March 2013 – Page 3 – The Aleph Blog

On Insurance Investing, Part 5

Posted on 14 March 2013 by David Merkel

The Squishy Stuff

I think I have just one more post left after this one, and this series ends.? This post deals with qualitative factors, which are harder to ascertain than the quantitative factors, and require more experience in order to learn.? But maybe I can aid my readers with a few pointers so they can learn faster.

Before we go, this series published at The Street.com University is an excellent start for any analyst, and includes many insurance examples.? But now for the rest.

Some products cannot be underwritten.? Anytime the insured knows more than the company, that is not a policy to write.? As an example, I toss out Long-term care policies, where the insurance industry has lost and lost again.? The insureds know their likely claims far better than the insurers do.? I feel the same about credit and mortgage insurance, where losses are so correlated that in a real crisis the insurance company fails, and those relying on the insurance fail as well.

I feel the same way about variable annuity living benefits at present — a rising market sets up the losses for when the market falls.

Avoid investing in companies where the law of large numbers does not apply.? This is true of all financial coverages.? If there is one big macro factor that drives your business it is not a safe place to be.

On Management

Management teams should be reliable.? They should always give complete and consistent answers to all questions, and demonstrate that they are managing the business, with underwriting being profitable.? They also should be willing to let results fall short of analysts’ estimates when it is true.

Though the short-term stock performance will be bad, the honesty will support the stock nearer to book value.? Investors appreciate honest companies, even when they do badly.

Finally if management has any sustainable competitive advantages (rare in insurance) they will use the advantages, and describe them in general terms so hat other insurers don’t reverse engineer them.

Be sure and read my series listed above.? It offers far more than what I have written here.

Neglected Stocks Are Typically in Strong Hands

Posted on 13 March 2013 by David Merkel

Neglected stocks — I measure it by the ratio of market cap to average dollar volume.? 15% of my portfolio is allocated to such stocks, but I would be happy for it to be 50%, if not more. Many of my companies have a single large holder or group — Industrias Bachoco, National Western Life Insurance Company, CVR Energy, and?Berkshire Hathaway.? These companies have few analysts; there is no way for a brokerage to make money off of them.

Yes, there is a control discount for such companies, because they can’t be taken over, except by the dominant owner.? But if they are well-run, they can be great places to invest.? The dominant investor has his interests aligned with yours over the long haul.? This means that in good and bad times, a large amount of the stock is locked up, and is not available to be bought or sold.? Strong hands hold the stock, which is typically a good place to be.

I like holding cheap, illiquid companies, where there is no hint of financial stress, and they are earning decent money.? I don’t care if they are in dull industries.? If they are compounding their earnings at a decent clip, the stock will eventually catch up.

The point is to own good businesses at good prices.? That’s what I aim to do.

Full disclosure: long BRK/B, CVI, IBA & NWLI

Should Brokers Be Fiduciaries?

Posted on 13 March 2013 by David Merkel

From a reader:

As a reader of yours, I find your views always interesting and well thought-out, even when I disagree. Thank you for sharing your thoughts, wisdom, and experience, as I truly believe you raise up the areas of thought you touch.

I have a question that I hope you will address on your blog, though the urgency is low. As a CFA and CFP working in a small RIA, I have been paying close attention to the debate about imposing a uniform fiduciary standard onto RIAs and brokers. I would loved to hear your thoughts about this topic, maybe addressing the following:

Should brokers giving advice be held to the high fiduciary standard of advisers?

Could a two-tier fiduciary standard work (i.e. codification of the Merrill rule)?

The primary broker argument against the fiduciary standard, as I hear it, is that it would make services to retirement accounts unprofitable. Do you agree?

I hope to hear your thoughts on this published on your blog because I know that quite a few people with second or third degree connections (maybe first, but I don’t know) to the policy makers and lobbyists read your blog.

First, thanks — I know my reader base stretches into some lofty places, not that I deserve it.

