Will Boomers Cash In

HnE--

You're right about that. And the more I think about it TIPS if held to maturity should do the same job. Nice thing about I Bonds and EE Bonds is that they will give you your principal back after some small holding period.
Good catch.

Donner
 
Donner, thanks for the link and your time.

I am not an economist and I am struggling to get
around some of the concepts like what moves
real long term rates. Basically what I have learned
from reading "The Coming Generational Storm" is
that real rates are driven by supply and demand
for our debt.

If/when the world perceives that the US is in real
trouble, our debt will be shunned and real rates
will spike to attract buyers. In response, the fed
will pump up the money supply to reduce the value
of our debt .... and this will cause a real spike in
consumer prices as measured by the CPI. If the
fed does not pump up the money supply, businesses
will not expand due to the high real cost of debt and
recession/deflation will ensue. The latter is politically
unacceptable so actual CPI inflation is the most likely
outcome, IMHO.

The only thing saving our bacon so to speak is that
the rest of the world (except possibly the UK) is
worst off than we are. :D

Cheers,

Charlie
 
The only thing saving our bacon so to speak is that the rest of the world (except possibly the UK) is
worst off than we are.
Click to expand...

Some nations buy our treasury bills to keep their currencies low compared to ours, which keeps their economies humming by exporting to us. They can do this because they pay for our treasury bills by simply printing more of their money (creating new money out of thin air), and using the new money to buy the bills. It is not like they actually have to work to earn the money to buy the treasury bills.
 
Charlie--
I am enjoying this discussion of cause and effect in the capital markets. You make a lot of sense in your observations as everybody on this Board has come to depend on. If you are reading "Coming Generational Storm" then I am going to make a point to get a copy.

What establishes the real rate for various asset classes is kind of a mystery to me, too. I think there are a few models around that attempt to quantify the determining variables. But I think the best you can do is observe the result.

You have to observe the result and work backwards from there in order to understand what could be causing that result. Kinda like the wind. Can't see it, touch it, smell it, or hear it. But you know its there through its effects.

To me the most plausible explanation for the effects we are observing in the capital markets today is an overabundance, a superabundance, of surplus capital in the world economic system. All of us are participants in that system as both suppliers and users of capital -- we are savers and consumers at the same time. But we in the US are doing way more consuming than saving and we depend on the rest of the world to make it work. Fortunately, those people save like crazy. And they get to save because we consume. Its either a virtuous or addictive cycle depending on your point of view.

Personally, I think we are in an unsustainable and unstable situation which is creating a strategic problem for our country as we become less and less able to break this pattern of twin trade and fiscal deficits. The optimists say not to worry. More tax cuts and more currency devaluation and we will grow and export our way out of it. (see Larry Kudlow). I'm no longer so confident about that. And neither apparently are a bunch of other people. We are beginning to circle each other around the cage. You don't want to be the weak cat in that situation. I believe the US is getting relatively weaker by the day as measured by the twin deficits.

I think Greenspan understands all this and is working to reverse and repair the damage before it becomes a really big problem for all of us. And that means that Americans are going to have to consume less and save more. Hence, he is moving those short term rates up to discourage our consumption and encourage more saving at higher rates. That's going to strengthen our currency and inflict a little pain on the the other cats in the cage. And it will keep the flow of capital coming our way. Unfortunately, it means that lower demand will slow the economy down, reduce the growth of earnings and dividends, raise prices in the bond market and put a cap on asset inflation in the markets. At least, I think thats the goal, anyway.

But in the process of making us strong enough to fend off the other cats in the long run Greenspan is going to have to be the enforcer of financial discipline in the short run. He went up to Capitol Hill last week and hectored the Congress to cut the deficit by reducing expenditiures (consumption). He said, in effect, "I am going to do my part to reduce demand through monetary policy you guys do your part through fiscal discipline and we will give those other cats in the cage something to think about"

Greenspan did what he had to do for the last 4 years to keep the economy out of the tank. Now that the economy is gaining momentum he is turning his mind to our long range strategic best interests before his term is up. As investors, we just have to be aware that the landscape is changing before us. And we should be aware that part of the plan for long term health of our economy and our country is rising rates, real and nominal, with the unfortunate side effect of this medicine being the crushing of some capital. I think he believes that pain in the markets is something we are just going to have to take now in order to keep the country strong. So, no, he is not smiling much these days.

