The Limerick of Finance for 12/06/15

Universal income coming soon
Finland first to see if it's a boon
Getting paid just to live
No real effort to give
Take the check and then sleep until noon

The Haiku of Finance for 08/14/15

Claim that benefit
Loopholes won't last forever
Abusing system

Social Security Loopholes Will Accelerate Systemic Insolvency

I had the misfortune of listening to a financial "expert" today who pointed out multiple loopholes in the Social Security system's enrollment and claims processes.  Savvy enrollees have almost a dozen ways to game the system and milk it for more benefits.  Only a small percentage of Americans figure out how to do this every year as they become eligible.  Their impact on the system is probably small, but Social Security will be more unsustainable as a result.

The Social Security Administration (SSA) publishes its financial reports every year.  The FY14 statements show the SSA receipts and outlays as part of the total finances of the federal government.  Remember that the next time someone says Social Security is an insurance program with its own asset base as collateral for liabilities.  It is no such thing.  It is a transfer payment from current taxpayers to current beneficiaries.  More well-informed people legally gaming the system will increase the burden on current payees to keep the system solvent.

I read the "Highlights of Financial Position" section of the SSA's FY14 report.  The chart on page 31 for the number of months of expenditures the FY-end asset reserves can pay shows a decline from 42.5 in 2010 to 37.1 in 2014.  That should concern anyone who thinks they can extract more early benefits with legal tricks.  I will quote directly from page 31's long-term financing discussion:  "Social Security's financing is not projected to be sustainable over the long term with the tax rates and benefit levels scheduled in current law."  The trust fund asset reserves will be depleted by 2033.  The fawning, laughing fools who listened to today's financial expert have another 18 years to jump through loopholes for a few thousand dollars more each year in benefits.

I am getting much better at suppressing my inclination towards eye-rolling and smirking when self-proclaimed experts say dumb things.  Today's expert showed his ignorance by claiming financial advisers don't sell TIPS because investors can get them commission-free directly from the US Treasury.  True, but many advisers manage ETF wrap accounts that include TIPS ETFs that are eligible for covered call writing.  A yield-enhancing ploy like covered call income more than makes up for a few basis points of expense.

I felt disturbed when this expert claimed the US would renege on the bonds it owes to China before it would renege on the nonmarketable, intergovernmental holdings owned in the SSA's funds.  He thought it was a joke.  This guy had no clue what a selective bond default would do to the sovereign debt rating of the US.  Selective defaults would make further bond issuance much more costly, jeopardizing the government's ability to fund future benefit recipients.  Just ask Greece's finance minister.  The valuations of bonds SSA currently owns would logically suffer if government accountants were honest and marked them to market.  Since the bonds are technically nonmarketable, some exceptional financial excuse could keep their valuations artificially high so the SSA trust funds could remain technically solvent.  Any argument for selective default also completely ignores the hyperinflation risk the US would experience in the event of a global run on the dollar.  The international bond market would purge as many Treasuries as possible, making the Federal Reserve the instant buyer of last resort for every US bond on the planet.  Way to go, mister expert.

The audience entertaining this dude today just laughed it all up.  I won't disclose the expert's identity or the venue, but suffice it to say it's one of my favorite intellectual haunts in The City.  The expert admitted that the US government wants a broad constituency of payers and beneficiaries to maintain Social Security's political support.  The financial services sector would call that a Ponzi scheme given its obvious unsustainability.  The eventual political changes to the program will force means tests and lower benefits.  It makes more sense for old folks between the ages of 66 and 70 to claim benefits ASAP before they evaporate.  Maybe they'll make a few bucks before the whole Ponzi collapses.  People in the audience were laughing heartily at the expert's lame jokes toward the end of the presentation.  I could not laugh at all.  The eventual impoverishment of many Americans who falsely assumed Social Security would be there for them is no laughing matter.

Full disclosure:  No investments in TIPS or ETFs related to TIPS at this time.