There should be informed choice when choosing those that advise investors.? I don’t think that brokers should be held to a fiduciary standard, but I do think they should have to state to clients that they have a potential “conflict of interests.”? Clients don’t make money when trades occur, but brokers do.

The trouble is, retail investors are the dumb money.? There is a tension between allowing freedom and letting people get shorn by those that are more skilled.? Some financial products are sold not bought, and it is largely because people will not plan in advance for themselves.? We see that in life insurance all the time.

Here’s the other side of it: we can’t make retail investors smart.? In most transactions of life, the foolish get hosed.? We can’t protect people from being dumb.? If we did that consistently, our economy would probably fail.

The idea of “just prices” does not work.? It’s not flexible enough.? In the end, things work best when we let let markets work, but require extensive disclosure that most will understand, and some won’t.

Perfection is not possible in law or regulation.? If we get “pretty good” we have hit the top.? Enjoy pretty good where it exists, though I would encourage investors to use those that have to put your interests ahead of all else.

PS — there has to be a way to service retirement accounts — as with insurance contracts, some sort of AUM fee or trailer commission would do it, but not something based off of transactions…

On Annuities, Particularly Variable Annuities

Posted on 12 March 2013 by David Merkel

From a Reader:

I read your blog quite frequently and really enjoy the work you put into it.? It helps me to think about other opinions/concepts and always look at things in a different light.?? I’m a financial advisor in St. Louis for a small boutique firm and truly feel your blog helps me be a better financial advisor.
?
Anyway, in trying to better myself and feel even more comfortable about recommendations I make for clients, I wanted to get your opinion on annuities.? In short, I used to avoid these things like the plague early in my career.? Now?? I find myself using them quite a bit for a portion of clients money and I find that in the planning process, they are a great tool in which to be able to tell clients exactly how much income they can expect in 5 or 10 years when they retire.? These riders and benefits are actually very useful in my opinion and have come a long way over the years.? I guess where I struggled in the past was during the 2008 crisis when my nice, neat 60/40 allocation for clients still lost them money…..sure, I was charging 1% and that’s cheap compared to the cost of an annuity but I can’t help but think how far ahead of the game clients would be if they had a portion in a product that guaranteed their income.? Of course, their account values might be down but their guaranteed income would still be intact.
?
So, with all that in mind and because of your background in the insurance business, I figured you might be the perfect person to fire away a few questions.
?
1) What’s your general opinion of guaranteed income riders?? Do you think they are worth it?? I know everything is relative to clients needs but from a pure practical standpoint, do you find that the benefit is still a good one?
2) What’s your opinion on contracts like with Jackson National or Metlife that offer a 5% guaranteed withdrawal AND a minimum death benefit combo of at least your initial contribution?? You have to leave $1 dollar left in the contract for the death benefit to pay but it seems to me to be an attractive option….guaranteed 5% w/d’s with assurance you can pass at least the initial premium on to your spouse or heirs
3) Lastly, what’s your take on this recent article?? Maybe for clients not wishing to pass money to heirs, this might be a good strategy?? Seems smart actually when they lay it out this way…..
http://www.advisorone.com/2013/02/22/milevskys-va-shocker-turn-on-your-living-benefit-n
?
I’m sure you are extremely busy.? I appreciate any feedback.? Sorry to ramble, just wanted to get my thoughts across.

When a Variable Annuity is popular, it is because the secondary benefit is underpriced.? Many life insurance companies sell such policies; that is one reason why I don’t invest in them.? The other reason is that GAAP accounting for life insurers is too liberal, particularly with guarantees on variable products.

There are many attractive benefits that have been offered in the past with variable annuities.? If an insurance company offers to buy you out of an annuity with such benefits, refuse them, unless you know better than they do that you will die soon.

There are some attractive benefits out there, and insurers that have underpriced the benefits.? Where you find attractive benefits, have clients invest in them.

Finally, if the living benefit is attractive, exercise the option.? Think in your own interests.? What will give you the best payoff?? At a time like this, where equity values are high, converting asset value into income could be a great idea.

