Dead Broke!?!

We Just Can't Afford It!

By Howard Gold | 7 July 2009

How bad is the nation’s fiscal crisis? Worse than you think. Two reports published last month underscore how grim the outlook is. A report by the liberal Brookings Institution’s respected economist William G. Gale, along with Alan J. Auerbach of UC Berkeley, describes the situation in nearly apocalyptic terms. "The fiscal-year 2009 budget is enormous; the ten-year projection is clearly unsustainable; and the long-term outlook is dire and increasingly urgent," the two economists write.

And the Congressional Budget Office, a nonpartisan watchdog, also sounds the alarm: "The federal budget is on an unsustainable path— meaning that federal debt will continue to grow much faster than the economy over the long run," its June report reads. "Large budget deficits would reduce national saving, leading to more borrowing from abroad[!?!] and less domestic investment, which in turn would depress income growth in the United States," the report continues. "Over time, [it] would seriously harm the economy."

How much money are we talking about? This year, the US deficit may hit $1.7 trillion, 12% of gross domestic product, the highest percentage since World War II. And Gale and Auerbach project annual deficits averaging $1 trillion a year until 2019. The total estimated ten-year deficit: a whopping $10 trillion. Although the two economists expect a recovery and the end of some crisis-relief programs to cut the deficit to 4.8% of GDP by 2012, they expect that percentage to move up again to 6.4% of GDP.

In the very long run, Social Security and especially Medicare will consume more and more resources. The CBO projects Medicare and Medicaid will account for 80% of the growth in spending between now and 2035, while Social Security will represent the other 20%. Right now, however, the main culprit is the thoroughly reckless policies of the Bush Administration and the equally reckless plans President Obama is currently cooking up— and the Republican and Democratic Congresses that approved them, or soon will.

Remember, back in 2000, the CBO was projecting $5.6 trillion in surpluses over this decade. The dot.com bust, the recession, and September 11th put an end to that. But policy decisions made the real difference. David Leonhardt of the New York Times analyzed ten years of CBO reports and found that 37% of the swing from surplus to deficits can be explained by the recessions of 2001 and this one. Another 33% came from "new legislation signed by Mr. Bush."

That includes the Medicare Prescription Drug Benefit and No Child Left Behind. President Obama’s continuation of other Bush programs [[the very first President to cut taxes in a time of not merely one, but 2½ wars: normxxx]], like the lion’s share of the tax cuts, will account for another 20% of the change. (That includes our declining military presence in Iraq and stepped-up involvement in Afghanistan.) And only 10% is from new legislation proposed by the current president— the stimulus bill and his agenda for energy, health care, and education.

In fact, says Diane Lim Rogers, chief economist of The Concord Coalition, a nonpartisan group that supports responsible fiscal policy, "the number-one most expensive item in the Obama administration is the extension of the Bush tax cuts." The president made repeal of the tax on top earners a centerpiece of his campaign while repeatedly pledging not to raise taxes on the middle class. But rescinding the cuts for the top tax bracket will save us "only" $600 billion; $2 trillion worth of tax cuts continue for everybody else, and they will cause the most red ink of all, Rogers says.

It’s now clear that extraordinarily low interest rates, financial shenanigans on Wall Street, and most of all, the housing bubble created the 2003-2007 recovery [[such as it was: normxxx]]. With subpar employment and GDP growth, cuts in marginal tax rates clearly had little impact this time around— except to make the deficit balloon. Yet it would seem to be politically impossible and economically inadvisable to let those cuts expire for everyone by the end of 2010, when we might just be emerging from the recession and joblessness may still be high.

I do see signs, however, that the American people are coming to grips with reality. Some 52% now think the deficit is a serious problem; during the campaign only 2% thought it was our most important economic problem. That’s a step forward, but it’s not enough. Truth is, we simply can’t afford any new domestic programs until we figure out how to pay for the ones we’ve got.

That includes universal health care coverage, education spending, and cap and trade. Heck, we can’t afford the current Medicare, Medicaid, and Social Security plans. If we continue on this path, we’ll need to seriously consider means testing people to make sure only the needy get access to these benefits— we may need to ration medical care as well.

Someone may have to tell families that their 85-year-old father is not going to get extraordinary care unless they’re willing to pay for it themselves (or they have the insurance coverage to do it). Somebody may have to tell Social Security recipients that they can’t get [early] benefits until they’re, say, 65. And someone may have to tell the public that if they want government services, they’re going to have to pay higher taxes— or expect fewer benefits.

"Doing nothing is not an option," writes Rogers on her EconomistMom blog. "Legislation must ultimately be adopted that raises revenue or reduces spending or both". Newsweek columnist Robert J. Samuelson writes , "The system has promised more than it can realistically deliver. We are borrowing not to finance investment in the future but to pay for today's welfare— present consumption. … The sensible thing would be to decide which forms of public welfare are needed to protect the vulnerable and to begin paring others.

The American people have been living in a dream world. They have just begun to realize that they can’t have a 5,000-square-foot McMansion unless their reliable income and/or net worth are many times what it actually is— without credit! And, are they ready to accept that they’ll have to pay more to get their trash collected and their kids educated, too?

Until we all grow up and accept the fact that there are limits to everything— including satisfying our wants and desires— we can’t expect craven politicians to do anything different from what they’re doing now. If we don’t change and we don’t pressure our elected officials to do the same, we might as well start firing up the printing presses now, because we’re going to need a lot more dollars to fill the deepening hole. [[And, remember, it's the middle-class that gets wiped out in a hyper-inflation!: normxxx]]

We're In The Middle Of A Crash

'We're In The Middle Of A Crash' Predicted By "The Black Swan"
There Was An International Financial Crisis In 2007 And 2008

By Nassim Taleb | 6 July 2009

See video:



The financial system is crashing and action must be taken by the US government to convert debt into equity to produce a more stable environment, Nassim Taleb, author of "The Black Swan," told CNBC Thursday. "You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that's breaking," Taleb said on "Squawk Box."

