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Financial Skeptic Bulletin, September 2013

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[Sep 30, 2013] Economist's View Links for 09-28-2013


"I'm from Wall Street and I am here to help with your retirement".

Nor did anyone know that part of Raimondo's strategy for saving money involved handing more than $1 billion – 14 percent of the state fund – to hedge funds, including a trio of well-known New York-based funds: Dan Loeb's Third Point Capital was given $66 million, Ken Garschina's Mason Capital got $64 million and $70 million went to Paul Singer's Elliott Management. The funds now stood collectively to be paid tens of millions in fees every single year by the already overburdened taxpayers of her ostensibly flat-broke state. Felicitously, Loeb, Garschina and Singer serve on the board of the Manhattan Institute, a prominent conservative think tank with a history of supporting benefit-slashing reforms. The institute named Raimondo its 2011 "Urban Innovator" of the year.

The state's workers, in other words, were being forced to subsidize their own political disenfranchisement, coughing up at least $200 million to members of a group that had supported anti-labor laws. Later, when Edward Siedle, a former SEC lawyer, asked Raimondo in a column for how much the state was paying in fees to these hedge funds, she first claimed she didn't know. Raimondo later told the Providence Journal she was contractually obliged to defer to hedge funds on the release of "proprietary" information, which immediately prompted a letter in protest from a series of freaked-out interest groups. Under pressure, the state later released some fee information, but the information was originally kept hidden, even from the workers themselves. "When I asked, I was basically hammered," says Marcia Reback, a former sixth-grade schoolteacher and retired Providence Teachers Union president who serves as the lone union rep on Rhode Island's nine-member State Investment Commission. "I couldn't get any information about the actual costs."

This is the third act in an improbable triple-fucking of ordinary people that Wall Street is seeking to pull off as a shocker epilogue to the crisis era. Five years ago this fall, an epidemic of fraud and thievery in the financial-services industry triggered the collapse of our economy. The resultant loss of tax revenue plunged states everywhere into spiraling fiscal crises, and local governments suffered huge losses in their retirement portfolios – remember, these public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its fraud-riddled mortgage-backed securities in the pre-crash years.

Today, the same Wall Street crowd that caused the crash is not merely rolling in money again but aggressively counterattacking on the public-relations front. The battle increasingly centers around public funds like state and municipal pensions. This war isn't just about money. Crucially, in ways invisible to most Americans, it's also about blame. In state after state, politicians are following the Rhode Island playbook, using scare tactics and lavishly funded PR campaigns to cast teachers, firefighters and cops – not bankers – as the budget-devouring boogeymen responsible for the mounting fiscal problems of America's states and cities.

anne said in reply to EMichael...

I did not understand and was confused by this sentence:

"Nor did anyone know that part of Raimondo's strategy for saving money involved handing more than $1 billion – 14 percent of the state fund – to hedge funds, including a trio of well-known New York-based funds: Dan Loeb's Third Point Capital was given $66 million, Ken Garschina's Mason Capital got $64 million and $70 million went to Paul Singer's Elliott Management...."

-- Matt Taibbi

Was this sarcasm?

EMichael said in reply to anne...

No, it is not sarcasm.

The woman decided to move state pension money to those hedge funds.

If you read the entire story, the idea of saving or making money by moving funds to hedge funds is beyond silly, as their costs are incredibly high for such services. Then again, considering the fact that hedge funds are very aggressive (to say the least) in their investment strategies, it is very strange that pension funds would put as much as 14% of their total assets in such hands.

From the link:

"Union leaders all over the country have started to figure out the perils of hiring a bunch of overpriced Wall Street wizards to manage the public's money. Among other things, investing with hedge funds is infinitely more expensive than investing with simple index funds. On Wall Street and in the investment world, the management price is measured in something called basis points, a basis point equaling one hundredth of one percent. So a state like Rhode Island, which is paying a two percent fee to hedge funds, is said to be paying an upfront fee of 200 basis points.

How much does it cost to invest public money in a simple index fund? "We've paid as little as .875 of a basis point," says William Atwood, executive director of the Illinois State Board of Investment. "At most, five basis points."

So at the low end, Atwood is paying 200 times less than the standard two percent hedge-fund fee. As an example, Atwood says, the state of Illinois paid a fee of just $57,000 last year on $550 million of public money they put into an S&P 500 index fund, which, again, is exactly the sort of plain-vanilla investment that Warren Buffett used to publicly kick the ass of Wall Street's cockiest hedge fund.

The fees aren't even the only costs of "alternative investments." Many states have engaged middlemen called "placement agents" to hire hedge funds, and those placement agents – typically people with ties to state investment boards – are themselves paid enormous sums, often in the millions, just to "introduce" hedge funds to politicians holding the checkbook."

anne said in reply to EMichael...

"Nor did anyone know that part of Raimondo's strategy for saving money involved handing more than $1 billion – 14 percent of the state fund – to hedge funds, including a trio of well-known New York-based funds: Dan Loeb's Third Point Capital was given $66 million, Ken Garschina's Mason Capital got $64 million and $70 million went to Paul Singer's Elliott Management...."

-- Matt Taibbi

[ This phrase "strategy for saving money" is either sarcasm or is misleading, even as sarcasm however it can be misleading for a reader. The writer is clever but likes to plays games in writing and is offensive in use of language which weakens the effect of what is written considerably. ]

[Sept 28, 2013] 'Rage of the Privileged'

Economist's View

Greg vP said in reply to beezer...

It increaseth surpassing slowly.

I worried about the trajectory of unchecked capitalism at the fall of the Berlin Wall. Pretty soon I realized that it will likely end in a stagnant feudalism.