On Merger Arbitrage

Posted on 12 March 2013 by David Merkel

From a Reader:

I?ve mentioned this before but I?m an avid reader of the blog. I?m currently going through your old posts one by one and learning a lot. Yours is one of 2 or 3 other blogs that I am reading the archives? thanks for spending so much time sharing.

My question is about arbitrage (tenders and merger arb). I?ve been reading through Buffett?s old letters and in the late 1980?s he had quite an impressive run with his arbitrage investments (I think in 1987 he made around 80% on his arb investments).

Both he and Graham seem to have had long time success for decades using merger arb and other arbitrage techniques. I?m wondering if you ever employ any of these strategies in your portfolio? It seems like a specialized area, but also seems like an area that would add uncorrelated returns to the portfolio, and serve as a great substitute for cash when markets begin to become overvalued.

Would love to hear your thoughts on merger arb if you have time?

I did small deal merger arb for two years 1998-1999 and took some losses in the process.? On the whole I made money, but:

Merger arbitrage is a lot like credit analysis.? Analyze why the deal might not go through.? Your upside is capped, but your downside is unlimited.
Only work with binding commitments.? Do not speculate on “letters of intent.”
Do not speculate on mergers that the media cooks up.
Merger arbitrage is an “over-fished” area of the market.? The regular gains from it have been competed down to low yields.

When Buffett was doing merger arbitrage, few were doing it. That’s why he did so well then, though it was a small part of his strategy from an asset standpoint.

You are picking up nickels in front of a steamroller when you do this, so? don’t deceive yourself into thinking this is a low-risk venture.? This is a mature area of investing, with a lot of clever competitors.

One final note: this is not as uncorrelated as you think.? Merger arb is highly correlated to the credit cycle, because most mergers require credit to fund the purchase.? Also, many funds that do merger arbitrage consider fixed income investments as an alternative.

So be wary here… there is no free lunch.

On Floating Rate Funds

Posted on 12 March 2013 by David Merkel

From a Reader:

Floating Rate Funds — Do you have any thoughts on these investments. I don?t want to be involved in something that is going to blow up.

In general, I like bank loans because:

Default rates are low.
They are senior in the capital structure, so losses are small when they happen
They float with short-term rates, which are zero now, so they can only go up

Here’s the problem though.? Enough people know that such that ALL of the closed-end loan participation funds trade at a premium to net asset value.? I have never seen this before.

I would avoid the asset class, unless you buy into the non-traded funds, which price at book value.? Bank loans tend to have low default rates, and when they do default, losses are smaller than for bonds.

Shrinking Economies Deserve Gridlock

Posted on 11 March 2013 by David Merkel

This will be very short.? Growth solves a multitude of economic sins.? So what prevents countries from encouraging growth?

Cronyism
A shrinking population, or something near that.
Too much regulation that affects production or hiring.
Cultural decay.

When economies stop growing, factions argue over their slice of the pie.? Gridlock ensues, and nothing good comes of it.

I wish I could be more optimistic here, but the world works better amid growth, but the policies of our governments suppress that.

A large part of this says don’t press your own agenda, it is not good for everyone else.? A freer economy creates more growth, freedom promotes opportunity.

But an economy where taxes are regular and predictable promotes growth also — corporations can plan for the longer-term, and not worry that current investments might earn less from higher future taxes.? Businessmen want predictable future taxes, which is one reason why a budget that is way out of balance concerns them.

Politicians do better with a rapidly growing economy because their revenue base allows them flexibility, because taxes received will rise without government action.? To them, the growing economy is magic — the gift that keeps on giving, but they have no idea what affects it.? They want to see the economy grow, aiding their efforts, but they engage in all manner of regulations that reduce growth.

