HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Putting Things in Perspective
Sometimes it can be difficult or even impossible to determine the value of something when viewed in isolation. However, if it can be compared to something better known or more easily valued, you can make a more intelligent decision.
In a recent newsletter I noted that in 1914 Henry Ford doubled his worker’s salary to $5 per day. To show how the standard of living has fallen in the US, I noted it would now take a salary of $150K per year to make enough money to buy the $25 in gold that a line worker with a 4th-7th grade education could earn 100 years ago working for Ford.
In the Old Testament, about 550 BCE, one ounce of gold bought 300 loaves of bread. During the Great Depression, one ounce of gold could buy 300 loaves of bread. In 2011, one ounce of gold can buy 500 loaves of bread (suggesting gold is over-priced, or more likely, wheat is under-priced). In Roman times, one ounce of gold could buy a fine toga. Today one ounce of gold can buy a fine suit.
What encourages me to write on this topic are two things.
I just received a capitalization notice on a CD. The balance is $3,232. Next month I will receive 55 cents in interest.
Put this into perspective. Say you are an experienced, competent nurse with 20 years’ experience making $65K per year. After everything, including mortgage and funding your retirement account to the maximum (always take advantage of all employer matches), you save about 5% of your salary=$3,232. That is the total savings generated from a year of hard work: nights, weekends, holidays, taking call, irritable doctors and demanding patients and their families giving you heat, the hospital administration requiring more paperwork and take care of more patients; everything!!
One of the reasons to save is that your investments are supposed to work for you. In this example; the money (capital) that it took you a year to save, working every second for an entire year, will generate $6.60 in interest. That’s about enough to buy a Big Mac with super-sized fries and 48 oz. Coke at McDonald’s.
RMD comment: Of course, don’t forget to subtract federal, state, and local taxes. Now you can’t super-size your order. If you add in inflation (to remind you, the official government inflation statistics are lowballed), you have a loss on the money you scrimped and worked an entire year to save. Our system: the artificially-low interest rates, the tax structure, the insidious, pernicious inflation, are punishing savers and stealing your wealth.
Another point: Considering you are making nothing on such investments, I suggest you just keep some of this money in cash. You are losing nothing, and have instant access to your money.
We were in Boston the weekend before last for the reunion of the Dept. of Medicine in association with the 200th anniversary of the Massachusetts General Hospital. The event exceeded my expectations. 1) At high school reunions, it is just your class. Here there were people from the years before you, the years after, and many of our teachers. It really was like “going back”. 2) Many of the leaders in medicine trained at the Mass. General: Nobel Laureates, University Presidents, Deans, government officials, etc.
Bureaucracy and regulation were a prominent topic at one of the discussions. One discussant used the term “lawyertocracy” to describe the apparently never-ending quest to have rules, regulations and laws to cover ever possibility that might ever occur.
I went to the microphone and made a point I had made in a previous letter: The first four of the Ten Commandments describe how to worship God. Commandments 5-10 concern how we should interact with other people. If you drop out all but one of the “thou shalt not”, the 63 words of these 6 Commandments proved adequate to govern Western Society for 3 millennia. Now the tax code is more than a million words, an order of magnitude longer than the Judeo-Christian Bible, NCAA regulations on how to recruit athletes are more than 960 pages, the new Dodd-Frank bill is 2,200 pages, with regulations that even Federal Reserve Chairman Bernanke admits he doesn’t understand.
Trying to put things into perspective, to compare them to something else, will force you to ask questions you would not have otherwise, and allow you to draw your own conclusions, which may very possibly be different than prevailing dogma. It is one way to be a contrarian.
RMD
This last weekend I ran into a subscriber at a University of Chicago Alumni event. His private equity firm manages a total of $650M. One reason he takes this letter is because it provides a different perspective than other, more traditional, financial publications. He feels the letters are well researched and the advice has been solid.
He and a few others have commented that some of my discussions sound dire. This is worth clarification: Everyone is happy when things go well. Since the beginning of my writing, one basic aim of my advice is to help protect you if things go badly. Making 8% instead of 10% is one thing; getting wiped out is different.
I believe the chance of something truly dire, like significant social unrest in the US, is very, very, low—but it is not zero. In fact, I would say it is about 1-2%. I arrived at that number by looking at history. In the 228 years since the end of the Revolutionary War in 1783, we had a Civil War which lasted 4 years. 4/228=0.0175. This is a greater than 98% chance of a peaceable outcome. I would prefer you consider my views as reflecting historically-based pragmatism, and remember that most of my bearish concerns have, unfortunately, been proven correct.