Anything that's as fragile as the current international and U.S. financial system will eventually crash, he said. "We're in the middle of a crash," Taleb said. "So if I'm going to forecast something, it is that it's going to get worse, not better". The government needs to deleverage debt and not try stimulus packages that will inflate assets, he said. [[You can't blow up a broken balloon again; FDR tried it and failed.: normxxx]]

IMF: International Mortgage Reset Chart

U.S. Mortgage Reset Chart

"What makes me very pessimistic is not seeing any leadership or awareness on the parts of governments on what has to be done, which is deleverage $40 to $70 trillion," Taleb said. [[To staunch the imminent huge second wave of foreclosures.: normxxx]] "The monkey on our back is debt," he added. As an example, Taleb said banks should not be sending demands for larger and larger sums from homeowner in arrears on their mortgage. Instead the bank should offer to lower the monthly payments in return for part-ownership of the property. [[Good idea, BUT, in our derivative world, who makes up the difference to the end lenders!?!— who are mostly not the banks?: normxxx]]

"People would be able to start from scratch on a healthy basis. You don't want to wait for foreclosure," he said. The Obama administration's attempts to fight the financial crisis with more cash is like "treating a bad tooth with Novocain instead of a root canal". The main problem is the level of debt, and Taleb compared the authorities' efforts with those of a not very skilled pilot who is trying to land a Concorde on a narrow strip, between an ocean of deflation and a mountain of hyperinflation.

"These people failed us before, they're going to fail us again," Taleb told CNBC. "They tell the banks to 'lend more but with less leverage'" and expect people to go out and "consume while unemployment is rising", he added. "The way to restart everything is restructuring, conversion of debt into equity, convince people that debt is not good." … "Do not delay the root canal. Do not do 'piecemeal' solutions to a problem that is fundamental. The solution is there, convert debt to equity. Usually it happens with Chapter 11, let's do it faster, and across the board," Taleb concluded.

Slideshow: The 15 U.S. States with the Worst Expected Budget Gaps

Slideshow: The World's Biggest Debtor Countries

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Yes Virginia, There Was An International Financial Crisis In 2007 And 2008

By Brad Setser | 23 June 2009

Now that the markets have lost a bit of their froth, it seems fitting to note just how sharply trade— and private financial flows— have contracted over the past year. The US Q1 balance of payments data is rather stunning. (Trade— as we all know— contracted far more rapidly during this cycle than in the past.)


Click Here, or on the image, to see a larger, undistorted image.

But the fall in private financial flows— outflows as well as inflows— has been even sharper than the fall in trade flows. US private investment in the rest of the world rebounded a bit in the first quarter, but private demand for US financial assets remained in the doldrums. Private investors were still pulling funds out of the US in the first quarter.

A close examination of the graph indicates that demand for US financial assets by private investors abroad actually peaked in the second quarter of 2007— a peak that came after gross private flows (inflows as well as outflows) rose strongly in 2005 and 2006. That surge was— in my view— linked to the chain of risk associated with a world where central banks took the currency risk associated with financing the US external deficit and private intermediaries took the credit risk associated with financing ever more indebted US households. Any interpretation of what caused the crisis has to explain this surge. But any interpretation of the crisis also needs to explain why US imports and exports continued to rise— and the US trade and current account deficit remained large— even after private inflows collapsed.

I suspect that part of the answer is that a lot of private inflows were linked to private outflows— as special investment vehicles operating in, say, the US could only buy long-term US mortgage bonds if someone in the US bought their short-term paper. The fact that private outflows collapsed along with private inflows meant that net private flows didn’t fall at the same rate. Indeed, at times— notably in Q4 2008— the fact that US investors pulled funds out of the rest of the world faster than foreign investors pulled funds out of the US provided the US with a significant amount of net financing.

And part of the answer is that private investors never were the only source of financing for the US current account deficit. Strong central bank demand— especially in late 2007 and early 2008— offset the fall in private flows. One thing though is sure: the scale of the collapse in private financial flows during this crisis is entirely unprecedented. There were a few instances in the past when private flows (excluding flows into Treasuries) were slightly negative. But outflows of 5% of GDP in a quarter are entirely unprecedented. And now that the US data has been revised to reflect the survey, adding private purchases of Treasuries back in doesn’t change all that much.

Net private demand for long-term US financial assets— that is purchases of US securities and foreign direct investment in the US, net of US purchases of foreign securities and US direct investment abroad— has been weak for some time now. There is more to say on the details of the balance of payments data, but I’ll live it for another post.


Click Here, or on the image, to see a larger, undistorted image.

The Lessons Of 1937

The Lessons Of 1937
Policymakers Must Learn From The Errors That Prolonged The Great Depression

By Christina Romer, From The Economist Print Edition | 18 June 2009

Christina Romer is the chairwoman of Barack Obama's Council of Economic Advisers and a scholar of the Depression.

At a recent congressional hearing I cautiously noted some "glimmers of hope" that the economy could stabilise and perhaps start to rebound later in the year. I was asked if this meant that we should cancel much of the remaining spending in the $787 billion American Recovery and Reinvestment Act. I responded that the expected recovery was both months away and predicated on Recovery Act spending ramping up greatly. Only later did it hit me that I should have told the story of 1937.

The recovery from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war. But the truth is the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid. Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%. The second world war aside, the United States has never experienced such sustained, rapid growth.

However, that growth was halted by a second severe downturn in 1937-38, when unemployment surged again to 19% (see chart). The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy. One source of the growth in 1936 was that Congress had overridden Mr Roosevelt’s veto and passed a large bonus for veterans of the first world war. In 1937, this fiscal stimulus disappeared. In addition, social-security taxes were collected for the first time. These factors reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure.

Also important was an accidental switch to contractionary monetary policy. In 1936 the Federal Reserve began to worry about its "exit strategy". After several years of relatively loose monetary policy, American banks were holding large quantities of reserves in excess of their legislated requirements. Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed or if "speculative excess" began again on Wall Street.

In July 1936 the Fed’s board of governors stated that existing excess reserves could "create an injurious credit expansion" and that it had "decided to lock up" those excess reserves "as a measure of prevention". The Fed then doubled reserve requirements in a series of steps. Unfortunately it turned out that banks, still nervous after the financial panics of the early 1930s, wanted to hold excess reserves as a cushion. When that excess was 'regulated away', they scrambled to replace it by reducing lending. According to a classic study of the Depression by Milton Friedman and Anna Schwartz, the resulting monetary contraction was a central cause of the 1937-38 recession.

The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently.

If the government withdraws support too early, a return to economic decline or even panic could follow. In this regard, not only should we not prematurely stop Recovery Act spending, we need to plan carefully for its expiration. According to the Congressional Budget Office, the Recovery Act will provide nearly $400 billion of stimulus in the 2010 fiscal year, but just over $130 billion in 2011. This implies a fiscal contraction of about 2% of GDP.

