What the Books of a Declining Empire Look Like

Don’t say we weren’t warned. (But, of course, it’s likely we will later say we didn’t know the risks simply because we are loathe to take responsibility for our own actions.)

As the chart demonstrates, the current Congress has taken actions in the past six weeks that will inflate the deficit substantially. Yes, it’s true: the Republicans have gone from the party who pretended to care about the deficit to the one that doesn’t give a damn about it, even in public. Not that Democrats are any better, of course. They’ve done their fair share over the years to create this fiscal mess. And, of course, no one ever thought the president would be fiscally responsible. After all, he’s the one who drove businesses into bankruptcy and had a university go belly up. I suppose it’s only appropriate that he be the one to lead the country down the path of fiscal demise.

As a grandfather, the worst part of this (in addition to what it means for Medicare and Social Security, which, of course, isn’t good) is what it will do to your generation, Vera. Simply put, your standard of living will be lower than it could and should have been. All because of the selfish decisions of the people who came before you.

Obviously, not enough people share my concern. If they did, then we wouldn’t be seeing this fiscal train wreck in action.

In any case, it is what it is. There may not be anything you can do about it other than to keep it in mind as you make your own financial and career decisions. And to realize America’s best days might be behind it.

P.S. The below chart shows what I already knew but that runs counter to popular opinion, namely, that Republicans run bigger deficits than Democrats.

P.S. # 2 – The president released his budget today. So we now know, using conservative assumptions, that  total US debt is projected to rise from $20.5 trillion today to an unprecedented $29.9 trillion in 2028.

The last chairperson of the Federal Reserve Bank said this should keep people up at night. Apparently, it doesn’t. But it will someday.

P.S. # 3 – Oh, by the way, here’s what Mr. Trump said about our national deficit in December 2015:

If we don’t … balance up our budget — at least get it damn close and soon — we’re not going to have a nation anymore.

Not that I consider him a reliable source. But even a broken clock is right twice a day.

What Goes Up, Can Go Down

Here we go again. Somehow, someway, we forget the maxim that has survived the test of time: What goes up, can go down.

In the first decade of this century, many of us thought, despite overwhelming historical evidence to the contrary, that real estate values could only go up. Millions of foreclosures and bankruptcies later, we discovered we were wrong. We had to relearn the lesson the hard way. But it seems we didn’t learn the lesson at all.

I read in this morning’s newspaper how people are spending more and even dipping into their savings because they feel wealthier due to rising stock and real estate prices. Indeed, the savings rate has fallen of late, just when interest rates are showing the urge to rise. Bad timing.

People are borrowing more money to buy stocks. And they’re taking expensive vacations beyond their means. And going deeper into debt to pay for colleges they can’t afford. And buying more house than they need.

An overwhelming majority of investors think the stock market will be higher in six months. They might be right. But they might be wrong. Are they prepared to be wrong? Many aren’t.

Reason would dictate you’d sock more money away during the good times — for rainy days, college, retirement, or simply to have a safety net. But by now it’s pretty obvious many of us live for today and aren’t all that concerned about tomorrow.

History tells us it’s highly likely, at some point, the stock market will fall quite a bit from its current lofty levels. It could be tomorrow. It could take longer. But it surely will fall.

There is a good chance real estate values, at least in certain areas, will fall, too.

If any of these inflated values are sustainable, it will be in only nominal terms, that is, without taking inflation or currency values into account. People are acting that neither is a significant risk. I fear they’ll be mistaken on one or both counts. Indeed, it’s hard to imagine any scenario that sees a stronger dollar in the long term. And we know inflation and interest rates are already below historical norms, suggesting the risk to the upside is not immaterial.

The timing and sequence of events are impossible to predict. A material decline, in real terms, in the value of equities and real estate is easy to predict.

But either way, it’s only a prediction. And that’s the point: the future is unknown. All we can know for sure is there will be bumps in the road. At some point, what went up will go down.

Warren Buffett, the most successful investor in the world in my lifetime, is famous for saying, “You only find out who is swimming naked when the tide goes out.”

When asset values fall, or inflation rises, or the dollar falls, or interest rates rise, as these things will most surely do at some point, we’ll discover who was swimming naked.

Save yourself the embarrassment, Vera. Act prudently. Never assume the sun will shine forever just because it’s shining today. And don’t forget life’s hard lessons, particularly this one: What goes up, can go down. And try not to be surprised or unprepared when it does.

P.S. 2/12/18 – This cartoon seemed appropriate.

Believing in the Impossible

I’m intrigued by people’s ability to believe in the impossible. And I take it as a warning to myself, for if others can believe in the impossible, then there’s every reason to think I can too. Which gives me pause.

