Tag Archives: Retirement

Druck on the Coming Debt Crisis

May 17, 2023 tremendousblog 3 Comments

Stan Druckenmiller and George Soros made over $1 billion shorting the British pound. Now Druck is turning his sights to another mismanaged nation: the United States.

At a recent keynote address at USC, Druckenmiller sounded the alarm about ballooning entitlements.

“If I wasn’t so worried about the country I’d be salivating over the opportunities this could set up.”
Stanley Druckenmiller

Today, we spend 40% of our tax dollars on programs for seniors. By 2043, that will be 60%.

How do we pay for that? There are two main options: cut spending or raise taxes.

But the changes required would be huge.

Druckenmiller reckons we’d need to cut spending by 35% starting today and maintain that lower level forever. If we don’t want to do that, we could raise taxes 40% — permanently.

“Expect this trend to continue…absent radical policy changes.”
Stanley Druckenmiller

The last of the baby boomers retire soon. We’ve promised them benefits that will soon crowd out all other federal spending.

No defense, no education, no bridges, no nothing.

So how do we fix it?

Druckenmiller calls for big entitlement cuts. He supports ending payments to wealthier seniors and cutting cost of living adjustments (COLAs).

Means testing is a great place to start. People like me don’t need a government check.

And as painful as ending or reducing COLAs may be, it can happen anyway. State pensioners here in New Jersey haven’t had a COLA in 12 years, and the sky hasn’t fallen.

We must also raise eligibility ages. I see no problem with Social Security’s full benefit beginning at 75 (rather than 70) and Medicare at 70 (currently 65) for younger people like me.

I never expected to get a cent out of these programs anyway. Most young people don’t.

Reining in benefits is the one chance to salvage something for future retirees. If we don’t do something now, there will be nothing left for younger generations.

“You’re screwing seniors, you’re just screwing the future seniors. Why do they get a dollar and you get zero?”
Stanley Druckenmiller

I’m confident that we’ll muddle through to a solution. It will probably involve some combination of benefit cuts and tax increases.

“…if it can’t go on forever it will stop.”
Herbert Stein, economist

What do you think the future holds for entitlements and the US economy? Leave a comment and let us know!

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Top VC Firms Have Great Returns…Right?

February 15, 2023 tremendousblog Leave a comment

CalPERS did everything right. It won access to some of the finest venture firms: NEA, Khosla. The returns? Terrible.

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New data is pulling back the curtain on VC returns. For the $440 billion California pension fund, many venture investments have notched poor results.

From a report out this morning in Business Insider:

The CalPERS fund’s $75 million bet in 2001 on a venture fund managed by the Carlyle Group lost money. That same year, the $75 million it invested in a fund from the VC giant New Enterprise Associates yielded a dismal internal rate of return of 2.7%. A $25 million investment in DCM’s 2000 fund had a 1.9% IRR.

Its $260 million investment in two Khosla Ventures funds in 2009 yielded an IRR of 11.8% for the early-to-midstage fund and 6.9% for the seed-stage fund. Those figures were both below the 14.7% benchmark for that year…

A fund that returns about 2.3x qualifies for the elite, top quartile. Over a 10 year fund life, that’s around 9% a year.

The funds CalPERS invested in badly missed their benchmarks.

What Went Wrong?

I have a few theories:

1) Adverse selection.

CalPERS has to report the returns of the funds it invests in. This means it’s locked out of some of the very best firms.

Again from Business Insider:

It did not help that CalPERS was locked out of top firms like Sequoia, Benchmark, and Accel because they did not want their performances publicly disclosed in filings.

2) Too much money. Nice problem to have, right?

Not always.

You often get higher returns by investing in smaller, early stage funds.

But a startup that’s barely off the ground only needs so much cash. Give them $100 million, and they won’t know what to do with it.

This means that you can only put so much capital to work at the early stage.

But CalPERS has billions to deploy! They’ll never get there by giving $5 million at a time to little seed funds.

This pushes them to the late stage and locks them out of some of the best returns.

3) Rotten valuations. CalPERS investments in 2001 did particularly poorly.

The NASDAQ started falling in early 2000. But it didn’t bottom out until late 2002.