If all goes well, private demand will have increased enough by then to fill the gap. If that is not the case, broad policy support may need to be sustained somewhat longer. Perhaps a more fundamental lesson is that policymakers should find constructive ways to respond to the natural pressure to cut back on stimulus. For example, the Federal Reserve’s balance-sheet has more than doubled during the crisis, drawing considerable attention.

Monetary policymakers have made it clear that they believe continued monetary ease is appropriate. Moreover, the Fed’s credit programmes are to some degree self-eliminating: as demand for its special credit facilities shrinks, so will its balance-sheet. But now may also be a sensible time to grant the Fed additional tools to help its balance-sheet contract once the economy has recovered.

Some have suggested that the Fed be authorised to issue debt, as many other central banks do. This would enhance its ability to withdraw excess cash from the financial system. Granting such additional tools now could provide confidence that the Fed will be able to respond to inflationary pressures, without it having to create that confidence by actually tightening prematurely.

Fiscal Health Check

Now is also the time to think about our long-run fiscal situation. Despite the large budget deficit President Obama inherited, dealing with the current crisis required increasing the deficit substantially. To switch to austerity in the immediate future would surely set back recovery and risk a 1937-like recession-within-a-recession. But many are legitimately concerned about the longer-term budget situation.

That is why the president has laid out a plan to shrink the deficit he inherited by half and has repeatedly emphasised the need to reduce the long-term deficit and put the debt-to-GDP ratio on a declining trajectory. In this regard, health-care reform presents a golden opportunity. The fundamental source of long-run deficits is rising health-care expenditures. By coupling the expansion of coverage with reforms that significantly slow the growth of health-care costs, we can dramatically improve the long-run fiscal situation without tightening prematurely.

As someone who has written somewhat critically of the short-sightedness of policymakers in the late 1930s, I feel new humility. I can see that the pressures they were under were probably enormous. Policymakers today need to learn from their experiences and respond to the same pressures constructively, without derailing the recovery before it has even begun.


Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

A 20-Year Bear Market?

Outside The Box

By John Mauldin | 30 June 2009

Long time readers know that I am a huge fan of the work of Neil Howe. His book, The Fourth Turning, written with William Strauss, was one of the seminal pieces of my reading over the last 30 years. [[Earlier, they also wrote Generations: The History of America's Future, 1584 to 2069 : normxxx]] And it has turned out to be stunningly prophetic. Uncomfortably so. A roughly 80 year cycle (±2 to 4 years) has been repeating itself for centuries in the Anglophile world, broken up into four 'generations' or 'turnings'. We have begun what Howe called many, many years ago The Fourth Turning.

Neil Howe is the co-author, with the late William Strauss, of a number of seminal works on the impact of 'generations' on cycles of history. Howe is a founding partner of LifeCourse Associates (lifecourse.com) which provides research to institutions looking to capitalize on generational research.

The June 2009 edition of The Casey Report, the flagship publication of Casey Research, featured a comprehensive 23 page interview with Neil Howe as well as suggestions on how to position your portfolio to profit during a Fourth Turning crisis. I persuaded my friend David Galland to at least summarize it for my Outside the Box this week, and he graciously did so. David is the managing editor of The Casey Report and has had a long career in the financial services industry; as a founding partner of the successful Blanchard Group of Mutual Funds and, before joining Casey Research, as a founding partner of EverBank, one of the big success stories in independent online banking.

Casey Research is offering readers of Outside the Box the opportunity to read the full edition of The Casey Report featuring the Howe Interview, and receive the publication for the next three months with a 100% satisfaction guarantee. For details click here

I trust you will find this week's Outside the Box to be helpful. The more things change…….

John Mauldin, Editor
Outside the Box
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

A 20-Year Bear Market?

By David Galland, Casey Research | 30 June 2009

In November of 1997, my partner and co-editor of The Casey Report, Doug Casey, wrote an article (annotated in 2005) titled "Foundations of Crisis," which leaned heavily on the research of Neil Howe and the late William Strauss. Howe and Strauss have written many books on how generations determine the course of history and how they will shape America's future. Their forecasts on a wide variety of indicators have turned out to be amazingly accurate.

They were among the first to predict (back in the late 1980s) the rise of Boomer-driven culture wars and the simultaneous rise of Gen-X-driven free agency and distrust of government. And they were completely alone back then in predicting, for the post-X "Millennial Generation" (a label they coined), a decline in youth crime and risk taking and an increase in youth civic engagement that would first become apparent around the year 2000. Guess what? For the last ten years, everyone has been noticing exactly these trends among teens and 20-somethings.

Howe and Strauss also made extensive predictions, based on 'generational aging', on how America's entire social mood would likely change, in dramatic fashion, during our current 2000-2010 decade. To quote Doug's prescient 1997 article, which was reprinted in Outside the Box late last year (2008):

"[1997]… an excellent case can be made that the U.S. is approaching another time of secular crisis, a Fourth Turning, with an expected due date of 2005— seven years from now— plus or minus a few years in either direction. "The Stamp Acts catalyzed the American Revolution, the election of Lincoln catalyzed the Civil War, the Crash of '29 catalyzed the Depression/WW II era. What might precipitate the elements now floating in solution? The answer is practically any random event that's sufficiently traumatic. Any of the [premises] of current disaster/action novels and movies will do nicely. "Perhaps the accidental or intentional release of a super plague vector. The crashing of an airliner into the Capitol during a joint session [[remember, this was written in 1997! : normxxx]]. An all-out assault on the IRS computers by an armed group— or perhaps the computers just melting down due to the Year 2000 Problem. Perhaps a financial disaster that cascades into the Greater Depression. In any of these, or a hundred other scenarios, the federal government would almost certainly act precipitously and with a heavy hand, which would bring on a whole other set of consequences. "There's no way of telling where the Crisis will lead, or how it will end. That's going to depend not only on exactly who's in control, but what they do, who they're up against, and a hundred other variables we can't even anticipate. "One thing that seems certain is that real crisis brings out strong leadership. Because of its age and size, it will come from the Boomer generation, and it will be in the mold of Roosevelt or Lincoln— both very dangerous precedents. The boomers in elderhood will be dogmatic, harsh, puritanical, and quite willing to burn down the barn in order to destroy whatever rats they see. [[ We lucked out(?) by finally skipping the boomers for a gen-Xer! Clinton and 'w' were the boomers— who left us with a wrecked economy, 2½ wars, a severely compromised constitution, …: normxxx]] Admix that attitude to a time resembling the Revolution, the Civil War, or WW II, overlain with today's ethnic strife, urbanization, financial overextension, and powerful, compact new weaponry in the hands of foreign fanatics out to teach the Great Satan a lesson and it's a real witch's brew."