In my lifetime, I suppose there have been many examples of this phenomenon playing out in real life. But lately my focus is the investment world. That’s where I spend a considerable amount of time and energy.

In the late 1990s, people who bought stocks believed in the impossible. They drove prices up to astronomical levels — far behind anything that could be supported by reasonable assumptions or objective data. I remember at the time thinking, this is crazy. Yet it continued, far longer than some people thought possible. Until it stopped. And the inevitable bursting of the bubble.

Some stocks still aren’t back to their highs from that era, eighteen years later. And quite a few companies that were highly valued in 2000 aren’t even in existence today. A lot of money was lost. Many household balance sheets and retirements were gutted.

Less than ten years later, we saw it unfold again. It was hard to believe. Hadn’t we learned anything? Apparently not.

Real estate values went through the roof. People were getting mortgages far beyond their ability to repay. Speculators were flipping properties like pancakes. Until it stopped. Until the bubble burst.

Bankruptcies ensued. Evictions spiked. Many homeowners and investors lost a lot of money. Some homeowners are still underwater (i.e., no equity in their homes). Banks had to be rescued.

And now, a decade later, we’re at it again, only this time it’s broader. It’s not only real estate. Or stocks.

We’re already seeing the worm turn in commercial real estate in certain areas and, to a lesser extent, residential real estate in certain markets. I suspect we’ll see much broader reversals before it’s all said and done.

In the stock market, some equities are priced at levels that could never be justified by expected returns. It’s only a matter of time before the correction wipes out massive amounts of paper gains, except, for some, they aren’t merely paper gains.

Many people have borrowed money to buy stocks. They’ll be on the hook for those debts irrespective of what the market does.

Others bought into the market late, paying high prices that they may not see again for a very long time, if ever. Paper losses have a way of becoming real losses.

Meanwhile, the latest fad, crypto currencies, quickly morphed into the mania phase last year. It’s hard to know exactly how this will play out, but it’s easy to see that quite a few people will lose a lot of money — mainly, people who believe in the impossible.

Belief in the impossible isn’t restricted to investment decisions of course. It plays out in every area of life, from health and work to politics and religion.

I suppose it’s sometimes easier to believe in the impossible than to face the reality. At the very least, it can sometimes put off the day of reckoning. It also can interject excitement into otherwise mundane and boring lives.

Some people say it’s good we have the capacity to believe in the impossible. The hope of miracles is beneficial, they say. I’m not so sure. It seems to leave a lot of carnage in its wake.

I like to delve into the reasons for our motivations. What causes us to believe in the impossible? What’s our motivations? What propels us to take risks that, from an objective standpoint, seem ridiculous?

More importantly, how and when am I susceptible to the same motivations? How can I avoid falling prey to the forces that prop up the world of make-believe?

From an investment standpoint, how can I profit from the mistakes of others? There are always two sides to every transaction. How can I ensure I’m on the right side of the trade?

There’s a lot to consider. The answers aren’t always easy to spot. Yet the temptations are always alluring, especially when the masses follow.

It’s in our nature to find security in the herd. Being strong enough to leave the herd when the herd has gone mad isn’t as easy as it sounds.

Yet that’s what we have to do at certain times, Vera. We have to be strong enough, and smart enough, to recognize the madness. To remain grounded in reality and not allow ourselves to be swept up by the false promises of the impossible. To be able to distinguish between hard challenges and the unobtainable. To be able to tell the difference between the impossible and the unknown.

The differences aren’t always apparent. And therein lies the challenge.

The Nonprofit Scam

It’s that time of year again, when nonprofits are beating down doors for end-of-year donations. Some time ago I explained why I no longer contribute to most nonprofits. But, of course, I don’t care if others do. It’s their money; they can do with it as they please. It’s just that I no longer desire to subsidize the gross waste, redundancy, extravagance and inefficiency (including lack of results) that permeate the nonprofit world. That said, I’m sure there are some nonprofits that are doing wonderful work and are good stewards of their donors’ contributions (so if you’re working for such a nonprofit, please don’t get upset by this post). It’s just that it might take some work to confirm whom they are.

My current position was triggered by my time working for a nonprofit college. But the seeds of it were present long before that. I had earlier served on an executive volunteer board for the United Way. That was my first exposure to the extreme redundancies in the system. And it was then I first learned of the number of nonprofits that exist mainly (if not solely) to provide employment and income to their founders or executives (or faculty).

But back to colleges for a second. Today the Chronicle of Higher Education ran a story titled Private Colleges Had 58 Millionaire Presidents in 2015. The president of Wake Forest University received more than $4 million of compensation (which, to be fair, was overshadowed by the $9.6 million showered on the president of Savannah College of Art and Design in 2014). You can find all the presidents’ compensation here if you’re interested.

