Cancel Most US Federal Holidays To Save Money

I mentioned in one of my recent Financial Sarcasm Roundups that canceling Presidents' Day would be great.  I totally need to take this concept all the way.  The US federal government can save a ton of money and get more work done by canceling several official holidays.

Uncle Sam is nice enough to list the official holiday lineup.  The government also lists a bunch of stupid days like Groundhog Day, Valentine's Day, and Halloween, but those don't grant days off.  My focus is on some other stupid days that do cause people to skip work for no good reason.  The US Senate published an official Congressional Research Service paper from 1999 describing the origin of the eleven official holidays.  Note one very important point from the paper's abstract:  The holidays only legally apply to federal employees and the District of Columbia.  Your local laundromat or shoe repair shop that claims one of these holidays as an excuse to close is therefore just being lazy.

The eleven holidays in Uncle Sam's list are free days off for government workers, but alas nothing in this world is free.  The taxpayer pays through the nose for all of those cubicle dwellers to do nothing for almost one "working" day each month.  The Washington Times noted that one paid holiday in 2008 cost an estimated $450M.  Paying this out ten times a year, plus part of it once every fourth year for Inauguration Day, adds up to some serious cheddar cheese.  The opportunity cost of lost economic activity spills over into the private sector when service-oriented businesses decide they need to voluntarily shut down for a federal holiday.

Here's my modest proposal to restore sanity to America's out-of-control holiday calendar.  Let's eliminate every holiday that does not specifically relate to the nation's founding or its defense.  Conflict shapes our national character more than any other phenomenon.  Reducing the holiday count to this bare minimum leaves us with Memorial Day, Veterans Day, and Independence Day.  That should be enough for federal workers who also get accrued vacation days.  I question the rationale for giving federal workers Inauguration Day off because common sense should require the federal government be somewhat fully staffed while its head of state changes heads.  The other holidays are totally superfluous.

New Year's Day and Christmas Day are private functions for most people.  How we celebrate them should not be the government's concern.  The secularization of America is progress.  Elevating one religious holiday to a federal day off means granting other religions' special days the same status.  We either celebrate them all out of fairness, or celebrate none of them officially.  Take an accrued vacation day off if you must go visit your grandparents.

Thanksgiving Day can remain a semi-official holiday with no paid leave for federal employees.  Every civilization has some kind of harvest celebration and Thanksgiving fits the bill for America.  It also maintains the spirit of unity and magnanimity Abraham Lincoln had in mind when he first proclaimed it during the Civil War.  It therefore has something to do with building the nation's character and reminds us of our agrarian roots.

Labor Day makes no sense.  It is a vestigial reminder that the capitalist class once feared socialism enough to throw a bone to working stiffs with a special day.  We can declare victory in the class war by getting rid of Labor Day.

Celebrating Dr. King, our late but great Presidents, and Christopher Columbus likewise makes little sense.  Most Americans only paid minimal attention in school during history lessons.  Your average Joe or Jane Six-Pack probably wouldn't be able to pick those figures out of a lineup of cartoon characters or breakfast cereal mascots.  When those days occur, hardly any Americans stop and reflect on those holidays' notable namesakes.  Instead they go bowling or skiing, or whatever.

Federal holidays should serve a unifying purpose and remind us that we have a nation worth defending.  They should also take cost effectiveness into account.  Our modern federal holidays are too numerous and cost too much.  The private sector's imitation of government holidays costs the nation in lost productivity.  The nation got along just fine through the 1880s with barely half a dozen federal holidays.  Returning to the Republic's hard-working, thrifty roots is an excellent example for the government to set.

Nota bene:  Alfidi Capital is open 24 hours a day, seven days a week.  I have published blog articles during all major holidays.  This firm never takes a break, unlike the rest of this lazy, shiftless, good-for-nothing planet.  

The US Mental Health Care Market is Big Enough for Disruption

The Commonwealth Club's recent talk on reforming our national mental health system got me thinking about this niche market in health care.  Advocates for metal health reform want better preventive care and more research funding.  The Mental Health Parity and Addiction Equity Act (MHPAEA) ensures that insurance plan reimbursements will sustain mental health spending.   Money will flow and providers will profit.

