Subject: debt ceiling deal--Gary's thoughts re our portfolios

Subject: debt ceiling deal--Gary's thoughts re our portfolios (10/16/2013)

Good morning.  I write this to let you know how I am approaching our portfolios regarding the political conflicts in Washington, DC.

Big Picture:

·         Stay the course, invest more on market declines.

·         I predict we will not have a market crash like in 2008.

·         We might have a market correction like in Summer/Fall of 2011.

·         There is always SOMETHING causing anxiety for investors.

·         The best strategies for the long-term have been most effective when we just stay invested and continue to save and invest more.

·         I know, that is easier said than done given the political picture.

Political Update:

·         Word this morning is that the House will vote on the compromise worked out by the Senate.

·         There was talk of the House working its own deal (which I believe would have failed in the Senate), but one of my best contacts said yesterday that was a no-go and the Reid-McConnell negotiation is what will really be voted on soon, and reports today are indicating the same.

·         I expect Speaker Boehner will get enough of the Republicans to vote for it, joining most Democrats to approve it in the House.

·         Barring a filibuster or some procedural maneouver by some protesting Senator, the deal will then pass the Senate also, and the president will sign it.

Results of "deal":

·         debt ceiling lifted for a while (we pay all of our bills--albeit with ever-more borrowed money)

·         government re-opened soon

This does not "fix" "everything", of course.  It just means our credit cards will have not been cancelled and we will have found our checkbook and a pen, and government services and workers get back to speed.  It also means we probably are going to see more negotiations/battles like this in the near future.

What this means:

·         no "default"; our bills will be paid pretty much on-time

·         no "real" default; our bond interest obligations will be paid, and our bond principle will be paid-back upon maturity

o   I think this "default on our debt" issue was overblown and misunderstood, as the government cashflow is more than enough to cover our actual debt obligations

o   Secy of Treasury Lew has discretion to prioritize payments

o   So, Secretary Lew would have to deliberately choose to default on our bond interest/principle if no deal has passed in time, and that is almost impossible to imagine for reasons both economic and political

·         money market funds are likely to NOT "break the buck" (our cash, while never FDIC-guaranteed, is likely to remain quite safe)

·         no progress on long-term fiscal strategy (entitlement reform, tax code, other budgetary items)

·         no guarantee this won't happen again (debt ceiling debacle of August 2011 was followed by Fiscal Cliff anxiety a year ago…)

For our portfolios:

·         Flex and Strategic portfolios should stay invested if Senate deal passes House

·         If no deal passes, we have the option of going to cash/money market funds IF we think we're facing another 2008-size market slide

o   I strongly caution against going to cash, though.  Market reactions tend to be swift and strong during such times, and I don't want people missing out on a rally that comes after a sell-off

·         Uninvested cash will be invested in large chunks or entirely if the market drops more than ~5% in a week or so AFTER there is a political deal

·         Uninvested cash will be averaged-in over the next three months if the market volatility is normal after there is a political deal or series of deals

·         You can override my recommendations, of course--it is your money even after I provide my advice

Please contact me with any questions.  Thank you!

--Gary

Bill Gross' Lets It All Hang Out--Radical Change of Approach Needed for USA

If you can get over the initial intellectual/emotional hurdle presented by this article--that college is, for many if not most, as it is currently working, not exactly part of the solution to our economic woes--you'll find a lot to chew on here.

Bill Gross is arguably the greatest money manager in modern history (he's "the bond king" and "the Warren Buffett of bonds"--and his PIMCO Total Return fund is the largest mutual fund on the planet and owns a tremendous market-beating track-record), and he has a global perspective that is almost uniquely astute and often pretty unconventional.  And he calls it like he sees it, whatever "it" is...

In short, he sees no way for private-sector market-based idealism--OR government-as-usual--to dig us out of this hole any time soon.  Time to think radically, perhaps.

We have created less than two-million jobs while the workforce has expanded by 15 million people in the past decade.  And while he doesn't say it here, there's a strong argument to be made that the 20mm+ jobs created in the previous decade were largely thanks to a largely false (over-leveraged, service-based instead of asset/manufacturing-based) economy...  think of the causes of the economic disaster that started in late-2007 and persists today.

Balancing the budget and re-jiggering the cost-curve of entitlements and healthcare programs are of course necessary, Gross says or implies, but will not be enough to close this employment gap, and neither will the education provided by Today's version of undergraduate college education.

Call to action, or crazy billionaire screaming?  Either way, I'm listening.

How To Prepare For the Storm We Hope Won't Hit Us

With a new round of "quantitative easing" (printing new money so the Federal Reserve Bank can buy US Treasury Bonds that investors and China don't want to buy at such low interest rates) threatening to cause potentially crushing inflation, albeit while it is intended to fight-off looming near-term DEflation, Americans and others around the world are afraid.

Rightly so, as this could get ugly. It's a big storm brewing, but we don't know if it will hit us or pass us by. For those who want to prepare for it hitting us, here are some action items I recommend:

1) Make sure you have life and disability insurance enough to pay the bills for the family if you die or can't earn your living any more.

2) Pay-down or pay-off any credit cards and personal loans, including 2nd mortgages and HELOCs.

3) If you accomplish #2 above, then build-up cash reserves, preferably a year's worth of necessary family living expenses (food, shelter, transportation, health insurance and medicine, but no need to budget, in this case, for vacations and clothes and spa treatments).

4) If you have investments, diversify globally; 50% of your stocks/stock-mutual-funds should be investing in foreign developed and emerging markets, and same with your bonds/bond-mutual-funds.

5) To make #4 really work, do not use index funds or even traditional style-pure mutual funds; find global and flexible mutual funds with consistent management and outstanding long-term track records--the best among them were down only 25% or less during the 2008 40% market crash, and many were actually UP during the early-2009 market crash, and they have kept-up pretty well during the post-March 2009 market rally; these funds also often invest in currencies and commodities better than most of us ever could.

6) Be prepared to do radical things, like the adult children moving home, or the elderly grandparents moving-in.

7) Stay optimistic. There are some good signs. Ford Motor Company has made an astonishing turn-around, so other manufacturers can also.

8) Take prudent advantage of current low interest rates--re-finance your house and investment properties, buy that new car if you need to, consolidate debt you can't pay-off.

9) Make sure you have that cushion described in #2 and #3 above.

Helpful?

Newsflash: It Was Not Just "Sub-Prime"

It never was, but it was easy for pundits, and more convenient for politicians, to say it was.

Saying it's just the "sub-prime" borrowers that are defaulting allows Left-wingers to manufacture a victim in this mess, and it enables Right-wingers to blame it on the less-able or more lazy among us.

But get this: one in seven mortgages over $1mm is "seriously delinquent", while only one in 12 mortgages below $1mm fit that bill.

You read that right. The more affluent borrowers are almost twice as likely to be up a creek on their mortgages than everyone else.

From a "what the heck were the banks thinking" standpoint, Sub-Prime is a much larger share of this mess, and so that issue is not to be ignored. But what does it say about the direction and mindset of our country when the more successful among us are more likely than the masses to do the wrong thing with their financial lives?