Investing For The Far Off Future

Time will tell if this will work as advertized. Since the S&P is capitalization weighted, there is a bias toward putting more money into stocks that are overpriced and less into stocks that are underpriced.

 

Log in or Sign up to hide this ad.

I don't expect the situation with Greece to play out in the US. There will no doubt be selective defaults some time in the future, but I've always believed that the Fed and US Treasury are much smarter than internet gurus give them credit for. It won't be painless but I don't see the dire outcome popular in some circles.

 

Howdy,

Nasty news about Greece, BTW. That will not be pretty. Another reason to be debt free. Taking advantage of 'freebees' when they are not free is foolish. It's like when the gov't sends you too much money as a tax refund by mistake . . . do you really think they're not going to discover it some day and ask for the money back?

As for Greece being the first and the US being the last domino to fall . . . WTF knows. Alas and alack, I fear that the very nature of fiat currencies to encourage politicians to spend more than they tax is its fatal error. Yeah, I know what they're trying to do and some sort of financial meltdown is not the most likely future. However, the problem is that the probability of a finanical meltdown is greater than zero and is large enough that a prudent person takes some precautions against it occurring.

IOW, a meltdown is not very likely but the consequences are sufficiently dire, that one must insure against it.

peace,

rono

 

A common problem with all indexed funds. Btw I never said S&P index, preferring "index stock funds" to include a basket of different indices based upon the level of risk the person is quasi comfortable with.

 

This isn't especially bad news for Greece. In fact it means the shackles come off their ankles. The bad news is for the TBTF banks holding the debt. This includes some of those here in the USA that are mixed up in the mess taking risky bets again. What remains is how much their host governments or institutions will again take over the responsibility which means socializing the debt. Greece is a member of Nato and a member of the EU (which is separate from the Eurozone). If they let their currency fail and go back to the Dracma (?) then I don't see how they could be shut out of the world financial system.

It should be noted that Greece has a considerable amount of gold for a country its size. This is the central banker currency, so their new central bank should have no issues. The country will have de-leveraged, items will cost a lot less.

The real issue of course is this is the tip of the iceburg.

 

I see it as very bad news for them if its upheld. The world is moving to digital currency. However, if your country has a law allowing dismissal of debt at the drop of a hat, then that access willl either be severely inflated in terms of costs, or denied altogether. I do not see it in any way positive for the common man on the street in Athens.

Yes, short term all banks who have exposure to Greek debt like this will take a hit, but long term it will be the poeple of Greece who have to pay through the nose or be prohibit things because of this law.

Just my view.

 

^Every country has local laws regarding bankruptcy, banking standards, foreclosures, etc. We have them here in the USA. In fact, in this country we have two soverign systems. The federal government and the state governments. For example, the federal government lays claim over bankruptcy proceedings, but it's the state governments that lay claim over foreclosures. Both deal directly with debt at banks.

This works when banks are local as they were in the USA until the 1980s. (Banks could not cross state borders) When they let the TBTF banks form, they crossed these jurisdictions then even started to cross the international boundaries. These banks are now involved in all sorts of very complicated and risky deals which end up being manifested in local laws and rules. Imagine a state government being told here in the USA it can't pass a law because it might cause a bank in France to fail. There is no fix to this. (well not without some big time wars and a world government)

 

Howdy,

I think that fatima is spot on here [yes, virginia, there IS a santa claus]. The Greeks have themselves. They're going to have to go their own way, but geez, isn't that what we all want? To go our own way. Maybe it works and maybe it doesn't. The Greeks may be deciding to go this route and that's good. If they do well - and add enough value for self-fuciency - or they don't have have to go begging or otherwise sell themselves. I want to visit the Acropolis. Do I really care what currencies good? feh. We've all been around enough to know that there is always some 'currency' that works.

Tip of the iceberg? Sure. I think it was suggested that the Fed would find some way via QE3 or whatever, to cover the greek bond holders for more than what is supposed. That's the nut. Early on they were *****ing about having to take any reduction. Recently, it had been a 50% devaluation. Yesterday it was a 60% haircut. Now, the people may be saying, BS, give them nothing and we'll survive without them.

 

(cont)

Sorry, these old fingers.

As for debt and this excusing this debt or that debt. I'm sorry, but this is an extremely vestered wound with me. Not from a personal perspective, mind you, but just a humanitarian point of view.

There are some debts that can be reduced or forgiven, if deemed so by a bankruptcy judge. However, there are others that are not able to be altered. Mortgages and student loans come to mind. Back during the negotiations to deal with the mortgage meltdown, the ability to 'cram down' mortgages almost made it through but was bought out by the banks. Student loans. Come on. Do you want to invest in the future or not? And mind you I'm not saying to forgive all debts. You borrow it, you pay it back. However, there are circumstances where it all becomes relative and when judges need to decide. [note that sgt o says the occupiers should fight to erase all student debt and settle for crammed down via bankruptcy].

