A persistent situation has developed among the current political and economic climate that forebodes of large potential problems in the future.  This situation finds its source in a phenomenon that we refer to as “Evading the Obvious.”  The way this effect manifests itself is a stalwart refusal to recognize and adapt to the economic realities.  This issue is modestly problematic when constrained to people and absolutely catastrophic when employed by the political authorities.

The reason for this is because people are limited in the extent to which they can impact the overall marketplace.  However, political authorities can establish highly destructive rules and regulations that have the ability to cripple an otherwise vibrant economy.  Of the many pitfalls and problems that public officials can find themselves caught up in, there are three main principles that drive the most evasion of obvious economic truths.  These principles are that spending isn’t free, profits and losses are equally important, and that prices communicate knowledge.

Reality #1: Spending Isn’t Free

Against the backdrop of huge deficits in both the US and Euro-Zone, this truism cannot possibly be expressed poignantly enough.  Every time that any person, business, or government spends money, that money must come from somewhere.  In the cases of people or businesses, the spending frequently comes from either savings or credit.  In the case of governments, it can also come from ‘monetary expansion’ or simply printing new money.  In all cases, it is not free.

The world is a place where resources are limited.  These resources are often represented in terms of money, but there is no scheme that can ever be devised to create new resources out of nothing.  When savings are spent, those savings are not available for spending on anything else.  When money is borrowed, it must be paid back … with interest.  When new money is created, it devalues the money already in circulation.  Any time that money is spent, it represents a choice to bear a certain cost in exchange for a certain outcome.

Thus, the fundamental question for people, businesses, and governments is one of whether their money/resources are being spent in the most effective way possible.  It is certainly true that the notion of effectiveness is inherently subjective.  However, it is also true that when people are spending their own money, they do so much more effectively than people spending other people’s money.

When investors borrow to build a new factory, they do so because the rate of return from the factory is expected to exceed the cost of interest on the loan.  When people spend their savings, they do so because they value what they are buying greater than having a certain amount of money available to spend on something else.  When the government borrows or prints money to spend on “stimulus” projects, the net result is to either create or destroy value.  Projects more valuable than the alternative uses create value, and projects less valuable than the alternatives destroy value.

When one considers that political decisions are made by people who must be re-elected at regular intervals, and who are spending other people’s money, it is not difficult to see how large sums of money are spent on value destroying projects that benefit a particular political constituency.  If we seek economic growth, then net spending needs to be concentrated in areas that will generate more value than the (full) cost of the resources.  It is not possible to create affluence through borrowing to spend on value destroying projects.

Reality #2: Profits and Losses are Equally Important

Another key concept that seems to have been lost over the past five years is the importance of losses in a free market.  Profits exist to encourage innovation and risk-taking, but the risk of loss must be present to encourage prudence, and to weed-out under-performing entities so that the capital can be deployed more profitably elsewhere.  Problems emerge when the government seeks to insulate certain businesses from the impact of losses.  When profits are guaranteed, and losses are bailed out, the result is highly inefficient entities that funnel benefits to their insiders.

The reason for this is because in a competitive market, businesses who take excessive risk or have incompetent management will eventually go bankrupt.  In this scenario, the assets of the business will be sold off at a discount to other entities who behaved more responsibly.  The profit and loss system systematically channels resources from under-performing entities to those who are more effective and more prudent.

The problem that many people see in this process is the ‘creative destruction’ aspect of economic growth that pushes some companies out of business while new enterprises emerge and grow.  In response to this churn of business fortunes, many companies seek protection of their business, while people seek projection of their jobs.  Unfortunately, all of this creates a barrier against the systematic re-allocation of resources toward their most effective use.

Reality #3: Prices Communicate Knowledge

The third, and least well understood of the fundamental realities is that prices communicate knowledge.  When prices for a particular product or service are high, it signals to entrepreneurs that there is an opportunity for profit.  This opportunity attracts new competitors, and this competition often places downward pressure on the prices.  Similarly, when prices are pressed down low by weak demand relative to the amount of supply in the market, it is a signal to the marketplace that there are too many entities in competition with one another.

The problem that many government’s run into regarding prices is their attempts to manipulate prices for political reasons.  Almost every politician in the world will complain about the high price of health care.  However, very few ask why health care costs are so expensive.  Much of the reason comes from the fact that most people access health care through insurance plans where they do not personally bear the costs of care.  This means that they have no incentive to economize, and often consume much more care then they would if they were directly responsible for the costs.

