HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Why we are Having Problems and How to Resolve Them
Part IV of IV: How it will End and how you can Protect Yourself
In the first three articles of this series, I provided historical background and what I believe are the factors that have led to the current, and ongoing, financial crisis. In this last article of the series, I suggest how this scenario might shake out and how you can protect yourself. I again emphasize that you don’t need to agree with what I say. Rather, I want you to try to play things out in your mind—if entitlements are cut, what happens, if they aren’t, what happens, if interest rates go up, what happens, if government workers are cut, what happens, if a big European or US bank goes under, what happens, if Italy goes under, what happens—and draw your own conclusions.
Everyone has heard the phrase “If present trends continue”. Trends can continue longer than anyone would have imagined, but no trend continues forever, or else it would go to infinity.
That brings us to the point of this series. If present trends continue, we (and many other developed economies) will go broke. What we are doing is not working, yet we keep doing it. We cannot afford what we spend, and borrow 40 cents of every dollar to do it. Our credit rating has been downgraded. We are trying to get out of debt by going further into debt
Last year The National Committee on Fiscal Responsibility and Reform put out the Simpson Bowles Report. Everyone knows what needs to be done, but neither our leaders nor our people have the will to do it. As I have previously shown, booms and bubbles are followed by busts and pain. It’s like a hangover; you have to pay for the good time. Everything we are doing is to put off the pain, and the longer we put the final conclusion off, the more painful it will be (see below).
The financial crisis of late 2008/early 2009 never really ended. The final shakeout, the events that will end the present trend, has not yet occurred. It is inevitable; it will happen. Will a leader of the greatest stature, a Washington or a Lincoln or a Churchill, arise in time to avert disaster, or will a Napoleon pick up the pieces? In the US, I am confident it will be the former, but elsewhere, I’m not so sure.
So, what can you do to protect yourself when it’s “payback time”?
1) Your taxes will go up. It is absolutely inevitable. If the present administration wins the next election, they will go up a lot. Even if the no-tax-increase people win, it is simple math: there is just no way the budget deficits can be brought under control by spending cuts alone. Your taxes will increase.
In general, you want to accelerate expense and delay taxes. But if taxes are destined to increase, you want to accelerate income. The biggest issues in this regard are investments with unrealized gains and your retirement account. The Traditional IRA and 401K plans are pre-tax. To be truthful, I saw this coming. Since the beginning of my financial writing, I have emphasized that such plans are hostage to future tax laws. Any increase in the marginal tax rate results in a drop in the value of your retirement account.
If you think your taxes will increase, then increase withdrawals from your retirement account. It may seem painful, but it’s pay less now or more (maybe a lot more) later. And if you have more than a million dollars in your retirement account, as I know many of you do, that makes you a millionaire. If you’ve followed the news, you know it is open season on millionaires, with no daily or possession limit. As I have also noted for some time, don’t be surprised if the final definition of rich is whatever you happen to have.
2) Buy gold. Gold is the only honest money in the world, beyond the manipulation of the politicians. It has no counter-party risk, it is no one else’s liability; it stands alone.
This is how I would like you to think of paper money. You go into the forest, chop down a tree, and grind it into pulp. Half of the paper is made into napkins that say Happy Birthday, the other half you adorn with Ben Franklin’s kisser and say it’s worth a hundred bucks. Gold has been wealth for 5,000 years, is accepted the world over as wealth, and can only be created by the sweat of a man’s brow.
I again recommend that the core holding of your entire investment portfolio be physical gold (and some silver if you wish) in your personal possession. GLD, SLV, the gold-mining stocks, gold futures, etc. are convenient vehicles for your investment accounts, but they are only paper. If there is one piece of investment advice you ever take from me, it is this: own physical gold in your personal possession.
3) Get out of debt. Debt is the final common denominator of all financial crises. If you are in debt when things go bad, you are vulnerable. A core strategy should be to pay off your home. I also suggest, if you are in such a position, to be more aggressive about giving money to relatives to help them with their debt; mortgage, student loans, etc. Remember, you can’t take it with you. All you need is enough to spend in one lifetime.