As eye-opening as Doug's predictions were, they brought us only to the onset of the current crisis. Consequently, we thought it both timely and important to check back with the source of much of the research he relied on. And so it was that I spent several hours talking with Neil Howe, co-author of the seminal work on generational cycles, The Fourth Turning, and, just recently, the subject of the DVD "The Winter of History". Howe is not just an historian, but also a Washington DC-based economist and demographer. While our conversation covered a great many topics, the overriding focus was on how things are likely to unfold from here.

Many bullish readers won't be thrilled to hear Howe's latest findings about the future, but given his predictive track record, dismissing them out of hand could be a costly mistake. The summary outlook, according to Howe, is that we are in the very early stages of a 20-year period of economic and institutional upheaval— an era denominated by a crisis during which we'll likely witness the tearing down and reconstruction of many aspects of society as we know it.

As individuals, understanding Howe's views and taking some reasonable precautions makes a lot of sense. As investors, those views also have the potential to make us a lot of money. Following is my high-level recap of my long conversation with Neil Howe, along with some general thoughts on the investment implications of a 20-year bear market.

Remember the Sixties?

If you're old enough— or possess even a rudimentary sense of history— think back to the 1950s, with roller-skating waitresses, crew cuts, and nuclear families of the sort represented by the iconic Leave it to Beaver. Fathers worked, while most mothers stayed home. Life had a certain predictable quality and, as far as anyone knew, would continue along the same lines until the end of time.

But then something happened… the 1960s. Literally no one saw it coming. It was as if someone had flipped a switch that electrified America and, quickly, the world. Most everything changed, and a society accustomed to conformity was blown away with a fierce individualism expressed with long hair, sex, drugs, and rock and roll, topped off with civil disobedience and bloody riots in the streets. [[Not to mention the start of the Viet Nam war…: normxxx]]

What happened?

According to Neil Howe, in the mid-1960s, generational change pushed society around a dramatic corner as idealistic, individualistic young Baby Boomers (born 1943 to 1960) rebelled against the midlife leadership of their G.I. Generation parents (born 1901 to 1924). These 'periods of transitions' are part of a larger cyclical pattern made up of four distinct eras, or "Turnings," each lasting approximately 20 years. It can be helpful to think of the four turnings as you might think of the four seasons, repeating predictably in their own natural rhythm.

A full cycle of turnings takes place over a period of about 70 to 90 years— roughly the span of a long human life. A new turning begins as a new youth generation comes of age, bringing a new social ethic that compensates for the excesses of the midlife generation then in power. While we don't have the space here to go into the full details of Howe's research [[see the references above: normxxx]], it's important to the topic at hand that we quickly recap the Four Turnings.

The First Turning is referred to by Howe as a High. As this follows a period of crisis, one of the hallmarks of a First Turning is a heightened sense of community and collective optimism, driven in part by the fact that the society has just come through a difficult and challenging time. Consequently, during First Turnings, societal institutions tend to be strong while individualism is weak. The post-World War II "High" of the mid-1940s through early '60s is the most recent example of a First Turning.

The Second Turning, called an Awakening, typically starts out feeling like the high tide of a High, with signs of progress and prosperity everywhere. But just as everything seems to be going along swimmingly, large swaths of society begin to chaff under the 'social conformity' of the High, beginning to gravitate to more 'individualistic' pursuits and demanding that their 'personal interests' come first. You may recognize the "Consciousness Revolution" of the mid-1960s through early 1980s, correctly, as the Second Turning.

Next up, the Third Turning, which Howe calls an Unraveling, is much the opposite of a High. To wit, individualism dominates, while institutions are increasingly weak and discredited. Quoting Howe on the Unraveling…

"This is a time when social authority feels inconsequential, the culture feels exhausted, and people feel bewildered by the number of options available to them. It is a time of celebrity circuses and a tremendous amount of freedom and creativity in our personal lives, but very little sense of public purpose. "The most recent Third Turning began in the mid-'80s with Morning in America, and continued through the '90s. Previous periods of Unraveling in American history were also decades of cynicism and bad manners. Think of the 1920s, the 1850s, the 1760s. And history teaches us that the Third Turnings inevitably end in Fourth Turnings."

Finally, there is the Fourth Turning, called a Crisis. The recent Third Turning appears to be winding down, and we are currently on the cusp of a Fourth Turning. This is a time of great turmoil, when society's basic institutions are torn down and rebuilt, and seemingly insurmountable problems are addressed. During Fourth Turnings, America engages in a struggle for its very survival and redefines its identity as a nation. Large wars are often a part of this process. The American Revolution, Civil War, and the Great Depression/World War II were all features of past Fourth Turnings. [[Think of 1920 as 'similar to' 2000 (including the severe recession of 1920-21)…: normxxx]]

In sum, Howe's research has shown that, with remarkable predictability, history is not a straight line extending toward a better and brighter (or increasingly awful) future, but rather a repeating cycle of the four distinct social eras. These four turnings have recurred with remarkable consistency throughout Anglo-American history, as Neil Howe outlines at length in Generations and The Fourth Turning. It is therefore no accident that America has experienced great cataclysms or "Crises" about every 80 years. Travel back eighty years from Pearl Harbor Day, and you land in the middle of the Civil War. Eighty years before that takes you to the Revolutionary War. If the rhythms of history hold, America is now poised to enter another Fourth Turning. [[And think of 2009 as approximately 1929±1 or 2 years!: normxxx]]

Bad News, Potentially Good News

You don't need me to tell you that the United States and in fact the world are now facing a plethora of intractable problems. The world's former powerhouse economy, the U.S., is now the world's largest debtor nation— and by a huge margin. The nation has $trillions in unpayable liabilities coming due on Social Security and Medicare, to name just two of many broken government programs weighing on the country. And our much vaunted democracy is increasingly dysfunctional— rotten to the core, truth be known— thanks largely to entrenched special interests and a voting public clamoring for their own piece of the pie [[bread and circuses!?!: normxxx]], while trying to hand the bill off to somebody else.

Meanwhile, the economy— despite rigorous jawboning by the government and its many friends in the large banking institutions— is in serious trouble [[which is desperately getting worse: normxxx]], with the housing market buffeted by tsunami-like waves of defaults, foreclosures, overvaluations, historic levels of personal debt, and tight credit that has left the U.S. government as the sole lender in many if not most major markets. Bernanke and his ilk may see 'green shoots', but what they're most likely seeing is Kudzu springing up once again to bury the economy.