The capitalism-feudalism transformation has occurred before, but never before now globally. This time it could be permanent. In that respect, this time is different.

ThomasH said...

In my personal experience, the most extreme opposition to downward redistribution (or things that look like or are "marked" as downward distribution) come from lower middle class white folks.

Whether it's because they mistakenly think that the funds for redistribution are coming from them (and do not recognize redistribution toward them) or because redistribution reduces the difference between them and lower socioeconomic groups, or racism is hard to say.

No One said in reply to ThomasH...

So you are disagreeing with the article which is about the super rich, not lower class whites.

I would argue the reason lower middle class whites and Asians are against increased taxation is that we get to pay as we have nowhere to hide. The people who should be paying more IMHO have lots of options.

This is why certain groups really like the idea of a "flat tax" but when you listen to what they want it is really an "alternate minimum tax heavily indexed towards the top of the tax pyramid" but "flat tax" sounds better.

DrDick said in reply to No One...

There is also the fact that many of them pay higher tax rates than the 1%, since all of their income is wages and salaries, not capital gains.


The claim that the lower middle class generally opposes social-economic reform is repeatedly made by political analysts, but I have found no convincing studies showing this is so and there is reason to think that there is considerable worry about lower middle class voting patterns by the most influential of people who worry they tend to vote for reform minded candidates.

In any event, where are the careful studies showing the lower middle class tend to vote for candidates representing the wealthiest?

Darryl FKA Ron:

"lower middle class white folks."

[You left out a shade of important difference. And no, I do not believe there has been an academic study of my relatives voting habits, but I am well aware that they are racist.]

EMichael said in reply to anne...

The ten lowest per capita income states have voted overwhelmingly Republican since at least Reagan.

The Blorch said in reply to EMichael...

You see takers are pigs and when they see another pig getting something they are inclined to see the other pig as a rival in a struggle over scarce resources.

However, there is a duality to human beings. Sometimes humans empathize with other humans. In fact that's what racists do. They empathize with people in their own race and organize politically to deprive people outside their racist grouping. Intuitively to the racist, this deprivation takes stress off the resource and lessens any threat of depletion.

Greg vP said in reply to EMichael...

> The ten lowest per capita income states have voted overwhelmingly Republican since at least Reagan.

Yes. Behavioural economics experiments have confirmed that people will take considerable personal loss in order to punish others that they do not like.

Those states are full of bigots.

EMichael said in reply to Greg vP...

Wouldn't think Idaho and Utah would be on that list, would you?

Surprised me.

Darryl FKA Ron said in reply to ThomasH...

because redistribution reduces the difference between them and lower socioeconomic groups

[Well that is a big one and less obvious. I cannot say that it is the majority reason or even the major, but it is a factor less well comprehended than stupidity or racism because it is less obviously displayed.

Eveyone needs someone to look down on and you should not try to take that away from people :<) ]

jrossi said...

The ueberrrich are organized and of course they have the money. The middle class and the poor are unorganized. It's a vicious cycle in which money leads to propaganda which leads to confusion on the part of the majority which leads to no coordination among those whose lunch is being eaten.

Another factor is that most of the wealthy simply do not have these other folks in their lives. It's easy to ignore the suffering of people you don't see.

Example from my little world: Radiologists are actually a case in point. They don't see people; they see images of people and are some of the most conservative docs.

ilsm said...

When the pentagon starts terminating contracts because there is no cash, pigs will fly......

Cut the warfare state before the welfare state. US spends 19% of outlays and 5% of GDP for national security, a lot of it a force for good of the MNC's in the world.

In 2009 the US spent more on war than: the combined expenditures of: China, Russia, UK, France, Germany, Japan, Saudi Arabia, India, Italy, Brazil, South Korea, Australia, and Others (summed including Canada, Spain, Israel, Turkey, Kuwait…). Sequestration only cuts about 10%, hardly draconian since the national security "take" doubled from 2001 to 2009.

Why the GOteaparty is all for war: the 1% brand of social insurance is the warfare state. The 1% lend the money and get dividends from the warfare state.

The Blorch said...

I see a conflict among the takers. Essentially, takers compete politically with other takers for scarce resources. Takers want to cut off other, rival takers so that these rivals don't threaten to deplete the resources. Basically, takers are pigs.

Basically, Obama has organized some portion of the takers, effecting electoral victory. But so has the Tea Party. Not all the takers went for Obama. Remember the Tea Bagger that said "Keep your government hands off my Medicare"? This disgruntled taker would have the government cut off some other taker rather than cut off her entitlement.

Dan Kervick said...

In a a word, plutocracy. The rich own the government.

And they own the media too, so they get to define for white, middle class folks who it is that is robbing them (Hint: the approved answer is that it is mostly differently-colored deadbeat people who are stealing food stamps, pretending they can't find jobs and cheating the disability system.)

I was happy to read Krugman's recent reaction to Wren-Lewis's realization that the reactionaries don't play fair and that their official intellectual rationalizations aren't on the up-and-up. But gee whiz. These guys are just realizing that there is war on?

Looking forward to reading the new book by Sam Pizzigati:

Dryly 41 said...

"We are not politicians or public thinkers; we are the rich; we own America; we got it, God knows how, but we intend to keep it if we can...". Frederick Townsend Martin, 1911.

save_the_rustbelt said...

The day AIG paid bonuses we should have sent someone to the AIG headquarters to ask for $180 billion dollars.

A company of Military Police could have handled it. Truman style.

When AIG could not cough up the money we should have forced the corp into Chapter 11 and carved it up like a fat turkey.

Being nice gets us nowhere.

save_the_rustbelt said in reply to save_the_rustbelt...