The National Institute of Mental Health (NIMH) funds basic research in neuroscience, behavioral health, and other mental health areas.  The NIMH's total budget for FY 2014 was almost US$1.5B.  The HHS's Substance Abuse and Mental Health Services Administration (SAMHSA) total budget request for FY 2015 is US$3.6B.  These are by no means the totality of the federal government's mental health spending, as the VA's mental health programs and other efforts can attest.  State and local governments also spend significant sums.

The ACA makes the policy jungle in health care more confusing than ever, but I believe entrepreneurs have room to maneuver.  Suffice it to say that disruptive enterprises have a clear path to determining the market opportunities for innovative mental health solutions.  The NIMH Statistics page reveals the size of this market by disorder, but not by dollars spent.  IBISWorld estimates the total size of the mental health market at $16B with no dominant players.  Compare that to the two dollar amounts I quoted above and see that the federal government accounts for at least one third of this market.  The SAMHSA Financing and Research page describes the federal government's multiple financing methods for mental health programs.  Selling into those programs and mastering their data sets represents the low-hanging fruit for early adoption.

Safeguarding information matters.  Entrepreneurs must incorporate FERPA and HIPAA compliant safeguards into their data management systems.  Data privacy violations open the door to an unforgiving legal environment.  I fully expect Big Pharma to use lawfare against startups that offer non-drug treatment modalities for mental health problems.  Startups using strong PaaS services can avoid the worst expenses.  An ounce of prevention will be worth a pound of cure, to borrow a health care phrase.

The health care sector is not a typical Alfidi Capital focus area.  It is more heavily regulated now than ever, which makes it harder than ever for smaller companies to grow market share.  Big companies that want to control costs under the insurance exchange regime may look to acquire smaller companies that can offer savings.  Startups have room to make money in mental health.  They'd be crazy not to try . . . pun intended.

The Cost-Benefit Framework for Police Militarization in America

Police militarization is on many Americans' minds after the recent unrest in Ferguson, Missouri.  One very important aspect of this discussion is hard to find but deserves a public airing.  The cost of police militarization is hidden deep in budget lines at all levels of government.  Taxpayers bear this cost and should ask what benefits they receive in return.

The Defense Logistics Agency (DLA) Law Enforcement Support Office (LESO) administers the DOD 1033 Program, which provides free materiel to local law enforcement agencies that request it.  The LESO notes that it transferred over $449M worth of materiel in 2013.  That's about $1.43 per capita, assuming the entire cost was funded with current year appropriations.  The program began with the NDAA for FY1997, so any comparison with results should start at that year.

The materiel in question includes armored vehicles, body armor, night vision equipment, surveillance devices, and other implements intended for use in high-threat tactical situations.  It is appropriate to consider whether situations requiring such equipment have occurred with more or less frequency since 1997.  It is also appropriate to consider the cost of crime as an opportunity cost that more robust policing should mitigate.  Slate notes that intermittent efforts to calculate the costs of various crimes have periodically filled our knowledge gaps.  I did not see statistics in that article for the cost of high-threat tactical situations.  Mark Cohen's landmark 1998 study "The Monetary Value of Saving a High-Risk Youth" is focused on the cost-benefit relationship in crime prevention, not high-threat tactical situations.

Let's consider other tools.  The RAND Corporation's Cost of Crime Calculator allows citizens to compare the costs of crime in their neighborhoods.  RAND's "Hidden in Plain Sight" study concludes that investing in police personnel (i.e., the number and quality of the humans in the force) has a favorable cost-benefit result.  It does not specifically cover high-threat tactical situations or use of materiel, but it points the way to understanding how to frame them.  "Hidden in Plain Sight" compares the annual cost of crime in a locality to that area's gross municipal product (GMP), aka gross metropolitan product.  Analysts can thus isolate the cost of a singular high-threat tactical situation, such as arson damages from a riot or sales lost due to store closures during a protest, and compare it to GMP.  We can then compare that financial loss to the cost of DOD 1033 Program materiel used to mitigate said situation to determine a cost-benefit relationship.