That's The Bad News

The potentially good news, if you credit Howe's research, is that the Crisis we're now entering will change pretty much everything. While this change will entail a great deal of pain and a reduced standard of living for a large number of people, by the time the Crisis subsides, society will have pretty much remade itself in ways that no one can predict at this point. [[but, given past experience, likely to be a whole lot better.: normxxx]] Put another way, today's intractable problems will be solved… one way or another.

What's Next

When discussing what's likely to follow next, Neil Howe turns to his generational profiles and points out that the rising societal power today belongs to the generation he calls the Millennials, individuals born between 1982 and 2004. They are a "Hero" generation, just like the G.I. Generation that coped so well with the turmoil of the Great Depression and World War II— the last Fourth Turning. Coddled as children, the G.I.s were ultimately called upon to help society through a dark and dangerous period and rose to the occasion. Again, quoting Howe on the Millennials…

"These are today's young people, who are just beginning to be well known to most Americans. They fill K-12 schools, colleges, graduate schools, and [whose leading edge has just] recently begun entering the workplace. We associate them with dramatic improvements in youth behaviors, which are often underreported by the media. "Since Millennials have come along, we've seen huge declines in violent crime, teen pregnancy, and the most damaging forms of drug abuse, as well as higher rates of community service and volunteering. This is a generation that reminds us in many respects of the young G.I.s nearly a century ago, back when they were the first boy scouts and girl scouts between 1910 and 1920."

Unlike the Baby Boomers, who are largely 'individualistic' and 'anti-establishment', the Millennials are good team players. We hear a lot these days about working together for a common cause, volunteerism, and the need for stronger government institutions, largely because these are the new priorities of the Millennial Generation. As you may recall, out of the devastation of World War II, a spate of transnational political and economic institutions were born, including the United Nations, the World Bank, the World Health Organization, and the International Monetary Fund. By the time the current Fourth Turning is over, expect more of the same— but probably even bigger and more ambitious.

What Does This Mean to You?

Most importantly, if Howe is right, this crisis is far from over. In fact, when I asked him where we are today on a scale from 1 to 10— with 10 representing as bad as the crisis will get— he replied that we are at either 2 or 3. In other words, the worst is very much yet to come. And, per above, he expects this period of turmoil to take 20 years to play out. Thus, if nothing else, you may want to continue approaching matters of personal finance cautiously.

Secondly, if you're the type of individual that tends to get steamed up by larger and more intrusive government programs, you may want to take a few deep breaths and resolve yourself to the fact that this phenomenon is likely to get far worse before we see a return to a celebration of 'individual' rights. (And the cycle shows that we will see such a return— about 40 to 50 years from now, when the next Second Turning comes around.)

If it is any consolation, the Millennial Generation places a great deal of weight on teamwork and the notion of doing things "smartly". That doesn't mean, of course, that the various programs that are kicked off in an attempt to fix the many problems now confronting society will necessarily turn out to be 'technically' smart. But they will almost certainly be better thought out than some of the numbskull initiatives we've seen over the last 20 years.

You can also take some comfort in the fact that Millennials are builders, not destroyers. By contrast, the individualistic Boomers that dominate today's aging political class are world-class dissenters, radio talk show 'aficionados' always ready to scrap it out for their beliefs. Millennials want to skip the philosophical debate and get straight to fixing things.

Other insights about Fourth Turning periods gained from my conversation with Neil Howe…

• Government grows powerful, and sweeping new legislation is enacted. The old 1990s rule was: just compete and stay off the state's radar screen. The new 2010s rule will be: better have a presence in Washington so you're not dealt out of the "new" new deal. One political party tends to dominate. The Democrats under FDR during the last Fourth Turning offer a good example. While Neil Howe doesn't think it will necessarily be the Democrats this time around, they are certainly in the pole position at this point.


• While public history speeds up, personal life slows down. Families will spend more time together, as in the old Frank Capra movies. Ever more households will be multi-generational, a trend now spurred by Boomers with large, empty McMansions and Millennials without jobs. There will be a blanding of the pop culture, with the entertainment of the young (put Miley Cyrus or "High School Musical" on fast forward) increasingly regarded as tamer than the entertainment of the old.


• Innovation tends to stagnate, while a few new technologies will be chosen to be adopted on a large scale. We will see the equivalent of canals or railroads or interstates being built across America. To borrow from Carlotta Perez' four-stage description of technological revolutions, we are moving from the "innovation" to the "implementation" stage.


• New laws and regulations will do less to referee a 'free' market and more to pursue one or another national priority. They will increasingly favor the large producer over the retail buyer, investment over consumption, planning over risk, debt over equity. Businesses will hustle to reposition themselves. Anti-trust legislation will weaken.


• The authority and obligations of community will strengthen at all levels, from local to national and possibly beyond (if our alliances prove durable). Personal reputation and membership will matter more. A "new localism" will reshape town and urban planning. A global slide toward national or regional protectionism will loom as a real danger.


• It is too early to tell whether the crisis will ultimately be inflationary or deflationary, though we at Casey Research come down on the side of inflation for the simple reason that the government possesses the means to inflate. Due to the gold standard, that was not the case early in the Great Depression.


• In the past, Fourth Turning periods have always resulted in the nation redefining who we are in some essential way. That was certainly the case during the American Revolution, when we transitioned from a British colony into a collection of independent states— and the Civil War, when those states were hammered into a single nation. And, again, after World War II, when the U.S. went from being a relatively isolated nation to a global empire. A wild card, for instance a terrorist nuke going off in a city anywhere on the planet, could similarly take the country, and the world, into unforeseeable new directions.


• Baby Boomers will continue to be respected for their cultural achievements (it's not a fluke of history that Boomer music and other entertainments are still wildly popular among the young), but will be increasingly ignored in the political debate. The term "senior citizen," already in decline, will disappear entirely. And if push comes to shove, Boomer's financial interests— including Social Security— will be subjugated "for the greater good."


• There will be a growing push to rebuild the middle class. The wealthy and the impoverished alike will both come under pressure thanks to new pro-middle class initiatives. If you are a high-income earner, it's a certainty your taxes are going up, and likely by a lot. If you want to make a fortune, don't pursue the niche or the "long tail". Invent the next big brand that will appeal to Everyman.