The Haiku of Finance for 10/25/14

Entitlement check
Feed mental dependency
Nation addicted

Financial Sarcasm Roundup for 03/10/14

You may not be ready for my sarcasm, but my sarcasm is definitely ready for you.  If you miss the LOLpics of animals, you're welcome to make your own.  LOLcats may reappear when needed.  True sarcasm needs no artificial additives.

One Chinese bank regulator says China should allow more corporate bond defaults.  Good for him.  He's one of the few honest people in the Chinese banking system.  The bad news is that more corporate bond defaults will destroy the wealth management products that rolled them up as part of their portfolios.  Bring on the cascading defaults.  China's non-emerging middle class is going to get hit in the wallet and learn very painful lessons in risk assessment.

The BIS is dropping hints that central bankers' forward guidance on policy isn't worth very much.  I don't expect the world's central bankers to take the hint.  The bankers in the developed world love the media attention they get from making policy promises.  The ones in the developing world need to reassure local policy elites if they want to keep their jobs.  Fed watchers have too much time on their hands anyway.  They would be more productive calculating the Fed's probability of going bankrupt if it loses control of the yield curve's short end.

China blames lunar new year celebrations for its trade deficit.  Wow, that's a new one.  American executives like to blame the weather when they have a bad quarter.  Now Chinese policymakers are picking up on blame-shifting tactics.  Hey China, maybe the rest of the world is catching on to the fact that your exported products are low in quality.  Maybe the world is getting sick of Chinese IP theft and doesn't want to invest in Chinese value-added manufacturing.  Whatever.  China isn't the juggernaut some Western analysts fear.

The Obama Administration is cracking down on high-income earners' Social Security strategies.  It's about time.  The bipartisan Bowles-Simpson commission warned us about entitlement programs that would destroy the federal government's solvency.  Chipping away at excess benefits one option at a time is better than nothing, although this one proposal probably won't make much difference.  I would hardly describe the ability to manipulate an unfunded liability as a preferred financial planning tool.  Financial advisers who consider Social Security to be the equivalent of an annuity or other collateralized income stream need to find a new line of work.  Acclimatization to entitlement checks is hard to unwind, but unwind it must.

I refuse to be sarcastic about current events in Eastern Europe.  That action deserves sober analysis.  

Helping Little Old Ladies Isn't My Calling In Life

I was on my way to lunch yesterday prior to the start of a conference on China's financial reform.  I passed by a very elderly woman being helped by a not-so-elderly man.  She was stooped over and moving very slowly, even for an old lady.  I asked the guy if she was alright, and he said yes.  Then he had the nerve to ask me if I could help him walk her down the street.  I said no thanks, as I was only concerned about whether she needed medical attention.

This little episode made me think briefly about my duties to my fellow human beings.  I am willing to go out of my way in emergencies to save human life in extremis, but I do not owe a duty of permanent care to random strangers.  Unfortunately, our entitlement-laden culture has become so enamored with passing the buck of personal responsibility that the elderly are now at their apogee of greed and selfishness.  Medicare isn't an insurance program, it's a transfer of wealth from current workers to current retirees.  Many of the Boobus Americanus genus don't understand that fact.  They want someone else to pay their bills for medical care.  The dude on the street helping his grandma or whatever the heck she was wanted me to do his job for him.  He can stick it where the sun doesn't shine.

My alarm bells go off when I see someone struggling or in obvious physical pain.  If the person's caregiver tells me they're okay from a medical standpoint, my concern ends and I resume my life.  People who think I assume an additional burden of care by making a random inquiry need to get their entitled heads out of their hindquarters.  Yes, little old ladies and their able-bodied guardians, I'm talking about you.  I don't owe you precious time out of my personal schedule to do things your caregivers find inconvenient.  Helping you walk down the street isn't my calling in life nor is it my personal responsibility.  My lunch, my conference, my career, my money, and my life are more important than your caregiver's inability to do their job.  