Analysts have national data standards on crime costs.  The FBI's Uniform Crime Reports aggregate crime data for all US municipalities, now updated with the UCR Data Tool for searches.  The NIH study "The Cost of Crime to Society" outlines standards for sensitivity analysis and endogenizes intangible costs that will likely follow most violent criminal events.  Analysis of high-threat tactical situations should adjust the NIH's base cases for the cost of DOD 1033 Program materiel committed to violent crime incidents.

This framework is only the beginning of a cost-benefit analysis.  Every municipality should run the numbers for DOD 1033 Program materiel deployed in response to local violent incidents.  High-threat tactical situations such as riots, bomb threats, and active shooter hostage situations are infrequent but dramatic.  Anecdotal reporting suggests that police forces are inclined to use military-grade gear to perform routine functions, with little regard for utility, fuel cost, or maintenance needs.  Serving a search warrant is obviously cheaper on foot than in an armored personnel carrier.  Municipal police forces should ask themselves whether their community's criminal statistics justify requests for heavy gear that they may never need.  Citizens in a free society have a right to ask whether a gas-gazzling surplus MRAP has a better cost-benefit result than a standard police cruiser.  

Treasury Secretary Jack Lew In California And Australia

I attended US Treasury Secretary Jack Lew's talk last week at the World Affairs Council.  I like hearing from top public officials firsthand.  They're going to hear from me eventually once my reputation achieves critical mass, so they might as well get used to seeing me at their public appearances.  I held back from publishing my comments on Secretary Lew's remarks because I wanted to compare his San Francisco talk to comments at the G20 ministerial summit in Australia.  He stopped in San Francisco on his way to that summit and I assumed he would stay on message.

I agree with Secretary Lew that resolving the debt limit conflict in Congress is a positive development.  The long history of the debt limit proves that it has never actually limited the growth of the national debt.  Eliminating it completely will end the hypocrisy of pretending to be serious about reducing the national debt.  His comments on international relations were more circumscribed, endorsing Iran's oil and financial sanctions and advocating IMF-style reforms in Ukraine.  Most Americans probably don't know that the US Department of the Treasury has a significant international portfolio.  Treasury has extensive guidelines for implementing the sanctions against Iran.

Secretary Lew addressed Bitcoin obliquely, leaving open the possibility that existing regulation and settlement systems could adapt to digital currencies.  He did not say whether Bitcoin would satisfy any legal tender requirement, which in the eyes of common law is really the most important test for settling transactions.  The IRS has not yet ruled on how gains realized in Bitcoin transactions may be taxed.  I'm guessing they'll be taxed as capital gains because Bitcoin acts like an asset when investors take positions.  If it quacks like a duck . . . it's probably not a swan.

I do not agree with the Secretary's belief that raising the minimum wage will raise significant numbers of Americans out of poverty.  His office should read the CBO's report from last week that projects large job losses from an increase in the minimum wage.  The Treasury's own data shows that most minimum wage earners are young and not heads of households.  They have the rest of their careers to seek wage gains.

I was very shocked to hear the Secretary refer to the cash reserves many large US corporations maintain as "retained earnings."  Oh wow, that is just so wrong.  Retained earnings is an accounting classification for the excess shareholder's equity built up from many profitable reporting periods.  It is not at all the same thing as holding cash!  The retained earnings accumulated in a year may not precisely match the cash committed to capex or other functions.  I can't believe this guy was COO of Citigroup's wealth management unit.  He learned nothing about corporate reporting if he thinks cash on hand equals retained earnings.  I couldn't forgive that misstatement after he said he wanted corporations to spend that cash pursuing growth.  I assess corporate America's huge cash hoard as a hedge against another financial market crisis.  The hoarding reflects the rational belief that Washington has not resolved the underlying causes of the 2008 crisis.  The US Treasury Secretary has a role to play in doing the right thing.  It's nice that he's listening to corporate executives talk about workforce skills training, infrastructure, and immigration reform.  Here are some other things he needs to hear, straight from the CEO of Alfidi Capital.  Bring us real stress tests for banks, the resurrection of Glass-Steagall, and the prosecution of fraudster financial executives if you want us all to get serious about risking cash on growth.