Don't Worry, Be Happy

That is, at best, a sketch of my long conversation with Neil Howe and doesn't do justice to his research. If nothing else, however, I hope I've succeeded in giving you at least some sense of the man and his unique research and encouraged you to think outside the box about the nature of today's crisis.

A couple of final observations.

First, Neil Howe is not a 'negative' person, nor a professional doomsayer. Rather, he is a social scientist and historian with decades of experience in the social sciences. As you speak to him, you get the sense that he doesn't view the world through any particular philosophical bias, but rather is simply reporting what his research is telling him about the current players on the global stage, and which act we are currently in. Second, speaking for myself (David) as a Baby Boomer and someone with a lifelong distrust of government and its meddling institutions, talking to Neil left me feeling oddly relaxed— letting go, if you will, of some of the frustration that has been building within me as I watch the 'nanny state' grow more and more bloated.

That is not to say that we at Doug Casey won't continue to speak out against government waste and profligacy. We will. But it seems increasingly clear that we're now caught up in a powerful trend toward bigger, not smaller, societal institutions— and that these institutions will, over the period ahead, change the world as we know it. Of course, being active investors, at the same time we raise our voices in protest, we'll deal with the reality of the situation by strategically positioning our portfolios to profit from the coming changes.

And so, like the Rockefellers and J.P. Morgan during the Great Depression, we'll 'make the trend'— no matter how negative— 'our friend'. You may want to consider doing so yourself.


See also:

Generation Gab (7/8/2008)

The Next New Deal

13th Gen: Abort, Retry, Ignore, Fail? Remember, Obama is a Gen-Xer!

CSIS— Global Aging Initiative:

"As recently as 1980, the median age of the oldest society on earth (Sweden) was 36. By the year 2030, the median age of the entire developed world is projected to be 45. In Japan and much of southern and eastern Europe, it will be over 50. As a whole, the developing world will remain much younger for the foreseeable future. Yet it too is aging"

The 2003 Aging Vulnerability Index; The Graying of the Middle Kingdom (2004); The Aging of Korea: Demographics and Retirement Policy in the Land of the Morning Calm.

Austria: First To Go- Again?

First Blood In Austrian Banking Apocalypse: Raiffeisen Withdraws "Capital Note" Offer
Or, Austria Once Again To Introduce The Great Depression!?!

By The Prudent Investor | 30 June 2009

[I have] had very serious thoughts about the gargantuan problems of tiny Austria's banking sector stemming from [its financial community's] overly euphoric attempts to 'recolonize' Austria's long gone empire [during the recently ended go-go-go years]. Since the end of 2007 bits and pieces of information began to confirm this blogger's suspicions that Austria will be really, really hard hit.

I am [now able to] provide specifics thanks to Zero Hedge's blogs providing references to [published] documents issued by Raiffeisen Zentralbank group. Here we go with a story that could not only happen in Austria but in every country with a small banking industry where everyone knows everybody else and compliance regulations are only valid during sparse official business hours from 8 AM to 3 PM. [[e.g., Iceland? See Frozen Assets: Those Poor Vikings!?!: normxxx]]

Zerohedge, a shooting star in the global blogosphere with millions of hits, first raised my attention last week when it published the prospectus for an exchange offer where RZB group offered to exchange its "€500 million non-cumulative subordinated perpetual callable step-up fixed to floating rate capital notes"— in short— 'unsecured crap'— against some other unsecured crap called "non-cumulative subordinated perpetual callable fixed to floating rate capital notes" at 55 cents on the Euro. This 45% haircut was sexed up with a 15% coupon (coupon of old notes was 5.69%), but when one reads the fine print it sounded more like a pretty weak promise, as the fine print says RZB group has to pay that high coupon only if "it has enough resources to do so".

OMG, why don't we just go to the horse races straight away? The new notes were to be issued by RZB Finance (Jersey) IV limited, which is a 100% indirectly owned subsidiary of Raiffeisen Zentralbank AG (RZB) via Raiffeisen Malta Bank— also not exactly a plush bank— with €2,000 paid-up capital. A 'perpetual' note is an investment vehicle that never has to be redeemed by the issuer and therefore can only be resold in secondary markets— if bids exist for it.

RZB Jersey IV Ltd. has a paid up share capital of €2,000 and is 100% owned by Raiffeisen Malta bank, which also negatively stars with a paid-up share capital of €2,000. RZB Jersey's sole business is to raise hybrid capital for its parent RZB. Read all the details in the prospectus over at Zerohedge. Both companies losses in a total default of the new issue "worth" €275 million would be limited to that total €4,000 as much as I understand the complex web of finances.

So much about the recent past of this issue which had been made public on June 18. (Find all the details of the proposed exchange offer over at Tyler Durden's Zerohedge blog.) From here the story gets really hairy.

RZB issued a release on Monday, June 29, saying that it withdrew the offer for the exchange of the old into new "capital" (haha) notes. Having stored this release on my computer I first want to offer Zerohedge's suspicions why the issue was withdrawn.

• Complete lack of investor interest


• Concerns about what would happen once this lack of interest becomes public


• Trouble with accountants


• Rating agency getting back to the bank that this would be treated as a distressed exchange (as Zero Hedge speculated), putting the company into an 'Event of Default'.

But Tyler would not be Tyler if he did not also have some other possibilities for the withdrawal on his mind:

"Then again, the real reason is probably much more innocuous, and has to do with the bank discovering a buried gold treasure in its back yard which will be used to satisfy the several hundred billion in toxic assets as a result of chicken coups built in Transylvania at a 180% LTV (in probably a JV with GE Capital)"

There is nothing to add. Austria's [[entire?: normxxx]] banking sector is up to its ears in you know what, despite officials (worried about their pensions) saying otherwise.

For more about Austria's big role in the demise of Central Eastern Europe, financed with the money of depositors at those Austrian banks click on "Austria" e.g., to find more information and background about the possibility that Austria, not long ago considered the 6th richest country in the world, is in a good position to be the first Eurozone member that has to default. For more background— why every Austrian from baby to octogenarian— may be liable for up to €19,600 per capita thanks to bankers who saw only bonuses and nothing else— like, maybe, responsibility— read this post.

[ Normxxx Here:  Sounds like piffle compared with what our U.S. 'big' banks have committed us to! Good thing that all we have to do is print more dollars!  ]

Find all the details of the proposed exchange offer over at Tyler Durden's Zerohedge blog.