This phenomenon bears itself out over and over in nearly every corner of the economy.  Most of the people who are upset about prices fail to realize that the prices are communicating valuable information.  Instead, they accuse the business charging the prices of ‘greed’ when the business is really just a messenger of market realities.  High gasoline prices stem from a relative shortage of petroleum that drives up market prices.  These market prices are created by other people who are competing for the same petroleum.  The reason the prices rise is because exploration of petroleum has not kept pace with demand.  Thus, the problem is not one of rapacious oil companies, but regulations that constrain supply.  Nobody is able to maintain high prices for long when competing against somebody else who is willing to sell for less.

As we have seen, the phenomenon of “evading the obvious” has a distinctive impact on each individual’s personal, professional, and financial life.  The impact of these fallacious misunderstandings escalate as the scope of influence grows.  As each of us go throughout our own lives, we must stay aware of the fundamental realities so that we can learn to recognize opportunities and take intelligent action.  It is only through embracing the obvious and understanding the reality that we will be able to create a life of happiness and fulfillment for ourselves and the people we care about.

 

Planning IRA Withdrawals

When a retirement account is big and its owner gets older, the money flowing from it can turn into a tidal wave. So can the tax liabilities.

An adviser can help by planning well before things reach that stage.

One strategy is to spread withdrawals over many years, by beginning at age 59½, when early-withdrawal penalties no longer apply, rather than waiting until minimum distributions are required after 70½.

That’s what Kevin Sullivan, a financial planner in Winston Salem/High Point, N.C., recommended for a 57-year-old retired corporate executive who had $3.5 million of his $8 million of assets in an IRA. Spending down the IRA to $2 million by age 70 would reduce required minimum annual distributions from around $180,000 to $100,000. To keep his tax bill manageable in the meantime, some additional dollars needed before age 70 could come from selling securities, with capital gains taxed at lower rates than the ordinary income from the IRA.

The best time to start on such planning is before clients retire, says Maria Bruno, a senior investment strategist at Vanguard Group’s Investment Strategy Group.

Advisers who work with retirement savings say they also keep an eye out for people forgetting to take out money when required. Often these cases involve inherited plans, and the tax penalty is steep: In some cases, it is 50% of the amount that should have been withdrawn. Walter Pardo, a wealth adviser in Basking Ridge, N.J., is working with a family in which a young woman, now a 21-year-old college student, inherited an IRA upon her mother’s death in 2006 and didn’t start withdrawals as required.

Tying the Hands of Unreliable Heirs

Trusts are a common tool used to control a fortune for an heir who would fritter it away otherwise. But they involve some tricky decisions, professionals say.

Simple trusts can pay out enough income to keep a roof over someone’s head, while shielding a fortune so that it can grow. Or strings can be attached so that money is doled out based on behavior: The beneficiary must stay drug-free, for example, or get good grades in school.

Financial adviser Bo Blankenship, managing director of Greystone Financial Group, a MetLife Inc. agency in Roanoke, Va., believes the best approach is to get client, attorney and adviser together in a room to talk through the details. In one such meeting not long ago, a couple brought their 35-year-old son and heir, Mr. Blankenship recalls. The parents told the son he would not be able to tap his inheritance all at once, but would get an income. The son acknowledged his issues with money and accepted the arrangement.

Not every case works out so well. Parents sometimes set out to change behavior, rather than shaping a plan to a personality that may not budge. Incentive trusts, a tool that tends to go in and out of favor, can create resentment and also backfire. A requirement that a beneficiary stay in school, for example, might produce a perpetual graduate student.

Ms. Dale, a special writer for Dow Jones Newswires in New York, can be reached at arden.dale@dowjones.com.

Article source: Wall Street Journal

 

Stable is nice, but it isn’t perfect.

Investors in “stable-value funds,” which are bundles of bonds tied together with an insurance policy within a 401(k) retirement plan, have fared remarkably well in recent years. But rising fees, falling interest rates and reduced flexibility make the funds a bit trickier than some might realize.

While the stable-value category isn’t “hot,” it is definitely warm. According to the Aon Hewitt 401(k) Index, which tracks retirement plans with approximately $120 billion in assets, some $1.6 billion moved out of stock funds this year. Three-fourths of that went to stable-value funds.

These vehicles are attracting new money because of their safety. Whenever their market value falls below book value (typically $1 per share), the insurance enables anyone withdrawing money to receive the full book value plus interest.

Thus the funds protect against loss while providing steady income—appealing when the Dow Jones Industrial Average heaves up and down by hundreds of points a day.

Investors have known this for a long time. The funds, which have been around since the 1970s, hold more than $600 billion in assets, estimates Christopher Tobe of Stable Value Consultants in Louisville, Ky. Investors in 401(k) plans have more money in stable-value than in bond funds.

