Asset Allocation – Page 11

Sorted Weekly Tweets

Posted on 19 July 2013 by David Merkel

Energy

US fuel export surge gives refiners surprise summer blockbuster http://t.co/8d3WbY7xZg We need free trade in energy & end corn ethanol $$ Jul 19, 2013
US approval of Enbridge pipeline plan irks some oil shippers http://t.co/4YYisxzgFH Limited pipeline capacity versus supply raises rates $$ Jul 19, 2013
Deadly derailment won’t stop oil on trains http://t.co/gb7u6riA6S Rail allows 4 flexibility at a higher cost and lower safety $$ Jul 19, 2013
The danger of too much ethanol http://t.co/huUzLpgvDX We would b a lot smarter 2 buy ethanol from Brazil, or drop ethanol in entire $$ Jul 17, 2013
Surging Gasoline Prices Push CPI Inflation Higher, But Weak Core Fuels Taper Uncertainty http://t.co/0Z5zXMjvlJ Inflation rising, note it $$ Jul 17, 2013
Senators Grill Refiners Over High Prices Amid Oil Boom http://t.co/j0jhNhkXSF There is cheap crude in the center of the US, not at coasts $$ Jul 17, 2013
US ethanol credits soar to fresh high http://t.co/1gUVMm5O3u Perhaps allow the importing of Brazilian ethanol; that would improve matters $$ Jul 16, 2013

China

China Loosens a Key Control Over Banks http://t.co/AS6hzeD9vY Not sure this is big; eliminating floor interest rate allows 4 lower rates $$ Jul 19, 2013
China’s Zhu Changhong Helps Steer Nation’s Currency Reserves http://t.co/WcjpJD4YiC Aligns China’s interests more tightly w/the US $$ Jul 17, 2013
China Keeps On Gobbling Up Treasurys http://t.co/4gOipjltfJ Meet the Fed’s competitor 4 acquiring Treasury bonds; forced buyers both $$ Jul 17, 2013
Wealth Products Threaten China Banks on Ponzi-Scheme Risk http://t.co/BB8162405P Chinese banks will b threatened by runs in a few years $$ Jul 17, 2013
Police Say Sexual Favors Spur $1.5 Billion Glaxo China Sales http://t.co/hrPhrJjGkb China sells itself cheap if this is true $$ #SAD Jul 17, 2013

Central Banking

Curse of the front-runner a bad omen for Fed contender Yellen? http://t.co/CabkT1vGRV We need someone other than a neoclassical economist $$ Jul 19, 2013
The Summers or Geithner nightmare http://t.co/oltKKRvRMC They benefit from not being Yellen. Otherwise, no reason to consider them. $$ Jul 19, 2013
Bernanke Says Unwinding of Risky Bets Boosts Borrowing Costs http://t.co/QVVmtUPUnq Interesting argument, given his prior encouragement $$ Jul 19, 2013
Bernanke: Three Reasons Interest Rates Have Risen http://t.co/AJ7fVb2Csp Stronger economy, ‘fraidy cat markets, & leverage unwind $$ Jul 19, 2013
Hilsenrath: What Bernanke Means http://t.co/riIsNWgsCq When you have a poor communications strategy, a lot of people r needed to explain $$ Jul 18, 2013
Four Factors the Fed Faces on Bond-Buying Exit http://t.co/nDpYsdDKef Fed does not get labor market, inflation, & fiscal concerns $$ Jul 17, 2013
3 reasons why Larry Summers should not b next Fed chairman http://t.co/kS6d0VcThG Many reasons y da conceited fool should not b Fed chair $$ Jul 17, 2013
Bernanke Boom Signaled by Yield Surge as Market Recalculates http://t.co/H7miGoHpoI Watch rates fall again on economic weakness $$ Jul 16, 2013

Rest of the World

Female Footballers Covered Head to Toe Inflame Islamists http://t.co/WWTPU4EIqu No matter how hard u try, some people won’t b happy $$ Jul 19, 2013
Honda?s Fujino Readies ?Flying Acura? to Challenge Cessna http://t.co/fAaOQ7Oq3v Honda pours lotsa $$ into a long-shot small plane venture Jul 19, 2013
Honda Builds ?World?s Fastest Lawn Mower? http://t.co/WpCe7DciTf Can go 130MPH, or 15MPH when it is cutting grass. All bragging 4 rights $$ Jul 19, 2013
Rudd Home Sale Thwarted as Canberra Market Slows Pre-Vote http://t.co/uts4KwqXru Housing prices fall as economy slows & govt shrinks $$ Jul 18, 2013
Abe Unleashed After Vote Seen in Biggest Risk Drop http://t.co/mKuANJSeKL Social-security costs r already 31% of government budget $$ Jul 18, 2013
Payday Looms on Dictator?s Defaulted Bonds in Peru http://t.co/0gDmQGzGu5 Expropriation in the 70s demands repayment 4 those that lost $$ Jul 18, 2013
Ahmadinejad Departure in Iran Means Moving Desk Down Hall http://t.co/Iiv0lTr3nI Never underestimate the staying power of a bad idea. $$ Jul 17, 2013
International Paper’s Big Pulp Bet Hits a Frosty Siberia http://t.co/zOv3fPyKC9 Cheap Timber & transport stymied by Russian bureaucracy $$ Jul 17, 2013
Merkel?s Unseen Power Beate Baumann Misses No Chancellor Details http://t.co/G23npBa7qF Baumann works behind scenes on policy & politics $$ Jul 16, 2013
In Egypt, the ‘Deep State’ Rises Again http://t.co/GEXtZ1kR63 Collusion between Army & Opposition parties against Muslim Brotherhood $$ Jul 13, 2013

Market Impact

A portfolio for all seasons? http://t.co/GZle4jAj2U If Harry Browne’s idea were more widely adopted, the price of gold would fly. $$ Jul 19, 2013
The 100 Best Finance Blogs: All The Internet?s a Stage http://t.co/6nUipa6mbv Aleph Blog is pleased to make the list @ # 48. Great blogs $$ Jul 19, 2013
Red Bull-Fueled All-Nighters Put Fortress Fund on Top http://t.co/VhA7FTlNNJ Diminishing marginal returns 2 scale; time spent late poor $$ Jul 18, 2013
Excellence Hurts Returns in US Stock Study http://t.co/IgN41lyuUA Stock performance mimics bond performance; junk stocks & bonds do well $$ Jul 18, 2013
Judge Slams S&P’s Defense in US Lawsuit http://t.co/PP9FNRlGGj Puffery: lousy argument 4a rating agency 2make b/c ur supposed 2b honest $$ Jul 18, 2013
Meet the Man Who Has Worked at Goldman for 80 Years http://t.co/JsQTRY20Vl Alfred Feld is still plugging away for clients @ $GS at age 98 $$ Jul 18, 2013
Eminent Domain Plan Decried by DoubleLine Sees New Life http://t.co/h78U7z5i5i Myth: ordinary people were innocent in housing bubble $$ Jul 17, 2013

Biggest Muni Sale of 2013 Set to Price for Texas Roadway http://t.co/VYTI7TAqH2 There is demand 4 muni deals; this is a prime example $$ Jul 17, 2013
Should You Invest in the New Wave of IPOs? http://t.co/CSBOFQYpIa When IPOs r many, often the quality is lower. B careful w/IPOs here $$ Jul 13, 2013
Senators Introduce Bill to Separate Trading Activities From Big Banks http://t.co/2ig1nWw4hH There r better reforms that need 2b made $$ Jul 13, 2013
The Yankees parking lots that went bankrupt, skipped city payments and took city land http://t.co/aIylgsyrmf Read; fascinating tale $$ Jul 13, 2013

Other

Three Ways to Unlock Great Insights http://t.co/wNpdgGcwp5 Consider anomalies, new perspectives,& desperation $$ Jul 19, 2013
South Carolina Psychiatric Patient Stuck 38 Days in ER http://t.co/ublh93VwXe Eats up a lot of hospital resources, but what to do? $$ Jul 18, 2013
For His Next Trick, the Cronut Maker Reinvents the S?more http://t.co/dyMYB1V6BO I am into cooking, but this sort of stuff makes me blink $$ Jul 18, 2013
The Cronut Maker Reinvents the S’more http://t.co/AqIfdAtEyo If you add enough calories to any recipe, it will be delicious. $$ Jul 18, 2013
Smartphone Upgrades Slow as ‘Wow’ Factor Fades http://t.co/G1dKzoe1Zm Every trend fades. Exponential goes linear, linear goes logarithmic $$ Jul 17, 2013
Health Insurance Shoppers Put Low Price Above Other Options http://t.co/qBBuCCvHXV People want basic coverage 4a moderate price $$ Jul 16, 2013

