Monday, January 07, 2019

Portfolio Balance, Investment Strategy, and Sources of Retirement Funds

I'm hopefully about four years away from retirement. I have a good salary and, looking out to 2023, I think I'm in good shape overall. There will be three main sources of funding for the retirement years.

1. Wife's and my 401ks and IRAs
2. A lump sum retirement contribution from my employer
3. Social Security

1 and 2 are about equal right now, 3 is a fixed future monthly payment.

The stock market has been hot since the crash of 2008. The Dow is now around 25,000. How much higher will it go? Is it going to crash? Would it be wise to transfer some funds from stocks into cash or bonds?

My first thought was Yes, of course! But, I did a little digging on this and one piece of advice was that people approaching retirement should have a couple years worth of cash in their accounts so they don't have to sell stocks in a down market. That makes a lot of sense, I have seen literature that shows how a stock market decline immediately following retirement can demolish retirement plans.

But then a realization hit me. My lump sum and social security future payments are, in essence, cash funds. They have little risk and little potential for appreciation. So I have the cash reserves available at retirement. In fact, with this realization, I am quite overbalanced in cash. My 401k portfolio has always been on the "risky" side, i.e. geared for appreciation. Financial advisors through the years have advised me to ratchet down the risk and invest in bond funds, etc. This didn't make sense to me--mainly because with interest rates at 0%, bond funds were likely to decline in value. Yes, you get interest payments, but that gets offset by value depreciation as interest rates increase.

So this realization that I already have over 50% of my retirement funds in cash was freeing. I consciously realized for the first time that my "risky" investment strategy was actually rational and, in fact, quite conservative.

I understand that defined benefit retirement programs (like my lump sum) are increasingly rare in the corporate world today, but people do get inheritances, life insurance, and other possible (usually sad) surprises as well. So this is a way to think about the potential for those as well.

And by the way, when you are highly confident that the market is heading for a fall or is very low (i.e. it is at a bookend, you should consider making some moves in the buy low sell high framework. Don't bet everything on a market turn, but don't ignore it either.

Tuesday, July 31, 2018

Donald Trump is not my vision for America

What trump is doing.

Two things:

He is fanning the flames of division, essentially betting that if his base, approximately half of the electorate has enough fear and motivation, they will vote him in. He is not trying to cross any divide or reach across the aisle. He is attempting to rule by getting a slim plurality to hate and fear the other half. He is succeeding. He is treating the US as a “majority rules” system, which we are to some extent, but that is not the fundamental principle of America. We are grounded by a constitution founded on the rule of law. Our greatest hope is that some portion of those that support trump today realize what he is doing and how it is undermining our nation.

I read an article recently that questioned how people could be loyal to trump, when he shows no loyalty towards them. Interesting perspective. It made me think though back to some of the management training or reading I have done over the years. Specifically the PIC-NIC framework for motivating people. PIC is Positive Immediate and Certain; NIC is Negative Immediate and Certain. Carrot and stick. Once you go outside the immediate and certain side, the motivators are much less motivating. Trump’s style is to emphasize the NIC. He rules largely by fear. It is a powerful style. But in the case of his former attorney Cohen, he no longer has the ability to provide short-term reward or punishment (within the law). Maybe he could give him a pardon at some time in the future, but that then gets outside of the IC framework. It is the future and uncertain. I hope the FBI is protecting Cohen well, otherwise, he is likely to receive a visitor with some NIC motivation.

Thursday, May 17, 2018

Sea Level Rise

Sea level has undeniably been rising for the last 10,000 years, since the end of the last ice age. In the 130 years from 1870 to 2000, global sea level rose by about 200 mm. That’s 8 inches. This works out to about 1.5 mm/yr. Between 1950 (when the anthropogenic signature begins) and 2000, sea level rose about 75 mm (3 inches).


That’s a pretty decent historical record.


A simple linear extrapolation of this trend gets you to 125 mm by 2100. That is an additional 5 inches or so. I’m not saying that is a good estimate of what will happen, but it’s probably a good starting point. In my view, it is probably towards the low end of what we would expect to see in the next 80 years. In a bay with 6 foot swings in tide twice daily, 5 inches is not going to change anything.



According to satellite data since 1993, the rate is about double the historical rate. If that trend were to continue, sea level will be another 10 inches above today’s level in 2100. This is about the same rate as sea level increased from 1930 to 1950 (before the anthropogenic signature), so this is not an extreme event.


Anything beyond that 5 inches has a high burden of proof on it. The IPCC does have scenarios that have numbers like what you have suggested 2 meters, but there are a lot of worst case assumptions built in to that.