As for me, I am going to try to stay away from the consequences of Greenspan's determination. I am going to tryto take as small a share as I can of the discipline to come. Crush somebody else's capital, Alan.
I need mine to get Mrs. Donner and me through the next 30 years.

Donner
 
Michael--

You've got the right idea. But those other countries need good old greenbacks to buy our Treasury obligations. Japan has about $800 billion worth and China has $600 billion. We had a $666 billion trade deficit in 2004. We need them to keep lending if we keep consuming the way we do. Can't keep it up forever without handing them a sword to do us in with. (fact is we have given them a big enough sword to do the job already) The Fed is saying enough of this already!

Give those other guys some credit -- they work plenty hard to earn those greenbacks. And they are using one virtue which we used to value in this country -- thrift.
But that's all out the window now. Gone with the wind.
Those days had better make a comeback in America or the jig will be up sooner than anybody thinks.

Donner
 
Donner,

Wow! I feel like I have my own personal financial manager. Thank you so much for all of your good advice. Also, if I remember correctly, your wife is the one that encouraged you to post. If that is correct, please thank her on my behalf!

Thanks for the birthday greeting. I just turned 52 yrs. Happy Birthday to you a little early. Congratulations on your first grandchild that you are expecting. I have a son that will be 27 in a couple of weeks, but I don't think he is dating anyone steadily at this point. I look forward to having grandchildren someday.

I do keep the Federal Health Benefit Family Plan and will keep it in retirement. I do not plan on using the tax deferred savings for 9 yrs, because hopefully that is how long my spouse will continue to work. He is 53 and needs to be able to draw a reduced social security benefit, since his pension will be neglible. I admit that I need to find out more info regarding his pension. Whenever, I try discussing his retirement plans with him, he says that he is going to work forever. He does like his job and his health is good, but I can see him telling me one day that he has had enough and will be retiring. I hope that he will be 62 at that time so he will be eligible for SS. Either that or else he will be willing to cut back on his spending. Who knows, what will be happening with SS. We have his estimate from the SS yearly statement that is sent, but that amount could be lower or else they could raise the early retirement age for SS. Our agency has a website that one can go to called EBIS (Employee Benefit Insurance Statement, or something to that effect) and it tells you the amount of pension that you can receive at age 55,57 and 59 with and without leaving a survivor annuity. I do plan on leaving a survivor annuity. An interesting note on this: I was at this site and I showed my spouse the amount that he could receive if I were to die. He looked at it and said that he could not possibly live on that amount.
 
Donner, Part II

I told him that it was alot more than I would receive if he were to die. As you said, SS would be 0 thanks to GPO! Luckily, his 401K plan is better than mine since his company does match part of it. I would at least have whatever portion of the 401K that remained. His family does live alot longer that mine does, so I guess it is good that he would get the pension.

My soon to be 27 year old is still in college. We were paying for all of his college costs, but quit when he informed me that he was going to start taking out college loans, because that was what everone did. He did not want to live at home and this was an easy way to get living expense money. I did not want him to start out life in debt, but he would not listen. I did not want to support a partying lifestyle, so we quit paying his college expenses. We have paid a time or two when he stated that he did not get the loan or it was late in coming. I just wish that he would graduate or else get a real job and finish at night. My 16 yr old daughter is a
 
Donner, Part 3

very good student. We did the pre-paid tuition plan for 4 yrs of college at an in state public college. We would still need to pay room and board, books and fees, but should be able to manage that pretty easily. She keeps talking about going out of state and I told her that would be fine, but she would need to pay the difference between what the pre-paid tuition plan pays and the out of state cost herself. She was angry to begin with, but now she wants to know if we can go visit some of the other colleges that are in our state. We live in a college town and she wants to move away. I think independence can be a good thing, so I have no problem with her going to another in state college.

