Archive for May, 2010

Too Much Debt = Too Much Credit

Tuesday, May 25th, 2010

For every debtor, there is a creditor…

I have read a lot of concern about the debt burdens of various nations, including not just government debt but also corporate, private, etc.  Mortgages, car loans, credit cards…  But, for every debtor, there must be a creditor.  Who are all the creditors?  And, with so much unsustainable debt, why is there so much credit?  Why have so many lent so much?

Did we try to sell the “New American Dream” of retirement to too many people?  Is there too much “retirement savings” chasing too few potential borrowers?  Can the economy support so many millions of non-working retiree creditors, as we will soon have?

Or is the distribution of wealth too skewed, with too many owing too much to too few?  Is the debt burden just another tax on the young and productive, transferring wealth to the aged and/or unproductive?

As for the creditors:  Why are they still trying to lend?  What happens when they stop trying?  Which borrowers will be able to pay off their debts, and which will default?

Is the Health Care Sector a sustainable investment?

Wednesday, May 19th, 2010

Unsustainably large sectors of the economy are likely to contract during a major economic upheaval (as we anticipate may happen!).  It’s fairly widely discussed that financials have overgrown their healthy natural bounds (40% of S&P 500 profits is a bit large for a sector that just reallocates capital?).  A similar complaint seems reasonable for the health care sector, where it appears that a large proportion of the spending (late in one’s life) just goes to keep unproductive retirees from dying until the last affordable moment.  Health Care is also an overgrown sector, we find from the ‘net, apparently from the HHS Medicare/Medicaid Summaries from 2003:

“Health spending in the United States has grown rapidly over the past few decades. From $27 billion in 1960, it grew to $888 billion in 1993, increasing at an average rate of more than 11 percent annually. This strong growth boosted health care’s role in the overall economy, with health expenditures rising from 5.1 percent to 13.4 percent of the gross domestic product (GDP) between 1960 and 1993.

Between 1993 and 1999, however, strong growth trends in health care spending subsided. Over this period health spending rose at a 5-percent average annual rate to reach $1.2 trillion in 1999. The share of GDP going to health care stabilized, with the 1999 share measured at 13.2 percent. This stabilization reflected the nexus of several factors: the movement of most workers insured for health care through employer-sponsored plans to lower-cost managed care; low general and medical-specific inflation; excess capacity among some health service providers, which boosted competition and drove down prices; and GDP growth that matched slow health spending growth.

In 2000 and 2001, growth picked up again, increasing 7.4 percent and 8.7 percent, respectively, to $1.4 trillion in 2001. Health spending as a share of GDP increased sharply from 13.3 percent in 2000 to 14.4 percent in 2001, as strong growth in health spending outpaced economy-wide growth. For the 283 million people residing in the United States, the average expenditure for health care in 2001 was $5,035 per person.”

Another useful dataset is at a Kaiser Family Foundation link.  Health care at 15.2% of GDP in 2003 vs. 7.0% of GDP in 1970, 8.8% in 1980, and 11.9% in 1990. And we can be reasonably confident that health care costs have outstripped inflation and GDP growth since 2003 as well.

Now, as a citizen and a taxpayer, I want to see the health care sector become more productive and efficient. As an investor, though, “productive” and “efficient” (from the consumer perspective) tend to suggest “reduced profits” (from the shareholder perspective).  I think this is good, because it will free up resources to do better things… or at least free up resources to actually provide decent care to the millions of retiring boomers.

But it looks to me as though the “health care growth to take care of retiring boomers” trend may have played out.  I don’t think this sector (as a whole) is a sustainable-gains sort of investment.  Although I will be keeping my eyes open for  companies leading the way to “productive” and “efficient” healthcare!