According to BrightScope, a firm that analyzes retirement accounts, nine plans with more than $1 billion have more than half their assets invested in stable-value funds. At DuPont, stable value makes up approximately 60% of its $8.2 billion in retirement-plan assets. Almost two-thirds of the participants in the plan are 55 or older and invest “with a conservative asset allocation stance,” says a spokeswoman.

Stable-value funds have proven their resilience. When Lehman Brothers failed during the financial crisis, its employees lost 1.7% in December 2008 on their stable-value fund. But the same fund still earned 2% for the full year. No other stable-value fund in a 401(k) fell below $1 or failed to deliver its promised yield, even as stock investors lost 37% in 2008.

There are a few concerns on the horizon, however.

First, costs are creeping up. “Wrap fees,” or the cost of the insurance, have gone from roughly 0.08% a few years ago to as much as 0.20%, says Gina Mitchell, head of the Stable Value Investment Association.

Those fees are rising even as yields are falling. The average “crediting rate,” or expected yield, ran at 2.99% in the third quarter, reckons the SVIA. That’s far higher than the 0.05% on the average money-market fund and exceeds the 2.4% yield on the Barclays Capital U.S. Aggregate bond index.

But the crediting rate has fallen by a quarter of a percentage point in the past year and is down from 4.05% three years ago—generating less income today, especially after inflation. Since the end of 2008, the yield on intermediate U.S. Treasurys has dropped to 0.82% from 1.25%.

And, just like homeowners’ insurance, stable-value coverage doesn’t eliminate every risk. “There are protections written into the contracts that could get the [insurer] out of the obligation to provide a guarantee,” says Mitchell Shames of Harrison Fiduciary Group, a financial firm in Boston. For example, if a company initiates massive layoffs or an external manager violates investment guidelines, the insurance provider could decline to make employees whole on their stable-value funds.

While employers work hard to insulate their funds against those hazards, says Mr. Shames, the risk of losing coverage remains a possibility. On the other hand, he says, “you get compensated for that risk in terms of the added return” over short-term bond funds.

And while it’s never been easy to exchange from stable-value options into other funds, restrictions appear to be growing more common as insurers seek to cut costs, says Peter Schmit, a research manager at Towers Watson, the benefits-consulting firm. Under “equity wash rules,” you can’t transfer straight from a stable-value fund to a money-market fund but must park your money in a stock fund (or sometimes a bond fund) for at least 90 days.

That could crimp your style if interest rates rise steeply. At the typical stable-value fund, the income credited to investors changes only quarterly. So, if rates go up, your income will stand pat for as long as 90 days, even as the yields on money-market and short-term-bond funds rise with higher rates in the marketplace.

The lag in adjusting to rate changes can “work against you on the way up,” says Susan Graef, whose group manages $28 billion in stable-value assets at Vanguard Group.

With these caveats, stable-value funds remain a solid option for conservative investors. But your expectations for these funds shouldn’t be stable; you should be lowering them.

—
intelligentinvestor@wsj.com; twitter.com/jasonzweigwsj

Article source: Wall Street Journal

 

There ain’t no such thing as a free lunch. Everything demanded by the Occupy Wall Streeters — whether “free” health care, a “world-class education” or a “guaranteed living-wage income regardless of employment” status — costs money.

When a CEO makes a lot of money in the private sector, it is because his company — rightly or wrongly — values that CEO’s services at that price. To say it is “not right” that a CEO makes (fill in the blank) times more than the janitor is to say it is not right for the marketplace to set wages. If the marketplace ought not set wages, then who or what should?

Most people work for the private sector, which cannot exist without profit.

Is the OWS objection to bank bailouts on the grounds that government should not protect businesses from the consequences of their actions? Or is the objection that bailouts should be for everybody?

We already have a huge welfare state, with entitlements — Social Security, Medicare and Medicaid — the biggest expenditure of the federal budget. Europe’s welfare state is larger, with a slightly smaller “gap” between the rich and the poor. Yet its citizens also take to the street to denounce inequality. Puzzling, isn’t it?

No one can legally ask about the immigration status of a public school student, so Americans and non-Americans, including illegal aliens, receive a K-12 public education at taxpayers’ expense.

Per-pupil spending for public education increased 49 percent from 1985 to 2005. Community colleges are cheap, and many states guarantee a junior college graduate admission to a public four-year college.

The physical advantage that men possess over women is an increasingly small advantage — given the decline of labor-intensive jobs and the technology that makes it easier for machines to do hard, dangerous, repetitive work.