Meanwhile, growth stage startups generally follow the NASDAQ with a lag. So those valuations may not have bottomed until 2003 or later.

This means that for many of the later stage investments CalPERS made, the prices were likely inflated.

Wrap-Up

So, should we run like hell from venture? Not quite.

Venture returns are still higher than any other asset class.

But CalPERS has only invested in a very small number of venture funds. They haven’t placed enough bets to hit a winner.

Institutions should invest in more funds across vintages. Some are laggards, but others shoot the lights out.

You have to stay at the table long enough to win.

What do you think of investing in venture capital?

Retirees Face $1.3 Billion Loss in Wall Street Fraud

June 24, 2022 tremendousblog Leave a comment

It was supposed to be a safe investment.

In small offices across the country, brokers sold a security called L Bonds. The bonds were backed by life insurance policies and were supposed to provide a steady stream of income.

Many buyers were elderly. Now they’re facing catastrophic losses of up to $1.3 billion.

From a report that broke this morning in The Wall Street Journal:

What many of these retail investors didn’t know was that [bond issuer] GWG’s founders and a board director would each use the money to fund and launch their own startup ventures, then move them out of the investors’ reach, according to people familiar with the matter. The roughly 27,000 individuals who bought GWG’s unique debt securities, known as L Bonds, are now facing huge potential losses – for many, their retirement nest eggs.

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The original business buying life insurance policies quickly ran into trouble. So, bond issuer GWG Holdings cast about for another strategy.

It settled on backing speculative startups run by the company’s founders.

That would be reckless enough a thing to do with small savers’ money. But worse yet, the miscreants running GWG quickly moved those assets out of reach of the L Bond buyers.

Once the top executives had taken the assets, they drove GWG into bankruptcy.

The judge overseeing the court proceedings in Houston said he had never before seen a company give up control of everything it owns before seeking chapter 11 protection.

GWG appears to have operated like a Ponzi scheme. Of the $1.26 billion in L Bonds the company sold, nearly two-thirds went to paying off prior bonds.

Meanwhile, the top executives siphoned off tens of millions of dollars in dividends for themselves.

The SEC began investigating GWG as early as 2020. GWG didn’t disclose the investigation to its investors for a year.

In the mean time, it sold another $200 million in toxic L Bonds.

The law generally prohibits the SEC from disclosing investigations. I think it’s high time to change those laws.

Many elderly put their life’s savings into these bonds.

They should’ve known the company was under federal investigation. The government they pay taxes to should never have kept that a secret from them.

It doesn’t help for the SEC to blow the whistle once the money is already gone.

What do you think of this case and how the SEC handled it? Leave a comment at the bottom and let me know.

See you on Monday!

Robinhood vs. Interactive Brokers: Smackdown!

November 12, 2021 tremendousblog Leave a comment

I’m working on making my own index fund. And it’s proving surprisingly difficult.

The Goal

My goal is to create a portfolio of the highest yielding Dividend Aristocrats. Dividend Aristocrats are blue chip companies that have increased their dividend every year for at least 25 years.

But even being an Aristocrat isn’t enough for your demanding author. I want only stocks with a yield above 3%, so I have some chance of keeping up with inflation.

I call this special group the Dividend Royals.

So which broker should I use to construct this portfolio?

The Contestants

In this corner: Robinhood!

Robinhood is one of the best known brokers today. It took the financial world by storm by offering zero commission trades.

And in this corner: Interactive Brokers!

This stalwart of finance has existed for decades and offers sophisticated tools to active investors.

Who will be the next champion?

Fight!

Robinhood is dead simple. Its intuitive mobile app makes it easy to buy and sell shares of stock, including fractional shares.

And then there’s the feature that made it famous: no transaction fees.

But Interactive Brokers no longer charges fees either in its Lite product. And its Pro offering can get you such great prices on shares that it should be worth the nominal fees if your trades are large.

Robinhood’s simplicity is also its Achilles’ heel. It lacks many of the powerful research and trading tools of Interactive Brokers.

Implementing a Dividend Royals strategy would be manual and painful.

What’s more, if you ever decide you’re sick of Robinhood, it’s expensive to get your money out. Robinhood charges you a usurious $75 fee.