One thing I forgot to say regarding the EBIS site is that they have an annuity amount based on your projected TSP balance and your contribution rate and how you are investing. The amount that it shows for me at age 55 is alot higher than 4% SWR on the projected amount. Of course, I have no idea how long that annuity would last or how they figured it. They give you the amount based on how much you think your annuity would earn. I used the 4%, just to be conservative.

I am very good at procrastinating, but you are right. I am going to have to start some number crunching shortly. Thanks for letting me know how I should do it. I also, need to recheck insurance policies, wills, etc. Our will was written in 1975 prior to having our 2 children. We made provisions for any children that we might have, but we lived in another state and have people in our will that are now deceased. See what I mean about the procrastinating! The next thing that I need to worry about will be doing this year's taxes!!

Thanks again and please continue posting! You seem to be a very popular poster, thanks to your intellect and thoughtful replies.

Dreamer
 
Donner, there is a section in "The Coming Generational
Storm" that says Greenspan is playing "economic
chicken" with the rest of the world ..... winning so far
but how long can it go on? The book also talks about
"unstable equilibrium" in that almost anything could
trigger a run on the bank, so to speak.

The defensive steps I recently took were to increase
my allocation to foreign equity in the Pacific (ex Japan)
and China. I also have invested some of my fixed
income in a global bond fund that is not hedged.
Although I increased my foreign equity, I reduced my
overall stock allocation to 50% As far as domestic
fixed income, I am almost totally in intermediate
bonds and CD's that pay 2+% + CPI. Since long
rates are composed of a "real" component plus
a consensus of long term inflation you can see why
I am concerned about a spike in real rates as opposed
to a spike in measurable consumer inflation.

Thanks for your comments.

Cheers,

Charlie
 
Yakers,

Sorry, that I did not respond to your question before, but I honestly don't feel that I know enough to give anyone any advice. I figured that Helen and Donner know a whole lot more than I do and I would not want to steer anyone in the wrong direction.

It does sound like we have quite a bit in common. My 16 year old is a daughter and she is a sophomore also. Sounds like you are doing pretty good on saving for his education. We did the pre-paid tuition plan for our daughter and hope that it is okay when it comes time to use it. There was some talk awhile back, that the plan was in trouble, but we received a letter stating that our state legislature was going to make good on it. If it was not any good, then that could derail my retirement plans by a few years. I would have to crunch the numbers as Donner states!

Congratulations on your first grandchild also. It should be a fun experience!

We do not have any debt either, except for the monthly Discover Card bill and we pay it off every month. We put just about everything on it, so that we can get the bonus. They have a double bonus with Blockbuster, so we normally get our movies for $2.00 per movie.

I am glad to hear that the growth on your head was not cancerous and that your health is good. I had a brother who died of lung cancer shortly after his 45th birthday. He was way too young and I miss him greatly! Cancer is not an easy way to go either. I wish that I could wave a magic wand and take away every one's nicotene addictions! He stopped smoking approximately 2 years before he was diagnosed. I am a former smoker who quit 12/31/85. I wish that I had all of the money that went up in smoke between my spouse and myself. We could probably be enjoying an early retirement, if we had invested it properly. Oh well, live and learn.

I noticed that you mentioned traveling by canal boats in England. There is a site that I read called Unconventional Ideas by John Anderson. I do not know how people are able to have the blue links post, so that one can just click on it, but you can go to www.unconventionalideas.com/england.html. His family did the canal boat trip in England and he has some pictures. I would be interested in hearing about your canal boat traveling. John Anderson has some pretty neat ideas on alot of things. He has some good common sense ideas, but a few that I would be afraid to try. I think that I have gotten too conservative in my old age!

I think that there is a lot of Baby Boomers out there who will be running into trouble. I see people who are retiring, who do not have the assets to retire and they do it anyway. I see people's income, assets and expenses, when they state that they are financially unable to repay an overpayment. It amazes me! I could not sleep at night, if we had as much debt and we are both still working full-time and these people are retired. I would not count on the majority of boomers to keep working. Some may have to end up going back to work at a later time, but they want the instant gratification of retiring the same as they wanted the instant gratification of stuff that ran up their credit cards and had them taking out second mortgages and refinancing their houses. I hope that I am wrong and that they will grow up! LOL.