Send AIG a friendly note.

Roger Gathman said...

This reminds me of the burning money experiment conducted by Professor Andrew Oswald of the University of Warwick and Dr. Daniel Zizzo of Oxford,in which participants who were arbitrarily given different amounts of money could use some of it to burn the money of other participants. As one might expect, many times the poor sacrificed to burn the rich - especially when they found the distribution of money unfair. But they also found that the rich would pay - to burn the poor. Such is the class bias of Oxford researchers that the poor burning the rich was taken to be an act of envy, whereas the rich burning the poor was pre-emptive reciprocity - the rich, knowing that they will be burned, burn the poor. But the rich also burned the other rich. Here's a summary of the 1999 experiment.
"In the twin experiment run in Oxford, Zizzo (1999) crossed advantage and deservingness in a factorial design, and found that deservingness mattered. More specifically, he found significantly more negative
interdependent preferences in sessions where the advantage was induced unfairly than when it was
induced according to a relatively fair procedure. Moreover, in one condition of that experiment,
stealing was possible. Zizzo then found that there was substantially more stealing by advantaged
subjects if they had got the advantage undeservedly. One possible interpretation of this interaction
effect was that undeservedly advantaged subjects expected themselves to be stolen or burnt
significantly more, and behaved using a reciprocity logic, in defending their own gains significantly

anne said in reply to Roger Gathman...

January 22, 2000

Are People Willing to Pay to Reduce Others' Incomes?
By Daniel John Zizzo and Andrew Oswald

In the twin experiment run in Oxford, Zizzo (1999) crossed advantage and deservingness in a factorial design, and found that deservingness mattered. More specifically, he found significantly more negative interdependent preferences in sessions where the advantage was induced unfairly than when it was induced according to a relatively fair procedure. Moreover, in one condition of that experiment, stealing was possible. Zizzo then found that there was substantially more stealing by advantaged subjects if they had got the advantage undeservedly. One possible interpretation of this interaction effect was that undeservedly advantaged subjects expected themselves to be stolen or burnt significantly more, and behaved using a reciprocity logic, in defending their own gains significantly more.

darrell said in reply to Roger Gathman...

Do unto others before others do onto you!

Is this not just an extension of the prisoners' dilemma?

Three people arrested on suspicion of burglary. The cops make each a deal for probation if they testify against the others. If all keep their mouths shut, all are likely to go free. If any one rats, he is sure to go free and the others go to jail. The cops put an urgency on the deal in that the first to rat goes free. Rat on them, before they rat on you, go free. They rat on you before you rat on them, you go to jail.

Logically, all should keep their mouths shut so all are likely (but not sure) to go free.

The jails are full of people who's partners ratted on them.

Roger Gathman said in reply to darrell...

Those are parallel but not synonymous situations. As the money comes from the experimenters, the advantaged and disadvantaged don't depend in any way on each other - except negatively. In the prisoners dilemma, it is essential that in the pre-scenario, the three cooperated to burgle.

Now, perhaps the prisoner's dilemma does apply to capitalism in its industrial phase - but as capitalism becomes dominated, in the developed countries, by speculative industries, the link between the workers and the masters of the universe becomes much weaker.

Lyle said...

If you go back to the times in England before Henry Viii, you find that a lot of what is now done by the government was done by the church (which was and still is in England a part of the church) The rich were expected to contribute to the church. Since we disestablished the church in the US the state has decided to pick up the burden the church as part of the state bore). As an example the poor law in England was actually a rate levied by the local parish on the parishioners, and being the established church you paid or went to hell (at a minimum also likley to debtors prison).

So one way to look at it is that since the state and the church were severed volunatry churches could not provide the services an established church did so the state stepped in. (Historically when it was the established church even after Henry VIII until the enlightenment you paid your church rates or else)

Bill Ellis said...

I like PK's observation... "It's not Ayn Rand, it's Ancien Régime."

But FDR said it much better still...

"These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power."

Economic Royalist --is a term that defiantly needs to be resurrected.

People on the left often lament that we can not match the the cons' ability for casting ideas in a way common Americans can understand. FDR could and did. His language is a treasure for expressing the lefts' views then and NOW.

His Speech before the 1936 Democratic National Convention of June 27, 1936.. "A Rendezvous With Destiny" is one of the greatest made by an American and it is Still valid and hard hitting today.

"Economic Royalist" I know it sounds old timey, but that would wear off fast.

Dryly 41 said in reply to Bill Ellis...

Your talking about when working men and women had a seat at the table and a voice in public policy. That is as opposed to now when they are referred to as "the labor market" not unlike the cattle market or the hog market.

Bill Ellis said...

Defeatism on the left is epidemic. It is on display on this thread.
The elite are just people like everyone else... almost.

Though they rarely escape some effects of being elevated and insulated from normal human trials-- and their population contains a much higher incidence of Sociopaths--their population still contains a full spectrum of human qualities, moralities, and political points of view like any other culture. (They are an international culture distinct from ours ) But we have allies among them. A lot of them.

Having said that...the elite will alway Rule. (excluding periods of transitional Chaos ) No utopian system, left or right will succeed in preventing an elite from ruling .

We have the political power, combined with the power of our elite allies ---to blunt or balance the power of the subculture of elites who would trample us into the ground.

This is ALL we have to work with. This is our ONLY game.

That is why one of the WORST things we can do to each other is to tell each other that our votes do not matter and that the elite is monolithically against us. If you convince people of this --you convince them to surrender the game to the elite with out a fight.

We can't get equality, we can only strive for it.

We can negotiate a New Deal...a better deal.