Wrong

Wrong: China’s Flying Propaganda Weapon Will Blow Your Mind http://t.co/OtBvBMFKle Will b an ez target, given RF signature & 4 turboprops $$ Jul 19, 2013
Wrong: Consumers Most Penny-Wise in Almost 50 Years http://t.co/LTuUGB3eEW A high correlation doesn’t mean a beta of one $$ #studystatistics Jul 19, 2013

At the Towson University Investment Group?s International Market Summit, Part 3

Posted on 18 April 2013 by David Merkel

On Time Horizons

Posted on 22 March 2013 by David Merkel

I wrote a piece with the same title four months ago, but this one will be different, because I want to focus on individuals, and less on institutions.? During the bull phase of market moves, people are willing to take chances.? That can take several forms:

Being willing to buy speculative companies
Lengthening the time horizon: buy-and-hold.
Committing to debt, or even just lessening cash reserves, to own assets like houses, cars, second homes, boats, furniture, etc.
Being willing to buy illiquid assets like art, private equity, hedge funds, etc.

This applies to institutions as well, because they also give into the boom-bust cycle.? They are willing to speculate in good times, and seek safety in bad times.

But for individuals, time horizons sum up asset behavior whether it is investing or buying consumer durables.? Willingness to part with cash lengthens time horizons.? Those with short time horizons hang onto cash.? But often the same people change from having a long time horizon to a short time horizon and vice-versa, and at the wrong times.

The delicious perversity of markets — they incline you to do the wrong thing at the wrong time.? Have I been taken by this?? Yes, but not as much as many, because I don’t trade much.

Optimism creates long time horizons; it simplifies thinking.? “Let the market pay your people.”? “Cash is trash.”

Pessimism creates short time horizons; it simplifies thinking.”I’m going to stick with my money market fund.”? “I will keep my savings in gold.” “I will buy long Treasuries because I want cash flows that are certain out in the future.”

Time horizons are a symptom of the bull/bear cycle.? During bull phases, people commit capital for long time periods.? During Bear phases, periods shorten to the degree that many hold only cash.

To some academics this will seem unreasonable.? People are rational, aren’t they?? They don’t regularly make bad decisions, do they?? Sorry, but with economics, the answers are no and no.? The assumption that people are rational is not proven.? A far better assumption is that people try to justify themselves, whether they succeed or not.? Winners proclaim their brilliance.? Losers blame the umpire.

Yes, people regularly make bad decisions, and those brighter than them sporadically benefit.? It is hard to buy at the bottom, but a few do.? It is hard to sell at the top but a few do.? Note: those “few” are not the same people, because native bullishness or bearishness overcomes.? No one consistently gets out at the top, and in at the bottom.? But many get out at the bottom, and in at the top.? That is the way the markets work.

You might argue that this increases inequality and is not fair.? I’m sorry, but this is fair because people misjudge the underlying businesses, and they don’t keep adequate cash around as a margin of safety.? The equity market is only for those who keep an adequate reserve of safe assets around.? It is too dangerous for anyone else.

Stocks do not reward people year after year.? It comes in fits and spurts.? That is as it should be, and get used to it.? Those who don’t have long time horizons should reduce the amount of stocks they hold, unless valuations are low, and that’s not true now.

This is a time to be cautious, and reduce exposure to risky assets.? Given the global troubles, be wary, because little things like Cyprus could prove as small as subprime, which was declared “well-contained” by someone who didn’t know which end was up, and still does not.

Linear Thinking in a Chaotic World

Posted on 15 March 2013 by David Merkel

If some is good, then more is better.? That’s the way simpleminded people think.

Think of alcohol.? A little is good, but past a certain point, more is bad.

I think about central banking the same way.? Until recently, quantitative easing seemed to stimulate the economy, but each increasing dose has done less.? The last one seemed not to work at all, and long rates rose amid buying of bonds by the Fed.

The same applies to running deficits.? Perhaps the Keynesian solution works when there is adequate borrowing capacity in the private sector, but when many cannot borrow more, running high deficits may scare businessmen and consumers, because they wonder whether the system is stable or not, how the books will eventually balance, etc.? Inflation, deflation, higher taxes, currency depreciation… there are so many possibilities.

The leaders in simple-mindedness are Ben Bernanke, and Shinzo Abe of Japan.? Add in George Bush, Jr., and Barack Obama — deficits don’t matter.? They are like Fat Freddy with a hammer; every problem looks like a nail, and he will whack it with his hammer.? BAM!? It’s better, right?

Economies are complex because people are complex, and groups of people are even more complex.? The simplistic tools of neoclassical macroeconomics do not work in situations where there is too much debt, but the ideologues display confidence to the watching world.

When this pattern breaks it will be ugly, and I don’t know when or how it will be ugly.? It all depends on whether policymakers move to inflate or deflate.? You might say, “Of course they will inflate.”? Many thought that in the Great Depression, and they were wrong.

My main point here is that we all know less than we think about the future.? We have no idea as to what might finally derail the policy monoculture of the dominant nations — large deficits and loose monetary policy, but it will derail, and how it will resolve is a mystery.

So diversify your asset allocation into things that benefit from inflation and deflation — maybe you will keep something after the crisis hits.? After all, the looser monetary policy is, the worse the adjustment when the tightening comes, and monetary policy has never been looser than this since 1790.

A Few Notes from the Berkshire Hathaway 10K

Posted on 5 March 2013 by David Merkel

Letting the document speak, here are a few notes, starting with with the most significant part of the risk factors:

Investments are unusually concentrated and fair values are subject to loss in value.

We concentrate a high percentage of our investments in equity securities in a low number of companies and diversify our investment portfolios far less than is conventional in the insurance industry. A significant decline in the fair values of our larger investments may produce a material decline in our consolidated shareholders? equity and our consolidated book value per share. Under certain circumstances, significant declines in the fair values of these investments may require the recognition of other than-temporary impairment losses.

A large percentage of our investments are held in our insurance companies and a decrease in the fair values of our investments could produce a large decline in statutory surplus. Our large statutory surplus serves as a competitive advantage, and a material decline could have a material adverse affect our ability to write new insurance business thus affecting our future underwriting profitability.

Buffett does very well, but I know of no other insurer that invests so much in equities funded by insurance liabilities.? There is a real risk that if the markets fall hard, a la 1929-32, 1973-4, 2007-8. that BRK would be hard-pressed, particularly if there were some significant disaster like Katrina or Sandy, or set of disasters like 2004 or 2011.

And a note on the accounting change that Buffett mentioned in his letter, but did not decide to describe:

Underwriting expenses incurred in 2012 increased $586 million (21.1%) compared with 2011. The increase was primarily the result of a change in U.S. GAAP concerning deferred policy acquisition costs (?DPAC?). DPAC represents the underwriting costs that are eligible to be capitalized and expensed as premiums are earned over the policy period. Upon adoption of the new accounting standard as of January 1, 2012, GEICO ceased deferring a large portion of its advertising costs. The new accounting standard was adopted on a prospective basis and as a result, DPAC recorded as of December 31, 2011 was amortized to expense over the remainder of the related policy periods in 2012. Policy acquisition costs related to policies written and renewed after December 31, 2011 are being deferred at lower levels than in the past. The new accounting standard for DPAC does not impact the cash basis periodic underwriting costs or our assessment of GEICO?s underwriting performance. However, the new accounting standard accelerates the timing of when certain underwriting costs are recognized in earnings. We estimate that GEICO?s underwriting expenses in 2012 would have been about $410 million less had we computed DPAC under the prior accounting standard and that, as a result, GEICO?s expense ratio (the ratio of underwriting expenses to premiums earned) in 2012 would have been less than in 2011.

The point is that BRK’s underwriting result would have been very good without the accounting change.? The accounting change was a good thing, though.? Companies trying to inflate profits look for every marketing expense that they can deem an “investment.”? All of those costs would be spread over the life of the policies, rather expensed in the current year.? The new accounting standard limits what costs can be expensed to those that are truly marginal to the business produced.