Keep posting. Dreamer
 
Hey, I see that the blue links appear magically!! That's cool!

Dreamer
 
Charlie--

"Unstable equilibrium". That's a neat way to put it.
Kinda like two tarantulas in a bottle! :D

You know things are bad when you see this stuff on TV dramas. Recently President Jeb Bartlett on West Wing had a dialogue with a Japanese economist who co-shared the economic Nobel Prize with him. The Japanese guy warned him about the debt situation and Martin Sheen told him to kiss off. You guys need us as bad as we need you was about his pitch. The end has got to be near.

Sounds like you have established a pretty good defensive stance in your portfolio. I have a gut feeling that things are beginning to change for the buck though.
First of all, you are right about the rest of the world. A lot of them aren't in such hot shape either -- particularly the Europeans. Second, Greenspan's actions to cool our own economy and raise interest rates will eventually shore up the currency. The diversify into foreign assets thing may have passed the peak. Everybody's doing it and that is generally not a good thing.

I understand completely now your concern about "real return" spikes vs increases due to CPI inflation premiums. I think real return is a very complicated phenomenon which will be determined partially by the superabundance of capital which will act as a deflationary bias on real rates versus psychological factors (ie., fear) which will refocus on risk and act as enhancer of real return requirement in the markets. How that is going to balance out in the long run who knows. Just keep your eye on Greenspan. He is on a not so stealthy mission to move rates higher (short term and long term) and you can call it "real return requirement" or whatever, but those nominal rates are on the way up.

In a game of chicken, I will bet on Greenspan every time.
I don't think he believes that America can afford to blink on this one. He has to enforce discipline or the countyr faces a perilous future. He knows the Congress won't or can't face up to this. Its his job. With the economy rebounding this may be the last chance to get us back on track without a massive economic adjustment. If we can't absorb the pain now when will we be able to? I remember how cold blooded Paul Volker was about the pain produced by raising short term rates to 20% in his day. Steely eyed guy. Lot of tears shed in those days. Horrible, really. Volker sat in those Congressional hearings and chewed on an unlit cigar. Stared those Congressmen down. I think Greenspan also has that in him. Bush's problem will be to nominate a successor with the cojones to see the job through. It's going to be tough to get that guy through the Dems on Capitol Hill. But the country is going to need one tough old bird to finish the job that Greenspan started last June. Maybe they could trot old Paul Volcker out of retirement for one last service to his country.

Donner
 
My Gawd.........is Volker still alive? He must be older than Clint Eastwood :) Greenspan looks like he was
dug up too. His wife is kind of cute though :)

JG
 
Paul Volcker, along with Eisenhower, FDR and Hank Aaron, the greatest Americans of the last 75 years.

Greenspan couldn't carry water for Big Paul.

Hip, hip, hoorah!!

Mikey
 
One of the enduring illusions we Americans suffer from is we think it's all in our hands.

We tend to forget Adam Smith's Invisible Hand - aka the markets in the rest of the world. Sometimes we get an offer we can't refuse - sort of like Volker. Of course nobody remembers that.

I like to read a lot of Stephan Roach at Morgan Stanley.

We're still the 800 lb gorilla - but even the gorilla can have a Bad Day at Black Rock. Fund flows to commodities, international, gold, and natural resouces are getting increasingly squirrelly now a days.

If central banks begin to shift reserves in a meaningful way - things could get - interesting.
 
JG--
Yeah, the old guy is still kicking. He is trying to straighten out the UN right now. They thought they could get him to whitewash the oil for bribes program but he is having none of it. Still chewing on those cigars,too! There's hope for all of us! :D

Donner
 
Jeez Mikey, none of them would have made my "B"
team. OTOH, I was thinking that it seems all of my real heroes are dead. There is a certain advantage in
having expired as you are no longer in danger of screwing up and having to endure the consequences.