Matt Young

This chart I derived from the Business Insider favorite indicator. The chart has two lines, one initial claims inverted, and the SP500. Since initial claims is minused, it rises with the stock market in the graph, (fewer layoffs are up). We can see they closely track from 2000 until today.

I make two conclusions. 1) Corporations lay people off when the market crashes and keep them on the payroll during booms. and 2) This mechanism only works during the bubble periods from 1995 until today.

So why did this mechanism start to work during bubble period but not prior? The answer: When DC is debt constrained, the only employment mechanism the Fed has available is to pump the market. If you see income dispersion during the bubble period, then it is likely this mechanism, the Fed pumping the market because federal debt has restrained the other paths to employment.

Matt Young said in reply to Matt Young...

So, the Fed really is hyperinflating the stock market, otherwise a crash makes for a huge increase in unemployment.

And Treasury is in a bind, if growth takes off the interest cost would rise from 15% of budget to 30-35%, and Congress would need rates surpressed. Low rates mean low dividend rate from stocks, as they have comparable margins in equilibrium. Low dividend rate is high price earnings, the supressed rates make stock price inflation. The market index concaves upward, until it has to go backward in time.

That is why I think this is a black hole problem, somewhere near Sacramento California.

Matt Young said in reply to Matt Young...

That putsw me one up one Farmer, he implied stocks drove employment, not so, the government drives unemployment and unemployment and stocks cointegrate. Prior to 2000, the accumulated debt costs did not constrain government. Once government flexibility became constrained so did the real economy, in real terms of stuff. Yet again, margins are comparable across sectors at equilibrium. This is what Delong talked about as the Treasury fear in the 90s.

The inflexibility of government is the problem, but the size goes along -iLog(i), -Log(i) the transaction size. That inflexibility shows up suddenly as a shortage of the most illiquid import.

Why has government become inflexible over time? The plot thickens.

reason said in reply to Matt Young...

Oh come one - almost anyone can answer that question with one name - Grover Norquist.

Lafayette said...


From MT's FT article: {Social insurance is a way of sharing the risks that our economic system imposes upon us.}

And the unspoken corollary to this fact is that Social Justice is the sharing of the plenty (that all-of-us contribute in creating) by means of much more progressive upper-income taxation than exists today.

We cannot divorce ourselves from A Common Destiny, which is the sine-qua-non of our existence, and defines the way we live, how we live and how well we live. We are not individualists who must strive for excellence (in remuneration) in order to show how very intelligent or very lucky we are.

We are all part of a larger economic whole without which, on our own, we would be nothing. As I am always fond of asking, "How many self-made millionaires do you know made their fortunes on a deserted island?"

Without the rest of us as Consumers creating Demand and workers who Supply labor-input, they are nothing. So why all the adulation of their individual success?

It's our success, not theirs, that really matters! So, where is the celebration of Our Success?

Nowhere to be seen, because no nation can celebrate high unemployment and foreclosures abounding. Our world has gone topsy-turvy, when far too many must hurt so the few can celebrate their success.

And thus Social Justice be damned ...

[Sep 27, 2013] Fed Chair Hopefuls Are "Lapdogs for the Establishment": Jim Rogers

At last count, more than 350 economists, 38 female House Democrats and about 17 Senators have signed letters to President Obama urging him to nominate Fed Vice Chair Janet Yellen as the next Chairman of the Fed. She emerged as the frontrunner for the job now that Larry Summers, a former economic advisor to the president and Treasury Secretary under President Clinton, has withdrawn his name from consideration.

While Congressional members and economists push their pick for Fed chair, international investor Jim Rogers tells The Daily Ticker: it doesn't matter who Obama picks because all Fed Chair candidates "are lapdogs for the establishment." He expects any new Fed chair will continue current policy, which he says is "insane."

"They should stop all of this, printing $1 trillion every year," says Rogers, author of "Street Smarts: Adventures on the Road and in the Markets." He explains: "The world will suffer very badly, very badly when this comes to an end. It's an artificial sea of liquidity."

And it's not just the Fed that is contributing to the excess liquidity, according to Rogers. "For the fist time in recorded history…every central bank-Japan, Europe, England and the U.S.-are "debasing their currencies," says Rogers.

The Fed may announce as early as this Wednesday -- when its two-day policy meeting concludes--the beginning of its retreat from the money printing that is upsetting Rogers. Two-thirds of the 47 economists surveyed by The Wall Street Journal expect the Fed will announce Wednesday a reduction in its $85 billion worth of monthly Treasury and mortgage-backed securities purchases. Their most common expectation: a $15 billion cut. At the same time economists expect the Fed will reduce its growth forecast for the year.

Given these two contradictory expectations and the fact that the job market is still underperforming four years into an economic recovery, the Fed could, however, decide once again to delay any tapering now. That's the last thing Jim Rogers would like to see. Watch the video above to see Jim Rogers discuss his analysis not only of the Fed but of the U.S. debt situation-"America is the largest debtor nation in history"-and the U.S. dollar.


Why the surprised look? Wall Street owns politicians. Wall Street has to, its profits, even its entire existence, hangs in the balance. So yeah, DC and Wall Street are all cuddly, and will be until US citizens take their country back. Which isn't going to happen because Wall Street owns the media too, and we worship the lying fear-mongers on TV and radio.


Rogers is right. Instead of Lehman Bros. the next big failures will be governments. Eventually the investing public will stop buying government bonds. Why buy currency that is purposely being devalued. It is interesting the Government bailed out GM but not Detroit. The reason is there was only one GM and there will be many Detroit's


The banks own the FED not the politicians. Obama will appoint who he is told to appoint. Barring a nuclear war, the "establishment" will have their way in American. Wall Street is riding high, the banks got bailed out and get their money free through the FED free. What don't you understand about the GAME.