The back-and-forth on issues like this produces gridlock, where deficits persist, amid growing needs elsewhere, and constrained taxes. I don’t see how 15% of the US states escape bankruptcy, even though they can’t do that.? There will be many significant fights over employee benefits in the states over the next 20+ years.? Only when we get past this black hole will growth revive.? (Add in normal monetary policy as well…)

Sorted Weekly Tweets

Posted on 9 March 2013 by David Merkel

Rest of the World

West Australia Set to Stay Liberal Highlighting Gillard?s Plight http://t.co/8Vp0mjPjJt Some Labor policies r perceived 2b anti-mining $$ Mar 07, 2013
Top Stock Kroton?s School-Loans Growth Decelerates http://t.co/NrmeHL4hP9 Brazil goes down the student loan path US has. Better results? $$ Mar 07, 2013
Merkel Looks East for Austerity Allies in Hollande Talks http://t.co/3uSJ5frCcm Austerity is getting 2b a tougher sell; when does it end? $$ Mar 07, 2013
Saudi Next Generation Has US Imprint as King Picks Leaders http://t.co/GBReGpuS2x Wahabiism won’t accept cultural reforms; 2 optimistic $$ Mar 07, 2013
Impotent Mursi Losing Grip on Egypt as Unrest Prompts Reversals http://t.co/tsm8FzIs5x Anarchy rules as Mursi putters; no 1 2 replace him $$ Mar 07, 2013
EU Unemployment: Titanic in Perspective http://t.co/StpmdeBEm7 ~12% unemployment across the EU & still rising. Sound like a success 2u? $$ Mar 06, 2013
Pound?s World-Worst Drop Seen Growing in Pimco Math http://t.co/4yqRnOldzj Everyone wants a cheaper currency in the race 2 the bottom $$ Mar 06, 2013
China ‘fully prepared’ for currency war http://t.co/cdR7AWWTHw Brave words from a country w/an immature financial system $$ Mar 06, 2013
Japan’s Economic Bad Mix : Yen, Oil and China http://t.co/ELaLyiQe9e Not a question of Japan getting into trouble, only what catalyzes it $$ Mar 05, 2013
Reforms Stall in Athens as Troika Considers Next Aid Tranche for Greece http://t.co/P0n3aSAe9u Still don’t c how Greece avoids leaving EZone Mar 03, 2013

Energy

Chevron Shale Bet Down Under Makes Senex Target http://t.co/GnfWLIKi98 That’s why gas found in Australasia is so valuable FD: long $CVX $$ Mar 07, 2013
Ethanol Outpaces Gasoline on Longest Supply Drop Since 2010 http://t.co/FluutBbaoa Margins r wide enough shut capacity reopens $$ FD: + $VLO Mar 07, 2013
Conoco Says US Should Consider Allowing Oil Exports http://t.co/D6FqHkZIvO Now that we make more than we consume, y not sell excess? $$ Mar 07, 2013

Other

When ‘Jazz’ Was a Dirty Word http://t.co/cpipuRDcNi Fascinating 2c how jazz musicians rejected the label, but played w/great enthusiasm $$ Mar 09, 2013
Making a Liberal-Arts Education Pay http://t.co/Ob8wZyKb7Z Trouble w/liberal arts: not enough science & math; written by an English prof $$ Mar 07, 2013
Stress at Work: Why Women Feel It More Than Men http://t.co/AeLwohdPvL Women tend 2 ‘Tend and Befriend.’ Men tend 2 fight/act or leave $$ Mar 07, 2013
Rice Glut Expands With Farms Poised for Record Crop http://t.co/6M5bUdEQyF I’ve heard there r animal feed shortages, can rice b used? $$ Mar 06, 2013
In Geology, Old-Timers Can Be Worth Their Weight in Gold http://t.co/4c7TP8TKxg They analyze plants, animals, not just computer analyses $$ Mar 05, 2013
Many Avoid Tough Path to Citizenship http://t.co/9HEiMYmQTf Costs time & $$, effort from studying, hiring a lawyer, etc. Mar 05, 2013
As Pirates Run Rampant, TV Studios Dial Up Pursuit http://t.co/KdBMYEIpOg Story of television trying to eliminate piracy and not winning $$ Mar 05, 2013
Glad that Venezuela does not have to suffer through more of Chavez, but sad 4 him. Now, what will the election result be? $$ Mar 05, 2013