Final note: They lost money on annuity reinsurance and retro at Berkshire Hathaway Reinsurance Group [Pp 34-36].? Retro sprang from new claims.? On annuities:

The annuity business generated underwriting losses of $178 million in 2012, $118 million in 2011 and $114 million in 2010. Annuity underwriting losses reflect the periodic discount accretion of the discounted liabilities established for such contracts as well as adjustments for mortality experience.

I am not sure I would want to reinsure annuities; I’m not sure that it is possible to insure long term investment guarantees, no matter how truncated.

Full disclosure: long BRK/B

Letters from Two Readers

Posted on 9 February 2013 by David Merkel

I wanted to drop you a line to commend you on your blog which I read with interest and almost universal agreement.

Your investment ideology and style is very similar to my own, and I enjoy the snippets of personal insight and glimpses of your life that you share.

I have worked in investment management for a number of life and general insurers in the UK and with a number of actuaries, some of these have been extremely able and had an outlook very similar to that which you hold. The more risk averse, countercyclical heads have tended to perform very strongly when given the time for their ideas to mature.

It is far easier to identify a good idea than to know when the market will come into line with your thinking!

Performance can be poor whilst you wait for the market to adjust, so you need have established your investment credentials beforehand. I have also seen a company destroyed by the unwillingness of a board to wait for investment performance switching managers and strategy at the peak of the TMT bubble, which ended up putting one of the strongest life funds into run-off.

Thanks for the words of encouragement.? It?s always challenging to strike the balance between earning returns and avoiding undue risk, much less having any sense of timing the risk cycle.? With bonds, it is a little easier, because you can tell when debt covenants, etc., and other terms of lending weaken.? We can see when incremental yield is most likely not going to be compensate for the risks involved.

The same applies to insurance ? stylistically, first pricing declines to technical levels, then terms and conditions deteriorate, then pricing declines further, until there is a disaster, capital reduces and pricing strengthens.

Thanks for writing.

I really appreciate the way you do twitter and blog. ?You always include your thoughts to some degree in your tweets, which I appreciate; and your blogging is great! ?I often read to hear about what your thinking and you do a good job of translating a lot of technical or specific information into applicable or at least thoughtful steps I can take.

I’m probably most amazed by your ability to find “truth” through mathematics due to your skills as an actuary. ?As a younger man in this business I’ve been from awed to disillusioned from the market and I still struggle to have a grasp. ?We use mutual funds predominantly so I don’t have to worry about knowing so much about the market and the individual goings-on but I still do a lot of asset allocation. ?Frankly, I think there is more risk in a poor asset allocation than a poor asset selection within that allocation.

Right now I’m thinking that high yield spreads are too tight and credit too frothy, but I read Third Avenue on high yield and they argue that we have a few years before that’s a problem. ?I guess what I’m asking for is advice on how to find the truth of where we are in the market cycle and how to take smart risks with my clients’ money. ?Should I be reducing or eliminating HY debt because of the “seemingly clear” overheated risk? ?If so, where do I find a decent return in fixed income or do I bite the bullet and stay short with little/no yield.

Especially for the more conservative investors who really need every penny to work out – it’s a hard balance to find right now. ?I don’t think I’m alone. ?Nevertheless, sorry for the long email. I hope to see something on your blog or a response if you find a minute of what must be a very busy life.

Yes, high yield is frothy, but it could get frothier.? Cramer had a saying, ?Absurd is like infinity.? Twice absurd is still absurd; twice infinity is still infinity.?? I read through the Third Avenue report? I generally like the way they do things though Marty Whitman got whacked in the financial crisis for owning too many low quality financials.

I learned early on from a junk bond manager who currently has five stars from Morningstar, that spreads are less critical to junk bond than dollar prices.? His view is that there is some irreducible risk in high yield, such that you need yield, not just spread, to guide your decisions.? Particularly when junk bond prices get so high that they are likely? to be called.? With such a steep yield curve for Treasuries, it is possible for option-adjusted spreads to rise as the bond price rises.

I can?t tell you what to do.? I can tell you what I am doing.? For my bond clients, I have assets? allocated half to emerging markets, both local currency and dollar denominated.? The governments of most emerging markets are run in a more orthodox manner than most of the developed markets, so I am comfortable with the risks.?? The rest is invested in short and longer investment grade corporate, and a small wager on the Swiss Franc appreciating.

I am happier getting yield from emerging markets than getting it from weak corporate credits. ?There are risks in the world today, and we could see high yield strategies fail.? After all, no one thinks about a moderate-sized war changing risk preferences.

That?s what I am doing.

-=-=-=-=-=-==-=-=-=-=–==-=-=–=-=–=-=-=-

To all my readers, risk is sometimes not obvious.? In this time of abnormal monetary policy and large budget deficits, it pays to be careful.

Sorted Weekly Tweets

Posted on 19 January 2013 by David Merkel

Central Banking

Records Show Fed Wavering in 2007 http://on.wsj.com/SgLPoG 4 all of their vaunted intelligence, the Fed was worried, but clueless in 2007 $$
Three Stages of Fed Grief: Key Quotes From 2007 http://t.co/X4ygwdqU Slowly realized the economy they overlevered was getting worse $$ Jan 18, 2013
Fed Concerned About Overheated Markets Amid Record Bond-Buying http://t.co/wDckfD77 The sourcerer’s apprentices note there is a problem $$ Jan 17, 2013
Paul Moreno: Gold, Greenbacks and Inflation: A History and a Warning http://t.co/75M1jNRo Ppl forget the degree the Fed has debased $$ Jan 17, 2013
Once you turn base money into short-term debt, can you go back? http://t.co/pG3gxBwA @interfluidity ideas getting deserved attention $$ Jan 16, 2013
First Shots Are Fired in Global ‘Currency War’ http://t.co/y6GJi0V5 Japan leads “race 2 the bottom.” Who will b first 2 stop sterilizing? $$ Jan 16, 2013
Currency Moves? & Central Bank Bravado http://t.co/zt7BI1As Posit that the yen is falling due to war risks & Japan biz risks in China $$ Jan 16, 2013
Abe Rocket-Start Lowers Sony Risk With Market Fuel http://t.co/J4cLgQKJ Loose monetary has spillover benefits 2 indebted corporations $$ Jan 16, 2013
I’ll grant this: the government always has some role in money, even commodity money like a gold standard… http://t.co/QtVI3oeC Jan 12, 2013

Rest of the World

Pressure Rises on China to Scrap One-Child Policy http://t.co/iDfZ0Ssl No better way 2 have a demographic crisis; change long overdue $$ Jan 18, 2013
Default Alarm Rings as Trust Loans Jump Sevenfold http://t.co/2tr1vFnq China is so messed up that it makes the Eurozone look good $$ Jan 17, 2013
Singapore Curbs Industrial Property Sales to Avert Bubble http://t.co/vZQhsdya Increases bid-ask spread; can’t fight fundamentals $$ Jan 17, 2013
Mongolia?s Erdenes TT Halts Coal Exports to Biggest Buyer China http://t.co/hoTHAxxZ Probably either gross malfeasance or bribery $$ Jan 17, 2013
European Dividends Tumble to Four-Year Low as CEOs Hoard http://t.co/D6YdzVqD Favor European Exporters over their Domestic companies $$ Jan 17, 2013
Euro at 10-Month High Poses Economic Threat, Juncker Says http://t.co/bk0FsVEE The #currencywars continue. Rule: Beggar thy neighbor $$ Jan 17, 2013
Russia Says World Is Nearing Currency War as Europe Joins http://t.co/OvVu0ZMH Accept export slowdown? Monetize debt? Stupid QE-like stuf? Jan 17, 2013
Rio Tinto CEO Steps Down http://t.co/lqWyRPES Every CEO should have etched on his wall: “Paying up 4 scale acquisitions is dumb” $$ $RIO Jan 17, 2013
China Capital Flow: Foreign Direct Dis-Investment http://t.co/V8erkuxL Foreign inv’t inflows falling, domestic inv’t outflows rising $$ Jan 17, 2013
China Starts Losing Edge as World’s Factory Floor http://t.co/pG7uOFqX SE Asia benefits as China becomes more expensive 2 operate in $$ Jan 16, 2013
Norway Sees Deeper European Job Pain as Default Fears Recede http://t.co/ztbfvp0H Rising NOK makes exports less competitive &fewer jobs $$ Jan 16, 2013
Often when FX vols spike it means something might break, like the SNB not able continue its EUR peg. But if… http://t.co/fydAlRSX Jan 16, 2013
HSBC needs 2 end its Ping An silence with simple answers http://t.co/8xVAWiHD much alleged insider deal information has been circulating $$ Jan 14, 2013
Mainland alchemists turn damaged zinc into solid gold http://t.co/W4zu69k7 An example of how Chinese banking system papers over bad debts $$ Jan 14, 2013
Rumor: large backlog of Chinese companies want to IPO, but having hard time slowing the required 2 years of rising earnings $$ Jan 14, 2013
Neighbors Grow More Wary of China http://t.co/aYMUvLs2 Ex-pat Chinese moving in, looking a little graspy w/respect to resources, etc $$ Jan 14, 2013
Mineworker Debt Mounts as South African Lending Booms http://t.co/hTkXyCTc There are few places in the world without debt overages $$ Jan 14, 2013

