Christianity

The foundation of Christianity is the belief that Jesus is both God and man and I firmly believe that but I would go further. I believe that human beings are physical, mental, emotional and spiritual and the first three of these are the human part but the forth is divine. This is blasphemous to many and so one might ask how it is that I came to this conclusion. It was the inevitable result of the meeting of two of my favorite subjects. The first is the psychology proposed by Carl Jung and the second is the strange concepts embodied in the study of particle physics. Jung believed like most of his contemporaries that we have a conscious mind and a sub-conscious mind but he added a third area which he named the collective unconscious. While the first two are personal to each of us the third is a group thing where all of our minds come together. Because it involves the spiritual it is not easily understood using worldly words and ideas so Jung created something he call arch-types. These are represented in the folklore that have survived the test of time. Stories that involve fairy tales blended in with real life to illustrate the mystical side of human behavior and then swallowed up in mythology. The story of Hansel and Gretel gives an insight to this spiritual side of human nature. The purpose of the tale could be the rather mundane instructions regarding forest safety or secondarily a cautionary note about the dangers of famine to large families, but its hidden meaning may evoke a strong emotional response due to the widely understood themes and motifs such as “The Terrible Mother”, “Death” and “Atonement with the Father”. The point I learned from Jung is that we do not have the vocabulary needed to deal with the spiritual side so we resort to stories that have a child like quality. From particle physics I learned that we cannot understand the subject even when we have the vocabulary. Concepts like the same thing being in two or more places at the same time confound our logical minds. The idea that cause and effect can become effect followed by cause make no sense to us. If I try to describe God in one word I say God is love. God used a part of this love to create my immortal soul and that is the part of me called the spiritual side. When I die, this side will return to its source. My spiritual side came from God and returns to God and from that I conclude it remains as God during my life. I am not equal to God when I am burdened with my human side but once free from that I return to be a part of God. It is not my purpose to convince anyone to think as I do but rather just to offer my opinion on a most complicated subject. I hope that this will encourage others to delve into their beliefs about the spiritual side of our nature.

Health care

It was about five years ago that I sat in my kitchen with a mortgage broker who told me I could borrow $300,000 to build a house with no money down and no proof that I could repay the loan. He said at 6% on a 30 year fixed my monthly principal and interest payment would be $1,800. He said it that was too much I could get an interest only loan for $1,500 and if that was too much I could get a negative amortization loan for $1,200. All this with no documentation as to my income or even if I was employed at all. What I didn’t realize at the time was that this same conversation was going on in millions of kitchens across the country and within a few short years this mortgage crisis had the whole world in recession and millions of people lost their homes. While I was still recovering from this free lunch scheme the President told me he was going to insure 31 million new people and it would save the country a trillion dollars over the next ten years. When I asked how, I was told to pass the bill and then we would figure it out. Well we did that and now the details are leaking out and the savings is disappearing like smoke in the wind. The latest blow to this Obamacare has not yet hit the news but it will shortly. Cities, counties and states are faced with something called legacy benefits. These are payments they have promised their employees to cover things like health care, including dental and prescription drugs after retirement. These entities do not set aside money for future payments as is required by law to cover pensions so they have to pay for these out of current income. Since most of these entities have defined benefit pension plans most employees retire at age 62 and for many much younger. As the population ages these cost rise and there is no money to pay the piper. But not to worry! Just at the darkest hour to the rescue comes Obamacare. All they have to do is to transfer their health care over to the federal government. Walla, problem solved! The answer is simple because the federal government can just print up money. Next in line, of course are all of the private companies who are saddled with the high cost of health care and they will soon be lining up at the trough. Now what will this cost? The IRS estimates that the cheapest Obamacare plan for an average family of five will cost $20,000. This, the cheapest plan is called the bronze. There are three others called silver, gold and platinum and each is more costly than the other. How much more we have yet to find out. As a financial advisor I would like to tell my grandchildren to save a third of their income to take care of their future needs but that would be folly since I believe that inflation will eat up their savings. Perhaps there will be some innovative concept that will save the day but I don’t see it at this point. The US has always survived by finding a Bill Gates or a Steve Jobs. I’m counting on the new generation to produce a miracle.