There are more tenants than landlords, which thus exemplifies the stupidity of “rent-control” laws. Rent-control laws disproportionately benefit the non-poor because the elite pull strings, work the system and are better connected than the poor. All of this matters when items of scarcity (in this case, apartments) are dispensed by government dictates rather than through prices.

Government possesses no money of its own. It raises money by taxing, by borrowing or by printing.

The bigger the government, the smaller the private sector.

Individuals can spend their money more wisely, efficiently and more humanely than can government.

People value and spend their money more wisely when they acquire it by their own efforts — also known as work. There are real-world, direct consequences on you for squandering your own money, as opposed to when government squanders the money of its people.

Government employees enjoy job security unknown in the private sector and are often paid more than their private-sector counterparts. Greed?

People spend their money more humanely because they won’t waste as much of it. Consider that to deal with “the poor,” the federal government has a vast array of agencies, programs and policies. But only about 30 cents of each dollar designated for the poor actually gets in the hands of the recipient. Contrast this with the United Way, Salvation Army and other private charities where 90 cents of each dollar donated gets to a beneficiary.

Americans agree that some people — whether faultless or irresponsible — need assistance, if only occasionally. The only issue is how they will be helped.

Americans are the most generous people of any industrial nation. We give more of our time and money than do the Germans, British and Japanese. Note that those states have a bigger public sector than we do. Maybe they feel they gave at the office.

The U.S. Constitution isn’t just any ordinary document. It is the contract between the government and its people, the ones who empower government and who — once upon a time — expected the Constitution to restrain government, not empower it.

Government’s involvement in housing caused the meltdown — not greedy Wall Street bankers. The same Occupy mindset caused the Community Reinvestment Act of 1977, placed on human growth hormones by President Clinton, who pushed banks into lending to poor credit risks and allowed Wall Street to play with taxpayers’ money.

There is no bad guy. It’s not the Koch brothers, Grover Norquist or the Maltese Falcon. There is no evil entity, snorting steam from his nose, standing in an office full of Nazi memorabilia, staring out the window with the cityscape view, laughing: “Ha! Ha! Ha! Pretty soon, all this will be mine. Mine, I say!”

Life has never been so good, with so many choices, with so many more conveniences, so much less danger of dying from disease, with so many choices for entertainment and affordable travel.

When you rob Peter to pay Paul, you can always count on the support of Paul. But at some point Peter begins to feel taken advantage of.

Larry Elder is a best-selling author and radio talk-show host. To find out more about Larry Elder, or become an “Elderado,” visit www.LarryElder.com. To read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

COPYRIGHT 2011 LAURENCE A. ELDER

DISTRIBUTED BY CREATORS.COM

Article source: Creators.com

 

Thomas Edison invented the incandescent bulb, the phonograph, the DC motor and other items in everyday use and became wealthy by doing so. Thomas Watson founded IBM and became rich through his company’s contribution to the computation revolution. Lloyd Conover, while in the employ of Pfizer, created the antibiotic tetracycline. Though Edison, Watson, Conover and Pfizer became wealthy, whatever wealth they received pales in comparison with the extraordinary benefits received by ordinary people. Billions of people benefited from safe and efficient lighting. Billions more were the ultimate beneficiaries of the computer, and untold billions benefited from healthier lives gained from access to tetracycline.

President Barack Obama, in stoking up class warfare, said, “I do think at a certain point you’ve made enough money.” This is lunacy. Andrew Carnegie’s steel empire produced the raw materials that built the physical infrastructure of the United States. Bill Gates co-founded Microsoft and produced software products that aided the computer revolution. But Carnegie had amassed quite a fortune long before he built Carnegie Steel Co., and Gates had quite a fortune by 1990. Had they the mind of our president, we would have lost much of their contributions, because they had already “made enough money.”

Class warfare thrives on ignorance about the sources of income. Listening to some of the talk about income differences, one would think that there’s a pile of money meant to be shared equally among Americans. Rich people got to the pile first and greedily took an unfair share. Justice requires that they “give back.” Or, some people talk about unequal income distribution as if there were a dealer of dollars. The reason some people have millions or billions of dollars while others have very few is the dollar dealer is a racist, sexist, a multinationalist or just plain mean. Economic justice requires a re-dealing of the dollars, income redistribution or spreading the wealth, where the ill-gotten gains of the few are returned to their rightful owners.

In a free society, for the most part, people with high incomes have demonstrated extraordinary ability to produce valuable services for — and therefore please — their fellow man.