Companies

Icahn Unbound Takes Activism to New Peak in Deal Fights http://t.co/M2eAw3DLWc He’s having a lot of fun going after poorly planned deals $$ Mar 09, 2013
Why Vodafone Should Head for a Verizon Exit http://t.co/0FusnV2ZzG $VOD should make $VZ pay up, they have less need 2 act | FD: + $VOD $$ Mar 07, 2013
Boeing Said to Boost 787 Battery Tests As Carmakers Aid http://t.co/yOqFiyGlx0 2 Many batteries passing “quality control” @ manufacturer $$ Mar 07, 2013

Market Impact

Wrong question. by @ReformedBroker http://t.co/jzY7UcQYuS Tie your hands w/asset allocation. Give yourself limited movement re fear/greed $$ Mar 07, 2013
Proof the Fed is Juicing the Markets http://t.co/6RDGyEDueG Correlation is not proof, but the monetary base is highly correlated w/DJIA $$ Mar 07, 2013
Welcoming, and Worrying About, a Record Market http://t.co/K3fdzRpOJ6 Last inflation adjusted DJIA high was not Oct-2007, but Jan-2000 $$ Mar 06, 2013
Young Adults Retreat From Piling Up Debt http://t.co/FRIgpI8ELb Saving is the secret to getting the big ticket items 2 make life pleasant $$ Mar 06, 2013
Qualified Private Activity Bonds Come Under New Scrutiny http://t.co/LHNuPoAWjQ Corporations have access to issuing tax-exempt bonds $$ Mar 06, 2013

US Government & Economic Policy

Yale Suing Former Students Shows Crisis in Loans to Poor http://t.co/nhc0JjmEj5 Loan programs seem cheaper in the short run, deceptive $$ Mar 07, 2013
Tom Coburn?s Campaign Against Government Waste http://t.co/SeIO1CIQI5 Coburn fights for what is right regardless of what the GOP thinks $$ Mar 07, 2013
Nurses Spar With Doctors as 30 Million Insured Seek Care http://t.co/jgCNVanub3 These fights will be more common as Obamacare proceeds $$ Mar 06, 2013
S&P Credibility Seen Eroded by Complicity in Soured Deals http://t.co/VsYxQL4wfw Where r the complaints about regulators forcing ratings? $$ Mar 06, 2013
Warren Buffett Sees ‘Hair Trigger’ When Fed Shifts Stance http://t.co/28nIn3rDiw Right. Now if he would spend time speaking truth 2 power $$ Mar 06, 2013
US Sequestration : Market Impact on financial assets http://t.co/6zUZXo2yWq Would nitially b deflationary, but lead to growth later IMO $$ Mar 05, 2013
Dr Copper and his funny friends dont agree with SP500 – Divergence ! http://t.co/TpmemT4Ai6 Real economy not doing as well as S&P 500 $$ Mar 03, 2013
US Restaurant Index and US Consumer Confidence http://t.co/4Bc83xsrbU Restaurants r sensitive indicators of consumer behavior: weak now $$ Mar 03, 2013
Federal Reserve: What Happens When It Runs Out of Ammo? http://t.co/F2jHPEROU3 What happens when they need2tighten & reaction is violent $$ Mar 03, 2013
Two Scenarios for Future of ‘Big Finance’ http://t.co/DdQwk7Jyj6 Finance still needs 2 shrink, the economy needs total debt 2b < 2x GDP $$ Mar 03, 2013
US Incomes Fall, Spending Rises http://t.co/ldYgPDETEc What do you expect when you add back the payroll tax? $WMT takes a hit also $$ Mar 03, 2013
Druckenmiller Sees Storm Worse Than ?08 as Seniors Steal http://t.co/A0eSwqZYab It is very bad, but I don’t get the $211T number, too big $$ Mar 03, 2013
Obama Orders Cuts That Will Be ?Slow Grind? on Economy http://t.co/lgzqxK8iWw Next stop, 3/27 when the spending authorization expires $$ Mar 03, 2013
Obama Makes Cuts Personal in Strategy to Bend Congress http://t.co/AqjKaD865f May try to mismanage sequester to embarrass Republicans $$ Mar 03, 2013