I would have preferred to hear Secretary Lew discuss the financial condition of the US government in more detail.  The evidence of mounting problems has been in the public domain for years.  The Federal Reserve's balance sheet is larger than ever and is extremely sensitive to rising interest rates.  Any potential losses would end its remittances to the Treasury.  The Foreign Credit Reporting System tables reveal the US government's small exposure to foreign debtors.  That is a huge change from much of the 20th Century when the US was the world's largest creditor, and US development aid opened new markets for American exports.  The annual trustees' report for Social Security and Medicare made it clear in 2013 that some of the funds' programs were facing imminent depletion.  Secretary Lew's signature is on those reports.

Here's the postscript from the G20 meeting.  The assembled finance ministers agreed on a two percent GDP growth target for this year.  They do not seem to know how to meet that target.  No one wants to talk about austerity anymore after riots in Greece and Spain spooked the European troika away from policy reforms.  Secretary Lew's advocacy of IMF-type monetary reforms was reserved for the home audience at the World Affairs Council.  The IMF prepared a report for this G20 meeting with notable changes in rhetoric.  The old advocacy of shock therapy through free market reforms is less visible now.  The new tone embraces indefinite monetary stimulus and infrastructure investment.  The Keynesian revolution is complete among the world's policy elite.

Secretary Lew talks a good game.  I like the guy.  His staff needs to prep him some more on financial terminology so that he doesn't appear to be a fish out of water with offhand references to "retained earnings."  This year's G20 action items will be judged by their success or failure in any future crisis.  The Secretary upheld his office's traditional reluctance to comment on the Federal Reserve's monetary policy.  That's a wise choice.  The hard part today is that so much of the G20's agenda is hostage to continued central bank monetary stimulus.  Specifics on just how the Secretary and his counterparts intend to realize two percent global growth are extremely relevant.  The Secretary's case for recovery so far rests on ARRA and Dodd-Frank.  He owes America a stronger case.  

The Haiku of Finance for 01/28/14

No course correction
Continue wasteful spending
Beg dollar collapse

Financial Sarcasm Roundup for 12/23/13

It's been too long since I published a financial sarcasm roundup.  It's not for lack of sarcastic things to say.  I just had to find decent LOL pictures to accompany the text.  That problem is now solved.  I was not satisfied with commonly available LOL pics.  Many of them are governed by copyright law because of their proprietary origins.  Getting permission for each use would be expensive and burdensome.  Free stock photos also usually come with caveats about acknowledging credit to the creators.  I decided to take my own photos.  No one deserves any credit except me.  Get ready for genuine original Alfidi Capital LOL photos.

Congress will negotiate its final spending allocations behind closed doors.  The lobbyists for the major sectors mentioned in the article pretty much know what they'll get, so there won't be many surprises.  They don't know that pork spending sprees can't continue forever.  Uncle Sam will have a hard time doling out research grants and child care subsidies after hyperinflation begins.  Meanwhile, let the catfights begin.

China is trying very hard to prevent a run on the yuan.  Note the discrepancy of over 300 basis points between the opening quotes on seven-day repos and that rate's mid-morning weighted average.  The PBOC is not injecting enough liquidity into the Chinese banking system to stop the rate from rising.  If real estate prices collapse, so will the shadow banking system, and then the run on the yuan will become very real.  I'm so glad I am no longer exposed to China in my portfolio.

The IMF is bullish on the US's prospects for growth next year.  It is no coincidence that Mme. Lagarde said this very close to the FOMC's taper announcement.  Central bankers and monetary authorities coordinate their actions and announcements to foster stability.  The IMF, as part of the European troika lending to the crippled PIIGS, knows darn well what the Fed's support means to the ECB.  I don't think she's realistic about the US's prospects but I'm one of the few analysts who lives in the real world.  She needs to know that corporate earnings are still at twice their historic norm as a portion of GDP, and when they revert to mean they'll take equities down with them.

Alrighty, then.  There's your fix of LOL pic sarcasm.  Expect more lulz now that I have a collection of my own meme photos to use.  