Oh, and medical debts. Do you know that most bankruptcies are due to med debts AND most of these folks HAD insurance.

So, please, let's not talk about this debt and that debt.

thanks,

peace,

rono

 

With medical debt I am with you Rono. I think the medical prices in this country are a travesty, and cause far too many bankruptcies.

However, do you want students to have student loans at all? That is the question. Time was all doctors graduated and then lined up at bankruptcy court en masse, This was the major reason the law had to be changed, to allow future students to be ABLE to borrow anything, as these mass bankruptcies were bankrupting the program. Same with housing. Take away the collateral, and you are talking about house loans in the neighborhood of 15-20% interest rates. The only reason home loans are affordable ARE the collateral.

Just my opinion.

Chris

 

Chris,

My whole belief in gold is based on the belief that we won't get ourselves out of this mess. We will take this all the way over the cliff. I hope I'm wrong.

I said before that we have three choices; default (won't happen), cut spending, or print. A meaningful cut to spending means totally revamping SS and Medicare. The politicians would be voted out of office immediately if they did that. They'll tinker with caps and other minor things to look like they're doing something, but they won't cut near-term pay-outs. So we will print.

Eventually this will cause interest rates to go up. For each 1% increase in interest rates, which will fully vest in 3-4 years due to roll over of maturing bonds, and given that our debt is expected to be $20 trillion in 2015, the increase in interest payments would be $200 billion per year. Given that the average interest rate over time has been in the 6% neighborhood, if interest rates increased by 4%, back to the 6% area, we would have "additional" interest cost of $800 billion per year. Add to our current interest cost and you're looking at over 40% of tax revenues going toward interest payments. We simply can't pay that.

However, there is a caveat. Many of the interest payments are to government programs, so they could delay those payments and kick the can further down the road. For how long, I don't know. But I do know that one day we'll run out of road.

If that's not bad enough we have the demographic ticking time bomb of the core of baby-boomers retiring in about ten years. That represents a huge increase in SS and Medicare payments. And those are immediate payments that can't be kicked down the road.

So I will hold gold.

 

I have to agree with fatima on this one. Greece isn't dismissing debt "at the drop of a hat." It's doing so to address a crisis where the alternative is debt servitude for the people of that country. The banks and the debt are supposed to be the servant of the people and not the other way around. Corporations have a history of dismissing and restructuring debt, and so do nations. Citizens have the same right. It is the obligation of the banks to not lend more than borrowers can repay. If we were talking about commercial loans, the banks would write them off in a heartbeat. Just because the people owe does not mean they sould be treated differently.

 

But the only point is that corporate loans have this risk built into the pricing. Every loan has a risk assessment built into the price. This was my point with Rono. If you change the rules and allow masses of bankruptcies to forgive student loans, then this risk would have to be priced into the loans, and its very likely no interest rate would be high enough for any bank to loan students money. Same for mortgages. If you take away the collateral portion of this loan, (ie you can keep your house even if you don't pay), then the low mortgage interest is a thing of the past. Banks would have to charge 15% or more for a mortgage if a borrower at any moment could just declare bankruptcy and gain free title to his home. Laws like this are NOT without serious long term repurcussions, and socialist politicians act like they are.

If you want Much higher mortgage rates, and a MUCH larger of the American population never being able to obtain a mortgage at any interest rate, then pass a law just like it appears Greece has. As has been said, there is no free lunch.

 

Sorry duplicate post.

 

I don't think there is any evidence that your assumptions are true. More likely is that banks will tighten their underwriting standards and stop lending to people who can't pay. Interest rates aren't going to 15% on mortgages or student loans because there wouldn't be any. And if the banks abandoned those huge markets, a lot of them would have to shrink substantially or close, and none will be willing to do that. As long as there is a free market, there will be loans available at prices that good credit risks can afford. If student loan standards are increased, you may even see colleges cut tuition costs rather than see an enormous shrinkage in the student population. The market will work if you allow it to operate.

 

"I don't think there is any evidence that your assumptions are true. More likely is that banks will tighten their underwriting standards and stop lending to people who can't pay. Interest rates aren't going to 15% on mortgages or student loans because there wouldn't be any."

Well, I already said banks would stop making loans, like you said. As for evidence, its a fact that CA pays higher mortgage rates because of a state law that allows the borrow to not be responsible for a deficit between what a repossessed house sells for and what is owed. This premium is just because of this small exposure to principal amount. Increase the exposure to 100% of the principal, and the premium would go through the roof. I spent a few years working for the nation's largest private mortgage company Cloud, I am not just making up stories or wild thoughts.

You are right it would be seen more that the loan would not be made because the interest that would be required would make the home unaffordable to most borrowers. The real affect of such a law would be 50% or more down payments required, and millions of Americans simply being told no, they no longer can aspire to the american dream.