[Sep 27, 2013] Stocks Heading for October Crash: "Take Some Chips Off the Table," Merk Says

The S&P 500 Index's (GSPC) seven-day winning streak may come to an end on Thursday, but that's the least of concerns for Axel Merk, president and CIO of Merk Investments. He tells The Daily Ticker that a stock market "crash" is highly likely next month and he has fully hedged his equity portfolio as a precaution.

"It's not just because October is crash season," he warns. "The stock market has been going up up up month after month. Volatility in the market is at very low levels. I don't trust this market."

In fact, Merk views volatility as the best indicator for finding bubbles in markets. The CBOE Volatility Index (VIX) has fallen below its historical norm as investors have regained confidence in the markets, a warning sign to Merk. "When everything goes up so smoothly, be careful," he advises.

Related: History Suggests Markets Will Soar When Fed's QE Ends, Says James Altucher

Merk compares the stock market today to gold last April, when investors conditioned to "buy the dip" got burned by the metal's sharp decline.

So could the next downturn be as big as the stock market crash of October 1987, when the Dow Jones Industrial Average (DJI) lost more than 22% in one day?

"Oh, certainly," Merk says. "The stock market is a risky game and that risk has been taken away in recent months."

[Sep 6, 2013] You're not a kid. Stop investing like one by Dan Kadlec

You're not a kid. Stop investing like one. Your age demands that you become more risk-averse.

September 6, 2013 Yahoo!/Money Magazine

How do you know when you've crossed the invisible line and you're not young anymore? Maybe it's the first time you look at Billboard's top 20 list and don't recognize a single name. Or when your kids start staying out later at night than you can keep your eyes open.

Or maybe it hits you when you realize that if the stock market falls 30 percent, as it does from time to time, you'll lose the equivalent of a year's pay, not a week's, and you don't want to have to work forever to make the money back.

In the last case at least, there's a silver lining. It means you've managed to put away a substantial sum, reaping the benefits of 30 or so years of steady saving and compounding returns.

But that's a once-in-a-lifetime deal. You will never get those 30 years back. If you're a boomer, in other words, the math has started to work against you: Whether you're 49 or 56 or 60, odds are you have more to lose than ever and less time than ever to recover if something goes wrong.

So your age demands that you become more risk-averse. And with the market coming off record highs, the housing market taking forever to find a bottom and a host of other troubling financial signals, you've got reason to worry about stock prices tumbling.

Yet with many good years still in front of you, getting out of the market isn't an option either. You need your savings to keep growing to outpace inflation and reach your goals.

How are you supposed to do all of these contradictory things at once?

Get some perspective

Although it may not feel like it, you probably have time to ride out a decline. Consider the bear market that started in 2000, one of the worst ever. Standard & Poor's 500 dropped 49% over nearly three years, and the index took more than seven years to fully recover.

Do you have seven years before you'll start drawing down your savings? Plus, you're not going to withdraw the whole shebang on Day One but rather over 20 to 30 years or more.

Keep this in mind too: Drops of that magnitude occur only about every 30 years. Declines of 20% to 30% are more typical, and on average the S&P 500 gets back to even 3.5 years after a pullback begins, says Sam Stovall, chief investment strategist at S&P.

In every market drop of less than 15% since 1970 (there have been many), the index has fully recovered within a year.

Do a gut check

That doesn't mean you shouldn't take action to minimize your losses in a pullback, especially if you reach for the Tums every time you listen to the financial news.

"If you're worrying because you can't accept a market drop, now - before there's another big one - is a great time to adjust your asset allocation," says Steven Sheldon, president of SMS Capital Management in Houston.

To assess your age-appropriate tolerance for risk, ask a few simple questions. How much longer do I want to work? Has my health declined? Do I have any large expenses fast approaching, like college tuition or elder care for a parent?

These will give you an idea of how much money you'll need fairly soon and how securely it should be tucked away.

Pick an asset mix that suits you - the sooner you need the money, the less you should hold in stocks - then rebalance once a year to maintain that blend.

For help, check out the Asset Allocator tool. A conservative recommended mix for someone who doesn't need current income and will retire in about 10 years: 40% large stocks, 15% small stocks, 15% foreign stocks, 25% bonds and 5% cash.

Minimize the downside

You want to spread your money among the broad asset classes of stocks, bonds and cash, obviously, but you should also diversify within them. Your stocks or stock funds, for instance, should include foreign shares and a mix of small, medium and large companies, especially big companies that pay a dividend and have consistently grown earnings.

Your bonds should be Treasuries and high-grade corporates. An inflation hedge like gold or Treasury Inflation-Protected Securities (TIPS) wouldn't hurt either.

How effective is broad diversification? Consider the Vanguard Wellington fund, which takes such an approach. In the last bear market - one of the worst ever - this fund actually rose 2.4%. It has lagged the S&P 500 since then but by only a small amount.

Then too, in the seven or so years that the large-cap S&P 500 was falling and clawing back to even, foreign stocks rose 30%, small stocks doubled and real estate investment trusts more than doubled.

The amazing truth: Folks who had properly spread their bets back in 2000 didn't feel much of a pinch at all.

Don't sell after prices fall

When today's bull market finally ends - and it will - don't give in to temptation and sell. It's not easy to stand firm. But selling after a drop almost always backfires.

In fact, if your nerves can stand it, buy more shares while prices are down. Although making a big bet on a market bottom is reckless, a regimen of investing the same dollar amount every paycheck, month or quarter lets you actually benefit from dips, corrections and bear markets.