People voluntarily took money out of their pockets to purchase the products of Gates, Pfizer or IBM. High incomes reflect the democracy of the marketplace. The reason Gates is very wealthy is millions upon millions of people voluntarily reached into their pockets and handed over $300 or $400 for a Microsoft product. Those who think he has too much money are really registering disagreement with decisions made by millions of their fellow men.

In a free society, in a significant way income inequality reflects differences in productive capacity, namely one’s ability to please his fellow man. For example, I can play basketball and so can LeBron James, but would the Miami Heat pay me anything close to the $43 million they pay him? If not, why not? I think it has to do with the discriminating tastes of basketball fans who pay $100 or more to watch the game. If the Miami Heat hired me, they would have to pay fans to watch.

Stubborn ignorance sees capitalism as benefiting only the rich, but the evidence refutes that. The rich have always been able to afford entertainment; it was the development and marketing of radio and television that made entertainment accessible to the common man. The rich have never had the drudgery of washing and ironing clothing, beating out carpets or waxing floors. The mass production of washing machines, wash-and-wear clothing, vacuum cleaners and no-wax floors spared the common man this drudgery. At one time, only the rich could afford automobiles, telephones and computers. Now all but a small percentage of Americans enjoy these goods.

The prospects are dim for a society that makes mascots out of the unproductive and condemns the productive.

Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

COPYRIGHT 2011 CREATORS.COM

Article source: Creators.com

 

How will 401(k) investors react to the latest blast of volatility in the markets?

If the recent past is any guide, they will retreat into the apparent safety of cash, Treasury bonds and “stable value” mutual funds.

They also will put money into their own company’s stock, which can be far riskier than leaving it in a typical stock mutual fund.

WSJ columnist Jason Zweig discusses the hottest new investment in 401 (k)s: company stock, due to workers’s belief that their own company is one of the safest options available during choppy economic times.

In August, when the Dow Jones Industrial Average went bucking up or down by at least 400 points on six out of the month’s 23 trading days, investors pulled out of every variety of stock fund, according to the Aon Hewitt 401(k) Index, which tracks the daily transfers of some 1.5 million participants in retirement plans nationwide.

That movement wasn’t a tidal wave; investors moved about 0.5% of their total assets, or $580 million. Half of that went into bonds, but fully 23% landed in company stock.

Likewise, in September, when stock indexes slumped by 6% or more, retirement investors put a startling 35% of the money they pulled out of diversified stock funds into the shares of their own company.

But while investing in your company’s stock might feel safer than betting on the stock market as a whole, that is usually an illusion. The return of the overall market tends to be driven by a few big winners—and, if your own company doesn’t end up among them, you will miss out.

Brian Wenzinger of Aronson Johnson Ortiz, a money manager in Philadelphia, estimates that only 13% of the companies that made up the broad-market Wilshire 5000 index generated higher returns over the past decade than the index itself.

What’s more, you already work at your company; do you want your salary and your retirement fund riding on the same risk?

Hewitt, says investors are making this seemingly safe but potentially much riskier choice out of confusion and uncertainty. “The No. 1 response we get in [investment] surveys of employees is, ‘I don’t know what the right thing is to do in these markets,’” she says. So investors are moving more of their money extra-close to home. “It’s just an emotional thing,” says Ms. Hess. “They feel connected to their own company’s stock, so it feels safe and secure to them.”

That appears to be true even among people who, above all, should know better: the employees of big banks and brokerage firms, many of whom earn their living by advising clients not to put too much money in the shares of the companies where they work.

“It’s a pretty concentrated problem,” says Shlomo Benartzi, a finance professor and expert on 401(k) plans at the University of California, Los Angeles. “A few companies have lots of company stock, and ironically, employees at some financial-services firms have huge exposure.”

At the median 401(k) plan offering company shares, 12% of assets are in the employer’s stock, according to the Plan Sponsor Council of America. That is down by nearly half from a decade ago, although it tends to remain higher at larger employers—including many major financial firms, where workers are deep into company stock, according to public documents.

At year-end 2010, employees at Franklin Resources, the mutual-fund manager, had 14% of their 401(k) assets in the company’s own stock; at TD Ameritrade Holding, the discount broker, 15% is in the firm’s own shares; at Bank of America, 16%; at J.P. Morgan Chase, 19%; at both Charles Schwab and Bank of New York Mellon, 22%; Morgan Stanley, 24%; Wells Fargo, 29%; U.S. Bancorp, 32%.

At many of these companies, spokesmen say, allocations are high because the firms match—or used to match—their employees’ contributions with company stock rather than cash. If your company matches your contributions in shares of its own stock instead of cash or a diversified fund, you are likely to leave the money there. Through sheer inertia, dollars tend to stick where they land, in what economists have christened the “flypaper effect.”

