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| September 28, 2010 | Issue 39 |
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Journey with DWM to
What's Next
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Some economists say "up" and some say "down". The truth is, no one knows the future. But affluent, enlightened investors recognize that DWM strategies perform in up markets and protect in down markets. Regardless of what the future holds, with DWM, savvy investors are ready for what's next. | |
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World:
Beware of Greeks Bearing Gifts | |
Would you buy a bond from this Greek? Probably not. But, on the other hand, he isn't selling bonds. But he is involved in their fiscal crisis. He and his monastery helped bring down the last Greek government, exposing the country's economic insanity.
Michael Lewis is one of our favorite writers. The October issue of Vanity Fair features Mr. Lewis and his analysis of the question "Will Greece default?" Here's a quick recap of the highlights of that article.
Mr. Lewis starts by viewing the global problem this way: "The tsunami of cheap credit that rolled across the planet between 2002 and 2007 created... temptation. It offered societies the chance to reveal aspects of their character they could not normally afford to indulge."
Entire countries were told "the lights are out, do whatever you want and no one will ever know". "Americans wanted homes larger than they could afford. Icelanders wanted to stop fishing and become investment bankers, the Germans wanted to become more German, and the Irish wanted to stop being Irish."
And what the Greeks wanted to do was to "turn their government into a piņata stuffed with fantastic sums and give their citizens a whack at it." Government wages doubled in ten years. The average government job pays almost three times as much as the average private-sector job. The Greek public school system employs four times as many teachers per pupil as Finland, Europe's highest ranked. The retirement age for Greek men is 55 and 50 for women.
In addition, it is assumed that "anyone who is working for the government is meant to be bribed." People who go to health clinics assume they need to bribe to get services. Government ministers emerge from office and buy huge mansions and two or three country homes.
Huge government expenditures are only part of the problem. "Greek people never learned to pay their taxes." In 2009, tax collections "disintegrated, because it was an election year." Apparently, "The first thing a government does in an election year is to pull the tax collectors off the street". But, it's not just election years. Most Greeks want to be paid in cash and not to provide a receipt for services. Returns are filed, but show little taxable income on the bottom line. "An estimated two-thirds of Greek doctors reported incomes under $15,000 last year and paid no tax. This includes plastic surgeons who made millions." If the return was audited, a bribe to the tax collector made the problem go away. And, the few whistle blowers in the tax collection lost their job or were routinely demoted to administrative jobs, far from the action.
In the 80s and 90s, Greece was not part of the EU and paid interest rates 10 per cent higher than Germany. They needed to drop the drachma for the euro. To do so, they needed to show budget deficits under 3% of GDP and inflation running at German levels. Enter Grecian Formulas administered by the Magician". Greece hit the targets by moving all sorts of expenses (including pensions) off the books. They manipulated the inflation rate and bingo, hit the targets, and got into the EU in 2001. Their cost of borrowing immediately went from 18 percent to 5 percent. To remain in the EU, they needed to meet debt and inflation targets on an on-going basis. This was no problem. They just keep using Grecian Formula and statistical Magicians.
The photo above is that of Father Arsenios of the Vatopaidi monastery, which figured in the crisis in a very unique way. As "CFO" of the monastery, in 2008 he helped swap a "fairly worthless lake" to the Greek government for far more valuable land. How the monks did this is unclear, perhaps paying an enormous bribe to a government official. No bribe could be found, however. When news broke of the swap broke, it "drove Greek politics for the next year." Ultimately, the scandal felled the last government and sent Prime Minister Kostas Karamanlis packing on October 4, 2009.
When new Prime Minister George Papadreou and his party took over they found much less money than expected and had no choice but to "come clean." They announced to the world it would take some time to nail down the numbers. Greek bond holders panicked. Ultimately, it was determined that the monks had swapped their $70 million lake for about $1.5 billion in real estate and financial assets. Overall, the Greek government owed about $1.2 trillion debt, or $250,000 for every working Greek.