Now and then

The President then and now “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. ... I therefore intend to oppose the effort to increase America’s debt limit.” — Then-Sen. Barack Obama, floor speech in the Senate, March 16, 2006 To even entertain the idea of the United States of America not paying our bills is irresponsible. It's absurd," Obama said in a press conference. This is not just an Obama problem, it represents politics in general. Its Party trumps Country. There are many such examples with many politicians. Seasoned politicians have learned to tell people what they want to hear.

Budget

A friend of mine sent me a simplified way to look at the US budget. He just subtracted 8 zero’s and called it a family budget and it looks like this. Family income $21,700 Money the family spent $38,200 New debt on the credit card $16,500 Outstanding credit card balance $142,710 Total budget cuts so far $38 I would like to add some further details to explain why this family budget is allowed to get so far out of control. Money to take care of aging parents $1,600 Money to take care of people not working $4,200 Money spent on interest on our debt $2,470

AIG

We have heard the phrase, “too big to fail” and a perfect example is AIG, the large insurance company that insured all of the bad mortgage loans that banks had provided. Recall these were loans given to people who did not have the where with all to repay unless the housing market continued its climb. The market did not cooperate and the buyers lost their homes. As the value of homes declined the mortgages that backed these loans lost value and the banks called on AIG to cover their losses, since that was the purpose of buying the insurance. As an aside, AIG did not call these products insurance because that would have meant oversight by the state insurance department so they called them credit default swaps. Now it was AIG’s time to step up to the plate but everyone knows that insurance is based on the concept that not everything will go wrong at once but that is just what happened. AIG’s stock went from $70 to one dollar and they were facing bankruptcy. Keep in mind that filing bankruptcy generally means your liabilities exceed your assets. AIG was a conglomerate that owned many different businesses and many not associated with the mortgage scene still had value but the losses suffered with the mortgage crisis exceeded the total value of the company. Now comes the fun part. The government stepped in and anted up 180 billion so that AIG could meet its commitment to the banks. Then AIG sold off some of its assets and the value of these toxic mortgages begin to rise. Keep in mind we are not talking about the actual value but the perceived value, that is, what a willing buyer will pay a willing seller. This increase was accelerated as the home market bottomed out. The end result is that AIG stock price begin to rise and when it hit $30 the government sold off its shares and made a profit. These shares became so in demand that the government sold them at auction and many bidders participated. The same banks that got hurt the first time around buying these mortgage bundles are now outbidding one another for the same bundles. They are betting that the recession is over and that housing prices will continue to rise. They are also assuming that if the bottoms drop out that the US government would once again come to the rescue. This is what is meant by the term, “moral hazard”. They are willing to take a greater risk knowing that the government will cover any downside loss. This is also what is meant by too big to fail.

Slippery slope

When it comes to the abortion issue you can call me a middle of the roader as I feel that in the first trimester the mother in consultation with her doctor and husband, if available, should be able to choose. The third trimester it should only be allowed for rape, incest or physical life of the mother and in the second trimester it must be on a case by case basis with experts from different areas involved. I bring this up because pro-choice people often argue about rape and incest to make their point and this is often brought up in the press. One argument for the pro-life people I have not heard involves late term abortion. Would you allow an abortion at 8 months and 30 days? Would you allow an abortion at 8 months and 30 days if the mother did not like the color of the baby’s eyes? If the answer is no then you ask about 8 months and 29 days and so on. I bring up these arguments, to show the weakness in the arguments on both sides where abortions are allowed for any reason and abortions are not allowed for any reason. Each side is unwilling to give an inch because the fear the slippery slope and it has been my experience when that is the excuse for any decision it is likely to be faulty. You can see this same reasoning when it comes to gun control. Those for do not want any restrictions on guns and those against want to get rid of all guns. Once again the driving factor is the slippery slope argument. If we finally agree to ban large clips and assault weapons, I don’t believe this will satisfy those who oppose guns. Let’s hope this ban is passed and we can see what happens next to find out if the slippery slope argument is valid.