This discipline can't work quick magic on large losses, but it virtually guarantees that you'll bounce back faster. So instead of worrying about the next bear market, get ready for it and sleep well - at least until the kids get home and wake you.

[Sep 06, 2013] Paul Krugman This Age of Bubbles

Economist's View

bakho said in reply to derangedlemur...

Good point. Inequality gives BigF more rope to hang itself. The same is true for 401Ks. Rather than the money controlled by professional investors, the money is control by the rubes who are easily suckered.

There are plenty of good investments that need to be made. Unfortunately, BigF is not in position to reap the return on investment. There are many investments that BigG could make and have no problem reaping the returns. BigG needs to take more money from BigF and make the important domestic investments.

This is another example of market failure.

Dan Kervick said...

Yes, financial deregulation seems to be a huge part of it. But along with that perhaps there has been a kind of moral deregulation? A change in the understanding and mores of millions of people with respect to financial investment?

What I mean is that everybody seems to have the idea these days that they are are entitled to some big financial score and that earning big yields from one's financial investments is the normal state of affairs. So it's not just the banksters. There is a whole bunch of dumb greedy money out there all the time, hunting the next big score. Look at all the online trading, the proliferation of personal finance magazines. I don't remember much of that kind of thing from when I was a kid.

Maybe insecurity is contributing as well (some coming from inequality). Perhaps people in an earlier generation had come to think that if you just did your job and were reasonably prudent, and saved extra money in some safe place, America would deliver a pretty decent life to you and a comfortable retirement.

Now America is a hustle, and so its hustle or be hustled.

Darryl FKA Ron said in reply to Dan Kervick...

"What I mean is that everybody seems to have the idea these days that they are are entitled to some big financial score and that earning big yields from one's financial investments is the normal state of affairs."

[OK, the only way that "everybody" could get even near a majority is if you count Lotto as one of those "financial investments." Otherwise, "everybody" in the financial markets search for yield amounts to less than 10% of everybody.

At any rate, what you are describing is the Pavlovian effect of present incentives which favor speculation over productive investment in financial markets. It is not just the greed, but the dopamine injection from speculating and occasionally winning. So, the difference between the securities and derivatives players and the Lotto players is mostly that the odds are better for many of the former to win as much or more than they lose.]

Lafayette said in reply to Dan Kervick...

Perhaps people in an earlier generation had come to think that if you just did your job and were reasonably prudent, and saved extra money in some safe place, America would deliver a pretty decent life to you and a comfortable retirement.}

One might add also that never has life been so replete with opportunity or alternatives -- both of which can be highly confusing.

Also, we are genuflecting at the altar of Mammon unlike we have, perhaps, ever in the history of the US. Being rich was always something "nice to be", but who (born before 1980) really believed it was indeed a real possibility.

Now, it is indeed possible. The TV is full of people who won enormous lottery fortunes. The magazines are full of "self-made millionaire" stories as well. Some people, with a college education and ten years experience in Silicon Valley, are indeed very, very rich.

Ditto Hollywood.

These super-rich have become "role models" for a great many young-adult Americans.

The country, in terms of the Americans who occupy it, has never been so rich for some and yet so poor for others. The disparity is alarmingly large.

And we can thank, I never tire of saying, Reckless Ronnie Reagan for it. His lowering of the higher-income tax-rates in the 1980s made it possible to get very rich, very quickly.

For some. The others are just gawking in awesome wonder ...

Can this highly disparate Income Inequality go on forever? (Yes, it can.) But should it?

We are nowhere near an answer, and far too many are hooked on "Making A Quick Megabuck". Or two, or three, or four, or a hundred ...

[Aug 19, 2013] The Bubble Watcher-In-Chief Speaks No More Bubbles

Zero Hedge

Via Bloomberg,

... ... ...

While economists are more concerned with inadequate growth, there's reason for vigilance. Thanks to low borrowing costs, U.S. companies have issued $241 billion in junk bonds this year, more than twice the amount during the same period in 2007; investors' use of borrowed money to buy stocks is up about one-third in the past year to a near record, and housing prices are surging in areas such as Las Vegas and Phoenix.

... ... ...

U.S. stocks also are near record highs

... ... ...

Republicans and firms such as Pacific Investment Management Co., manager of the world's largest bond fund, have criticized the Fed for fueling potential bubbles with easy credit and through its asset-buying program known as quantitative easing.

... ... ...

he wants a Fed chairman who "makes sure that we're not seeing artificial bubbles."

... ... ...

Some investors, such as Mohamed El-Erian, Pimco's co-chief executive officer, argue that a bubble may be emerging. "We see artificial pricing in virtually every asset class," he said.

... ... ...

A prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage," Stein said.

... ... ...

Sarah Bloom Raskin, a Fed governor nominated by Obama to be deputy Treasury secretary, highlighted the need for regulatory policy to prevent the emergence of asset bubbles and make the financial system more resilient.

"Asset bubbles are a feature of our financial landscape," she said at a Washington luncheon in July. "What happened before could happen again."

And some additional thoughts from Jones Trading's Mike O'Rourke on the bubble-watcher-in-chief and the rise of Larry Summers as front-runner for Fed Chairman...

On several occasions over the past 6 months, we have noted that the cornerstone of the President's and Federal Reserve's recovery strategy was the exact opposite of what the President promised following his election. The condensed version of the President's promise was one of better jobs and rising incomes but more importantly, he wanted to avoid a recovery fueled by speculation and debt. The President's tagline was "...we have to realize that we cannot go back to the bubble-and-bust economy that led us to this point."

