All about investment

By Richard Stooker

Managing your spending power to meet your needs is more important that "keeping up" with inflation.

Personal finance and investment writers constantly advise and admonish us to make sure that the value of our investments keep rising to match (if not exceed) inflation.

There's a sound reason for this. Inflation has been gradually eroding the value of our currency since the end of World War 2. From 1973 to 1982, the erosion was not even gradual. Everybody who went shopping during that period remembers how the prices of groceries and other goods seemed to go up every week. If the price didn't go up, what you got went down. It was the era of the incredible shrinking candy bars.

That is the period when annual Cost Of Living Allowances (COLAs) were instituted for recipients of Social Security and Veterans Administration benefits, government workers, and many private sector workers covered under union contracts. Of course, this institutionalized annual increases in expenses in the economy, which helps to maintain inflation in the economy.

So if I agree that inflation is a steady, insidious destroyer of the spending value of money, how does my advice differ from other financial writers?

I recognize that spending power should be managed across time.

And what I mean by that, is that it's usually better to defer spending when you don't need it, for times that you do . . . even if the spending power is reduced.

An example will make this clearer.

But first, remember that "saving money" is just another way of saying "postponing consumption." When you have $100 today you can choose to spend it -- or you can choose to save it so that you can use it to buy something later in your life, whether next week or when you're 105 years old.

In the 1970s, in reaction to the high inflation of that time, it became common wisdom to spend the money you had, as soon as you got it -- because it'd buy less in the future.

The most extreme case of this syndrome happened in Germany during the 1920s. Employers had to pay their employees during the middle of the day, then allow them to take their wheelbarrows full of their day's pay home during their lunch hour to buy bread for dinner. That's hyperinflation!

America in the 1970s was not that bad, but it was bad enough to really discourage savings, and to encourage financial writers to advise: "Your investments must keep up with inflation."

The problem is that planning for your retirement requires postponing consumption. You MUST save some of the money you earn during your younger years instead of spend it, so you will have it to spend during your elder years, when you're not bringing home a paycheck.

It's nice if you can find investments that maintain the spending power of that money -- but is it really a disaster if you don't?

Let's say you're now about 35 or 45 or 55 -- and working hard. All your bills are paid. You have a few thousand dollars extra, so you think about how much you'd like to take a Hawaiian cruise.

What if, instead of taking that cruise, you wisely decide to postpone consumption. You place that few thousand dollars into an investment that does NOT keep up with inflation.

Now it's many years later. You're too old and sick to work. You depend on Social Security and a pension, but they aren't enough for the lifestyle of your dreams.

One day you remember that few thousand dollars you put aside in lieu of taking a cruise around Hawaiian.

Inflation has reduced its spending money so that now it takes a few thousand dollars to buy a good meal. So you withdraw that money and buy yourself that meal . . .

THE FIRST MEAL YOU'VE EATEN IN FIVE DAYS!

So when is that few thousand dollars more important to you? When you have an affluent lifestyle and just want to take a Hawaiian cruise? Or when it buys a meal that keeps you from starving?

That's what I mean by managing spending power to meet your needs.

Of course, it's even better to invest that few thousand dollars in a way that will allow you to take as many Hawaiian cruises as you want, once you retire.

But too many people get discouraged by the "keep up with inflation" mantra, especially when they look at what their money earns in savings accounts and certificates of deposit. They fall into the trap of buying risky stocks for "growth," or they allow low yields on bonds and Treasuries to give in to the human impulse to buy now instead of save something for the future.

It's better to have a retirement of savings with reduced spending power -- instead of no savings and therefore no spending power.

By Rita Lambros-Segur

A charitable trust is designed to create a path whereby your assets may be converted into a life long stream of income and not a source of governmental revenue though taxes. Your taxes are lowered, what you pay now is lessened and what your heirs or your children pay will be lessened too when the time comes to pay estate taxes.

In recent years a charitable trust setup has become far more popular because they provide a valuable advantage to us in terms of what we pay currently and those taxes we will pay in future years. They permit us to provide for those causes or people who are important to us. These trusts are irrevocable and will not generate capital gains and estate taxes immediately.