Market Impact

Deutsche Bank Derivative Helped Monte Paschi Mask Losses http://t.co/PeqTdPBT Bad investing led to losses 2 hide. Enter Deutsche Bank $$ Jan 17, 2013
reaching for yield http://t.co/zFaWCA7h @researchpuzzler notes tight junk spreads, but + Ed Meigs & Dan Fuss r ?naysayers on junk credit $$ Jan 17, 2013
Short-term Debt and Financial Crises: What we can learn from US Treasury Supply http://t.co/UG1RvuHm Qty issue ST fin’l sector debt->crisis Jan 17, 2013
22 Insights From The Most Successful Investors In History http://t.co/4u3QVRJL Very nice assemblage of quotes from the best investors $$ Jan 16, 2013
[Will] the Bond Bubble Finally Burst? http://t.co/1c7hOX4W Synthesis of a variety of views: Yes, but not in the short-run… $$ Jan 16, 2013
FINRA to brokers: know your high-yield securities http://t.co/DJHC5NvT Intelligent words from FINRA; b able2show clients all possibilities Jan 16, 2013
The High Yield Market is “Completely Out of Control.” http://t.co/GBUfGOa9 Watch risky debt buyers; c if they need things 2go right2survive Jan 16, 2013
Gold Forecasters Splitting on Peak for Bull Market http://t.co/EIEgk2Al Most-accurate gold forecasters>price will probably peak in 2013 $$ Jan 16, 2013
Whatever Happened 2 Good, Old-Fashioned Accountants? http://t.co/aFofQ4Mv @retheauditors explains y basic blocking&tackling go a long way $$ Jan 17, 2013
Yale May Buy More Hedge Fund Assets After Favoring Cash http://t.co/D0cP9LDV Timing feels wrong here w/credit spreads tight & vol low $$ Jan 16, 2013
Baupost Group Sitting On 116% Return From Madoff Claims http://t.co/u4MYuhJI Bankruptcy judge said ?seller?s remorse,? denied his effort $$ Jan 16, 2013
Leeway on Repo Rules Is Cut Back http://t.co/B16EXZfR “…we’re basically saying all repos should be accounted for as borrowings,” $$ Jan 16, 2013
Inside the Self-Driving Index Funds That Finish First http://t.co/XPEfHyE4 @jasonzweigwsj $BLK low fees, shares sec lending revenue $$ Jan 15, 2013
How2use Twitter & Facebook 2 make $$ from shares http://t.co/lXXw321E Just watch: this causes the next ‘flash crash’ h/t: @abnormalreturns Jan 14, 2013
KRS Spin Machine Is Smearing The Truth Again http://t.co/VGGSkxHX Kentucky Retirement Systems does not use RFPs -> “pay to play” @ KRS $$ Jan 14, 2013
US Not So High Yield Bonds : “It’s Starting To Feel A Lot Like 2007” http://t.co/QUGhAMqC Will supply grow, or will misfinancing start? $$ Jan 14, 2013
SP500 Revisited – Testing 1484/1500 zone and reversal after? http://t.co/8TMktTjD Argues for a correction in stocks in the near term $$ Jan 14, 2013
Hedge-Fund Leverage Rises to Most Since 2004 in New Year http://t.co/rwFVhRmz H0: flexible $$ overallocated to stocks now> correction due Jan 14, 2013
39% of Fund Managers Beat the S&P in 2012 http://t.co/xRx3Juik It was a growth year & not a value year. 48% would b the 10-yr average $$ Jan 13, 2013

Billionaires

I suppose Bloomberg could write a book about hidden billionaires, and call it “The Billionaire Next Door.” http://bloom.bg/WN9Jo8 ?#yeah $$
Erie Billionaire Hagen Revealed as Car Premiums Surge http://t.co/BsMEp8gu $ERIE interesting company w/a unique asset-lite biz model $$ Jan 17, 2013
Hidden Billionaire Milking Saudi Dairy Fortune in Desert http://t.co/XAoRKBRp Bloomberg likes ‘outing’ obscure billionaires like this $$ Jan 14, 2013

Personal Finance

Why you can?t avoid dumb 401(k) mistakes http://t.co/fffPsn0k Plan sponsors chase hot managers & avoid passive options $$ Jan 16, 2013
Behind the indexed annuity curtain http://t.co/Qo7RdSX9 Avoid. Surrender charges r long & high 2pay commission; opaque int crediting $$ Jan 16, 2013
One in four savers has 401(k) ?leakage? http://t.co/TRBsFfwx Retirement seems far away, but $$ needs r near, so ppl tap their 401(k)s Jan 16, 2013
Seven Resolutions to Get Your Nest Egg in Shape http://t.co/cqNqpxJF Good basic advice 4 ordinary people taking care of the nest egg $$ Jan 16, 2013
E-Filing and the Explosion in Tax-Return Fraud http://t.co/9SAE6oPL Identity theft; 1 reason y I do it myself & file on paper $$ Jan 14, 2013
Housing Problems: Where To Get Help http://t.co/3hrCyQFy @retheauditors gives advice to those having issues with foreclosures $$ #goodstuff Jan 13, 2013

Banks and Investment Banks

More Ideological Excuse Making for Bad Banks http://t.co/0wjkQq3n It takes two to tango; it takes two to make a loan. Both deserve blame $$ Jan 17, 2013
A tempest in a spreadsheet http://t.co/W2mwYeHO A reason y having robust “smell tests” r needed when mathematical models get complex $$ Jan 17, 2013
Mortgage Nanny Added to Lender Job Description http://t.co/nRRonPBL Caveat Emptor:May make probs worse by creating illusion of safety $$ Jan 17, 2013
Wells Fargo to Start Jet-Leasing Venture http://t.co/a0FwgcNn FD: + $WFC | I like the fact that theyr starting small #organicgrowth $$ Jan 17, 2013
Jefferies Sets Table in Pay Clash http://t.co/s6utAuEy Or, they could jump 2 $JEF soon 2b $LUK. $$ motivates better, but conflicts occur Jan 16, 2013
Bankers Get IOUs Instead of Bonus Cash http://t.co/fKrpWXZL Will tie employees more tightly, unless they jump to related industries $$ Jan 16, 2013
Report of $JPM Management Task Force Regarding 2012 CIO Losses http://t.co/i7x0Ifi4 [132pp PDF] If interested in $JPM, summary in 17 pgs $$ Jan 16, 2013
Municipalities Should Ditch Wall Street Derivatives Deals http://t.co/Jqmgjllk If Wall St is on other side of table, watch your wallet $$ Jan 16, 2013
Banks say new agency’s oversight is slow, costly http://t.co/aHIGFRUh Banks pine away over the regulatory laxity they had 6-10 years ago $$ Jan 16, 2013
Goldman?s ?Secret? Team Shows Volcker?s Folly http://t.co/fovIyDRf Difficult to stop prop trading, better 2 remake I-banks partnerships $$ Jan 14, 2013
Bank Deal Ends Flawed Reviews of Foreclosures http://t.co/7DoTN8yA absurd, $$ will b distributed w/little regard 2 who was actually harmed Jan 13, 2013

