Beating Buffett

Right now… Nothing is truly safe but well-financed American, Japanese & Northern European equities (ex-Financials and ex-Ireland) look better than any other asset class to ride out the coming recession. In the short run anything is possible as we’re in completely uncharted waters.

Government bonds and (probably) all long-term fixed income are likely to be the worst assets to be holding once the SHTF.

“When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing – when you see money flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and pull than by work, and your laws don’t protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.”

Ayn Rand, Atlas Shrugged

How Government Should Cheat on the CPI – by Bloomberg Businessweek

Those who fill our own gas tanks, pay utility bills, contract for our own healthcare and purchase groceries know intuitively that inflation has been quite high over the past few years. Government agencies tell us we’re wrong and that prices have only risen 2 – 3% annually. They love to speak about ‘core inflation’ which excludes food and energy. Please raise your hands if you don’t partake of those items and thus don’t care about their costs.

This week’s Bloomberg Businessweek (Apr. 30 – May 6, 2012 issue) proposes a bipartisan deficit fix they say would produce $300 Billion in combined savings and tax revenues over the next decade. How would they accomplish this? Switch from the current standard CPI calculation – the Bureau of Labor Statistics market basket of 80,000 goods and services weighted to reflect what they claim are consumer spending patterns- to the BLS’s chained CPI.

What is chained CPI? The BLS says that when prices for specific items go up, consumers often substitute lower-cost goods instead of buying their old favorites. While the standard CPI measures the same basket of goods every month the chained CPI would assume steak lovers would trade down to hamburger or Granny Smith apple fans would settle for lower priced oranges should apple prices surge. Bloomberg suggested that consumers might even react to price increases in one item by going to another category altogether. If ‘bacon and eggs’ gets too expensive, why not simply have some cold cereal?

This alternative measure of including price substitutions is literally an apples-to-oranges comparison rather than noting the change in prices of exactly the same goods and services from the month before, as the average person would expect.

The chained CPI would assume that higher absolute prices force people to ratchet down their standard of living rather than pay more to maintain their normal choices. BLS says that this would lower reported CPI by 0.25 to 0.35 percentage points versus the apples-to-apples standard CPI calculation.

The Congressional Budget Office [CBO] estimates that the lower, chained CPI, would save $112 billion in Cost of Living [COLA] adjustments to Social Security recipients alone over 10 years. They see another $33 billion in COLA savings from other indexed Federal spending such as pensions, plus adjustments of tax brackets, exemptions, credits and deductions.

Bloomberg notes that many people’s wages would then be rising faster than the newly adopted CPI index, generating another $90 billion in extra taxes due to bracket creep over the next decade. They claim it would also reduce interest payments on the debt from inflation-linked Treasury bonds [TIPS] by $44 billion more over the next 10 years.

Businessweek’s editorial mindset is to skew the reported numbers to lessen government outlays while raising taxes without any fanfare or public debate.

Bloomberg thinks that retirees, savers and taxpayers should all accept lower standards of living in order to fund $300 billion in extra taxes and/or forgone COLAs. Those who bought TIPs thinking they were getting true inflation protection, via honest reporting of government statistics, can go straight to hell. Do NOT pass GO, do NOT collect $200.

Dr. Paul Price

April 27, 2012

Ultimate
Irony- Major Life Insurance Firms Settle with State AG’s

MetLife,
Prudential and John Hancock agreed to pay $40 MM, $17 MM and $12 MM
respectively to make a multi-state probe go away. These companies were
routinely cross-checking Social Security death records to prevent recurring
annuity benefit payments going out to deceased policy holders. That seems fair
and logical. In fact, SS itself has been criticized for wasting huge sums sending
out checks to dead people.

What was the
focus of the probe then? These companies did not voluntarily use this same data
to offer death benefits to heirs of life insurance policies. Benefits were paid
only if a claim was filed. That was standard operating procedure and perfectly
legal, if not a really savory business practice. Do you pay your personal bills
if they are never presented to you?

Florida’s
insurance commissioner said it was a landmark settlement in terms of the amount
of money ($400 MM) being paid out to consumers. Now that the largest firms have
settled, many smaller companies are being targeted for the same practice.

Here’s where the irony comes in.