The establishment of a charitable trust will halt the capital gains paid on immediate sales of your assets, lower your estate taxes sometimes as much as 50% of what your children or other heirs might have to pay after your death. Further advantages are that it will reduce what you currently pay for income taxes and this, in turn, will increase your income throughout the remainder of your life. It will additionally make a very positive future gift for your charity and increases those assets that your heirs receive after your death.

How does a charitable trust work?

Here is what happens. You transfer all cash, bonds, securities, and property that you own into the charitable trust. This is an irrevocable transfer. In other words, you can't do it today and change your mind tomorrow. The value of your estate is substantially lower than it was prior to now and as such so are the taxes as well as the estate taxes to those whom you designate as heirs. Based on what you want to do with the money when you are gone, you pick a kind of charitable trust to build. At the end of the trust, all assets are given to a charity that you will select. Some trusts permit you to choose more than one charity while others do not permit that.

Charitable trusts take some very skillful drafting to make them completely legitimate but they are most assuredly worth your time to look into. Some legal specifications apply, of course, to what end you can and cannot do. There are excise taxes which are given for acts of what is termed self dealing, meaning any type of transaction between the charitable trust and an individual who is termed a disqualified person such as a family member or the family of a contributor.

Others might be a loan between the charitable trust and the person who established that same trust. Such transactions, however, might cause a penalty in the form of an excise tax to both the recipient and the charitable trust.

By Darryl Schoon

As the US real estate market collapses, questions about subprime mortgages and those unable to pay are in the news. These are not inconsequential questions. Over $1.5 trillion of subprime—don’t ask, don’t tell—mortgages were issued and are now beginning to default.

As the defaults mount, the consequences will spread to countries and institutions far beyond the shores of the US and the desks of the originating lenders—for the majority of America’s subprime loans are owned by investors, banks, insurance companies, and pension funds in Europe and in Asia.

Why Would Anybody Do Such A Thing?

It retrospect, it wasn’t a good idea, to wit, to loan $1.5 trillion without asking applicants how much money they had or how much money they made. It seems improbable that bankers (remember those thin-lipped disapproving loan officers) would loan money under those conditions. But they did and this is why:

One year after the collapse of the US stock market in 2000, the NASDAQ dropped 80% and the US government feared a deflationary depression—a no money no demand depression like the 1930s—could happen.

So in 2001 the US government took quick and decisive action—in retrospect stupid and short-sighted—and flooded the US with money to prevent a depression from developing; but, in the process they created a real estate bubble and, as the bubble deflates, those who can’t pay their bills, aren’t.

Banks aren’t in business to loan money to those who can’t repay them and they knew that customers who “took advantage” of subprime mortgages were at high risk of default. So the banks sold their subprime loans.

Now, who would buy a “subprime”, e.g. substandard, loan? Who would buy a subprime steak, a subprime car, a subprime house, a subprime dating service? This is where the genius of Wall Street came into play.

To sell these soon-to-explode debt bombs, Wall Street cleverly bundled them with higher rated AAA debt and gave them a new name, CDOs, collateralized debt obligations, and sold trillions of dollars of 30% subprime but AAA rated CDOs to unsuspecting buyers.

Even if you don’t know what a CDO is, CDO sounds a lot better than subprime or substandard. That was the genius of Wall Street. It was a way for Wall Street to sell shaky debt before the fenders fell off. And it worked, at least for Wall Street.

These debt bombs are now embedded far across the global financial landscape, the majority bought by European and Asian investors and institutions seeking downstream revenues; but instead of downstream revenues, they will be absorbing unexpected and significant losses.

Fully 50% of the 2006 earning of HSBC, The Hong Kong Shanghai Banking Corporation, the world’s third largest bank, were wiped out by the subprime losses of its US subsidiary. AXA, a French insurance company and CommerzBank, a German Financial Services company were also major buyers of Wall Street’s subprime AAA rated debt and will suffer the consequences for so doing.