Post-Squid Investing Attitude Shift

Thursday, May 13th, 2010

I’ve done my share of speculative trading, but lately I’m no longer interested in dancing with the squid. At the moment I’m focused on my bond portfolio, and I’m trying to figure out how to be a *lender*, the old fashioned way, not a “bond trader”. I’d like to buy, hold to maturity, and sleep soundly at night without having to worry if a greater fool will turn up tomorrow to relieve me of my “paper” (now there’s a nice squid doublespeak term – a bond is a loan, a debt, an obligation which forces people to toil who otherwise might not – not just “paper”).

Looking at stocks, I was enamored for a while with the “Dividend Achievers” approach, e.g. the VIG or VDAIX fund. But the underlying “Dividend Achievers” index lost about 1/3 of its components in 2008-2009… Looks like dividend achievement is a bit unstable. Also, much of that dividend achievement is done with borrowing/leverage and may not be sustainable. And there are whole market sectors that need to experience destructive re-creation. I’m tempted to look more at low-debt, smaller companies (which respect their shareholders enough to pay at least some kind of dividend), with prospects for growth.

More philosophically: I don’t want to “own” something that “owes”. In my stock portfolio, I want to own things that produce, without being burdened by the high fixed costs of debt service… In my lending portfolio (bonds and bank accounts), I want to be owed, by those who don’t need my money, who I’m confident will pay me back, because they will amortize the debt and won’t need to roll the debt over. I want to be helping others do productive things and growing their way out of debt … not trapping them in it….

Lending needs to become more constructive, not predatory. And that means not giving the debt addicts another round, even when they ask for it.

And the ownership of stocks needs to be about rebuilding the real, physical, tangible, doing-cool-things economy, not speculative paper-shuffling.

Squid-Free Investing (small victories)

Thursday, May 13th, 2010

I’ve made some major progress this week in freeing myself from the squid-infested segments of the financial system.

The IRA is moving from Wells Fargo to Vanguard. My only remaining exposure to the huge TBTF banks is a small checking account at Bank of America and another account at Wells Fargo (used to pay our mortgage there). Total with the squid corps. is now just 2% of liquid assets. I can live with that.

Vanguard won my business by lowering their brokerage commission rates. We’ve had taxable accounts with them for 10 years, and love not being preyed upon.

Now I’m looking to reallocate 30-50% of my portfolio, which had been in a muni bond fund and some selected stocks. The muni bond market is suffering from too many credit-dependent entities in dire danger of a “Greece fire” should the bond market seize up again… which it may very well do, at least for those who are credit-dependent. I decided to focus my LENDING (not “bond buying” – more squid doublespeak there) more tightly on those who can amortize their debt instead of rolling it over…

On the minus side: For the next leg of my lending portfolio, I have set up a brokerage account with Fidelity since they offer the best commission rates on bonds (and at reasonable prices/yields). I’m still trying to find the catch behind their setup… one thing I’ve noticed is that their email “New Issue Offering” alerts are almost exclusively selling either squid bank CDs or squid corporate bonds (large financials). Where are the bond issues from healthy industrial and consumer corporations? Not a good sign!

Today’s crash led by bond market ETFs

Thursday, May 6th, 2010

Both JNK and HYG cratered about an hour ahead of the SP500.

Also, the only thing preventing today from getting a “Hindenburg Omen” warning is that there were not enough new highs.  But a significant number of stocks (200+ in bothy NYSE and NASDAQ) hit new 52-week lows, suggesting a soft underbelly in the markets.

The imploding charts where stops were run and no underlying bids were found bodes ill for trading in the near future.  I worry that the sheer amount of tradeable information released in the panic today is going to lead to a lot of aggressive moves tomorrow.

JNK Led SP500 in crashing.

Here’s what some of the DOW components (including the alleged P&G “fat finger”) did.  Note that they were all in deep doo-doo before the market cracked and fell apart.  There may have been one particular trade that broke through the bids on P&G (which got hit worst of the group in the chart), but this was a systemic issue and not a single idiot at a terminal.

P&G was not alone in crashing