See also crisis

In 'Foreclosure Limbo'

Not Paying The Mortgage, Yet Stuck With The Keys
Foreclosure Backlog Imperils Recovery

By Renae Merle, WP | 29 June 2009

A growing number of American homeowners are falling into financial limbo: They're badly behind on payments, but their banks have not yet foreclosed. The backlog of seriously delinquent mortgages, which so far affects about 1 million borrowers, is a shadow over hopes for a rebound in the nation's housing markets. It masks the full extent of the foreclosure crisis and threatens to depress prices even further just as some parts of the country are hinting at recovery. For lenders, it could portend even more financial losses tied to the mortgage meltdown.

"It just means foreclosure rates are going to keep rising," said Patrick Newport, an economist for IHS Global Insight. Rising mortgage delinquencies were at the root of the recession, and many economists say an economic recovery will be difficult until the housing market recovers and home prices stabilize. And even though a delayed foreclosure can be a blessing for some troubled homeowners, for others, it simply prolongs the financial distress, leaving them on the hook for the condition of the property. Even if they move out, they cannot move on.

"I have even begged them for a foreclosure," delinquent mortgage-holder Charlotte Jensen said. When she realized she couldn't save her Glen Allen home last year, she filed for bankruptcy, packed up her family and moved out. Nearly a year later, Bank of America has yet to take back the home.

During the first quarter of this year, the share of all homeowners seriously delinquent on their mortgage but not yet facing foreclosure more than doubled to 3.04 percent, or about $227 billion in loans. There was a total of $97 billion in such loans during the same period in 2008, according to Inside Mortgage Finance. In more prosperous times, the rate is much lower— it was less than 1 percent in the first quarter of 2007, according to the industry publication.

Some of the backlog reflects the inability of lenders to keep up with the swelling rolls of delinquent properties. "Lenders are having an immensely difficult time handling the capacity. They are torn between loan modification, short sales, foreclosures, and they are finding they can't do all these things at once, and do them well, so we're seeing a lot of things falling through the cracks," said Howard Glaser, a housing industry consultant and a housing official during the Clinton administration.

But some of the backlog also reflects an intentional slowdown in the pace of foreclosures as government and industry step up efforts to help borrowers who want to save their homes. Fannie Mae and Freddie Mac, the government-run mortgage financing companies, put a temporary moratorium on foreclosures late last year and many of the country's largest lenders followed suit. That gave some lenders more time to determine which borrowers could benefit from government help.

The glut of foreclosed homes on the market has already pushed down prices across the country. Existing-home prices fell another 16.8 percent in May compared with a year ago, according to industry data released yesterday. The overhang of homes in limbo means that foreclosure rates are likely to increase dramatically during the second half of this year and into 2010 as lenders work through the backlog, said Bob Bellack, chairman of Zetabid, which auctions foreclosed properties.

"Prices will fall to the point where you have equilibrium, and it won't reach that until there is no longer this foreclosure overhang," Bellack said. This could in turn put renewed stress on financial firms that carry mortgages or mortgage-backed securities on their books. As a general policy, many firms have been marking down the value of those assets as the loans become delinquent. But once the homes go into foreclosure and are sold, their value could decline even more, prompting another round of losses at financial companies.

For some homeowners, the foreclosure delays have provided needed breathing room to try to save their home, giving them a chance to live for free for a while or to work out a deal to save their property. "I think everyone has come to a realization that efforts to try to mediate are preferable to foreclosure right now," said David Berenbaum, executive vice president of the National Community Reinvestment Coalition, a nonprofit group.

But housing experts say that once borrowers are seriously delinquent— defined as 90 days overdue on a mortgage— some are too far behind to help or have already given up. According to a March report from NeighborWorks America, a large housing counseling group, 27 percent of homeowners who go to a housing counselor after missing three or four monthly payments end up in foreclosure. That figure jumps to 60 percent for those who have missed more than four payments before seeking help.

In better times, lenders tended to begin the foreclosure process after three months, said Guy Cecala, publisher of Inside Mortgage Finance. Now it is not unusual for it to take nine months for the process to begin, he said. "No one is in a rush, lender-wise, to deal with the property," he said. "If you have to sell at a loss, why rush?"

Lenders traditionally write down the value of the home six months after an owner stops making payments, but the total loss is not recorded until the property is sold in foreclosure, said Mark Zandi, chief economist of Moody's Economy.com. "Some may feel that the property is worth more than the market can bear at this time, and they are willing to wait until" the market improves, he said. "They don't want to sell it into a completely depressed market."

Once underway, the foreclosure process is governed by a hodgepodge of state and local laws and the time it takes to get through the process varies by place. The process can also vary based on the original lender, on the current owner of the loan and on whether the borrower has filed for bankruptcy. During the period that precedes final foreclosure, homeowners still have the legal obligations that come with ownership. Though in practice many borrowers who have stopped making mortgage payments may do little to look after a home.

"During that period, where the property is in limbo, until there has been a sale of the property, the homeowner is still the owner, technically," said John Rao of the National Consumer Law Center. "It used to be that they wanted to foreclose as quickly as possible. … [Now] it's like this [is a] hot potato that nobody wants". Even seriously delinquent borrowers can restart negotiations with lenders to stay in their homes with a modified mortgage or persuade them to accept a short sale, which involves a homeowner selling the property for less than the outstanding mortgage balance and then turning the proceeds over to the lender to satisfy the loan.

Jay Brinkmann, chief economist for the Mortgage Bankers Association, said his industry is doing its best to work through the backlog while carrying out federal foreclosure prevention programs. "If a lender has a house that they know they will have to sell eventually," he said, "they almost always want to sell it as quickly as possible because of the interest cost of holding the loan on the books, in addition to costs like taxes, keeping the grass cut and other maintenance". But, more than ever, foreclosure has become an unattractive outcome for lenders.

"What we're seeing more and more right now are cases of a lender threatening foreclosure and the foreclosure sale is canceled at the last minute," said Jeanne Hovenden, a Richmond bankruptcy attorney, who handled Jensen's case. "It's more like the lenders don't want to own any more real estate and are using foreclosures as a pressure tactic". The Jensens bought their home in 1999 and were able to make their payments comfortably until refinancing. Since moving out last July, they have not received a foreclosure sale notice even after hiring an attorney to encourage Bank of America to speed up the process.

Jensen visits her home weekly to ensure it hasn't been vandalized or taken over by squatters. She pays landscapers to keep the lawn mowed. When the home caught fire in January, the police department knocked on the door of her new home, confused about whether to notify her or the bank. When neighbors complained about the mess left from the fire, Jensen returned to clean up.