But it was not only European and Asian banks, insurance companies, and hedge funds and pension funds that will suffer, wealthy Japanese investors may suffer the greatest losses of all. It is believed that the highest-yielding but riskiest tranches (risk level) of the subprime CDOs were bought by wealthy individual Japanese investors.

The head of structured finance research at Nomura Securities, Mark Adelson, said these investors did not fully understand the risk they were taking, depending instead upon the ratings given by credit agencies such as Moody’s or the advice of those managing the security.

"A partial understanding of it is often no better than no understanding," Adelson said. "The devil is in the details; if you understand it vaguely, you can get your lights punched out."

Globalization has been a wealth builder, perhaps unequally so, but nonetheless wealth has been created. Soon, however, another darker side of globalization is about to manifest. Risk as well as money move quickly across global highways recently built and made possible by a one world financial marketplace, and that risk is now about to become apparent.

Global currency flows move swiftly and quickly and turn on a dime. The Asian liquidity crisis of 1997 was a recent manifestation of this phenomena; the next crisis will be the US. The subprime losses suffered by the buying of America’s bad debts may be the final straw in the diversion of foreign moneys away from America.

By selling foreign investors its bad debt, America has shot itself in the foot. Because America is now the world’s #1 debtor, because America needs over $1 trillion in foreign investment capital each year to pay its bills—and because it was foreign investors that were primarily burned by Wall Street’s subprime CDOs, the flow of foreign capital to the US may soon be going elsewhere.

In April 2007, a Merrill Lynch survey showed 38% of global money managers believed the best prospects for corporate profits were now in the eurozone, 42% believed the worst prospects were in the US.

Today, the word “de-couple” is increasingly heard where global markets are discussed. No longer referring to freight trains or dogs in delicto flagrante, de-coupling refers to the distancing, i.e. de-coupling, of global economies from the US, to wit, the increasingly perceived expeditious act or art of separating still-healthy economies from the slowing US economic engine.

While it is true the US has been the driver of the global economy, it is no longer. The sobriquet “has been” is literally correct in this instance. The US share of global economic growth so far in 2007 is 10%, a figure analogous to Barry Bonds batting .134.

Global capital flows, like tsunamis, are not something to be taken lightly. If the flow of foreign money to the US slows, the US dollar will collapse and the US will be forced to raise interest rates to continue attracting foreign capital. And, if US interest rates are raised, the US economy will collapse. Greenspan might call this a conundrum. Other people might call it and Greenspan something else.

Whose feet?
Whose fire?

America apparently cares little what happens to the primarily foreign investors and institutions who bought its subprime loans. On April 24th, Bloomberg reported the head of the US Federal Deposit Insurance Corporation, Sheila Blair, testified before a congressional committee, ``We should hold the servicers' and the investors' feet to the fire on this…We did not have good market discipline with investors buying all these mortgages.''

It is highly doubtful Ms. Blair will exhibit the same attitude should the flow of foreign moneys upon which Mr. and Ms. Average America depend go elsewhere. Thailand’s economy went into apoplectic shock and its currency and stock market fell by 50% in 1997 when international currency flows suddenly changed direction. America may soon be in for the same.

And if America falters and falls, the consequences of such will be felt around the world. Today, afternoon tea and scotch flow freely in The City as does dim sum in Hong Kong and Shanghai and sushi in Tokyo around their respective bourses. Soon, however, the risks that have lain dormant beneath globalization’s foundation are about to erupt and a reordering of the world’s financial geography is about to ensue.

It’s spring 2007 and the sun is shining in the US, backyard BBQs are being cleaned in anticipation of summer’s use. A severe financial crisis, however, is in the offing; a crisis as unexpected as the Golden State Warriors’ last minute streak to the NBA playoffs.

An unexpected financial crisis, however, will be much more consequential than Don Nelson’s magical resurrection of the Warriors’ NBA hopes. There, at least, the Warriors had a chance. But because most don’t know a financial crisis is coming, they will have little chance of survival. This summer, America’s subprime CDOs are coming home to roost, and not just to the US.