Wall Street Journal (10/17/11). “While falling inventories (of homes) are typically a sign of health…that isn’t the case right now. Instead, real estate agents say people are pulling their homes off the market rather than try to sell at today’s discount prices”.
RMD comment: Once a deflationary spiral starts, it’s hard to stop. Buyers hold off in anticipation of lower prices. Any strength in prices is met with renewed selling. Distressed sellers, who must liquidate their homes at any price, worsen the downward pressure on prices, forcing even more homes to be dumped on the market. Mr. Bernanke is a student of the Great Depression; a deflationary spiral is his greatest fear.
I would only buy a home if the situation were very compelling. If you want to sell a home, it must be priced very competitively. The price you “want” or “need” or paid has no meaning to anyone else in the universe; your home will just sit and sit and sit.
The headline on the cover of the 10/15-21/11 issue of The Economist is “Nowhere to Hide: Investing during a Time of Crisis”.
RMD comment: I have been emphasizing this for the last three years: in a bear market, there is no place to hide. Stocks have been dead money for more than a decade, the return on fixed income is negative zilch (see above); housing has been crushed. Only gold has preserved wealth. Unfortunately, it might not be over yet. If Europe comes up with something over the weekend it is almost certain to be temporary, not definitive. It appears The Economist has come to some of the same conclusions I have.
In 1786, Congress (under the Articles of Confederation) defined the dollar in terms of grains of silver and gold at a ratio of 15.253 to 1. In the Coin Act of 1792, the dollar was defined to contain 371.25 grains of silver, and the silver to gold ratio was fixed at 15 to 1. The dollar was $20.66 to an ounce of gold.
One legacy of the Spanish (Mexican) coins that circulated in the US until the mid-19th century is the dollar sign. The $ derives from the peso, the two parallel lines being the vertical portions of “P”, and the “S” indicating pleural. This also explains why the $ is used in countries, such as Argentina, where the currency is the peso (from Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, Eichengreen, Oxford U. Press).
In 16th and early 17th century Europe, the silver to gold ratio was usually around 10-12 to 1. At that time, in the Far East it was 6-8 to 1. Currently it takes about 52 oz. of silver to buy one oz. of gold.
RMD comment: I’ve seen several discussions on why this ratio has been increasing over time, but none explain it to my satisfaction. Whatever the reason, for more than 5 centuries, gold has been increasing in value relative to silver.
I recommend the Eichengreen book to you. His conclusion is simple. The fate of the dollar; of our military hegemony, of our dominant world position; rely upon the strength of our economy. If our leaders and our people have the will to tackle entitlement reform and our budget deficits, we will do well.
One point he makes that I have made before; if people lose faith in the dollar, it will not be a slow process, but a panic that occurs with little warning. The only time to prepare is yesterday.
Quotes of the week (from opposite ends of the intellectual spectrum):
Hedge fund manager Michael Steinhardt interviewed on 10/20 on CNBC: “The money-management industry in the US and Europe is the most over-paid industry in the world”.
RMD comment: I agree. I have discussed this before. In general, people are rewarded financially for how the market values their contribution. For more than 150 years, the average physician in the US has made 5 times the average worker’s salary. Bill Gates, Andrew Carnegie, Henry Ford and John D. Rockefeller amassed fortunes because they built companies which created millions of jobs, billions of dollars of wealth, and made this country great. At present, shuffling papers, which doesn’t create any wealth, is generating a compensation that is out of proportion to the shufflers’ contribution to society.
At O’Hare Airport: “Didn’t I see you at the game the other day? How many of those $9 beers did you have, Dude”?
“Hell, I don’t remember. Money ain’t important when you’re havin’ fun”.
RMD comment: With your family and your health; money’s not important. With everything else; money is always important.
I was behind the beer drinker in line to board the plane. He was wearing one of those triangular yellow cheese hats seen at Packer games. As he got on the plane, the lady taking the boarding passes said to me, “I hope that fits in the overhead compartment”. (Several ultra-Packer fans subscribe to this letter. No offense intended).
I will again be attending the Barron’s Art of Successful Investing Conference in Manhattan on October 24th. I will report the highlights to you in the next few issues.
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