I am not trying to be sensationalistic, in fact if anything I feel I am being subdued in the effects. Also remember we cannot just say, "well just make US banks eat it and loan anyway", when 90%+ of all of our mortgages are sold to international investors. They will not put up with such laws, and basically most of the money americans buy their houses with will be gone.

 

^On your earlier comment about "changing the rules", the rules were changed in 2008 when the congress and President agreed to TARP, expanded the base money supply by ~$1T (which gives the Fed system $10T) and rewarded the bad behavior of the very banks that caused this mess. They should have left it alone and let the existing bankruptcy laws deal with it. We would be 4 years ahead now if that had happened. Instead, they mostly signaled that it was OK to the big banks, "we've got your back" and the banks continued on making every bigger risks knowing they would not be allowed to fail. The problem has been made worse by the fact that the Federal Justice Dept. has made absolutely no effort at criminal investigations and enforcement of the entire mess. Historians will look back at this and decide it was one of the darker decisions ever made in the United States.

The results of this are again manifesting themselves as an unsustainable ponzi of money creation that is on the verge of collapse where Greece will be the first in line to go. The central banking system has created far far more currency that can ever be paid back and in a futile effort to fix it, they are creating ever more complicated schemes to keep it propped up. We haven't seen the last of this and as I said earlier, Greece is just the first example. There are states in the USA that are worse off than Greece.

If mortgage rates need to go to 16% to save the economy, due to market forces, then they should be allowed to go there then. The population will just have to deal with it. When the Fed, government, and banking system move in to intervene to prevent the free market from operating, then they create the mess that we see today. I simply don't believe that central planning works and the results do speak for themselves. This isn't telling Americans they can't aspire to the American dream of homeownership. Its telling them that the taxpayers won't backstop and unfairly subsidize loans which they otherwise can't afford. Huge difference.

 

I don't think your former employer would have chosen to voluntarily go out of business if the law was changed. [FYI, I also worked for a mortgage lender in the past]

Regarding foreign investors, they have no say and no choice if people stand up to them. Look at Iceland. A lot of threats by the banks, but now they are back lending again. So the real world doesn't seem to fit your assumptions.

People in CA don't seem to be too inconvenienced by the current mortgage rates.

http://www.homes.com/Mortgage-Rates/CA/

l know you are sincere, but the free market really works if you let it. Dire straight line predictions of disaster rarely occur.

Edit: Please keep in mind that what you are proposing is debt servitude, closing schools and hospitals, cuts in public services, no pensions, reductions in food supplies, etc... all so that the banks don't have to write off loans that should never have been made in the first place.

 

It such a complicated issue I am sure the three of us are mainly agreeing. My only point was such laws DO have long term, negative consequences on subsequent borrowers, even if its "great" for people right now. People can be self serving and pass such laws, but again its simply benefiting them at the expense of their children. Regarding foreign lenders and making them eat it, that again may be great for current owners, but they can simply NOT lend the money in the future, or simply demand hugely higher rates. You cannot force Taiwan to underwrite US home ownership at a loss. Take away foreign purchasers of housing debt, and our current financing system of housing in the US collapses overnight. Can we do so? Yes, but not at the low rates we now enjoy.

I am for letting the market work Cloud. I am for lenders demanding collateral for loans if they see fit. It is you saying government should be able to change the market by allowing the government to interfere with contract formation and prohibit collateralization of loans. I seriously do not see how I am the "anti-free market" guy here.

Fatima, I agree with many of your points. I am very much a free market guy, and all of the bailouts I disagree with, and think healthy markets REQUIRE firms to fail when they have made bad decisions. Without fear of failure, firms do not have the required discipline. That is the real negative outcome to all bailouts. The only caveat is when government intervention in the first place has forced a company into insolvency, that is a trickier issue. In my "perfect world", government stays out of business in every way, and is simply the referee preventing illegal acts.

Edit: Btw how am I advocating anything to do with public services? How does this affect the grossly inflated and wasteful budgets that most local governments in this country have? Their spending has gone up well above inflation for DECADES. To me that issue has nothing to do with either student or mortgage loans. It has to do with extravagent benefits promised, and poor budgeting decisions.

 

I think you are making a lot of assumptions that probably won't occur. Eliminating debt doesn't hurt future generations. It helps them have a fresh start, attend the schools that won't be closed, obtain medical care that won't be eliminated. It isn't self serving to fight for debt forgiveness. It is a high form of charitable sacrifice to bear any burden now to eliminate the massive debt load for the next generation. Banks will continue to loan. They have no alternative. Foreigners will lend here. All of the alternatives are worse. The difference between us seems to be that I see the institutions in society, including lenders, as existing to serve the community. You seem to see people existing to serve the institutions regardless of the harm it does. There is no free market, or freedom, if debt cannot be eliminated without taking the pound of flesh. What you describe is high tech 21st century serfdom.