At several big financial firms, the numbers have come down so far this year as the companies continue efforts to encourage workers to diversify.

Sometimes, however, the market forcibly reduces these exposures; with Morgan Stanley’s shares falling 48% this year, they probably make up less than 15% of 401(k) assets at the firm now. The bank’s employees have lost an estimated half-billion dollars on the stock so far in 2011.

If the latest market madness has you running for cover, find it in bonds or a blended “lifecycle” fund—not your company’s stock. And if your employer matches your contributions in its own shares, move them into more-diversified funds on a regular schedule whenever company stock exceeds 15% or so of your 401(k). Don’t let yourself get locked up too close to home.

—
twitter.com/jasonzweigwsj

Write to Jason Zweig at intelligentinvestor@wsj.com

Article source: Wall Street Journal

 

In various cities across the country, mobs of mostly young, mostly incoherent, often noisy and sometimes violent demonstrators are making themselves a major nuisance.

Meanwhile, many in the media are practically gushing over these “protesters,” and giving them the free publicity they crave for themselves and their cause — whatever that is, beyond venting their emotions on television.

Members of the mobs apparently believe that other people, who are working while they are out trashing the streets, should be forced to subsidize their college education — and apparently the President of the United States thinks so too.

But if these loud mouths’ inability to put together a coherent line of thought is any indication of their education, the taxpayers should demand their money back for having that money wasted on them for years in the public schools.

Sloppy words and sloppy thinking often go together, both in the mobs and in the media that are covering them. It is common, for example, to hear in the media how some “protesters” were arrested. But anyone who reads this column regularly knows that I protest against all sorts of things — and don’t get arrested.

The difference is that I don’t block traffic, join mobs sleeping overnight in parks or urinate in the street. If the media cannot distinguish between protesting and disturbing the peace, then their education may also have wasted a lot of taxpayers’ money.

Among the favorite sloppy words used by the shrill mobs in the streets is “Wall Street greed.” But even if you think people in Wall Street, or anywhere else, are making more money than they deserve, “greed” is no explanation whatever.

“Greed” says how much you want. But you can become the greediest person on earth and that will not increase your pay in the slightest. It is what other people pay you that increases your income.

If the government has been sending too much of the taxpayers’ money to people in Wall Street — or anywhere else — then the irresponsibility or corruption of politicians is the problem.

“Occupy Wall Street” hooligans should be occupying Pennsylvania Avenue in Washington.

Maybe some of the bankers or financiers should have turned down the millions and billions that politicians were offering them. But sainthood is no more common in Wall Street than on Pennsylvania Avenue — or in the media or academia, for that matter.

Actually, some banks did try to refuse the government bailout money, to avoid the interference with their business that they knew would come with it. But the feds insisted — and federal regulators’ power to create big financial problems for banks made it hard to say no. The feds made them an offer they couldn’t refuse.

People who cannot distinguish between democracy and mob rule may fall for the idea that the hooligans in the street represent the 99 percent who are protesting about the “greed” of the one percent. But these hooligans are less than one percent and they are grossly violating the rights of vastly larger numbers of people who have to put up with their trashing of the streets by day and their noise that keeps working people awake at night.

As for the “top one percent” in income that attract so much attention, angst and denunciation, there is always going to be a top one percent, unless everybody has the same income. That top one percent has no more monopoly on sainthood or villainy than people in any other bracket.

Moreover, that top one percent does not consist of the “millionaires and billionaires” that Barack Obama talks about. You don’t even have to make half a million dollars to be in the top one percent.

Moreover, this is not an enduring class of people. Nor are people in other income brackets. Most of the people in the top one percent at any given time are there for only one year. Anyone who sells an average home in San Francisco can get into the top one percent in income — for that year. Other one-time spikes in income account for most of the people in that top one percent.

But such plain facts carry little weight amid the heady rhetoric and mindless emotions of the mob and the media.

To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate Web page at www.creators.com. Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com.

COPYRIGHT 2011 CREATORS.COM

Article source: Creators.com

 

California is a great place for studying the thinking — or lack of thinking — on the political left.

The mindset of the left was recently displayed in a big, front-page story in the October 30th issue of the San Mateo County Times. It was an investigative reporter’s exposé of the “payday loan” business and its lobbyists.

According to the reporter: “In California lenders charge up to $45 in fees on a maximum $300 loan. This amounts to an interest rate of 460 percent, trapping some borrowers into a never-ending cycle of debt.”