Interactive Brokers charges nothing.

By Unanimous Decision…

Interactive Brokers is a much better choice. Its trading tools are powerful and its fees are even lower than famously cheap Robinhood.

I’m working with Interactive Brokers’ support to find out how to implement the Dividend Royals strategy using their BasketTrader tool. I’ll keep you posted!

There will be no blog on Monday. I’m background acting in an awesome forthcoming show from Netflix!

See you Tuesday. Have an awesome weekend, everyone!

Should Anyone Own Bonds?

September 14, 2021 tremendousblog Leave a comment

I used to love bonds. Especially government bonds. Guaranteed income, easy liquidity, and stability in a crisis.

What’s not to like?

But my old flame hasn’t done much for me lately. And I’m not the only one.

The Problem

Bonds have hovered at or below the rate of inflation since 2009:

Just barely keeping up with inflation might be enough, given that I have much riskier positions in stocks, real estate, and tech startups.

But if an investment pays a yield below the rate of inflation, you’re essentially paying someone to hold onto your money. Instead of getting even a modest return, you lose a little of your cash every year, like clockwork.

Today, I own long term treasury bonds and medium term treasury and mortgage bonds. The long term bonds pay 1.73%, and come with a big risk of decline when interest rates increase. Which they’re just about bound to do, given that that they’re are sitting near 0.

The shorter duration bonds pay even less: 1.28%.

What Kind of Return Do We Need to Keep Up With Inflation?

Recent inflation numbers have been scary: over 5% a year. But, if we look at the longer run averages, the picture brightens a little.

Over the last 20 years, inflation has averaged 2.16%. Over the last 10 years, the figure is 1.89%.

I don’t know how long the sudden higher inflation of the last couple of months will last. But it appears that a floor for a return that will keep up for inflation is no less than 2%.

Where Can We Get Our 2%?

The attractive features of government bonds are liquidity, stability, and a modest income. Let’s review a few alternatives, with that in mind:

1) Corporate bonds. Returns aren’t much better than government bonds, at around 1.7%.

2) Fundrise. Love it, but not a good substitute for bonds. Real estate development just isn’t as stable. It’s not very liquid either. However, returns are good. I’ve notched around 7% since I started investing.

3) Single Premium Immediate Annuities. A rather exotic choice. Rates can be good at around 3.5% in some cases. And the income is guaranteed. But they’re not very liquid: there’s a 10% IRS penalty for withdrawal before age 59.5. But if you’re older, they could work well.

4) Dividend Aristocrats. These aren’t just any high dividend stocks. These have a history of paying higher dividends every year for at least 25 years. That’s a surer bet than many stocks with even higher dividends, because those huge payouts may not last.

The yield on some of these large, stable companies is impressive:

ExxonMobil: 6.5%

Chevron: 5.5%

IBM: 4.8%

Consolidated Edison: 4.2%

Of course, the stock prices could go down.

But if you’re buying for income, and the company is large and stable and has increased its dividend of decades on end, you don’t care. You just collect your check and head to the golf course.

What’s more, you can buy a basket of these stocks, rather than just one, insulating yourself from the chance that one of them cuts its dividend.

Wrap Up

Dividend Aristocrats seem like one of the best options to replace the income bonds no longer offer. They are also less likely to fall with higher interest rates.

What do you think the best option is? Leave a comment at the very bottom of the page and let me know! I just might use your idea. 🙂

This One Trend is Driving Every Financial Market

February 5, 2021 tremendousblog 1 Comment

Regardless of which market we look at, we see a similar trend: skyrocketing prices since the beginning of the pandemic. You can see this in the S&P 500, a broad measure of stocks:

In commodities:

In the increase in real estate prices and the corresponding decrease in capitalization rates (this chart is from Dallas…see similar trends in other cities in the research papers linked in this post):

And even in Treasury bonds (recall that the yield moves in the opposite direction from the price, so a lower yield means a higher price):

Why are all these markets looking the same? The likeliest cause is a huge jump in the money supply. The Federal Reserve has aggressively printed money since the beginning of the pandemic, looking to counter the seismic economic shock. I think this is probably appropriate. In any case, the effect is unmistakable, however you measure money supply.