Markets

Edge: Milevsky, Ritholtz, Zweig, Ferri & More http://t.co/N5CIsbv4x4 This year?s Edge Q is What *should* we be worried about? I’m in it 2 $$ Mar 05, 2013
Kass Takes Buffett?s Challenge to Present Bearish Questions http://t.co/WEmq4Y57Cn @DougKass gets fun of poking holes in Warren’s theses $$ Mar 05, 2013
Buffett’s Advice to Apple’s Tim Cook: Ignore Einhorn http://t.co/5z6QEoMBAm Warren tells him to manage for the long haul. Wise words $$ Mar 05, 2013
Investing methods that beat the market http://t.co/1CFvZQMwLf Momentum, small cap, value, yield — can all be mimicked through ETFs $$ Mar 05, 2013
Birinyi Says Buy Mining, Technology Shares as Bull Ages http://t.co/ywui2NoQwL Yes 4 tech, but miners have over developed, poor profits $$ Mar 05, 2013
How much do stocks really return? http://t.co/J3u19M5AmP Good article, but I think the advantage of stocks over inv grade bonds is ~1%/yr $$ Mar 05, 2013
Say Goodbye to the 4% Rule for Retirement http://t.co/AhWrDqfOdy Better rule: Ten-year Tsy yield +2% if bullish, +1% neutral, +0% bearish $$ Mar 05, 2013

Other

In Florida, Sinkhole Risks Grow With Urban Expansion http://t.co/VRX7vsSqDr West Central Florida has a sinkholes, could lose 4 counties? $$ Mar 07, 2013
Imagining a Post-Bundle World for Cable TV http://t.co/U86Jducpeg Popular shows/networks would do better, less popular would suffer $$ Mar 03, 2013

Replies & Retweets

Why should the companies you listed pay 6%, when all of them could issue senior unsecured for less than that? http://t.co/Shc5Rq4c8F Mar 07, 2013
@The_Analyst They would give up that much to avoid being sr unsec liability?? Mar 07, 2013
Bigtime MT @BarbarianCap: $PRU >Annuity Fees Would Make Bankers Dance http://t.co/brvonxtRHS >> CEO touting how expensive their products r Mar 07, 2013
You can say that again RT @munilass: This is beautiful. The use of drones is finally getting the attention it deserves. Mar 07, 2013
Good one! RT @JMucken: @AlephBlog It would be metaphorical to give the winner a “gold” medal. Mar 06, 2013
I agree w/that, as it says in Romans 3:8 http://t.co/wYE9utGxjD RT @cogent_rambling: Bad doesn’t erase good. http://t.co/6yCqpHp405 Mar 06, 2013
RT @agnestcrane: I’d say credit markets feel pretty good about banks ahead of stress tests. BofA, GS, MS CDS spreads have more than halv … Mar 06, 2013
I use that when I worry about retailer spam RT @cullenroche: On a more serious note, why in the world do I still use my Yahoo email account? Mar 06, 2013
Maybe we could turn competitive devaluation into an Olympic sport. Send all finance ministers & central bankers 2 Sochi w/a 1-way ticket $$ Mar 06, 2013
@Fullcarry Thanks for the info, helps Mar 05, 2013
Jesus will surprise him RT @mattrixDOTinfo: re: Chavez and being sad. It’s a shame Chavez will now have 2b held accountable to our Maker. Mar 05, 2013

FWIW

My week on twitter: 39 retweets received, 2 new listings, 90 new followers, 36 mentions. Via: http://t.co/cPSEMLXpb8 Mar 07, 2013

An Inflated View of the Dow Jones Industrial Average

Posted on 6 March 2013 by David Merkel

So the DJIA has hit a new nominal high?? Big deal.? It has not yet eclipsed its inflation adjusted high, as is noted by this article at Bloomberg, where they said:

None of this is to say don?t invest in stocks. Nor is it to say a bubble has formed, like the technology boom of the late 1990s and the housing-fueled run-up of the mid-2000s. The evidence may even point in the opposite direction on this score: The price-to-earnings ratio — what it costs to buy a dollar of a company?s profit — for stocks in the Standard & Poor?s 500 Index is 16 percent below the level at the end of 2009.