Let’s take this one step at a time. Whatever the merits or demerits of the rest of the argument, $45 is not going to trap anyone in a never-ending cycle of debt, even if they are making only the bare minimum wage. Personal irresponsibility in managing money can trap anyone, but that is regardless of whether or not they take out payday loans.

Now to the 460 percent rate of interest. You don’t need higher math to figure out that $45 is 15 percent of $300. How did we get to 460 percent? Very simple: By distorting the actual conditions of most payday loans.

As the name might suggest, payday loans are short-term loans to tide people over until they get their next check, whether a salary check, a welfare check or whatever. Payday loans are relatively small sums of money borrowed for very short periods of time, often by low-income people who want some cash right now, for whatever reason.

Is it worth paying the $45 to get the $300 right now, rather than wait a couple of weeks for your check to arrive?

No third party can know that. But taking decisions out of the hands of those most directly affected is one of the central patterns of the political left that make them dangerous to the very people they think they are helping. This is not idealism. It is arrogance — and too often, it is ignorant arrogance, as in this case.

The 460 percent figure comes from imagining that the borrower is not just going to borrow the money for a couple of weeks, but is going to keep on borrowing every couple of weeks all year long.

Using this kind of reasoning — or lack of reasoning — you could quote the price of salmon as $15,000 a ton or say a hotel room rents for $36,000 a year, when no consumer buys a ton of salmon and few people stay in a hotel room all year.

It is clever propaganda, but do people buy newspapers to be propagandized?

What about the $45 that is at the heart of all this runaway rhetoric? Does that do more than cover the risk and the costs of processing the loan? Apparently our crusading investigative reporter did not find that worth investigating, even in a long article taking up another page and a half inside the newspaper.

What is called “interest” by the media includes things that an economist would not call interest. The fees charged must also cover the cost of processing the loan, which is to say the pay of people doing the work, the rent of the premises and other overhead expenses, as well as the risk of default.

But mundane facts like these would spoil the moral melodrama, starring the reporter on the side of the angels against the forces of evil.

Instead, we get the story of how the payday loan industry, like most other industries, has lobbyists contributing money to politicians to try to get spared more regulations. This the investigative reporter calls “protecting” the payday loan industry.

Protecting them from what? From the politicians. Some would call their campaign donations “protection money,” in the same sense in which the Mafia collects protection money.

None of this is peculiar to this industry, to California or to our times. When Al Gore was Vice-President of the United States, he phoned businesses from the White House to tell them how much money he expected them to contribute to political campaigns.

Franklin D. Roosevelt’s son extorted a $200,000 loan from a grocery chain that was under federal investigation — and he never repaid the loan. Moreover, FDR spoke directly to the head of the chain to seal the deal.

There are not a lot of angels to be on the side of.

To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate Web page at www.creators.com. Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com.

COPYRIGHT 2011 CREATORS.COM

Article source: Creators.com

 

If you are a gold investor, you’re probably quite pleased with yourself right now. It’s been one of the best-performing investments this year.

Indian stocks are down 16.5% so far, bonds have been middling, with 7% to 10% returns but gold – that’s been stellar with its 22% gain over the last year.

A customer tried gold bangles inside a jewelry showroom at Noida in the northern Indian state of Uttar Pradesh in this April 21, 2011 file photo.

So, today being Dhanteras, an auspicious day to buy gold, perhaps you won’t think twice about investing in the yellow metal. But you should.

Will gold continue to gain value from these high levels? Yes, said Bollywood actress Hema Malini recently. She said that the recent price gains are clear evidence of why it will continue to be a good investment.

Ms. Malini aptly summed up how thousands of gold-lovers – who don’t actively follow gold demand or supply markets or euro-zone crises — think.

The argument that price will go up simply because it has risen in the past is not exactly a logical investment case. But science can explain this thesis.

Many of today’s gold lovers are inflicted with what psychologists call the “recency” effect – the tendency of human beings to give most importance to what has happened in the recent past.

We experience this every day.

Think back to your last work performance review. Most likely, it was determined by what you did or didn’t do in the few weeks or months before the review date.

If you had to decide whether to watch a new movie, you’ll likely base your decision on the last couple of movies made by that movie’s director or actors. You won’t seek out all the movies made by the director in the last 10 years to make the most rational assessment.

These are examples of how our current behavior is often driven largely by a handful of recent experiences, as opposed to an average of experiences over a long period of time.

It won’t hurt you too much if you pick a bad movie to watch but recency bias can have harmful consequences when investing your money. This is what propels individuals toward “hot” investments, often after they have reached their peak.