The Haiku of Finance for 10/15/13

Bail out your grandma
Bank will pay her benefits
Send the bill to you

Alliance for Retired Americans Declares War on Mathematics

I recently stumbled across one of the most unproductive, brain-dead organizations you've never heard of until now.  The Alliance for Retired Americans is a lobbying group focused on delivering as much of America's productive wealth to greedy senior citizens as possible.  Yes, folks, that's really what they're doing and I'm not pulling any punches.

Check out their FAQ to see a great example of economic illiteracy:

We are opposed to any form of privatizing Social Security and Medicare. The Alliance is also fighting any new tax breaks for the wealthy at the expense of programs that help seniors.  We are also opposed to raising the retirement age.

In other words, they want the federal government's unfunded entitlement programs to be paid in full forever.  Their crucial "Issues" include preventing any cuts to benefits (with no mention of how future benefits will be funded), support for the Affordable Care Act's mandatory care and free checkups (again, with no clue how to pay for them), joy that legislators cannot find a compromise to reduce the federal budget deficit (with no understanding that deficit spending imperils the nation's credit rating and currency), and other points that ignore the math of the real world.

The morons who promote this Alliance need to read the Bowles-Simpson Commission's final report, which lays out the math.  The Alliance rejects outright some common sense reforms like using chained CPI for inflation-indexed programs and increasing the retirement age for Social Security recipients.  This group feeds the image of greedy geezers ripping off young savers and Alan Simpson himself blasted them for their ignorance.

My own recent encounter with two local activists from the California group Sen. Bowles excoriated (a.k.a. CARA) was the trigger for this blog article.  One activist spoke at a breakfast meeting I attended and made the following points (recapitulated from memory, as her talk was not recorded).  My comments are in italics.

"A big portion of the cost of health care is profit for the service providers.  I wish we didn't have to have that, because then we could afford more services."  Idiot, the profit motive is what incentivizes those providers to offer those services.  Take away the profit and you'll have no services at all.

"The rich need to pay their fair share in taxes."  Dummy, read this excellent explanation of how impossibly high taxes would have to rise to meet the funding shortfalls reported by the trustees of the Social Security system.

The speaker's breakfast companion, an able-bodied but overweight older woman, was too lazy to get her own breakfast plate.  I spoke up in the Q&A after the talk to personally insult the speaker and I was shouted down for being rude.  You're gall-dang right I was rude and I'll do it again if I get the chance.  These CARA takers abhor makers.  Her speech was the most intellectually dishonest and financially illiterate talk I've ever had the displeasure of hearing at a breakfast meeting.

The Alliance for Retired Americans is a union-sponsored monstrosity.  Its advocacy of fiscal irresponsibility ought to bring shame to its advocates but that is too much to expect given the gross stupidity in every statement on its website.  They ignore the data available from the government's own financial statements on the inevitable insolvency of entitlement programs because their union supporters are a greedy, lazy, and stupid pack of liars.  Unfortunately, they speak for a large number of citizens.  That is why no entitlement reform will ever come from deliberate action in national policy.  The global bond market's revolt will be very painful for these idiots when it destroys the real value of their monthly benefit checks.

The Haiku of Finance for 01/31/13

Entitlement greed
Lazy losers want payments
They cannot do math

The Haiku of Finance for 12/29/12

Medicare is broke
Don't count on getting any
Bills will go unpaid

Financial Sarcasm Roundup for 12/17/12

It's been some time since my last blast of outright sarcasm.  That's too long.

The U.S. has finally enacted permanent normal trade relations with Russia, more than two decades after the Cold War ended.  Uncle Sam sure takes his sweet time recognizing reality.  The Jackson-Vanik legal regime was a Cold War blunt instrument intended to hold the Soviet Union and its Warsaw Pact allies accountable for their human rights violations.  Now Russia's internal freedom is on par with that of the West, which says more about the West than it does about Russia.