The Haiku of Finance for 10/16/13

Capitol showdown
Budget deal hanging mid-air
Markets wait for news

JPMorgan Chase Will Bail Out Your Grandma For Uncle Sam

JPMorgan Chase announced that it will make good on its banking clients' Social Security and other benefit payments in the event Uncle Sam decides to turn deadbeat.  I did a double take when I heard that on NPR this morning, and I read the article to be sure I hadn't misunderstood something.  I can draw one of two implications.  Scenario number one is that JPM is supremely confident that its cash horde will withstand a one-time delay of government payments and it won't get hit with any more SEC fines or forced settlements.  The alternative is that JPM knows something no one else could know about whether it has its own backstop from the US government.

Such an guarantee is very unusual from a SIFI.  Most investors are nonchalant about hedging the possibility of a US default on its shorter termed Treasury obligations.  It sure looks like financial advisors and even portfolio managers haven't explored hedging with hard assets or futures contracts on non-US currencies.  Central banks are making appropriate preparations but the mention of increasing dollar swap lines makes me LOL.  If people panic and sell Treasuries the first thing they'll do is get rid of US dollar proceeds as fast as possible.  Central bank dollar swaps are just as likely to amplify a run on the dollar as mitigate it.

It's too late for your grandma to open a bank account at Chase to seize on this sweet deal.  The next few days will reveal whether one was necessary to bail her out.  

The Haiku of Finance for 09/30/13

Government shutdown
Protecting bond payment stream
Must close up the shop

Financial Sarcasm Roundup for 09/23/13

This should add some flair to the finance sector.  I know for a fact that the wealth management brokerage where I once worked would have been more intelligent if cats and dogs were running that show.

Greece and its lenders have agreed to falsify a budget surplus.  Calculating a budget surplus before paying interest reminds me of the '90s era dot-coms who claimed they were profitable based on EBITDA.  It's fiction, people!  They're even going to falsify a joint economic growth forecast.  The creditors and government officials who are party to this chicanery are committing frauds against the taxpayers of Germany and other European countries backstopping the troika bailout.  This is infuriating to watch!  Just imagine the Federal Reserve dollar swap lines underpinning the European troika bailout and how the never-ending Greek mountain of baloney piling up will eventually trigger their activation.  Is it now obvious to everyone why I'm bearish on the euro?!

Give credit to Ireland for not following the Greek example.  The Irish are sticking to austerity and Moody's upgraded its sovereign debt rating.  Maybe Irish whiskey doesn't rot the brain as thoroughly as Greek ouzo.  If they keep it up we can remove Ireland from the PIIGS acronym and just focus on the other four hair triggers of European insolvency.

US mortgage lenders are going for the subprime market again.  They're just not using that label.  I soon expect lenders to start accepting piles of manure as collateral.  This is the end result of the Fed buying all the GSE-backed mortgage paper in sight.  Banks will once again stretch for riskier income because the Fed creates moral hazard by absolving them of risk.

Washington is playing games with the nation's credit rating again.  It may come to nothing if regulatory threats against the rating agencies frighten them into inaction.  The markets won't be fooled for long.  The change to the GDP calculation won't fool future historians.

Enjoy this stuff, folks.  I put all of twenty minutes into making this so you'd better appreciate my hard work.  Expect a lot more of this stuff in the future from Alfidi Capital.  Finance makes me LOL.  

The Haiku of Finance for 02/28/13

Sequester coming
Bipartisan agreement
Won't happen on time

Financial Sarcasm Roundup for 02/25/13

I didn't watch the Oscars last night because I'm not interested in Hollywood's self-congratulations.  Hollywood should congratulate me for being such a good writer.  Maybe they will someday.  Until that day comes, I have the web traffic of my faithful readers - all three of them - to provide me with accolades.

The Brits are keeping their stiff upper lip rather than bemoan the loss of their AAA credit rating.  Good for them.  The UK can keep up its special relationship with the US as our credit ratings are downgraded together.  Don't expect to hear similar expressions of resolve on this side of the pond.  Americans will wail in pain as our declining credit rating forces real interest rates up.  We are the world's indispensable nation, after all.

