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Jan 28, 201312:27 PMFinancial Perspectives

with Michael Dubis, CFP

Potential themes for 2013

Potential themes for 2013

(page 1 of 2)

I prefer to work with what we know and course-correct when life happens, but there seems some logic behind the following potential themes for 2013.

(Disclaimer: I’m not good at making predictions; the reality is that no one successfully predicts anything on a consistent basis, let alone is able to then profit from it. Most folks who are perceived as smart are often just lucky or have said the same thing for five, 10, or 20 years and were finally able to be right. As they say, “being early is the same as being wrong.” Feel free to agree or disagree and opine intelligently why.)

In no particular order:

1. As long as interest rates stay low, investors will continue to look for yield and higher returns elsewhere (right or wrong), which means an ongoing bid-up of the prices of riskier asset classes.

2. The debt ceiling will be raised.

3. The U.S. will not become Greece. Greece has a low tax participation rate and can’t print its own currency. The U.S. has a high tax participation rate and can print its own money. The U.S. alone makes up about 40% of the world’s equity markets; Greece makes up less than 2%. The U.S. will not default on its debt while it can currently honor its bills. (I did not say the U.S. won’t inflate, though, nor did I say the U.S. won’t have difficulty honoring its bills in real terms, because those scenarios are entirely likely in the long term.)

4. The U.S. will continue to lose pole position to other countries. This is not meant to be anti-U.S. sentiment. I’m a strong optimist about this country’s future. Rather, it’s simply a mathematical reality considering how our GDP is used on taxing, spending, and investing. Because of its high debt levels and need for massive deleveraging and spending cuts, the U.S. will have less capital to invest in productive enterprises and consequently will experience lower growth compared to other countries that don’t have our levels of debt deleveraging. Other countries without as much debt will have the opportunity to grow their countries relative to the U.S. and other indebted nations.

5. I don’t think this will happen, but if the mortgage deduction is eliminated, mortgage rates may either stay the same or even fall. Investors of mortgages offer a certain interest rate for a certain supply-and-demand balance of mortgages. If the mortgage deduction is eliminated, all other market conditions being equal, there will be less demand for mortgage refinancing and home purchases. If they wish to continue to put money in this type of debt, investors will offer lower yields to match lower demand. One of the largest buyers of mortgages is the Fed.

6. The student loan bubble may pop or the government may enact a bailout this year. The debt is about $1 trillion and delinquency rates are on the rise. The popping of this bubble will be ugly, but it might promote the restructuring of tuition increases. The reasoning is simple: Student loans require little to no underwriting, so debt is abundant and anyone can take a loan. Consequently, the cost of education rises unhindered. Just like housing valuations burst when the mortgage market tanked, so could education costs when student loan supply slows down. This could be a good thing in the long term, especially for the majority of families that can no longer afford the average cost of a four-year college education without taking out a loan.

7. Companies will continue to make things that improve or meet our quality of life and return money to investors commensurate with the risk they are taking. When those returns come will be difficult to determine, while the risk of partial or total loss will remain if companies don’t meet expectations. This has never changed in the history of modern capital markets.

Jan 29, 2013 06:59 pm
 Posted by  Chuck Hinners

Predictions about markets and economics are increasingly based on mathematical models.
We cannot know all of the factors that drive markets, much less graph them and determine statistical correlation to build a reliable predictive model.
That doesn’t stop financial advisors from using tools like Monte Carlo simulation to model family finance and produce a number that will sustain an inflation adjusted income for life—the central problem of financial planning
The math of differential equations that explains the physical world is incomplete but nonetheless is passed off to prospective investors as sophistication—I call it sophistry. Regulators don’t understand basic investment principles and do nothing to protect investors. Regulators are less helpful than cops who show up five minutes after the robbers leave your house. The fact that they operate outside the strictures of the Constitution cannot be discussed in civil discourse, but nonetheless has been the central part of the problem since the SEC was created in 1934.

This does not keep financial pornographers and magicians from luring investors into schemes to separate them from their money following the dream that they will get rich.

No one gets rich without inside information.

Every person I have met with significant earned wealth (more than 100 million) has earned it investing in their own business. They are ALL insiders whose worst enemy is uncontrolled government. Therefore, they curry government favor using lobbyists to buy more inside information.

Apart from inheritors, who on the Forbes 400 earned their wealth by investing in someone else’s business?
The top 10 are named Gates, Buffet, Ellison, 2 Kochs and 4 Waltons and a NY mayor who made in money in publishing, not Tammany Hall.
George Soros (15) wealth might have come from hedge funds, but it was created during the wild west days before hedge funds moved to the US.
You won’t find Soros name on any Merrill-Lynch accounts.

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About This Blog

It is an understatement to say the world has experienced a radical shift in capital markets. There are more layers of information and opinions on the direction of the world than we've seen in decades. The internet and the media do not always make it easier, but Michael Dubis' contribution through IB blogs will help you sift through the noise and give you some perspective. You can find his company online.

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