Economic Policy

Portfolio Manager Creates Dazzlingly Deep Presentation On What’s Really Going On With The US Economy http://t.co/vcRHWwEe Long but good $$ Jan 17, 2013
Obama Finds Path to Congress Deals Goes Through McConnell http://t.co/B763HV1u Give him his due; has a nose that can sniff out deals $$ Jan 16, 2013
The Next Tax Increase http://t.co/7beI2QUO What the US Govt has belongs 2 the US Govt. What belongs 2u is subject 2 negotiation $$ Jan 16, 2013
Swap the Debt Ceiling for a Rule That Makes Sense http://t.co/NVYjvTD8 Maybe limit total liabilities of US Gov’t to 2x GDP? Way past that Jan 16, 2013
Why U.S. might be ?a nation of deadbeats? http://t.co/UuOHrKlt Consumers have been paying down debt, but walking away from more $$ Jan 16, 2013
A Credit Downgrade Warning Both Sides Should Listen To http://t.co/TbB3Gbdn Rating agencies r more honest than US Govt. Fitch may d/g US $$ Jan 16, 2013
Treasury Bill Rate Curve Inverts Amid Debt-Ceiling Showdown http://t.co/0KOQqC7A Bill curve showing some inversion due 2 debt ceiling $$ Jan 16, 2013
Money-Printing Will Lead to an Inflation in Another Guise http://t.co/erqP71P7 Debt overload & slack capacity short circuit credit growth $$ Jan 16, 2013
Two Warning Signs for Treasuries http://t.co/BdAcNkHE “yield curve btw 2&10 years is starting to steepen” Resistance 2 neg real rates up $$ Jan 16, 2013
TIPS Implied Inflation 4 2018-22 rose over 2012; flat now http://t.co/R28O77bX 2014 Inflation rising http://t.co/VCfupYLT $$ Fed target 2.5% Jan 16, 2013
US states flirt with major tax changes http://t.co/EnZmtggx Red states moving toward sales & away from personal/corporate income taxes $$ Jan 14, 2013

States & Municipalities

California, Unsaved, Speeds Toward a Wall of Debt http://t.co/pyrObgbr Constants in life that r not comforting: gimmicks in CA budget $$ Jan 17, 2013
California Could Be the Next Shale Boom State http://t.co/r0QChYDh Energy could flow from the Land of Squandered Advantages $$ Jan 16, 2013
Pension Funding Gap Widens for Big Cities http://t.co/a76JAJT0 Expect 2c many fights where bens cut 4 new, active & retired employees $$ Jan 16, 2013

Companies

Suitors Interested in H-P’s Autonomy, EDS Units http://t.co/AXdvxjei Wouldn’t put 2 much into this; $HPQ won’t get good prices $$ Jan 16, 2013
Genworth Shares Soar Amid Plan for Mortgage Insurer http://t.co/Jqmgjllk $GNW moves deck chairs on the Titanic; rewarded for now $$ Jan 16, 2013
Chevron Signs Deal for More Oil Exploration Acres Off China http://t.co/Yqb7yY7g FD: + $CVX smiles as it rides the tiger $$ #risks Jan 16, 2013
My Favorite Tobacco Stock Is Intel? http://t.co/Wupvh1qk @CharlesSizemore explains y it should deliver returns, amid hatred $$ FD: + $INTC Jan 16, 2013
TNT Left at Altar Gets No Immediate FedEx Deal http://t.co/QSdDHarC “FedEx in a good position to wait this out & let TNT come to them.” $$ Jan 16, 2013
Latest IPOs Arrive In The Form of New MLPs http://t.co/cq7XuIKv All of the new MLPs r energy-related $$ Jan 14, 2013
ARM CEO East Says Phooey to the ?Transistor Cliff? http://t.co/wfiIeQau Cost, speed, & power use r the key factors 4 logic chips $$ Jan 14, 2013

Miscellaneous

Davos Pitch for Dynamism Rams Into End-of-Growth Debate http://t.co/1bNvkwD7 I don’t think growth is ended, but bad finances interfere $$ Jan 17, 2013
Global Piracy @ 5-Yr Low http://t.co/YgJlRQSh 2012: Pirates boarded 174 ships globally v 439 in 2011, people taken hostage 585<-802 $$ Jan 16, 2013
NRA Labels Obama Hypocrite on Guns for Child Protection http://t.co/DqIsubsA Administration doesn’t like the argument; hits close 2home $$ Jan 16, 2013
Kidnap insurers eye sales as euro crisis bites http://t.co/w5CfiwOe Stable rates: More competition, & armed guards 4 sea transport $$ Jan 16, 2013
Mathematicians coming of age to become the most sought after professionals http://t.co/thXJdgsS Nerds of the world unite! Big data 2analyze! Jan 16, 2013
The Margin Debate http://t.co/zE6p5oO1 Labor share of US GDP has fallen because growth in the global capitalist labor force, wages fall $$ Jan 13, 2013

Financial Blogging

Your guide 2the financial blogosphere http://t.co/9mkoln2n Comprehensive list of finance bloggers. I’m listed under “Trading & Investing” $$ Jan 14, 2013
What are the 100 Top (Anglo-Saxon) Finance Blogs? A Pseudo-Scientific Study http://t.co/I9UU32zP I ranked higher than I expected 🙂 $$ Jan 14, 2013
The purpose of this site http://t.co/Bp4sqw5o @reformedbroker ‘s excellent piece on how his blogging helps him think & invest better $$ Jan 14, 2013

Painting Kate Middleton

@judehere Perhaps this then? http://t.co/hstcUqPq Jan 16, 2013
@judehere That’s okay. You say he painted the Queen? That’s interesting. Is there an image of that out on the web? Jan 16, 2013
‘ @judehere She seems to be a nice lady, so I wouldn’t be a fan of that. But Freud died in 2011, so the possibility is not there. Jan 16, 2013
But this portrait of Kate Middleton is worse in my opinion http://t.co/LBMKplpo No wonder only 19% like it. (2/2) $$ Jan 16, 2013
Learning to draw, I copied a photo of a friend w/pencil. Another friend said “You took a very pretty girl, & turned her in2 pretty girl” 1/2 Jan 16, 2013

Michael Pettis

Pettis: What I will watch in 2013: 10 things: hard commodity prices, trade numbers, Spanish Bonds, Target 2, & Japan (2/2) $$ Jan 14, 2013
Pettis: What I will watch in 2013: 10 things: China growth, Debt trajectory, financial scandals, bank activities, inflation (1/2) $$ Jan 14, 2013
Pettis: Imbalances can continue for many years, I argue, but at some point they become unsustainable & the world must adjust by reversing $$ Jan 14, 2013
Pettis: Policymakers do this by shortening their time horizons &managing from crisis2crisis, rather than sorting out the underlying problems Jan 14, 2013
Pettis: policymakers… taking steps that protect them from the consequences of the crisis but that also make the crisis worse. $$ Jan 14, 2013
Pettis: It is interesting that policymakers are so pleased by an end (temporarily, I assume) to the financing crisis. $$ Jan 14, 2013
Pettis:We ended 2012 in a burst of optimism for Europe, w/everyone cheering Mario Draghi 4having ?saved? the euro, but I am deeply skeptical Jan 14, 2013

Wrong

Wrong: How to Find a Fund Manager Who Can Beat the Market http://t.co/2Nq1Z9b2 Doesn’t understand difference btw correlation & beta $$ Jan 15, 2013
Wrong: US Budget : Federal finances continue to improve http://t.co/HKzv6pLK It is a *spending* problem that started w/Bush 43, not revenue Jan 15, 2013
Wrong: Municipal Bonds May Not Be Safe From Income Taxes http://t.co/MnIQIdor Would be a big shift, hit blue states hard. Won’t happen $$ Jan 14, 2013
Wrong: Chris Hayes’ Brilliant Explanation Of Money Is One Of The Best Things We’ve Ever Seen On TV http://t.co/e0kxN5oZ #goldstandard $$ Jan 13, 2013