“The average person buys more aggressively in response to recent price rises,” said Terrance Odean, a finance professor at the University of California Berkley, in the neuro-science book, “Your Money Your Brain.”

Mr. Odean, who has studied 3 million stock trades by 75,000 American households, added that it’s not just yesterday’s boom that spurs buyers. “What makes people buy is a combination of very recent rises and any longer-term ‘trend’ of rising prices that they might perceive,” said Mr. Odean.

This “trend” is basically a few instances we put together in our minds to create a pattern.

Coming back to gold, for instance, my mother will argue that gold’s price has gone up over the long term. It was at around 330 rupees ($7) per 10 grams in 1973 and was recently trading at 26,300 rupees ($530) per 10 grams more recently.

This long-term trend is at best a fallacy. Prices of everything have gone up over the last four decades. Even milk – as per my mother’s recollection – has gone up by as much or more!

The fact is, when adjusted for inflation, gold is more than 30% below its price in 1980.

Still, we get carried away with its recent performance.

Money managers and fund companies are well aware of this recency bias and use it to sell us their products.

They’ve been launching several gold-investment funds this year, which aim to provide the return of gold without having to own physical gold. HDFC Asset Management Company introduced such a fund earlier this month, and last week IDBI Asset Management Ltd. launched its offering.

If gold is a good investment today at $1,612 an ounce, then it was an awesome investment in 2007 when it cost just $750 an ounce, right?

Yet, more than two-thirds of the 18 gold-oriented mutual funds that are available in India today were launched after 2010. Why didn’t we see a rush of gold funds in 2007?

Because at that time fund companies were busy launching stock funds when — you guessed it — stocks were booming. The Sensex gained 50% in 2007.

Investors who joined the stocks bandwagon then because of recent price gains, were in for a rude shock. In 2008, the Sensex lost more than half of its value.

So-called investment experts are not much better at getting away from this recency bias. Numerous stock market pundits today will advise you to buy stocks of fast-moving consumer goods, like toothpaste-maker Colgate-Palmolive (India) Ltd. and food products company Nestle India Ltd., which as a group have gained nearly 9% over the last year.

But if you want to make money, don’t you want to buy something cheap which you can sell for a higher price later?

Even if you are not a stock investor and haven’t been hurt in recent stock market crashes, it doesn’t hurt to learn from other people’s mistakes. Your brain is wired pretty much the same way.

Think about that before you decide to buy gold as an investment this Dhanteras.

Write to Shefali Anand at shefali.anand@wsj.com

Article source: Wall Street Journal

 

Money exited from long-term mutual funds for the third consecutive week, as investors pulled cash from equities and added to bonds and hybrid funds, according to estimates from the Investment Company Institute.

For the week ended Oct. 12, long-term mutual funds had estimated outflows of $2.93 billion.

The funds haven’t yet come close to recovering from a six-week streak of steeper outflows when investors retreated from a volatile stock market amid concerns about an uncertain economic outlook and worries about the debt load in the U.S. and Europe.

Equity funds had outflows of $7.48 billion, compared with outflows of $3.86 billion in the prior week. Investors pulled $5.94 billion from U.S. equities and withdrew $1.55 billion from foreign funds.

Meanwhile, ICI reported bond funds had inflows of $4.04 billion, compared with prior-week outflows of $5.81 billion. Investors added $4.01 billion to taxable funds, while inflows to municipal funds totaled $28 million.

Investors also added $512 million to hybrid funds after prior-week outflows of $1.35 billion. Such funds can invest in both stocks and fixed-income assets.

Separately, assets in money-market funds increased by $1.08 billion in the week ended Tuesday, as investors added more money to taxable and prime funds, according to iMoneyNet.

So far this year, the money-market information provider has mostly reported outflows. Though the funds have seen more inflows in recent weeks, withdrawals were common throughout most of the summer due to concerns about the euro-zone debt crisis and a weak economic outlook in the U.S.

For the week ended Tuesday, total assets in money-market funds rose to $2.607 trillion, iMoneyNet said. Its reading on the seven-day yields for taxable money-market funds held steady at 0.02% for the 12th consecutive week. Last month, the Federal Open Market Committee reaffirmed its decision to keep key rates unchanged and hold them at exceptionally low levels until 2013.

Taxable funds rose $3.58 billion as institutional investors added $2 billion and individual investors added $1.58 billion. Prime funds, which invest in securities such as commercial paper, had $2.77 billion of inflows, while government funds grew by $806.9 million. Tax-free funds decreased by $2.5 billion, falling to $288.10 billion.

Yields for seven-day funds and 30-day funds each held steady at 0.01%.

Article source: Wall Street Journal