Colleges have had a relatively easy time raising money because many of their alumni have a strong sentimental attachment to their schools, which, of course, if a good thing for Mr. Hatch (president of Wake Forest) and the other millionaires leading our nation’s colleges and universities. Meanwhile, of course, our nations’ students and former students are carrying nearly $1.5 trillion of student debt. What a system we have.

I used to tell my students that, to understand the dynamics of a particular situation, they should follow the money. Most of the time, it’s that simple.

Fortunately for many nonprofits, their donors aren’t all that concerned where the money is going. But if they ever get concerned, watch out. The nonprofit world will be turned upside down.

Is Medicine As Bad As My Surgeon Says It Is?

During my last appointment with one of the surgeons who operated on me following my auto accident, after discussing my latest injury and path forward, she changed the subject and threw me a curve ball: She turned the subject to my emergency care in the hours following my accident and offered her opinion that the hospital to which I was taken by ambulance had committed malpractice.

Now, malpractice isn’t a work doctors use lightly. In my experience as a lawyer, I find that most doctors are protective of their medical colleagues and their profession. Many dislike lawyers because they second-guess doctors’ decisions. And seek monetary damages for their clients. Frankly, I never thought I’d hear a doctor go out of her way to offer an unsolicited opinion that her distant colleagues screwed up.

I wasn’t surprised by the opinion, however. Indeed, I had reached the same conclusion on my own, although I hadn’t intended to do anything about it other than to call the hospital and share my concerns. I certainly had no intention of suing, and I still don’t have any such intention.

My doctor didn’t stop there. She began talking about the state of hospitals in general. She criticized what had become of most of the teaching hospitals, including some well-known ones. She opined that, outside of a few institutions like the Cleveland Clinic and MD Anderson, most have seen their quality erode. Finally, she said she would avoid most hospitals, including a well known one right here in Indy.

She offered quite a few specifics to back up her claim, but I’m not going to get into it here. Nor am I going to explain the basis for her and my opinion that the hospital to which I was taken had committed malpractice. I’m not going to get into it because, by and large, most of us have no choice in the matter. Or very little choice.

We will go to the nearest hospital to which the ambulance takes us or our GP or specialist sends us. Moreover, we lack the time and sophistication to research the quality issues adequately. Or at least we lack the commitment to take the time. That said, there is more we can do.

I have a friend who thinks you always need an advocate to help look after your interests if you find yourself hospitalized. I have another former friend who can recite the times her presence at the hospital (one of the top-ranked hospitals in the country) helped save her husband’s life. I have another friend who took her mother from Pittsburgh to Texas for an operation because that’s where the best care could be secured. In other words, there is something we can do; we’re not as helpless as we often act.

When I look back to my relatively brief hospital stay, I can see where an advocate would have helped. I had suffered a concussion that had rendered me unconscious for a considerable period of time — an injury to the brain. I was hardly in position to make important decisions or to question decisions being made by doctors.

I was fortunate though; the negative consequences of their mistakes may have been relatively minor. But others haven’t been so fortunate. Some mistakes have been costly. Some have been deadly.

There always will be mistakes, of course. We’re human. We’re imperfect. Mistakes are part of our makeup. But there are mistakes, and there are mistakes.

I’d argue that many of the mistakes today are the foreseeable product of a corrupt incentive system. My surgeon would argue — and I tend to agree — that most hospitals are being run by the finance department these days, which is a fancy way of saying that money rules. It’s not surprising. We see it everywhere, not only in medicine.

We see it in the fields of research (pharmaceutical and others), government (corporate special interests calling the shots), education (the atrocious quality of the student educational experience at most of our colleges and the abysmal results achieved by many K-12 schools), religion (despite Jesus overturning the tables, it appears the money changers won), and elsewhere.

But medicine is arguably different. Lives are at stake. But is it different? Why would we think it would be?

I’m grateful for the skill and expertise of some of the doctors, nurses and other medical professionals who worked on me and my case in the aftermath of the accident. But I’m also disappointed in the performance of some of the doctors and others.

I’m not going to forget what my surgeon told me. The next time (if there is a next time), I’ll be less deferential and more skeptical, especially concerning the judgment calls the doctors make. And I will ask for help from someone who isn’t in the middle of the crisis.

I know that money corrupts. History teaches few lessons that are as clear as that one. Is money corrupting our health care system? Or perhaps the better way of asking it is, Is medicine immune from the corrupting influences of money?

How could it be?

Should Anything Stand In The Way of Making Money?

Last evening, I took issue with this tweet of a financial blogger whom I had followed for his investment insights (Cullen Roche):

The idea of a “sin stock” never made sense to me. Who is the arbiter of whether a company makes the world worse or not?