So should we assume 10 inches and stop worrying? No! First low-lying areas need to be smarter about development. Any area whose infrastructure is less than the high tide level is relying on pumps for drainage and sewage. The good news is that we have proven it can be done in Europe and New Orleans. The bad news is that it is energy intensive and costly to maintain.
 sea level measurement includes adjustment calculations, e.g. what would the sea level change have been if the ocean basins had not increased in volume. (WTF?) If we assume that the trend prior to 1950 was natural (we really did not emit much CO2 into the atmosphere before then) and that the following increase in the trend since 1950 was 100% due to humans, we get a human influence of only about 0.3 inches per decade, or 1 inch every 30 years.

Wednesday, December 27, 2017

Previous Hypothesis Disproven: Trump is NOT ethical or moral

I recently wrote a post as a thought experiment—Hypothesis Trump is moral and ethical. In a nutshell, that hypothesis is disproven.

Some people read my headline and assumed that I am pro-Trump. I am not. I have never believed that Trump is a good person. His actions in the White House have demonstrated that enriching himself and his family is a high priority of his administration. At the same time, I know I live in an echo chamber that accentuates the negatives about Trump, and seldom presents different possibilities.

In my view, the possibility existed that most of Trump's accomplishments had been relatively harmless signals to his constituency. Many people believe that Trump has caused a lot of damage tot he country (including reputational), despite lack of significant progress, and I get that. I think that until now, most of the damage has been easily reversible. I selected this issue as the litmus test, because there was pretty widespread belief among economists and laypeople, that the bill would be a net negative, it was clear that Trump would benefit from the passage, and it was the first significant action he had a chance to take. Remember, repeal of ACA never got to him.

In my mind, there was a possibility (maybe a hope), albeit slim, that Trump had good intentions with respect to the presidency and the nation. Scott Adams argued that Trump first needed to take leadership of the Republicans by pacing and leading. In other words, prove that he is one of them, then use that identity to steer the direction (see point 5 in this link).

Some of my friends thought I had gone into "engineer mode" when I put the previous post out there. I had. It is my best tool to try to overcome confirmation bias.

I ended that previous post with the following statement, “If he signs the bill, we must reject the hypothesis that he is a moral and ethically aware adult. If he vetoes it, there is still a possibility that he is morally and ethically aware.”

Any belief that Trump has a shred of decency is now disproven by his signing of the bill. The bill was passed purely along party lines, against public opinion polls, and despite the fact that every non-partisan analysis showed that it would increase the deficit, reduce aid to the needy, and transfer tremendous wealth to the top few percent of the nation. Furthermore, I can't think of any larger conflict of interest in history for a person elected or appointed to oversee the public trust.

Sure, many people will see a lower tax bill in 2018, but over the next 10 years, those tax savings decline. Personal tax savings for middle-class workers completely goes away in 2027, when their tax cut expires. On the other hand, Trump and his family will reap tremendous personal benefit from the new tax code. Keep in mind that a 10% savings for someone paying a 10 million dollars in tax is 1 million; A 10% savings for someone paying 10,000 is only 1000.

By the way, if anyone wants to argue that because the bill does not eliminate the estate tax, Trump dd not benefit much, I have a few points to make. First, he will get plenty of benefits from the change in the pass-through tax rate as well as other benefits granted for real estate businesses. Second, Trump would not personally benefit from the estate tax, his family would. Finally, this game is not over. He has three years to take other bites at this apple. Repeal of the estate tax will come back. For anyone saying it is double taxation, I have one thing to say (which will not change your mind). The deceased is not double taxed. He is taxed once when the money is earned (maybe), then when he dies his family is taxed on their receipt of the money.

The bill is also balanced in a way that punishes blue states while enriching red ones. Trump's signature is a completely unethical money grab by him and his fellow 1%ers. Trump is not draining the swamp, he is the swamp.

Monday, December 04, 2017

Hypothesis - DT is ethical and moral

Background: The tax bill recently passed by Congress will have two results: benefits will go down for the majority of Americans and taxes will go up for the majority of Americans. Donald Trump and his family are in a position in which they will overwhelmingly benefit. They do not need most of the benefits, and DT's inheritance taxes alone will decrease by $4 billion. His family will also benefit enormously from the change in the pass-through rate. I am assuming that he pays taxes in the US at all, which based on the one tax return he made public is the case. It is fair to assume that the Trump family will benefit by more than $5 billion personally overt he next 10 years or so.

Hypothesis: Donald Trump, as president of the United States is in a position to approve or veto a bill that will benefit him more than 99.99% of his constituents. Human beings all have a self-serving bias, and ethically and morally aware adults realize this. As a result, if Donald Trump is ethically and morally aware, he will veto the bill and force Congress to pass it with a 2/3s majority, thereby ensuring that the right thing is being done for America.