Efforts to raise the retirement age, reduce government pensions, and otherwise reduce the spoils of public sector life have met with protests of thousands of government employees.
Mr. Lewis concludes by trying to answer the question: Will Greece default? There's a school of thought that says they have no choice; but government cuts and efforts to raise revenues, may cause what's left of the productive economy to leave. Even if it is technically possible for Greece to repay their debts, live within their means and return to good standing, do they have the inner resources to do it? If responsible Greek civic life has died, can it ever be re-created?
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Detterbeck Wealth Management
www.dwmgmt.com
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Palatine, IL 60067
847.359.6262
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Business: Having Fun at Work | |
Some of our readers know that DWM has three core goals:
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Always put our clients' interests first
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Do a great job for our clients
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Have Fun
Our office fun is a bit more reserved than the office in the video below, but we enjoyed watching it and thought you might as well.
Click here.
Motivational Keynote Speaker Jody Urquhart says you there are three ways to motivate people to work harder, faster and smarter: threaten them, pay them lots of money, or make their work fun. These days many companies are obsessed with fun. Software firms in Silicon Valley have installed rock-climbing walls in their reception areas and put inflatable animals in their offices. Red Bull, the energy drink company, has installed a slide in its London office. Zappos, the online shoe store, boasts that creating "fun and a little weirdness" is one of its core values.
Google is the acknowledged champion of the cult of fun. Their offices have volleyball courts, bicycle paths, a yellow brick road, a model dinosaur, regular roller hockey games, several professional masseuses, and more.
The Economist believes the cult of fun is driven by thee of the most popular current management tools: empowerment, engagement and creativity. Managers hope that "fun" will make workers more engaged and creative.
So, if climbing the rock-wall in the reception area is not in the cards for your office, you might consider some of the following suggestions for having fun in the office:
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Hire competent employees who already value fun and have a sense of humor.
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Be sure humor and fun are modeled by top management.
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Create a humor bulletin board.
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Put up photos of the management team as children.
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Open or close meetings by sharing a funny incident that happened on the job.
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Promise someone an award that requires you to dress up in a silly costume if they win.
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Be on the lookout for a motto to put over your desk to keep daily hassles in perspective, such as "Just when you manage to make ends meet, they move the ends."
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Have cartoon caption contest.
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Respond to fun when it happens.
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Organize a "Fun Committee".
Here's a final thought. Dr. Norman Cousins says, "Children laugh an average of 400 times a day. That number drops to only 15 times a day by the time people reach age 35. Laughter releases endorphins into the body with the same exhilarating effect as doing strenuous exercise. And it increases oxygen intake, increases the pain threshold, and relieves stress". We're sold- let the fun continue.
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Retirement: Will You Outlive Your Assets? | |
Will you outlive your assets? Yes or No? Perhaps you're not sure where to start. This may help: Let's say we have a couple, both 54 years old who want to retire at age 64. They know what social security and/or pensions they might receive and they estimate that in today's dollars, they will need $100,000 from their investment portfolio each year for the rest of their lives.
Question: How big does their investment portfolio need to be?
Answer: Perhaps $2,222,222 in today's dollars. (Yes, 22.2 times the spending amount).
Here are the hypothetical assumptions:
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When both are 64, their joint life expectancy is 26 years. We've used 31 years to be conservative.
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Inflation is 3% per year on average. Hence, spending needs increase 3% per year. However, around age 84, in our example, spending is estimated to decline by 30%.
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Income taxes have to be paid each year. We estimate that there will need to be an additional distribution of 22% of the spending amount taken out to cover taxes. This works out to a 31 year overall tax rate of roughly 30% on earned investment income. (Remember, some of this may be IRA money which was never taxed).
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Investment gains are 6% annually.