4) Have more money in “things” and less in financial assets. Money in financial assets can be taxed. If you are concerned about the health of the banking system, then don’t put your money in the bank. To quote bank analyst Dick Bove, “People are selling the bank stocks, then putting the money in the same bank. It doesn’t make any sense”. Examples of where to put your money include art, quality collectables, portable wealth such as gold jewelry and watches, or even an upgrade to your vehicles (I plan to do this within the next 6 months, and will write about it at the time).
It is impractical and almost impossible not to have money in stocks and bonds. In addition to the precious metals, overweight the stocks of commodity/hard-asset companies, such as the miners, energy, agriculture, and companies that pay a good dividend (the utilities have been out-performing the market). I cannot think of a more risky investment that the 30-year bond of almost any country, including the USA.
Ten years ago, even 5 years ago, a discussion like this would have been considered so far “out there” that it would have caused the author to lose credibility. But I believe we have not yet seen the end of this financial mess, and when it comes, it will be painful. To quote Sir Mervyn King, Governor of the Bank of England (the UK’s equivalent of Ben Benanke), in a speech just last week (10/7), “This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever”.
The cover on The Economist of October 1-7 says “Until politicians actually do something about the world economy—be afraid”.
I suggest you read Wealth, War & Wisdom (Barton Biggs, Wiley, 2008). It shows that financial crises occur all the time, provides insight on more ways you can protect your wealth, and reminds you that the only time to prepare for such events is yesterday.
RMD
All of the above was written before I read “Europe’s Comedy Hurtles Toward Tragedy” in today’s Barron’s.
“The euro zone’s sovereign-debt fiasco…is unfunny and getting more so by the day…Lending more to the country (Greece) most likely will only worsen matters…Greece has fallen into a vicious spiral, as austerity leads to more economic contraction, leading to more austerity. The longer an orderly (debt) restructuring is put off, the worse it gets”.
RMD comment: Read that again, because it summarizes the main point of this 4-article series. The longer the final reckoning is put off, the worse it will be.
Have we seen, at least in the near term, the stock market bottom? Maybe, but caution is still warranted. 1) Seasonality: Sept/Oct. is usually the market low.2) Sentiment was ultra-bearish, a positive. 3) Of the stocks I suggested you watch, Freeport-McMoran (FCX, the stock market proxy for copper), has been strong (see chart, next page). 4) Unfortunately, the financial stocks, such as Bank of America (BAC), Goldman Sachs (GS), and XLE (an ETF of the largest financial stocks), (charts not shown), have remained weak. It will be hard for the market to have a meaningful rally without the financials.
For a while during the summer, gold moved inverse to the market: when people were scared and dumped stocks, they bought gold (but not silver or the miners). More recently, the precious metals have moved with the market, basically reflecting if we will have real deflation or if there will be more quantitative easing (money printing). 5) It is bullish that silver and the miners, esp. the gold miners, have started to out-perform bullion.
My over-all impression: Cautiously bullish, but everything could be trumped by the European debt crisis. To quote Felix Zulauf from last year’s Barron’s Art of Successful Investing Conference (I will again attend on October 24th), “The greatest risk to your investments is political”.
A subscriber noted that a very successful businessman he knew told him gold was in a bubble, similar to the NASDAQ of the late 90s.
RMD comment: I use this to illustrate a point. There is a difference between being a successful businessman and a successful investor. They require different skill sets. I would make an analogy between a major league shortstop and a major league catcher. They are both very successful at what they do, and certainly share some skills (speed, strength, agility, hand-eye coordination, desire to succeed, etc.) but would probably not be as successful if they switched positions.
Warren Buffett is a good example. BRK buys whole businesses, but Buffett leaves the management in place. He lets the people with business acumen manage the business, while he manages the capital allocation.
I also believe the run in gold is not yet over.
I have not yet finished, but recommend, Bismarck: A Life (Steinberg, Oxford U. Press). The book describes how the most dominant political figure of 19th century Europe assembled a powerful modern state from a myriad of near-feudal kingdoms.
How about Chris Carpenter’s 1-0, 3-hit shutout of the Phillies on Friday night, to put the Cardinals into the National League Championship Series? He looked like Bob (Super) Gibson (as we called him at Granite City Steel) in the 1964, ’67 and ’68 World Series.
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