Without question, the Fed has pursued an ultra-easy monetary policy for nearly half a decade. By the end of the year, a 5 year chart of the Fed Funds target rate will simply be a straight line across at 25 basis points, and low rates are far from being the easiest part of the recovery policy. Today we live with a recovery in financial asset prices that far exceeds the rest of the economy. The reason we bring this up today is that Bloomberg published a story titled "Obama Focuses on Risk of New Bubble Undermining Broad Recovery." [see above]

The article notes that the President "spoke four times in five days of the need to avoid what he called- artificial bubbles." In addition, it highlighted many of the signs of heightened risk taking we have mentioned in recent months. Most of these recent comments the President has made have centered around the selection process for the next Fed Chairman. As the Bloomberg story also notes, the President has stated he believes income inequality is a driver of asset bubbles.

In a speech 3 weeks ago, he stated "Even before the financial crisis hit, we were going through a decade where a few at the top were doing better and better, but most families were working harder and harder just to get by. And reversing that trend should be Washington's highest priority. It's my highest priority."

As most people can deduce, we suspect this line of discussion is intended to lay the foundation for a Summers led Federal Reserve. We envision the story of the appointment will go something like this - Chairman Bernanke was the right person for the past 8 years and to lead the nation out of the Great Recession, but now is the time for a new direction in policy to make sure we don't repeat the mistakes of the past.

Needless to say, we already believe many mistakes have been repeated making the unwind far more challenging than the President expects.

Vanguard's Best Bear Market Mutual Funds Financial News - Yahoo! Finance

Vanguard LifeStrategy Income (NASDAQ:VASIX - News)

This is a fund of funds that keeps most of its money in fixed-income portfolios: Vanguard Total Bond Market (NASDAQ:VBMFX - News) and Vanguard Short-Term Investment-Grade (NASDAQ:VFSTX - News).

But its equity stake can vary from 5% to 30% depending on the asset-allocation calls of Tom Loeb and his team at Vanguard Asset Allocation (NASDAQ:VAAPX - News), which gets 25% of assets here (Vanguard Total Stock Market Index (NASDAQ:VTSMX - News) accounts for the rest of stock holdings).

Loeb uses quantitative models to figure out how much of his portfolio to devote to S&P 500 stocks and the Lehman Brothers Long-Term Treasury Index, and his calls have been consistent and accurate over the years. (Currently Loeb's fund has about three fourths of its assets in stocks, so this fund's equity allocation hangs around 20%.)

That give this conservative fund a little upside potential, but it's really designed to preserve capital and generate income. The fund's bear market rank is better than 97% of its conservative-allocation category peers and in the third quarter through Aug. 28 it eked out a small gain that put it ahead of 96% of its peer group.

Investors who are further away from their goals or who are more risk tolerant can check out Vanguard LifeStrategy Conservative Growth (NASDAQ:VSCGX - News) and Vanguard LifeStrategy Moderate Growth (NASDAQ:VSMGX - News), which devote more money to equity funds and have done well in bear markets relative to their peers.

Vanguard Wellesley Income (NASDAQ:VWINX - News)

A colleague of mine recently told me that this portfolio, which keeps most of its money in bonds, was the first fund she ever bought. My first reaction was to say that it seemed awfully conservative for someone whose retirement was still decades off. She retorted that she was looking for a one-stop fund that wouldn't burn an inexperienced investor. Since then she has built a more age-appropriate asset-allocation plan around this fund, but she has never regretted her first purchase because the fund has been so reliable. It has lost money in just three of the last 20 years, has done better than 97% of its peers in bear markets, and has succeeded in delivering a steady stream of income with a portfolio of undervalued, high-yielding stocks and high-quality (mostly corporate) bonds. That the fund has held up well (better than nearly 90% of its conservative-allocation peers for the third quarter through Aug. 28) in the middle of a credit crunch with such a large corporate bond stake is testimony to the security-selection skills of long-time fixed-income manager Earl McEvoy and his team from Wellington Management. Wellington's John Ryan on the equity side is no slouch either. He's leaving the fund next year but has a seasoned understudy lined up in Michael Reckmeyer III. My colleague argues that there are worse newbie-investor mistakes than buying this fund, and I'd have to agree.

Vanguard Short-Term Tax-Exempt (NASDAQ:VWSTX - News)
This fund is cautious and consistent. Longtime manager Pam Wisehaupt-Tynan keeps the portfolio's duration, a measure of interest-rate sensitivity, low and its credit quality high. Low expenses allow the fund's conservative approach to work in its favor over time. Put too much of your portfolio here and you could run the risk of not keeping up with inflation or not seeing enough appreciation to meet your goals, but it can take the edge off a taxable portfolio. It's done better than 96% of its peers in bear markets and outpaced almost 80% of them in the current quarter through Aug. 28.

Vanguard Balanced Index (NASDAQ:VBINX - News)
Once again, simplicity and low costs work in a Vanguard fund's favor. A mix of 60% MSCI U.S. Broad Market Index (essentially Vanguard Total Stock Market Index ) and 40% Lehman Aggregate Bond Index has produced reliable absolute returns. It's done better than 86% of its peers in bear markets and has bested about four fifths of them so far in the third quarter. The fund's correlation with the overall market is higher, but it's still a solid core holding.

Vanguard Wellington (NASDAQ:VWELX - News)
This is another old stalwart managed by the redoubtable Wellington Management. In June, my colleague Chris Davis highlighted this one of Morningstar's favorite "sleep-at-night funds", or offerings that don't keep you awake at night wondering what they are doing. Since then the fund has acquitted itself relatively well. It posted a 1.9% loss for the third quarter through Aug. 28, but that was still better than 82% of its moderate-allocation peers. Its long-term bear market rank also is still better than 86% of its rivals. And like its sibling Wellesley Income it has delivered consistent absolute results, losing money in just three of the last 20 calendar years.