Obviously, these hypothetical amounts are not guaranteed results. Actual results and circumstances will vary by individual. Past performance is no guarantee of future results. Furthermore, we are showing linear assumptions (same rate per year). Major investment shortfalls or spending overruns, particularly in the first few years, will have huge negative impacts. We've identified the "multiplier." Now, let's look at the spending needs. This is so critical. A drop of $10,000 in yearly spending need, in our example, may drop the "pot" requirement by $222,000 or more. The spending need must be accurate. Start by tracking all of your expenses. This includes not only the regular monthly payments but also those irregular items, including vacations, clothing, real estate taxes, gifts and others. "Test" your annual number by adding your annual income to your beginning cash balance and subtracting total expenses. Compare this to your ending balance. It sounds simple, but we have many examples of individuals who are quite amazed at what their total annual spending really is.
Use the current spending level and realistically determine what it might be in retirement. If you are currently working for a company, are there some expenses that are paid by the company that you will have to fund in the future (like a company car)? What expenses might go away or diminish? What about increases in travel or other expenses in retirement?
Once the spending during retirement is calculated, you can subtract other sources of income during retirement, including social security, pensions, and others to determine your preliminary spending need amount. We encourage clients to perform this process. Sometimes, it becomes obvious that their planned spending "needs" are unrealistic. And, therefore, they must reduce their expenses currently and revise their long-term "needs" downwards. This helps them two ways. First, it lowers their eventual "number" and, in the meantime, they may be able to add more to the pot currently because they are not spending as much.
The third key element is the investment return. Everyone is unique. You have your own investment objectives, risk tolerance, time horizons, income needs, tax status, liquidity needs and perhaps other unique needs and circumstances. Using that information, it is imperative to construct, monitor and manage a well diversified investment portfolio that provides the maximum return with minimal risk.
We encourage you to make it priority to review the above and make your own judgment- will you outlive your assets? Yes or No? Either way, we'll be happy to discuss this important matter with you. |
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Cities: Mayor Daley's Legacy | |
After 21 years of Mayor Daley, many Chicagoans find it hard to believe that there will be a new person in charge as of May 16, 2011.
As the Associated Press reported, Daley has presided over some of the most dramatic changes in Chicago history: "He assumed command of the floundering school system in 1995 and replaced entrenched bureaucrats with tough, results-oriented administrators. Homework became mandatory, and the "social promotion" of underperforming students was halted. Test scores climbed steadily".
Daley was also the catalyst for a citywide facelift. West Side slums were cleared, new green space created and the theater district in the Loop brought back to life. He embraced cycling and walking. Chicago today has more than 100 miles of bike lanes and routes and more bike parking than any other U.S. city.
Critics have grumbled about City Hall scandals and lucrative contracts to the mayor's friends as well as corruption and police brutality cases. In addition, Chicago's bid for the 2016 Olympic Games came up short.
But perhaps Mayor Daley's most interesting legacy may not be what he gave to the city but what he sold off. Chicago has been the most aggressive city in the U.S. in privatization of public infrastructure. Other politicians, struggling to balance their budgets, are now reviewing his example.
Chicago began leasing its assets before the recession. In 2005 the city leased the Skyway toll road for 99 years for $1.83 billion. This was followed by a 99-year, $563 million lease of parking garages in 2006 and a 75-year, $1.15 billion lease of parking meters in 2008.
The Skyway and garage deals have been enormously successful. The transition to private management was seamless and the Skyway proceeds were used to pay off debt and create a long-term reserve fund.
Privatization of the parking meters hasn't gone so smoothly. Enraged by higher rates, some Chicagoans filled the meters' coin slot with glue. Others believe Mr. Daley pushed the deal through without proper debate and may have short-changed taxpayers by almost $1 billion.
Even so, other politicians are looking at selling public assets. With empty coffers and a requirement that budgets must be balanced, state and local leaders are desperate for quick cash. However, many believe that Daley's model for selling taxpayer assets shouldn't be copied. They argue that there should be some basic taxpayer protections in place before the sale. Lease deals shouldn't extend beyond 30 years. And, most importantly, the public needs to receive fair value.
Daley's privatization programs, particularly selling public assets, may someday be his most important legacy. At this point, it is tough to tell whether, in years to come, his legacy will be positive or negative.
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