Here’s how the “monetary base,” or “the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve),” has expanded:

If you look at another definition of the money supply, M1 (“the sum of currency held by the public and transaction deposits at depository institutions”), it looks like this:

And if you broaden your definition of money supply to M2 (“M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares”), you see the same familiar pattern:

Whichever way you slice it, there’s a lot more money out there than there used to be. That money can be used to bid up stocks, bonds, real estate, commodities, bitcoin, Gamestop, or whatever you like.

There is some debate in the literature about whether you can draw a correlation between the money supply and increasing stock prices. This study sounds a cautionary note:

future profits may not change, if interest rates decline at the same time that demand for firms’ products, and thus their sales, decline.

This could be relevant for companies that can’t deliver their products in a contactless manner. But companies that can have been thriving.

In all, it appears that the massive increase in the money supply is driving financial markets of every stripe in one direction: up. Until the Fed changes policy, I suspect the bias is likely to be toward buoyant markets, especially with vaccines coming on line and the pandemic’s end in sight.

Have a great weekend, everyone!

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Photo: “Governor Jerome Powell speaks at Brookings panel, ‘Are there structural issues in U.S. bond markets?'” by BrookingsInst is licensed under CC BY-NC-ND 2.0

Business, COVID

What Does the Pandemic Mean for Real Estate Investments?

January 28, 2021 tremendousblog 1 Comment

A health and economic crisis is scaring nearly everyone right now, including investors. Stocks recovered in record time, but what about investments in real estate? Are they doomed, or is the bad news perhaps a bit overblown?

I invest in real estate through Fundrise, which allows me to spread my money across many projects nationwide. I prefer this to the concentration risk I would face in, for example, owning an apartment building in New York City, where a recent rent law change has substantially reduced the value of buildings.

But regardless of how diversified you are, the pandemic is impacting all aspects of life…and business. So I set out today to gain more understanding of how these changes would affect my real estate investments.

The national picture for apartments, which is most of what Fundrise owns, is surprisingly good. Vacancy rates in major markets including Dallas, Los Angeles and Washington DC, all areas where Fundrise has many buildings, are not all that elevated. This squares with my returns in Fundrise, which were over 7% in 2020 despite just about the worst market conditions imaginable.

Indeed, despite the strong and sustained lockdown measures in LA, its vacancy rate is comparable to that of Dallas, an area that locked down a lot less. Dallas, LA and DC all have a vacancy rate around 5%. Only LA is materially above its Q1 2019 vacancy rate, and keep in mind that LA has had a serious housing crisis for many years.

Of these three markets, LA definitely concerns me the most, with higher unemployment. But prices have held up so far.

So, what’s the upshot? National unemployment is up but still not extremely high, and the higher end apartments Fundrise tends to own are less likely to be occupied by those in leisure/hospitality, who may struggle to pay their rent right now. Add that to the fact that more vaccines are being deployed daily, bringing the beginning of the end of this health crisis.

So, I see the outlook for residential real estate investments as fairly bright, all things considered. To sell now in the face of slight weakness and a coming end to the pandemic simply wouldn’t make sense.

I intend to sit tight.

Note: If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

Photo: “Boarded up & masked – 10th Avenue, New York City” by Andreas Komodromos is licensed under CC BY-NC 2.0

Business

My View on Markets in 2021

January 20, 2021 tremendousblog Leave a comment

My main business is investment, and some recent developments have gotten me thinking about where markets are headed this year. An end to the pandemic by Q2 2021 is predicted by multiple models (here and here). We’ve seen a substantial increase in personal income in 2020, largely due to the CARES Act. Much of that was saved and might fund consumption in 2021. More stimulus is likely forthcoming from the new administration and a Democratic Congress.

The combination of an end to the pandemic, increased personal income/saving/pent up demand, and further stimulus seems to set up a great scenario for stocks this year.

Meanwhile, Treasury yields dropped substantially in 2020 despite massive stimulus (and thus borrowing). The same may not occur this year, but suffice it to say the Treasury market seems to be able to absorb quite a lot of new issuance (see page 3 of this document).

My investments are heavily weighted toward equities, and I am expecting a good year. Perhaps we’ll revisit this in a year and see if I was right!

Tremendous