Comments and Retweets

Good night. Blessings to all. Jan 18, 2013
@cogent_rambling Think of judges in a court. No one will forgive a man for doing wrong in one area, because he has done good in others Jan 18, 2013
@cogent_rambling It’s not a question of weakness but wrong. Divorce your wife for no good reason, cheat at your craft, all amounts 2 wrong Jan 18, 2013
@cogent_rambling Good question. God created Lance with a weakness. If Lance had trusted God, he could have overcome it, but he didn’t. Jan 18, 2013
@cogent_rambling Not those that are God-given. Mt 5:48: “Therefore you shall be perfect, just as your Father in heaven is perfect.” Jan 18, 2013
@cogent_rambling One last point: in the view of Jesus is there is no balancing. The least amount of evil poisons any good. Jan 18, 2013
@cogent_rambling Read some of the writings of Kahneman & Tversky. Bad things have 3 times the force of good things. Good doesn’t erase bad Jan 18, 2013
@cogent_rambling Okay, I get it. But doing good things does not erase bad things. Doing things that are notably bad tarnishes anything good. Jan 18, 2013
@cogent_rambling I have heard the word as a part of popular culture, but have no idea what it is beyond a phrase. Jan 18, 2013
@cogent_rambling Okay, I’ll bite. His charitable endeavors, but what else? Jan 18, 2013
@sallyeastman1 Well said Jan 18, 2013
My view: Lance Armstrong is best ignored. Close the browser window, change the channel on the TV, he will go away. I don’t care about him $$ Jan 18, 2013
@AboveAvgOdds Off to meet w/u & Chris Mayer in downtown Baltimore Jan 17, 2013
Endorse. I have read over half of these $$ RT @TheStalwart: The 22 books that Dylan Grice says you must read. http://t.co/QSOWvuBc Jan 17, 2013
@graemehein good point, but most simple models have obv intuition. Complex models have more potential 4 error b/c of 2nd+ order effects $$ Jan 17, 2013
@cate_long Others that did the same in 1994: Piper Jaffray’s Institutional Gov’t Income & FPA’s Fundamental US Gov’t Strategic Income funds Jan 17, 2013
@cate_long Combined w/levering them, and not having the mathematical savvy to price them right http://t.co/5vkUxgO6 Story near the bottom Jan 17, 2013
@cate_long Cate, you’re right, I’m wrong. At the time, David Askin & those like him were notable. W/Citron it was mostly structured notes Jan 17, 2013
@kirstensalyer Sorry, that honor belongs to the first quantitative hedge fund manager, Ben Graham, who was doing that in the 1920s Jan 17, 2013
@cate_long Also used complex RMBS. There was kind of a contest 2c how much negative convexity one could absorb in exchange 4 yield Jan 17, 2013
RT @maxrudolph: #unintendedconsequences when pension regs set up EA designation cut off practitioners from ALM development. Still catchi … Jan 17, 2013
Well done $$ RT @LaurenLaCapra: Jim Chanos talks to @Reuters about Herbalife & whether Ackman or Loeb will win out: http://t.co/sV7B604o Jan 17, 2013
@finsovet @prieur @vitaliyk Honored 2b included in such a group Jan 17, 2013
Think this analysis is correct, but uncertain $$ RT @mickwe: 3D printing is a lot of hype and it’ll never go mainstream http://t.co/8wkr5oxp Jan 17, 2013
I just left a comment in “7 gut checks before the stock market?s opening bell” http://t.co/MrSqVXZF Jan 17, 2013
@niubi If so, good for him. He revolutionized my economic thinking with his last book. Looking forward to the next one. Review copy coming Jan 17, 2013
+1 RT @dpinsen: Paging @TomFriedman: comment on How a ‘model’ employee got away with outsourcing his work to China http://t.co/wukYAV8T $$ Jan 17, 2013
+2, scrap IFRS RT @Alea_: +1 Britain should scrap IFRS accounting standards, MPs told http://t.co/woWmyC2v Jan 16, 2013
@oddballstocks very different mindsets; marketing and operations r different from finance, which is still different from investing Jan 16, 2013
@oddballstocks I did that as well from 1992-1998. Tried very hard to select non-name-brand mgrs w/durable competitive advantages Jan 16, 2013
‘ @ClayNickel It depends on how equitylike the bonds r, & the financing composition of the holders. If the bonds r financed w/sig debt.. $$ Jan 16, 2013
RT @Matthew_C_Klein: The big deal about the German gold story isn’t that they’re taking some of it out of NY but that they’re moving *al … Jan 16, 2013
RT @Matthew_C_Klein: @izakaminska has a thoughtful take on the base money debate between @interfluidity and @NYTimeskrugman http://t.co/ … Jan 16, 2013
‘ @joshuademasi Good point. After all, most nations would love to swap for Norway’s economic situation. $$ Jan 16, 2013
@earwulf Good insights both. We live in “interesting times” in the full meaning of the Chinese curse Jan 16, 2013
@ReformedBroker Rieder is a bright guy, as is my friend Ed Meigs at First Eagle; HY is okay for the short run, but 2 years out… $$ #Boom! Jan 16, 2013
@earwulf Yes Jan 16, 2013
@earwulf No, I don’t really find them persuasive. I do think that some Central Bank will stop sterilizing asset purchases, start new phase Jan 16, 2013
@JacPatterson I thought about that too, & think he really meant “English Language” Finance Blogs Jan 15, 2013
“But that also means you have to keep more $$ around if the puts get exercised, which Buffett had & many don’t.” http://t.co/uEIRn5i3 Jan 15, 2013
@joelight @spbaines the paragraph that starts ‘To screen out such “closet indexers,”‘ is factually wrong, does not understand statistics Jan 15, 2013
@joelight @spbaines I’m not arguing w/R2 as a proxy for active share, though there r better measures; article says correlation, means beta Jan 15, 2013
+10 Mmmmm… RT @dpinsen: Bresaola, lemon, olive oil, Parmesan, and basil joining forces for a great sandwich. http://t.co/pMMVmoI5 Jan 14, 2013
@abnormalreturns I’ve run into a *lot* of people trying to do this. Some are cleverer; not sure how it will work out… Jan 14, 2013
@JayLeonard but gold does control inflation and limits the government’s ability to use monetary policy for its own ends Jan 13, 2013
@JayLeonard Much of the difficulty is not gold vs not gold, but how banks were regulated — short liabs carrying long assets Jan 13, 2013
@GuldbergPeter Thanks, though I have heard that Canada *may* have issues. Jan 12, 2013
RT @GuldbergPeter: “@AlephBlog: Is there anyplace in the world that hasn’t overlent on real estate? Sweden, Canada and actually to some … Jan 12, 2013

FWIW

My week on twitter: 40 retweets received, 1 new listings, 67 new followers, 65 mentions. Via: http://t.co/SPrAWil0 Jan 17, 2013

Matching Assets and Liabilities Personally

Posted on 15 January 201315 January 2013 by David Merkel

An email from a reader:

I saw some of your articles on Seeking Alpha, then read through a bit of Aleph Blog.? Thanks for writing the articles, they are quite interesting.? I have seen the advice “Match Assets and Liabilities” more times than I care to count.? And your insurance example is a very clear one.? However, I have never seen a clearly worked example for an individual.? When I look at it for my own case I never quite see a clear optimality from matching assets with liabilities.? Perhaps part of the difficulty is that most individual liabilities (or at least for me) are flexible in some way (vacation – luxury or basic?).? Another issue is that my major “asset” is my salary – which produces vastly more income than my assets.? So I’d love to see you (or anyone) work out a clear example of how matching works for an individual, particularly one with more salary income than investment income.

If you care for some numbers, here is my rough case:

0) I have a significant buffer.? Green light here.

In addition to the buffer, enough cash to prefund all of the following:

1) 5,000 liability in 2 months

2) 20-30,000 liability in 6-12 months (I have some, but not total, flexibility in timing and amount)

3) 40-60,000 liability in 2-4 years (again flexibility, and hope that investment return could help increase the number)

After that are two larger expenses which I don’t have sufficient cash for.? The amounts would be significantly modified based on investment returns:

4) 100-200,000 purchase to upgrade house? in 5 to 10 years

5) In 30 years retire based solely on savings.

Let me start by mentioning two old articles:

Personal Finance, Part 11 ? Your Personal Required Investment Earnings Rate [PRIER]

Personal Finance, Part 12 ? Longevity Risk

Both concepts play a large role in what I will write here, but I am not going to repeat them here.? I’ll try to keep this simple.