Read more about Vanguard funds in our Vanguard Fund Family Report. To view a risk-free trial issue, click here.

Dan Culloton does not own shares in any of the securities mentioned above.

[Sep 10, 2007] Juicing a lemon 401(k): Five ways to make even lousy 401(k) choices work in your favor - MarketWatch By Murray Coleman,

Sep 10, 2007 | MarketWatch

SAN FRANCISCO (MarketWatch) -- In the past several years, retirement plans have been busy adding mutual funds and expanding investment options. But more isn't always better.

"There are still very few 401(k) plans with a lot of investment options we'd enthusiastically recommend," said Paul Merriman, of Merriman Capital Management, a registered investment adviser in Seattle.

So what if your defined-contribution plan at work features a lineup of mutual funds that seems lackluster

"I've never run across a 401(k) plan so bad that I would discourage someone from using it completely," said Raymond Benton, a longtime Denver-based adviser. "You should at least be able to find one fund to invest in."

And that's important, as Merriman says, because "you want to take advantage of any matching contributions by your employer."

So rather than compound the problem by making lousy choices within a lousy 401(k) plan, you can make the best of your situation. Here are five suggestions:

1. Use a target-date or life-cycle fund only

Within 401(k) plans, many advisers suggest target-date retirement or life-cycle funds. These include stocks and bonds, both international and U.S. Target-date funds fine-tune portfolio allocations along preset timelines. As you get closer to retirement, they'll gradually reduce stock exposure in favor of bonds.

Life-cycle funds are a bit different. An example is Vanguard LifeStrategy Growth Fund (VASGX ) . An investment board sets allocations between stocks and bonds with more aggressive investors in mind. Sister funds are offered aimed at more conservative investors.

"Life-cycle funds stick with more static allocations depending on risk tolerance and investment time horizons," said Valerie Antonioli, another Denver-based adviser. "You've got to actually move out of one fund and into another if you become more conservative or aggressive."

Both types of funds might be best-suited for investors with smaller accounts, she added. "They generally offer fairly basic choices in terms of diversifying a portfolio," Antonioli said.

By automatically leaving allocation and asset class choices up to fund companies, you're also sacrificing an ability to make tweaks as your circumstances change.

Of course, that might not be such a limitation, given that investors tend to make the wrong moves at just the wrong time, says Antonioli.

"For people with more saved up in their 401 (k) accounts, target-date or life-cycle funds alone probably aren't going to be optimal," she said. "But these types of funds are better options than just putting everything in something like a large-cap value fund or a real estate fund. They're a good place to start."

The popularity of such options means that in all likelihood, some form of one-stop shopping is in your plan. At least 50% of all defined-contribution plans now have either target-date retirement or life-cycle funds, according to the Profit Sharing/401(k) Council of America.

2. Use a balanced fund

The odds improve if your plan has a more traditional umbrella fund. Such so-called balanced funds include stellar long-term performers like Dodge & Cox Balanced Fund (DODBX

) and American Funds Income Fund of America (AMECX ) .

"Balanced funds of some sort are in almost all plans today," said David Wray, the profit sharing council's president.

But they usually offer less diversification than most target-date and life-cycle funds, says Patrick Geddes, chief investment officer at Aperio Group in Sausalito, Calif.

3. Stick to the index funds

Aperio, which develops and runs portfolios for advisers around the country, suggests that investors consider creating their own simple portfolios using low-cost index mutual funds.

Stock index funds found in some 401(k) plans include Fidelity Spartan Total Market Index Fund FSTMX) and Vanguard Total International Stock Fund Index (VGTSX ) .

"You can really build a good, long-term oriented and well-diversified portfolio with three basic index funds," Geddes said. "One should cover a broad range of top U.S. stocks, the other provide exposure to foreign stocks and a third to bonds."

The same tack can be applied to actively managed funds. Although managers can shift into different corners of the market when cycles change, they're also typically much more expensive than index funds. Actively managed funds are also less transparent than index funds, says adviser Merriman.

4. Get help with your picks

While your own company or plan provider isn't the best place to turn for advice since they are the ones that saddled you with the poor options in the first place, there are outside sources of aid.

For example, Merriman's Web site,, contains a 401(k) help section that reviews more than 80 different corporate retirement plans, including U.S. government options. Some of the private companies listed include Microsoft Corp. (MSFT

Microsoft Corporation.

There is also a money-market option that figures into the mix of the moderate and conservative portfolios.

The site notes that the plan covers U.S. large-cap and small-cap growth stocks. But it also says that value offerings are light in small-caps, both internationally and domestically. The plan also lacks a dedicated emerging markets fund, point out the analysts. "It's rare we see a perfect plan," said Mark Metcalf, an adviser at the firm. "But most 401(k) plans have at least one good role player you can use as part of a larger diversified portfolio." Focus on an overall allocation plan and build from there, Metcalf adds. "Look for strong support players instead of a lineup of home-run hitters," he said.

5. Work all your accounts into the mix

And don't forget to include Individual Retirement Accounts and possibly a separate taxable account into the mix, says Bryan Lee, a Plano, Texas-based adviser.

"People have a tendency to focus on their 401(k) plans," he said. "But they can also take advantage of other types of accounts like IRAs."

Says Metcalf: "Pick and choose from the best in each asset class across all of your different accounts, from IRAs to 401(k) plans." That way, he adds, even if your 401(k) leaves something to be desired your overall portfolio will still be solid.

Murray Coleman is a reporter for MarketWatch in San Francisco