A Bank of America spokeswoman, Jumana Bauwens, said the delay was caused, in part, by the fire. She said the home has since been referred to foreclosure. "The company makes every attempt to find a home retention solution for a borrower before proceeding with a foreclosure," she said.

For the Jensens, the delay has extended a painful period. "There was a sense of responsibility that until someone says we no longer own that property, we wanted to make sure it's handed off correctly," Jensen said. "We could have walked away like everyone else and said, 'We don't care.' But we loved our neighbors and our neighborhood. We hold ourselves responsible."

Just 5 ETFs… !?!

ETF Expert: Just 5 ETFs… And You're Set?
Buy-N-Hold Silliness Still Carries On…

By Gary Gordon | 22 June 2009

You'd have thought that the 2000-2002 bear that ravaged portfolios in the first half of the decade would have stifled buy-n-hold, asset allocation forever advocates. Alas… "simpleton" journalists and "commission-based, keep-your-assets" advisers continued to push the ridiculous notion that you refrain from selling. Certainly, the 2008-2009 bear that dehumanized investors must have put an end to the silliness, right? After all, assets from stocks to bonds to commodities to real estate demonstrated that buying-n-holding any investment type is far too risky; plainly speaking (writing), there isn't a magical asset allocation percentage that diversifies a portfolio away from life-changing losses.

It's pretty surprising, then, that:
(1) Bogle of Vanguard fame,
(2) "defrocked-a-decade-ago" Motley Fool and,
(3) Money Magazine
…have each thrown their respective fishing lines directly into the winds of change. It's surprising because more successful marketing machines began changing their tunes a long time ago. Think Suze Orman… a reformed buy-n-holder.

Bogle, founder of Vanguard, has raged against the ETF machine for nearly 10 years because ETFs seemed to be challenging Vanguard's indexing dominance. Of course, Vanguard was smart enough to develop 40+ ETFs of their own, ignoring the founder's disdain and cementing their place as one of the top financial institutions. Keep in mind, just because ETFs are tradeable like individual securities, an indexer can still choose to be a passive buy-n-hold, one-time asset allocator. ETFs just make it easier for an investor to buy or sell at a price point that one desires… something Bogle thinks leads investors to make poor "timing" decisions.

(Note: Ask any Vanguard 401k investor how happy they were to have restrictions and penalties for leaving or entering mutual funds. The disincentive, as well as the public pressure to "hang in there," caused millions of people to lose half of their retirement savings! Say "No" to ETFs, Mr. Bogle… really?)

The idea that any financial institution knows what's better for the "average" investor such that it artificially restricts trading activity, something that Bogle thinks is a 'good' thing, is intrusive, oppressive and insulting. What happened to freedom of choice? If an ETF investor wishes to hold on, he/she can. If an exchange-traded index fund investor wishes to sell, he/she should have that ability— and not be penalized!)

Not everyone is against ETFs anymore. Yet I find it ironic that the kings of 'foolish buy-n-holding' of individual stocks, the Motley Fool, who softened their tone after the 2000-2002 bear market ruined their reputation, are now talking up ETFs.

Here in 2009, they've put forth the "only" ETFs you will ever need:

• SPDR Trust (SPY)


• Vanguard Small Cap (VB)


• iShares MSCI EAFE Index (EFA)


• Vanguard Emerging Markets (VWO)


• iShares Barclays Aggregate Bond (AGG)

So this covers the investment universe, does it? Any asset allocation for any risk level, the folks at Motley Fool claim.

An "all-in-one" aggregate bond fund that is effectively dependent on intermediate U.S. treasuries flies in the face of scores of important bond and income possibilities. Where to begin? Short, medium, corporate bonds diversify in the way that small cap stocks diversify from large-cap stocks alone. Munis, inflation-protected, foreign bonds, emerging market bonds, and yes… high quality mortgage backed. How can the world of bond investing be minimized to AGG… albeit, an excellent core holding?

Do I even need to go further with the income that's not presented above? I guess there's no need for domestic REITs or foreign REITs. Perhaps we can forget about the buy-write option income approach. Preferreds? Convertibles? Why… they must be a waste, according to Motley Fool "journalist/investors".

As for stocks, I am a big fan of Vanguard Emerging Markets (VWO). Yet to minimize the importance of China and Brazil is ludicrous. And to minimize the criticality of small-cap funds like China Small Cap (HAO) and Brazil Small Cap (BRF) is near-sighted at best. At the very least, you think these folks might have at least served up SPDR International Developed Small Cap (GWX) as having relevance like U.S. small caps do. And do I even need to mention the failure to include commodities?????

Money Magazine is equally shameful, if for no other reason than that the advice seems wholly to change issue by issue. In "ETF Investing Done Right," the writer(s) of this July 2009 piece claim that you need just 5 ETFs to get your diversified mix of 60% stocks, 40% bonds. Ironic, since the magazine's late 2007 mixes typically showed 70%-75% stock appropriate for most. By April 2008, it shifted to 50% stock and 50% income. Now it's 60%/40%?

Keep in mind, these are no systematic rebalancing or recommended asset allocation changes taking place in the magazine. Each presentation is offered as a 'buy-n-hold', leave-it-alone 'solution' for 'moderate' risk tolerance. Pick up the magazine one month, get a "cure-all". Pick it up another month, find an entirely different "cure-all".

Below is Money's "ETF Investing Done Right" for July 2009:

1. Vanguard Total Stock Market (VTI)         35%
2.Vanguard FTSE All-World excl U.S. (VEU)    20%
3. Vanguard Total Bond Market (BND)          30%
4. Vanguard Real Estate Inv Trust (VNQ)       5%
5. iShares Lehman TIPS Bond Fund (TIP)       10%

I could "tee off" on Money Magazine for its failure to identify two of the most powerful forces in diversification: foreign bonds and commodities. For foreign bonds, one could use the SPDR Lehman International Treasury Bond ETF (BWX) and for commodities, one could employ the services of the Powershares Total Commodity Index (DBC). Naturally, it doesn't make much sense to get too wound up about weak presentations from has-beens and/or media mainstreamers. As easy as ETFs are to use, a serious investor needs to take a bit more interest in what he/she does. 'Buy-n-hold', one-time asset allocating is never sensible… and 5 ETFs won't cover your retirement life adequately.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "LIVE", via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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Normxxx    
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.