Intuitively, people know that they need to match assets and liabilities, but they sometimes forget that when greed or fear emerge.? If I am planning on buying a house next year, and I have just enough for the down payment and closing costs, why do I not invest the money in stocks?? Because I might not be able to follow through on my goal if the market drops.

If I am planning on retiring in 30 years, but I am risk-averse, why shouldn’t I invest all my money in a short-term bond fund?? Because higher long-run average returns result from bearing moderate risk.? On average, maximum returns result from bearing moderate risk over long periods of time.

So, how does this calculation work?? You create two columns of numbers.? The first column is what I need to fund.? Now when I say that I am not talking about regular living expenses. I am talking about the big ticket items that are required, and that you know about now.? Plot out those cash flows, year-by year.?? For the really long cash flows, like retirement, you might want to add in an adjustment for inflation.

The second column is how much you will save each year after regular living expenses, including the excess assets that you have now.? The difference between those two columns is your net cash flow profile, and by using the IRR or XIRR function in Excel, you can figure out your PRIER.

Don’t expect to earn much more than what long Baa/BBB bonds yield now (presently 4.7%).? If the PRIER is so high that you know that you can’t earn that, then it is time to make hard choices:

Save more
Reduce goals
Work longer
Etc.

Now, as to the investment of funds to achieve those goals, it’s not that complex.? Inside five years, buy short/intermediate term bonds. 5-10 years half intermediate bonds, half risk assets, like stocks. 10-20 years should be 75% risk assets, 25% long bonds.? Beyond 20 years, 100% risk assets, or, extremely long bonds if attractive.

When I say this, I do not mean to ignore market conditions.? There are times when risk premiums are low, like now, 2000, 2007, and it does not look like risk will be rewarded on average over the next ten years — that is a time to preserve capital.? Then there are times when the market has washed out — 2002, 2009, those are times to take more risk.? Stocks are harder to measure, so if you need better guidance, look at the yields on junk bonds.

Asset allocation is a compromise between matching assets and liabilities, and examining relative advantage in the asset markets.? Sometimes stocks are better than bonds, or vice-versa.? Gold works well during times of financial repression.

In Closing

There are a number of key variables we don’t know here:

Future inflation
Likely savings
Asset returns in nominal or real terms

A good plan will attempt to leave some slack in case asset returns are lower than expected.? I would not assume that I could earn more than 5%/year over the long run, or maybe 2.5% after inflation.

Given what I know, this is the best answer I can give.? With more data, I could sharpen it.? But the really hard part is estimating expenses when retirement is a long way off.

The Order of Battle in Financial Planning for Ordinary Folks

Posted on 11 January 2013 by David Merkel

I sat down to talk with a young couple with three kids about personal finance.? This taxes me, because I’m not a financial planner.? I can remember most but not all of the rules on the taxation of various investments.

But this is the way that I handled it:

Do you have your risks covered?

Life insurance on the husband, because the wife stays at home with the kids.? Bright lady, highly employable, but she wants to raise the kids.? Not enough insurance for this family.
Disability insurance — covered by his employer.
Health insurance — ditto.
P&C insurance for cars and house — difficult to avoid, but wise to check.

Do you have a buffer built of 3-6 months of expenses?

Remember my stoplight rule:

Less than 3 months expenses in the savings fund? Red light. Defer all discretionary expenditures.

3-6 months expenses in the savings fund? Yellow light. Some discretionary expenditures allowed, so long as you don?t dip back into the red light zone.

More than 6 months expenses in the savings fund? Green light. Discretionary expenditures allowed, so long as you don?t dip back into the red light zone.

When my friends asked me how to define a month of expenses, I said take half of your discretionary expenses over a year, add it to your non-discretionary expenses, and divide by 12.? In this case, it revealed that they weren’t tracking their income and expenses, and so I suggested getting Quicken.

They need to build the buffer.

After the buffer comes expenditures that improve life, or reduce long-term costs.? Use cash payment to get discounts.

After that, invest the excess.? 50-50 stocks and bonds in index funds is an excellent start, with annual rebalancing. Or 25-25-25-25 cash-gold-stocks-bonds works really well across a wide number of economic environments.

The most important thing is to spend less than you earn, build the buffer, and then invest, or reduce debt, whichever is more promising.? How you invest is secondary.? The first priority is to be wise with your spending money, and then, save.? Especially in a low interest rate environment, the biggest benefit of saving is saving, and not what you earn.

One more note: there are two ways to make sure you spend less than you earn.? The first way is to budget strictly.? The second is to make sure your cash balance grows over every six months.? The latter has been my way.? It is more flexible, but it requires that people have limited desires, viewing spending as a necessary evil at best.

Sorted Weekly Tweets

Posted on 22 December 2012 by David Merkel

Macroeconomics

Here’s my plan for reducing the deficit: http://t.co/XJPjf8A5 #mydeficitplan via @wsj Draconian, I know, but the budget shoould b balanced Dec 21, 2012
Canada?s exports crucial as sluggish growth continues: IMF http://t.co/iIOJ6PoF Bank of Canada should raise rates 2 reduce excessive debt $$ Dec 21, 2012
Everything You Need To Know About the Economy in 2012, in 34 Charts http://t.co/aXnjSkR0 Good stuff; could have been formatted better $$ Dec 21, 2012
Fiscal Cliff’s Dirty Secret: It’s Not About Taxes At All, But Too Much Spending http://t.co/UY8rKW9h We need 2 deal w/SS, Medicare & Defense Dec 20, 2012
We?ve Nationalized the Home Mortgage Market. Now What? http://t.co/YSCrvVmK Congress loves 2 have cows around that they can milk for $$ Dec 20, 2012
EU Banking Re-Unions http://t.co/khSA0co0 The lack of a timetable indicates that things aren’t really finalized; not sure this will fly $$ Dec 20, 2012
?Spending Cuts? Lose Something in Translation http://t.co/DYFxVMno Only in DC is reducing planned growth in spending called a cut $$ Dec 20, 2012
Money Funds Brace for Flood http://t.co/4J7VWuxx MMFs r between a rock & a hard place: loose Fed policy & regulatory over-reach $$ Dec 20, 2012
Wall Street’s Biggest Geniuses Reveal Their Favorite Charts Of 2012 http://t.co/at12mMsV Very long, but lots of good stuff $$ Dec 20, 2012
My forward estimates, derived from TIPS are rising, 2014 inflation, and 2018-2022 inflation. The latter has… http://t.co/tgrGfiDG Dec 19, 2012
Estimated 2018-2022 inflation rate continues to rise: http://t.co/ebqeM5KJ Stagflation may be coming. cc: @federalreserve #stagflation $$ Dec 19, 2012
Estimated 2014 inflation rate continues to rise: http://t.co/ZrvIc5Nk Stagflation may be coming. cc: @federalreserve #stagflation Dec 19, 2012
Economics may be dismal, but it is not a science http://t.co/I6B9LbSw No universal economic theory, & new economic thinking must be eclectic Dec 18, 2012
Fisher: Fed Risks ‘Hotel California’ Monetary Policy http://t.co/fRKOYl9d When the Fed starts 2 tighten, it will b hard 2 do $$ Dec 17, 2012
FDIC Guarantee Program Set to Expire After Senate Block http://t.co/qPdQNWQF Will squeeze the short end of the yield curve further $$ Dec 17, 2012
US Banks Lack Liquidity to Withstand Crisis, Study Says http://t.co/psmQEP1z Liquidity mismatches r pernicious; key risk gets ignored $$ Dec 17, 2012
Mkts r discounting mechanisms. Temporary events like bond ratings, debt ceiling & fiscal cliff should not affect market much $$ Dec 17, 2012
So, as an example, if the govt runs a deficit, it should not stimulate much b/c people discount future econ adjustment b/c of more debt $$ Dec 17, 2012
Same 4 monetary policy; the Fed can “stimulate” as much as it likes; mkt players discount the future removal of policy, inflation, etc. $$ Dec 17, 2012
Cliff? What Cliff? http://t.co/QEvklDQU Or maybe, just maybe investors don’t care whether we go over the “fiscal cliff” or not. $$ Dec 17, 2012