The Wall
Street Journal said the probes started when an ambitious, minor league auditing
firm approached several cash-strapped states with the idea that they could
seize these unclaimed life policies as ‘abandoned property’. 35 states signed
up for this cash grab, contracting with Verus Financial LLC and promising them
a cut of their eventual take.

The states, now calling out the
insurance companies for failing to seek out rightful beneficiaries, were looking to take these unpaid death benefits
for themselves- not consumers.

It is
unclear when the decision to switch up to the more altruistic purpose was made.
Perhaps someone involved finally grew a conscience.

*****************************************************************************

Government
agencies looking to confiscate other people’s money apparently are not at all
unusual in today’s world. I was surprised to find clauses in the fine print of
every on-line bank account telling depositors that if they didn’t access their
accounts for just 12 consecutive months that
the entire balance would be turned over to their home state under that same
abandoned property clause. It’s easy to think that savers, especially those
with multi-year CDs would have no reason to keep checking on their accounts. Heirs
of account holders that died might not even know these accounts existed.

Poof, all
your money could be taken away without notice by either your bank or your home
state.

Similarly,
many states are now confiscating unused gift or prepaid card balances as soon
as two years after purchase. AMEX and some other firms are rebelling against
New Jersey’s requirement to have buyers of their prepaid cards give zip codes-
allowing NJ to lay claim to any dollar amounts, bought by Jersey residents, not
used promptly.

It appears
that governments can take consumer value without hesitation even as they accuse
private industry, and extort fines from them, for doing exactly the same thing.

Some years
ago I received a version of this in an un-credited e-mail. I wish I could take
ownership of these wise thoughts. They are worth repeating for anyone who hasn’t
seen this.

Politicians often exclaim; “It’s just a
tax cut for the rich” and
that is just accepted as fact. But what does that really mean?

The parable that follows may help clarify the
issue.

Tax Cuts - A Simple Lesson In Economics

Every evening ten men go out for dinner. The bill for all ten comes to $100.

If they split the check the way we pay our
taxes, it would go something like
this:

The first four men (the poorest) would pay
nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh $7.
The eighth $12.
The ninth $18.
The tenth man (the richest) would pay $59.

That seemed fair to the majority and that’s
what they decided to do.

The ten men ate dinner in the restaurant every day and seemed quite happy
with the arrangement, until one day, the owner threw them a curve.

“Since you are all such good customers,” he said, “I’m going to
reduce the
cost of your daily meal by $20.”

Now dinner for the ten only cost $80. The group still wanted to pay
their bill the way we pay our taxes.

The first four men were unaffected. They would still eat for free. But
what about the other six, the paying customers? How could they divvy up the
$20 windfall so that everyone would get his ‘fair share’?
The six men realized that $20 divided by six is $3.33 per person. If they
subtracted that from everybody’s share, then the fifth man and the sixth man
would each end up being ‘PAID’ to eat their meal.

After much debate the restaurant owner suggested a solution. He proceeded to
work out the revised amounts each should pay.

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33%
savings).

The seventh now paid $5 instead of $7 (28%
savings).

The eighth now paid $9 instead of $12 (25%savings).

The ninth now paid $14 instead of $18 (22%
savings).

The tenth now paid $49 instead of $59 (17%
savings).

Each of the six highest earners was
better off than before and the first four continued to eat for free.

Once outside the restaurant, the men began to
compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He
pointed to
the tenth man “But he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a
dollar, too.
It’s unfair that he got ten times more than me!”

“That’s true!” shouted the seventh man. “Why should he get $10
back when I
got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t
get
anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for dinner, so the other nine sat
down
and ate without him. When it came
time to pay the bill they discovered
something important. They didn’t have enough money between all of
them for
even half of the bill!

That, boys and girls, journalists and college professors, is how our tax
system works. The people who pay the highest taxes get the most benefit
from a tax reduction. Tax them too much, attack them for being wealthy, and
they just may not show up at the table anymore.

Obama to Propose $300B for Jobs

In his speech Thursday, President Obama will ask Congress to pump $300 billion into the economy for job creation—mainly through tax cuts, infrastructure spending, and direct aid to state and local governments, sources told Bloomberg News on Tuesday. As part of the long-term deficit-reduction package, the president will reportedly ask Congress to offset the cost of these measures by raising tax revenues in later years.

This follows his pattern of buying votes now with other people’s money while pushing all the costs into years well beyond his own tenure in office.