Uncle Sam will probably be just as slow in recognizing the weak demographic assumptions underpinning entitlement spending.  The slowdown in legal immigration due to the prolonged recession is probably offset by the large numbers of illegals who remain here and have kids.  The irony of illegal immigration is that our own government encourages illegals to apply for benefit payments while they are paid off-the-books income that can;t pay into Social Security or Medicare.  Illegal immigration makes the unfunded entitlement problem worse and no one in our business or political elite even cares.  My solution is simple.  If you apply for benefits, please include your U.S. birth certificate or naturalization papers with your application.

Meanwhile, private equity firms have learned nothing since 2008.  They are using more leverage than ever to buy companies whose earnings will be destroyed in the next round of the recession.  Borrowing at record-low interest rates isn't such a great idea when the earnings needed to pay back those debts won't be there.  I'll be watching the headlines for the first private equity firms that go bankrupt next year.

Sell-side analysts have learned nothing from last decade's master settlement.  Some Morgan Stanley banker got his firm smacked for coaching Facebook on how to materially mislead analysts.  That $5M fine is peanuts, so this is hardly going to hurt anyone other than that one banker.  State regulators are paying attention while the SEC is asleep.  My readers should be grateful that all of my articles reference facts already in the public domain.  Anyone idiot can mislead analysts on a conference call.  Only a genius like me can tell the truth.

I think I'm losing my touch.  These boring news items aren't getting me fired up enough to be truly sarcastic.

Americans Prefer SNAP Over Job Search, Medicaid Over Wealth

Recent economic data releases show the changing nature of work preferences in America, or rather, non-work preferences.

The BLS unemployment numbers from December 7 show that the civilian labor force participation rate declined by 0.2%, the only really significant change from the previous month.  That BLS report masks the true state of discouragement in the workforce.  Check out Table A-16, which shows that the number of people not in the labor force is much higher now that it was a year ago.  Multiple job holders are more numerous too.  People give up on finding work when there's no work to be found.  People take second jobs when one income isn't enough to pay for food and energy that the Federal Reserve's monetary stimulus has made more expensive.  Stagflation is the new normal, until something breaks down and we head into another abyss.

Czars of government benefits programs like to see high unemployment because that drives demand for their programs.  The Supplemental Nutrition Assistance Program (SNAP), aka the federally funded food stamps now delivered via EBT, showed an increase of 607,559 individual participants from August to September.  The number of households participating increased by 289,235.  That comes to about two people per household on the program, or in plain terms lots of single moms with one kid swiping their welfare card at Wal-Mart once per month.  People respond to incentives, and many people are disinclined to look for work when welfare benefits are generous.

Some benefit programs are so generous, and the taxes levied to pay for them so onerous, that even productive people of means are looking for ways to opt out of success and become wards of the state.  "Medicaid planning" is the hip new way for affluent people to become destitute enough to qualify for government-funded long-term care.  People respond to incentives, and a blank check from the government for heroic end-of-life interventions care looks more attractive than a self-funded hospice stay.

It's hard for me to call poor people lazy when government EBT payments disincentivize them from seeking jobs.  It's hard for me to call affluent people stupid when generous government care disincentivizes them from using their wealth productively.  Public policy has become so perverse that many normal people are transforming from makers into takers because that's the financially sound thing to do.  The 47% of our citizenry who see themselves as victims grows larger by the day.  This will continue until the mass of takers overwhelms the productive economy's ability to support them through transfer payments.

My guess is that the madness will never cease of its own accord by reforming the policy system.  The fiscal cliff negotiation pantomime under way shows us that Washington D.C. is not interested in anything other than the usual drama.  The international bond market will have to be the adult in the room and stop this nonsense for us with a run on the dollar.