The same goes for the Dow, which has more than doubled in four years, yet its valuation is 15 percent below the 20-year average. When adjusted for inflation, moreover, the Dow is still 9 percent below the previous all-time high hit on Oct. 9, 2007. In other words, stocks are still a bargain, historically speaking.?[Emphasis mine]

Sorry, but that’s not true, the Dow is still 12 percent below the inflation-adjusted all-time high hit on Jan. 14, 2000.? Have a look at this graph:

People forget how badly the DJIA, much less the S&P or NASDAQ overshot in 2000 from tech speculation and loose monetary policy from the Fed to cover for Y2K.

Here’s another graph to express the same idea:

Yes, there may have been a ~2% dividend over the last fifteen years, so the DJIA with dividends beat inflation by a little.? Bonds did a lot better.

All I want to say is that there is little reason for excitement over new nominal highs in the DJIA.? Also, it is a weird average, and gives IBM too much weight.? There is a better way to create a megacap index as I pointed out in the prior link.

So take a chill pill, and realize that? the DJIA is a weird index, still behind inflation-adjusted highs, at a time when profit margins are at all time highs.? This is not sustainable, and long-term valuation measures like the Q-ratio and CAPE10 indicate a market 20% or so overvalued.

So to all I say take defensive measures.? Of course things can go higher, but markets were a lot lower in 2002 than in 1999.

Cookie Jars

Posted on 6 March 2013 by David Merkel

When I was a little kid, there was a cookie jar in my house, and Mom who baked excellent cookies.? I was a scrawny runt, and at that time a picky eater.? But when I got home from school I could have a snack, so long as it was not within an hour of dinner.? I remember a bowl of potato chips, and some cookies.? Maybe slicing up a banana with a little sugar and milk.? Or, sliced carrots with Italian dressing. Mmmmmm….

Anyway, we all know what we like.? Politicians know what they like as well.? They want to promise a lot, and not tax much.? That has problems, because over the long run, budgets must be balanced, unless you want to live in Fantasyland.

Maybe Disney needs to take lessons from the governments of the US, because they live in Fantasyland now.? Ask yourself this: what governmental entity of any size has their budget balanced on an accrual basis?

Are retiree benefits fully funded? (pension & healthcare)
Are the rainy day funds funded?
Are the “trust funds” funded, and not raided?

The list goes on.? Often local, state, and federal governments raid the value of assets meant to fund future expenditures in order to fund current spending needs.? Most famously, the trust funds for Social Security and Medicare hold non-marketable debts of the US Government.? There is nothing behind Social Security aside from the taxation power of the US Government.? Same for the military and old DB [Defined Benefit] plans for US Government employees.

The money has been spent, and the payment of future benefits relies only on future taxation.? But lest you blame the Federal Government overmuch, the states and municipalities aren’t much better.

I’m relatively certain that most states and municipalities have to balance their budgets on a cash basis, not an accrual basis.? Another way of saying this is if there is a dollar left in the till, on a cash basis, the budget is balanced, no matter what future promises remain to be paid, with no assets to back up the promises.

We would never let insurance companies or banks be run in such a manner, but we let governments slide because of their taxation authority.? When the time comes to raise taxes, how well will that be received?? When the time comes to reduce benefits, even those being paid? now, how will that be received?

I don’t see how this works out.? I believe in pre-funding future obligations.? Practically, our governments believe in raiding cookie jars until there are no more cookies left, and maybe, some anti-cookies.

Government finance will be rough for the next 30+ years.? It could have been a lot easier if governments had decide to pre-fund, and not raid the assets.