no such help.

Here’s my easy prescription: raise the retirement age to 75.? Now.? Shatter the idea that in old age you can have an easy time of it, while one is still relatively healthy.? Instill an idea that says work is valuable, and those that do not work are sponging of of society.

In a time where government intervention is growing, it is all the more important to tell people that they can’t rely on the government.? The government is broke.? So will be those that exclusively rely on it.