The Stingy News Weekly (10/02/2011)
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""Igor! My portfolio needs a boost. Fetch me some high risk stocks", declared Frankenstein. You see, the Doc was in a pickle. Castle costs were way up and heating the drafty halls was just the beginning. His once friendly contractors rebelled and started to demand danger pay to fix the lightning machines. To make matters worse, the price of brains was getting, well, ridiculous. But his financial advisor had a solution. The Doctor could fund his exciting experiments by dialling up the risk level on his portfolio and thereby restore his treasury. While you probably don't have a moat to tend, you're likely familiar with the link between risk and returns. In fact, to many it is the most important rule in investing: The more risk you take, the higher your potential returns. But what if it isn't true? What if, in fact, after a certain point, taking on more risk actually lowers your returns?"
Buffett on taxes
"Warren Buffett, the billionaire who runs Berkshire Hathaway Inc., talks about the need for the ultra-rich, who 'make money with money' to pay more in taxes."
California and bust
"The smart money says the U.S. economy will splinter, with some states thriving, some states not, and all eyes are on California as the nightmare scenario. After a hair-raising visit with former governor Arnold Schwarzenegger, who explains why the Golden State has cratered, Michael Lewis goes where the buck literally stops—the local level, where the likes of San Jose mayor Chuck Reed and Vallejo and fire chief Paige Meyer are trying to avert even worse catastrophes and rethink what it means to be a society."
A national debt Of $14 trillion? Try $211 trillion
"'We've got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by $40,000 — you're talking about more than $3 trillion a year just to give to a portion of the population,' he says. 'That's an enormous bill that's overhanging our heads, and Congress isn't focused on it. ... To eliminate the fiscal gap, Kotlikoff says, the U.S. would have to have tax increases and spending reductions far beyond what's being negotiated right now in Washington. 'What you have to do is either immediately and permanently raise taxes by about two-thirds, or immediately and permanently cut every dollar of spending by 40 percent forever."
What's the use of saving money?
"Ritchie Hok, an actuary living in Ottawa, is convinced savers will ultimately wind up paying the price for others’ imprudence. At the peak of the U.S. housing bubble, Hok lived in Minneapolis and saw the excesses first-hand. While there he resisted those who urged him to get into the market a wise move given prices are down 40 per cent there. Now that he’s in Ottawa, though, he’s hearing all the same arguments for why he should take advantage of low rates and buy a house before prices rise even further. He’s convinced Canada’s housing market is a bubble that will eventually burst, and when it does, policy-makers will rush to people’s rescue. “My fear is that most people in Canada are now debtors and not savers, and so governments will enact policies to help them because they make up most of the population,” he says. “Savers may get screwed on the way down, too.” If Hok is right, the frugal few could be in for even more pain ahead. Why is it again that it pays to save?"
Most S&P 500 stocks yield more than bonds
"With the 10-year US Treasury yield now down to a record low level of 1.77% and equities getting crushed, the number of stocks yielding more than Treasuries continues to expand. As of this morning, 52.6% of stocks in the S&P 500 have a higher yield than the 10-year US Treasury. While equity dividends are by no means guaranteed, it seems that with each week that passes more companies are raising dividends than cutting them. This week, Microsoft (MSFT) became the latest mega-cap company to raise its dividend with a 25% hike in its annual payout bringing the yield above 3%."
Bringing down the house
"In simple terms, the young and middle-aged save for old age by buying assets, often with borrowed money the old sell them to pay for retirement. As the working-age population rises—as it did, for instance, after the baby boom—asset prices rocket because of increased demand. As baby-boomers reach retirement, the reverse may happen."
Chicago economics on trial
"By now, the Krugmanites are having aneurysms. Our stunted recovery, they insist, is due to government's failure to borrow and spend enough to soak up idle capacity as households and businesses 'deleverage.' In a Keynesian world, when government gooses demand with a burst of deficit spending, the stick figures are supposed to get busy. Businesses are supposed to hire more and invest more. Consumers are supposed to consume more. But what if the stick figures don't respond as the model prescribes? What if businesses react to what they see as a temporary and artificial burst in demand by working their existing workers and equipment harder—or by raising prices? What if businesses and consumers respond to a public-sector borrowing binge by becoming fearful about the financial stability of government itself? What if they run out and join the tea party—the tea party being a real-world manifestation of consumers and employers not behaving in the presence of stimulus the way the Keynesian model says they should?"
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