The Limerick of Finance for 08/12/12

The SocSec surplus is a lie
That "trust fund" is bound to run dry
None of us will get paid
By the time we have grayed
Your check is just pie in the sky

IMF Says US Headed For Deficit Trouble

This should elicit groans from credit analysts at the major rating agencies who will now be asked by their supervisors if they've factored enough outliers into their rating models.  The IMF has a new warning out about U.S. budget deficits:

The U.S. shortfall will reach 10.8 percent of gross domestic product this year, ahead of Japan and the U.K., the Washington-based agency said in a report released today. It estimates that President Barack Obama will need to cut the deficit by 5 percentage points of GDP in the next two fiscal years, the largest adjustment in “at least half a century,” to meet his pledge of halving it by the end of his four-year term.

Let's not forget that Congress is the other half of any potential deficit-cutting partnership.  Both sides will be hard-pressed to come up with a more substantial path to balanced budgets given the difficulty they had reaching an agreement last week.  Substantial deficit cuts will of course destroy the phony economic recovery and bring on the second leg of a long-overdue depression. 

Hey America, have you noticed that some banks like JPM are doing exceptionally well while your own disposable incomes have stagnated?  Don't forget that GS is getting another public tongue-lashing from the same class of people who take its campaign contributions in exchange for no real change.  The phony recovery benefited Wall Street and you paid for it with TARP and toothless new regulations.  I just thought you'd like to know. 

Full disclosure:  No position in JPM or GS at this time. 

Did Baby Boomers Trade Retirement For Christmas?

We've heard this refrain before.  Americans approaching their golden years haven't saved for retirement: 

Through a combination of procrastination and bad timing, many baby boomers are facing a personal finance disaster just as they're hoping to retire. Starting in January, more than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years.

This season's retail results may indicate why this is so.  Shoppers are still very willing to part with their hard-earned money: 

Forget the returns line. People hit the stores after Christmas to buy, indulging the rediscovered retail appetite that may have made 2010's holiday shopping season the biggest ever.

I would love to see a generational breakdown of this year's shopoholics.  Did the Baby Boomers neglect their IRA contributions so they could have a glorious Christmas?  Did the Sixties' hippie kids keep on "living for today" right through tomorrow and the next day?  Did they spend all that they would earn tomorrow so that they could have today?  I know, that last sentence is a reference to an oft-heard line about sacrifice, but in this context it is an apt description of sacrifice through delayed gratification that did not occur at all. 

Entitlement can mean many things.  It can mean an expectation that Social Security and Medicare are fully collateralized insurance plans when they are in fact unfunded liabilities.  It can mean an expectation of ever-expanding material acquisitions with no regard for payment.  If entitlement means all of those things, it ultimately means insolvency. 

Old habits, acquired long ago and repeatedly reinforced, can prove very hard to break.  Unbroken habits will break us all financially.  Merry Christmas. 

Nota bene:  The author is a member of Generation X. 

The Greatest Generation Goes Greatly Into Debt

The Greatest Generation saved the world from fascism but didn't save enough for retirement.  That's why they have to go into debt to maintain their lifestyles:

Retired Americans are racking up credit-card debt like never before, be it for vacations or medical expenses, and a surprising number have no intention of paying it off before they die.

Several generations of middle class entitlement programs have taught Americans the value of a free lunch.  The trouble is that Social Security and Medicare aren't enough for people who've been conditioned to think that their living standards should keep rising into their golden years.  I can't even begin to understand the mentality of people who feel entitled to buy luxuries but refuse to save enough to afford them. 

It's too bad the Baby Boomers saved even less for retirement than their parents did.  They'll be left with nothing when Grandma's estate is liquidated at auction to pay the credit card bills she ran up on her last trip to Paris.  C'est la vie!  Indeed. 

Our political leadership will never be able to force austerity measures on an audience like this.  That's why they're willing to let the Fed be the bad guy by inflating away the government's unfunded liabilities.