Cullen went on to say:

The point I am getting at is that if these companies were truly sinning then the economy would divest them. Their stocks would go to $0.

[I]f they operate legally & have customers they’re not sinners.

There you have it, Vera: the market is the arbiter of what’s right and wrong.

I’d feel a whole lot better if I thought Cullen was an outlier in this regard. But I’ve seen too much. And lived through too much. I know better. I know that, often, the market — more specifically, money — is the arbiter.

Who’s to say what makes the world worse? Or better?

Some people say, “Let the market decide!”

Others say, “There is such a thing as morality and ethics that should constrain the markets. And individual choices.”

Today, I am so thankful you have the parents you do.

The Boomers’ Last Hurrah

About 10,000 Baby Boomers (those born between 1945 and 1964) retire each and every day in the United States. And now a large number are reaching age 70 each and every day. Our last hurrah is about to unfold.

The aging of my generation will produce a couple of indisputable consequences. First, outside of health care, the massive wave of retirements will depress consumption — that is, spending — in a very significant way, which will limit growth and exert deflationary pressures.

Second, this retirement wave will exacerbate our pension mess by increasing pension and Social Security costs dramatically. This comes against a backdrop of underfunded plans.

Despite what the right-wing propaganda machine persistently spews forth, Social Security is a relatively easy fix. But the state and private pension fix isn’t.

State and corporate pension plans are grossly underfunded. Some have already failed. More failures are to come. In short, some will renege on their obligations and retirees will not be receiving the monthly checks they’re expecting. (The only “bright”spot for the pension plans is that Americans are now dying earlier, thereby reducing the plans’ payouts.)

Saving some of the public systems will require tax increases, which will further suppress consumption.

Third, equity prices and, therefore, investment portfolios, will take a hit. Take General Electric for example. GE’s underfunded pension hole is $31 billion. Yet the market has yet to fully price into the stock this huge deficit.

Many other companies have large unfunded pension commitments. This will not be good for asset values and, by extension, individuals’ and endowments’ portfolios. Less spending. Deflationary pressures.

There are 72 million Boomers in the U.S. My generation had a major impact on our economy and society as we moved through adulthood. Don’t expect the impact to be any less as we move through retirement. It’s just that the impact will be very, very different.

When Debts Are Fun, and When They Aren’t

“Some debts are fun when you are acquiring them. But none are fun when you set about retiring them.” – Ogden Nash

I don’t mean to beat a dead horse to death, Vera. But I know you’re going to be bombarded with people, banks, credit card companies, stores and others encouraging you to borrow. And making it really easy for you to borrow.

Why wait when you can have it now? And you can have it all!

That’s the message. What you’ll never hear, however, is anything about the pain of paying it back (retiring the debt). And of not having enough savings to become financially independent and enjoying the freedom that comes from that.

Borrowing has come to be the American way. I’m not really sure why. But I am sure that excessive debt — and, in particular, the incurrence of huge amounts of unproductive debt — have caused all kinds of problems for people, companies, and local and state governments.

Yet we seem never to tire of debt. In fact, we borrow even more.

Oh, well, I suppose you’ll figure out what’s best for you. Just try to remember Mr. Nash’s point when you’re considering whether to get into debt: there is nothing fun about repaying loans.

That’s not to say that all debt is bad. Indeed, debt for productive uses can be good. Debt that yields a robust debt-income stream can be good.

But much of the debt incurred doesn’t. Paying that back will hurt the most.

Generational Theft

In my lifetime, we have witnessed the greatest intergenerational transfer of wealth ever seen. Seniors have benefited. Our youth have taken it on the chin.

Oddly, even so-called conservatives don’t seem to mind this massive redistribution of wealth. It enjoys broad support. The reasons are obvious; 1) older people vote at a higher rate than young people and 2) people (both voters and their elected representatives) tend to vote their self interest.

Hence, at least thus far, the Boomers and their parents’ generation are doing just fine, the recipients of massive transfers; the youth are massively in debt and on the hook for trillions of obligations owed to what I call the dying generations.

I’m not going to get into the numbers here. If you want to catch a glimpse of them, you can watch this video of renowned investor Stanley Druckenmiller (a former Pittsburgher so he must know what he’s talking about!).

But you shouldn’t have to be convinced. Just think for a moment of the massive transfers that take place in the form of Social Security (people take out far more than they pay in), Medicare, special benefits extended to seniors by state and local governments (e.g., real estate tax breaks) and the less visible countless tax breaks and subsidies that inured mainly to the benefit of the Boomer and their parents’ generations, both in earlier times (education in particular) and now as they age and die.

The result? Continue reading