Italian voters might get their act together someday but I won't count on it.  Multiple contenders in their national election today portend a muddled result.  The eurozone countries in default are probably better off with Eurocrat carpetbaggers imposed on their systems but that experiment just wasn't palatable to voters who won't accept austerity.  Whoever wins will have to renege on many campaign promises and handle Italy's insolvency, which I believe will require the country to leave the euro and immediately hyperinflate the new lira.  I may still have relatives living in that country but I have nothing in common with them at all.

State governors know the federal sequester will tip some of their economies back into recession.  I say bring it on. The states have relied on federal matching funds for too long and they need to break the addiction.  Funding social services should be decided at the local level anyway, so people can see the impact of taxing and spending decisions in their own communities.  I don't feel sorry for states like Maryland and Virginia that have benefited from exploding federal spending on defense and homeland security since 9/11.  They could learn from California's experience in the early 1990s when defense cuts at the end of the Cold War forced many communities to diversify their economies.  The sequester will probably look a lot like the fiscal cliff debate two months ago, with lots of posturing and last-minute concessions on future spending so deficit spending can go on as usual this year.  The bond market gets the final say on this one.

Strong auto sales?  Yeah right.  Read what I blogged yesterday about the questionable underpinnings of the auto sector's revival.  Look at how fleet sales make up 21% of this month's demand, then look at my paragraph just above this one about what a sequester will do to state budgets.  In case you can't make the connection, the simple math is thus:  Sequester risk + bond market run = end of strong government sales in automobile sector.

The European Commission expects the eurozone recession to continue in 2013.  This is despite unprecedented central bank support for credit markets to stimulate demand.  The Economist notes that central banks are determined to continue the substance of their experiments with finer language as a cloak.  In summary, no one has learned anything, nor is anyone capable of learning anything.  Stupid people are in charge of the developed world and will use their enormous power to ruin life for everyone else.

I am not stupid but I am not in charge.  Someday I will be in charge of something.  It would make a great Hollywood story and I'll bet I'd win an Oscar for writing it.

Financial Sarcasm Roundup for 01/28/13

It's time for another roundup of typically human tricks in finance.  BTW, if you're expecting a diatribe on Stolen Valor veterans, that's for another time and place.  Fighting fraud in the veterans' community isn't my only priority.  There's also plenty of fraud and stupidity in the finance community to keep me entertained.

The U.S. is angling for a big trade deal with the E.U.  Could this be the "grand bargain" we all heard so much about during tense moments in Washington?  Nah, this one's even grander.  It pits Europe's (read Germany's) desperation for revived exports against American farmers' hunger (pun intended) for continued protection.  I'd be very surprised to see a deal get done at Davos because most big shots are there to party, but if this is the U.S. negotiators' idea of a main effort then they probably aren't taking it seriously.  The farm lobby is more important to much of Washington than Europe's trade problems.

If Europe can't get a trade deal with the U.S., then by golly they can try for Latin America.  Chile is playing host to hopeful Euro-dealmakers and keeping its underclass out of sight.  The socioeconomic inequality might actually be a good thing for European leaders to see.  They'll be seeing more of it on their side of the Atlantic as their welfare state crumbles so it would be instructive to see what it takes to maintain stability in a plutocracy.

I'm disappointed that there may not be a U.S. government shutdown in March after all.  I was kind of hoping that the shock therapy of big spending cuts and worker furloughs would send the stock market tumbling, thus allowing me to buy in.  *Sigh.*  A sequester without a shutdown won't mean much because Congress will just postpone it again in another cosmetic deal.  Shutting things down for a couple of days would send a more serious message to the markets.

Investors who are drunk on the supposed housing recovery need to snap out of their daydreams. New home sales are down sharply, and the only people surprised were those who don't pay attention.  They'll keep dropping as long as banks are unwinding the foreclosure inventories they keep under wraps, lest regulators figure out they're insolvent.  These games of fake economic recoveries and phony sector growth get boring sometimes, so I'm glad I'm not playing.

I'll close today's sarcasm blast by welcoming the new readers I'll get who follow a certain Stolen Valor case. Hi folks!