JG
 
Unclemick--

I remember reading a little article tucked in the back pages of a paper years ago. It was a story about Paul Volcker attending a meeting of International Bankers in some Eastern European capital like Bucharetst or someplace like that. The Saudis drew him aside at that conference and threatened the United States of America. They told Volcker that if he didn't get inflation under control they were going to move their reserves out of the US and require payment in anything but dollars for their oil. Volcker about swallowed his cigar. Got on a plane and when he got off in NY he started jacking short term rates through the roof. The rest as they say is history.

I would give a nickle to have saved that article. I would have it framed and hang it over my desk as a reminder of how things could get.

Donner
 
Jeez Mikey, none of them would have made my "B"
team.  OTOH, I was thinking that it seems all of my real heroes are dead.  There is a certain advantage in
having expired as you are no longer in danger of screwing up and having to endure the consequences.

JG
Click to expand...
I see wat you mean John. FDR only saved America, Eisenhower only saved Western Civilization, Volcker only set the stage for the 20 year bull market and business expansion, and Aaron only holds the unmedicated HR recordl

Bunch of slackers, if you ask me!

Mikey
 
You are givin' these people too much credit. Other folks helped too (except for "Hammerin' Hank").
You are generalizing, big time. Personally, FDR MIGHT be my fav.
dem of all time. Beyond that............My heroes have always been cowboys ( Willy Nelson).

Seriously, I admire Caesar (Julius
not the salad), R. E. Lee, Custer, Patton, Hemingway, Ayn Rand,
Lincoln (Abe, not the tunnel), and Einstein (the man not the bagel).

Disclaimer: This has nothing whatsoever to do with ER.

JG
 
Unclemick--

I remember reading a little article tucked in the back pages of a paper years ago. It was a story about Paul Volcker attending a meeting of International Bankers in some Eastern European capital like Bucharetst or someplace like that. The Saudis drew him aside at that conference and threatened the United States of America. They told Volcker that if he didn't get inflation under control they were going to move their reserves out of the US and require payment in anything but dollars for their oil. Volcker about swallowed his cigar. Got on a plane and when he got off in NY he started jacking short term rates through the roof. The rest as they say is history.

I would give a nickle to have saved that article. I would have it framed and hang it over my desk as a reminder of how things could get.

Donner
Click to expand...


So does that mean the Saudis saved us? Volcker didn't get moving until threatened?? Or was he trying to do something and Congress prevented it?

I must have been asleep. I always thought of Volcker as one of the bad guys during Jimmy C's presidency. I mean, the economy went to hell during his watch and it resulted in about 20 years of Republican presidents. Donner, your posts indicate you're a lot smarter than I concerning these things, but I am mystified by your adoration of Volcker. Further, I thought Greenspan was the hero of the bull, etc. Or is ole Alan just a caretaker?

I do confess I have not read anything about Volcker. I'm not trying to be annoying, I just don't know about him. Any good books? or articles?
 
JG,

Your list has it's bright spots, but Custer? That arrogant jerk who's last words were along the line of "MAN, look at all those freakin' Indians!"?
 
George C. was not perfect by a long shot (last in his class at
West Point). But, he was devoted to his wife, was the youngest general in the Civil War, a published writer.
pretty honest (he testified against Grant's brother in a fraud scam). He had honor (19th century style) and courage in spades. As far as the Indians, he admired them even while he was killing them. The same was true for the Confederates. It was a different mindset
from today. From the Native American point of view though, it's hard to argue with the bumper sticker
"Custer had it coming!" :)

JG
 
Well, I don't know much about him, so I shouldn't talk, my comments were based in a Andrew "broken deals" Jackson, trail of tears, wounded knee sentiment. I studied enough of the Civil War to know that I am very glad the North won, but respect R. E. Lee tremendously. He took the job reluctantly to defend his state, and made fools of the Northern generals despite overwhelming odds, until the Northern industrial engine kicked in and these guys Grant and Sherman showed up. ;)
 
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