Stocks & Sectors

There are 272 gold & silver companies trading on US exchanges or OTC. 59 of them have mkt caps > $100M. 22 of them have mkt caps > $1B $$ Dec 21, 2012
Aviva Sells US Life Business to Apollo for $1.8B http://t.co/UqM2kqyr When Aviva bot Amerus, I said that they overpaid massively. Proof $$ Dec 21, 2012
Value Investing In Practice: A Conversation About Oaktree Capital http://t.co/4FVok5wz Good value investing does not hyper-diversify $$ Dec 20, 2012
ICE in Deal to Buy NYSE http://t.co/ik348vsZ New era; expect 2c more deals like this. As an aside average holders of $NYX stock lost $$ Dec 20, 2012
Buffett’s Leading The Corporate Buyback Surge http://t.co/U3piJgDv He has the $$, & 1.2x BV is a defensible floor ||| FD: + $BRK.B Dec 19, 2012
Investment Fads and Themes by Year, 1996-2012 http://t.co/cvLFKyRE @reformedbroker on what the broad themes this year & back to 1996 $$ Dec 19, 2012
Alterra up after deal, analyst positive on Bermuda peers http://t.co/Y5jTB40c Room 4 a new round of consolidation. $MKL buys $ALTE $$ Dec 19, 2012
$ALL Bets on Home Insurance as Stock Rally Withstands Sandy http://t.co/XBQOOSB5 Insured damages (excl flood) low4 Sandy; premratesflat $$ Dec 19, 2012
Stocks Held Hostage as CEOs Plan Spending Cuts http://t.co/5c7nBKAS It is difficult to avoid deflation; so much uncertainty presently $$ Dec 18, 2012

Credit & Fixed Income

Swaps ?Armageddon? Lingers as New Rules Concentrate Risk http://t.co/QK3s19Hz Clearinghouses r not a panacea; it is possible 4 them 2 fail Dec 21, 2012
Americans Hacked Don?t Know Chamber Left Them Alone http://t.co/DSBDUijq Common programs place yr computr @ risk; CoC defends SW makers $$ Dec 21, 2012
The Indianapolis 500 of Corporate Bonds Yields http://t.co/dCamXED3 Too much $$ flowing into corporate credit; feels like 2006 Dec 20, 2012
India Cash-for-Gold Loans Hide Shadow-Banking Risks http://t.co/BGnO4YWI 2much lending creates a mess; 2much secured lending creates a panic Dec 20, 2012
Pimco Sees Spreading Slowdown Boosting [Australian] Bonds http://t.co/oDFSkGoF Pimco buying the debt of fringe developed nations $$ Dec 19, 2012
CAB Legislation Expected in January http://t.co/TSuxBmM4 California legislation proposed 2 limit issuance of Capital Appreciation Bonds $$ Dec 19, 2012
Why China May Be Facing US-Style Credit Crunch http://t.co/99xMzC3M “To some extent, this is fundamentally a Ponzi scheme,” [Xiao] said. $$ Dec 19, 2012
Pimco’s Gross Cuts Back on MBS http://t.co/4FaxLTKq Lightening up on MBS & Corporates, buying developed fringe, sticking w/TIPS $$ Dec 19, 2012
Mind the rate risk http://t.co/nVqjlWW9 Rates may stay low 4 a while, but when they run up, total returns could b worse than 1994 $$ Dec 19, 2012
Spain House Prices – Deconstructing Spain http://t.co/7ARRPZqS Housing prices continue 2fall, more foreclosures, setting up bad bank fund $$ Dec 17, 2012

Energy

Valero Received Approval 2 Ship US Crude 2 Quebec Refinery http://t.co/ojABCqu1 Could b start of something big: US exports oil FD:+ $VLO Dec 20, 2012
Extracting shale oil from a Dead Cow http://t.co/bok4bNE7 Interesting: after the expropriation of Repsol that oil majors line up4more $$ Dec 20, 2012
Gasoline at US Pumps Drops to Lowest in a Year on Supply Gain http://t.co/4pI5SXiV Good news coming to users of refined fuel products $$ Dec 19, 2012
California refiners dreamin’ of shale oil face hurdles http://t.co/vJgiW4rm Many efforts t get cheap oil 2 CA; $24/bbl price difference $$ Dec 17, 2012

Other

CEOs Concerned about the Time and Cost of Implementing Predictive Analytics http://t.co/QcABrcFH Big data facilitates cluster pricing $$ Dec 20, 2012
In the Flesh: The Embedded Dangers of Untested Stem Cell Cosmetics http://t.co/de2aio1V Adult stem cells can do as much harm as good $$ Dec 19, 2012
The First Time Tech Ruined the Music Business http://t.co/d0RE4002 As technologies improve all manner of “rights” issues crop up $$ Dec 18, 2012
Advisers Question Modern Portfolio Theory http://t.co/lLbCVvgL Look through the security 2 the underlying economics of the investment $$ Dec 17, 2012
Twitter has started rolling out the option to download all your tweets http://t.co/IIOVO6mJ Not common yet, but may b coming soon $$ Dec 17, 2012
Schools Safer Than 1990s as Educators Anticipate Killers http://t.co/aQaB6G6Q Students r far less likely2b killed in school than elsewhere Dec 17, 2012
Highest-Paid California Trooper Is Chief Banking $484,000 http://t.co/JwgYWfg2 Giving officers comp time rather than $$ 4 unused vacation Dec 17, 2012
‘Followers for sale’: Twitter’s very own black market http://t.co/HKCqo074 Fake Follower Check will estimate how many followers r real $$ Dec 17, 2012
SEC Says Asset Firm Manipulated Trades to Enrich Some Clients http://t.co/L8IJQ77k I remember their ads, proclaiming their track record $$ Dec 17, 2012

Wrong

Bad idea: Africa Dreams of Building Telescopes to Study Space http://t.co/gSwkKIBs Would make more sense 4 Africa to fix agriculture $$ Dec 20, 2012
Wrong: US should intervene in Nagorno-Karabakh process at the highest level http://t.co/2tJTKtht We should stick 2r own business $$ Dec 18, 2012
Wrong: This is why I generally don’t like Quartz; pretending to be smart $$ RT Our favorite charts of 2012 http://t.co/w2bvLDvX Dec 18, 2012

Replies & Comments

“This would have been a better article if you had put separators between each graph/explanation.” ? David_Merkel http://t.co/uoMy61H1 $$ Dec 21, 2012
@EddyElfenbein Thanks, Eddy. Dec 19, 2012
@geekpryde Hey, thanks for the kind words, I appreciate that you follow me. Dec 19, 2012
@VIXandMore Ludwig is letting us down, and 3 days after his birthday. Call Schroeder 😉 Dec 19, 2012
@Alea_ Cool new avatar, I like it Dec 19, 2012
@Money_in_Stereo Well said, though I am not an expert there. Thanks for sharing that. Dec 18, 2012
@BarbarianCap Hint: if company is offering u a nice buyout, they r offering less than its worth, unless u no more about when u will die $$ Dec 18, 2012
@volatilitysmile @carney I knew a close adviser of Mozillo; he told me stories of how disconnected Angelo was w/reality in 2009 $$ Dec 17, 2012
@nicster There have been many changes, but they are all local, and don’t make the news. US Govt was stupid on the shoe bomb. Local better $$ Dec 15, 2012

Retweets

Amazing RT @moorehn: “the average lifespan of American musical superstars in the pop, rock and rap genre is only 45.” http://t.co/uXVNuStF Dec 20, 2012
Practically. Old bond mgr rule: underweight the most rapidly growing debt class $$ RT @ToddSullivan: didn’t they already do student loan? Dec 20, 2012
Remember deriving formula when younger $$ RT @munilass: Twelve Days of Christmas and tetrahedral numbers http://t.co/VVNnyU2V (via @ptak) Dec 20, 2012
You can say that again $$ RT @japhychron: @AlephBlog Always funny the way they call economics a science. Studying people is anything but. Dec 18, 2012
Banks are insolvent & w/large & rapidly growing budget deficit $$ RT @FGoria: DJ: Cyprus May Be Days Away From Default — Fin Min Official Dec 17, 2012
Sad & dumb $$ RT @carney: You’d never guess who has a completely self-serving & bonkers theory of the financial crisis. http://t.co/LIAd8WqB Dec 17, 2012

Twitter Summary

My week on twitter: 72 retweets received, 1 new listings, 85 new followers, 132 mentions. Via: http://t.co/SPrAWil0 Dec 20, 2012