The Limerick of Finance for 12/30/12

This year has wound down to an end
A "fiscal cliff" deal still not penned
Some plan will get done
That will please no one
More posturing just 'round the bend

The Haiku of Finance for 12/15/12

Low water levels
Hurting riverborne commerce
Where is stimulus?

The Haiku of Finance for 08/04/12

Peak defense bubble
Uncle Sam can't afford it
Budget cuts will come

The Haiku of Finance for 07/24/12

Geithner sees danger
Europe, fiscal cliff warning
Investors won't hear

The Haiku of Finance for 07/18/12

Bernanke warning
Budget fix or recession
Yeah, what does he know?

First Warning On End Of Tax-Advantaged Retirement Accounts

The federal government will somehow close its enormous budget deficit.  The effort begins with demarcation of boundaries.  The debate so far does not include reforms of Social Security or Medicare as the Simpson-Bowles commission urged.  Those are popular handouts that are highly visible in the lives of the lower middle class and working poor.  The debate has instead begun with tax breaks that the middle and professional classes use to build wealth and prepare for a self-sufficient retirement.

Lawmakers have begun discussing "changes" to tax-advantaged retirement accounts.  The only real change this could mean is the elimination of the tax-free treatment of gains in these accounts.  It's funny how some brokerages have been encouraging clients with traditional IRAs to convert them into Roth IRAs in the hope of enjoying tax-free withdrawals someday.  That hope is probably going to be dashed in a few years.  Investors who converted their IRAs paid a tax penalty and probably wasted a chunk of capital in light of what's likely coming.

I had wondered whether financial repression measures would have simply limited retirement accounts to buying only government debt, but this emerging discussion will simply neutralize the accounts altogether.  Poor people don't have IRAs but they do love Medicare.  The end of tax-free retirement investing means taxes will be raised on the middle class's passive earnings to preserve transfer payments to the poor.  Those who intelligently saved for retirement will be punished and their meager wealth will be reduced to benefit those who chose not to save.  This is redistributive policy at its worst. Don't say you weren't warned.

Full disclosure:  I have an IRA.  

Musings On Taxable Year 2011

Today was the last day for American citizens to file their federal tax returns for tax year 2011.  This calls for some reflection.  This year's tax filing deadline happily coincides with Tax Freedom Day for the first time I can recall (not that I paid attention in years past, but I'm not the one responsible for the calculation).

I learned a couple of things from reviewing my filing documents for 2011.  My realized short-term capital gains were lower in 2011 than they had been in 2010 because I didn't pursue as much event-driven investing, particularly M&A activity.  I tracked a flurry of mergers in the fall of 2011 but chose not to act on them because of the precarious nature of this bull market in equities.  I simply do not know when the bottom will fall out.  I was thus unwilling to risk going long-equity or short-put with stocks that were M&A targets because I did not want to risk holding something if a market crash forced a merger to unwind.  Stuff like that does happen.

I also learned that my tolerance for buying outstanding municipal bonds at a premium had some beneficial effects.  The premiums I paid, small though they often were, helped negate the capital gains I realized from selling equities and writing covered calls.  The net effect was to reduce the taxable amount of some of my gains while I collect the tax-free interest payments from the munis.  The only drawback was the negative effect of the accrued interest I had to pay out on bonds that were outstanding issues held by my brokerage on behalf of the underwriter.  It wasn't too much of a big deal because I always hold bonds to maturity, so the next coupon pays me back.  After that, the rest of the tax-free cash flow keeps rolling in.

I have no reason to be smug about using muni bonds this way in the near future.  I'm not buying any more fixed income instruments due to the severe threat of hyperinflation in the U.S.  My remaining California muni bonds will mature this summer and I will not replace them.  Some combination of TIPS and their ETFs, foreign currency ETFs, and hard assets (oil/gas/pipeline) MLPs and their ETFs will replace them in my asset allocation strategy.  I have convinced myself that those things will more effectively preserve my purchasing power and generate more yield than traditional fixed-income instruments in a high-inflation scenario.  The next year or two will determine whether I am making the right choice.