Debt Co-Chair Tells Truth About Milking Social Security

Money is the mother's milk of politics.  There's also another kind of mother's milk . . . the kind that the middle class expects from entitlement programs headed for bankruptcy:

An advocacy group is calling for the ouster of former Sen. Alan Simpson, the co-chairman of President Obama's bipartisan debt commission, who described Social Security as a "milk cow with 310 million tits!" in an email.

The idiots excoriating Sen. Simpson for his truth-telling no longer surprise me.  The ability to succinctly summarize an entitlement program's worth is a disqualifier for high-profile advisory commission work, at least in the eyes of morons.  Time will prove Sen. Simpson correct and his critics will find someone to blame for their destitution besides themselves. 

Another Senator, Bob Dole of Kansas, stated things even more precisely in a comment attributed to him at the second inauguration of President Reagan in Jan. 1985.  Sen. Dole supposedly said, "America, land of the provincial and home of the naive, thank God." 

Youth And Innovation In The City

My loyal readers (yeah, all three of them) could have found me imbibing at a happy hour in my attorney friend's workspace tonight.  Props to Adam Bier of bierLegal for being a generous host and mixologist.  I was probably one of the senior citizens there at the ripe old age of 37, but one of the attractions of private happy hours is the proximity to the flower of youth without music that destroys your ears.  Youngsters have so much spunk and feistiness, ya know?  I never had it but I'm probably a late bloomer . . . or perhaps a reverse bloomer a la Benjamin Button.  Nah, scratch that second option.  I'm definitely getting grayer. 

The youngsters at the shindig weren't gray yet.  One was a social entrepreneur who had raised money for a relief project in Cambodia (I think, my memory's hazy as I was in the middle of a nectarine cocktail).  Another guy owned a bicycle repair business and had a retired investment banker as a mentor.  One gal was hosting comedy performances in her home and was planning to exhibit experimental films.

None of them needed bailouts or stimulus money to get these projects going.  They just scraped some resources together, found a niche, and launched.  That's the kind of thinking that built America into what it was before the entitlement mentality made it prematurely senile.  It's the kind of phenomenon that will eventually get us out of Great Depression 2.0 once we realize that entrepreneurship is the only thing left to try once all of the wasted stimulus money is gone. 

This is why I won't live anywhere besides San Francisco.  Urban collectives like Noisebridge are hacking their way into future technologies while soccer moms worry about whether their Social Security checks will cover their SUVs' hydrocarbon fuel bill (hint: they won't).  Creative spaces like ARK221 are spawning artists and filmmakers while Hollywood shovels the same formulaic baloney onto Joe Six Pack's plate. 

Count on San Franciscans to show the world how technology and culture are done.  The kids are all right.  :-) 

The Haiku of Finance for 03/14/10

Baby Boom bust-out
SocSec about to go broke
Call the whaaaambulance

I.O.U.? More Like "You Owe You" By Way of Social Security

The slow-motion decline of the United States continues and no one among the masses appears to be the wiser.  Social Security is about to provoke a funding crisis for the federal government:

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.

Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.
(snip)

Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn't be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

There is no way to close the gap between what is owed to Social Security recipients and what Uncle Sam is able to pay without some combination of the following:  curtailing benefits, raising taxes, or decoupling annual increases from the Consumer Price Index.  All of these actions will directly impact the Baby Boomer generation, which happens to be the least-prepared generation in American history to face retirement. 

The street protests we've seen in Greece for the past few weeks will soon explode here.  The difference will be the ages of the protestors.  Our Baby Boomers, coddled and indulged since birth, are completely unable to contemplate austerity.  They took to the streets in the 1960s because they were unwilling to make a civic sacrifice for the Vietnam War.  They will take to the streets in their golden years, in walkers and wheelchairs.  This will have a very ugly effect on American culture and politics in 2012 and beyond.

Perhaps that's why the Mayan calendar doesn't run past 2012.  It must have been designed by a Mayan Baby Boomer who didn't want to face retirement. 

Nota bene:  Anthony J. Alfidi is not a Baby Boomer but is preparing for retirement without relying upon Social Security.