If he signs the bill, we must reject the hypothesis that he is a moral and ethically aware adult. If he vetoes it, there is still a possibility that he is morally and ethically aware.

Sunday, November 19, 2017

The Business Tax Cut Will Go to Workers - Not!

There is a lot of talk from the republicans about how the tax cut on business will flow down to workers.

Let's be clear about this though. The initial impact will be to increase profits to businesses. The tax shortfall has to be made up from somewhere else, either reduction in spending (mainly from programs for the poor), or from increases on others (aiming at blue state tax deductibility).

Wages are set based on the local labor market. Any belief that a tax cut will result in higher labor rate is irrational. There is an argument that lower taxes will result in more investment, but this takes years, and may not actually happen.

By the way, taxes on US businesses are among the lowest in the world already. Yes, the statutory rates are higher, but there are many deductions and dodges allowed. And ultimately, if we are to have programs that protect us and the poorest and least fortunate members of society, it has to be paid for. Ultimately, that means taxes. We all pay for it in some form or another.

Wednesday, November 15, 2017

​Trump's tax game

I wrote this in October of 2016. I had no idea how prescient it would be.
Trumps greedy long game - Trumps' heirs would receive at least $4 billion benefit at the expense of the US taxpayer
Donald's 1995 tax return was recently released. It's interesting that he had a tax loss of almost $1 billion in that year, but that, along with tax deductions, is business. Really nothing to see there. But it got me thinking.
The tax system is complex for businesses. One of the features is that it allows businesses to recognize depreciation of assets. Most governments do this in some form to encourage investment. If you invest $1,000 on an asset that is allowed to depreciate over 10 years, you can subtract $100 per year from your income each year for the next 10, until the tax value goes to zero. This reflects the value from a tax perspective, not the actual value.
If you then sell the asset for $50, you then owe taxes on $50 (sales value minus depreciated value). There's an important exception though. If you die before selling it, your inheritors can place a fair market value on it, so when they sell it, no taxes will be due.
Now let's make a few assumptions:
  • The value of Trump's estate is $10 Billion. (His claimed net worth).
  • Most of that value is in real estate.
  • The real estate has likely been depreciated down to a fraction of the purchase price.
  • Purchase price was relatively low to start with.
  • Real estate has appreciated tremendously over the last 30 years.

So let's say the tax value of his property is $1 billion, depreciated from the $3 billion purchase price. That means that Trump has had tax free earnings of $2 billion. This is totally fair and ok. It is part of our tax code and encourages investment.

Under our current laws, with an inheritance tax applied, if his kids were to inherit that property, they would assume the fair market value and owe an estate tax of about 40% on most of that value. Immediate sale of the property at the fair market value would incur no additional income tax. They would need to come up with 40% of the market value.

If however, our lawmakers decide that there should be no estate tax, the equation changes. Upon death, the kids would owe no taxes. Only when they sold the property would they be exposed to taxes. This is the key though. Their base value for tax purposes is the value of the property when they inherit it. Not the $1 billion depreciated value, not the $3 billion purchase price. So Trump would get the tax depreciation, his kids would get the property with the full value basis, and the American taxpayers get cheated out of $4 billion in taxes. If they turned around and sold the property at $10 billion, they would owe no taxes--not one cent.

Now, for anyone wondering about Trump's motivation let's do a cost-benefit analysis.

Cost: pick a number. I'm sure most of his funding is from PACs and donations, but he has probably chipped in some of his own money. He has not been able to put full attention into his businesses, but he has large capable staff members to do that work. He holds events at his properties when he can, so that undoubtedly offsets some of his costs. According to Fortune magazine, he spent $566 million, but his businesses received 11 million.

Benefit: first, his name and brand is now bigger than ever. Whether he wins or not. If he gets to the presidency and can influence the tax code to eliminate the estate tax, his heirs stand to gain $4 billion.

There are other parts of the tax code hat would benefit him too. From the NYT, "...he would make the code more favorable for his interests by proposing to cut the rate for limited liability corporations and partnerships — the entities in which he holds his real estate assets — to just 15 percent from ordinary income rates."

Trump has no downside and a ton of upside by achieving the presidency of the US. Removal of the estate tax does not and will not help the bottom 99.5% of the people of the US. On the contrary, it will simply shift more tax burden to the middle class.

Edit: There is also all the revenue he is pulling in by trips to his properties, foreign dignitaries staying at his properties, etc. You can bet that no representatives who want to do business with the US are getting discounts on their rooms. The mind boggles at the potential for essentially laundered payments to the first family. I am not saying it's happening, but there is unique potential for it to happen in this presidency.