Quantitative easing

Quantitative Easing (QE) is a euphemism that means printing and borrowing money by the Federal Reserve Bank. We have been through QE 1 and QE 2 and a few months ago we started QE 3 where the Fed would purchase 40 billion a month in mortgage backed securities. QE 4 has now joined QE 3 and the Fed will purchase 45 billion a month in long term government bonds. Recall that a mortgage backed security was a group of home mortgages usually about 100 in a bundle that were sold as securities on the open market. These individual mortgages were purchased by home owners through various financial institutions and then they were sold to other investors around the world. It was joked that the buyers of these securities had no way of knowing what they were worth. The only sure way to determine the value was to open them up and have each of the individual homes appraised and this was obviously too costly and too time consuming. Imagine what this means! Sophisticated buyers around the world were purchasing securities for a set price when they had no idea what they were worth. Now after thinking that through, understand that the Fed is currently buying these securities at the rate of 40 billion dollars a month and no one is the least bit concerned. Taking a closer look at a mortgage bundle we learn some things. First of all if there are 100 mortgages in the bundle and the average mortgage is $200,000 we are talking 20 million dollar which means that there are no small investors in this market. Second say the average mortgage in this bundle has a 6% rate so the return on your 20 million is 1.2 million per year. Understand that when these bundles were most popular interest rates on things like CD’s were 1 or 2 percent. Now let us say that the value of houses drops by 20% and another 20% of these go into default so the new value of the bundle is 12 million and the return is now 3.6%. The value of this bundle has decreased from 20 million to 12 million but no one knows this. People are now just buying and selling paper. If the houses were worth nothing it would not matter. To put this in the proper perspective assume that I bring out a large box wrapped in brown paper and I tell you there is a new car inside and ask you to bid on it. What is the first question you are going to ask?

Printing money

The treasury prints money and loans it to the Fed at zero interest. The Fed uses the money to purchase mortgage backed securities from Fanny Mae and then collects the interest they earn on these securities. This allows the Fed to make a profit and then they pay back the treasury with principal and interest and this year that came to 80 billion in profits. A take-off on this procedure has helped AIG get out of debt as they now advertise on TV that they have paid off their government loans. Recall that the investment banks that purchased the junk bond called mortgage backed securities covered themselves by purchasing an insurance policy from AIG which transferred the risk to AIG. Since these bonds turned to junk, AIG was facing bankruptcy. The government intervened and purchased 92% of the company. This gave AIG time to restructure and come up with a plan to buy back its stock from the government. They completed this and now are bragging on TV commercials about it. The government bought the stock with free money like they bought securities from Fanny Mae. After AIG got back on their feet they used the government money to buy back their stock. While the government was holding this stock they made a profit of several billion. There is a story within the story here worth mentioning. Gold Sachs received some of the AIG bailout money to supposedly pay off their investors but about 3 billion went directly to Goldman and this was not legal. Recall the Hank Paulson treasury secretary who came up with the bailout plan was the former CEO of Goldman. Goldman was the same company who made up a mortgage backed security account filled with losers and sold these to foreign banks totting them as winners. While they were doing this they sold short on this same securities and made 500 million when these securities went south. This coalition of bank and fed is just one more example of the corruption that is so prevalent.

stocks

When I was working as a financial advisor I stayed away from individual stocks for a number of reasons but the most important was that stocks did not seem to rise and fall based on any logical reason. The one example that stands out in my mind was silver. I knew early on that digital cameras would not need silver to process film and I knew that the biggest use of silver was in film processing. Logic told me to sell silver short as the price would decline as demand declined. Even though the use of silver in films declined to almost nothing the price of silver rose and this happened with in a 15 year span. While all of this change is taking place Kodak and Polaroid file for bankruptcy but silver use just kept growing. Amazon came out in 1994 and everyone thought this would be a winner but they didn’t make a profit until 2001 and then they paid one cent per share. Many people who bought early did not hold on and missed out on the big run up later. It is not only what to buy but how long to hold. I found the market was much like people who go to the casino. They tell you about the winning but not about the losing. In the market the spectacular winners get the publicity so others try to pick the next big winner.

Spend or cut

It is becoming more obvious by the day that our elected officials have agreed to do what the people want and that is not to reduce any government programs. Do not touch my Medicare or do not touch my social security are cries heard all too often these days. People on welfare say they need the safety net and those getting unemployment need their checks until they find a job. Homeowners demand their interest deductions and farmers want their subsidies. Business wants to deduct health premiums and charities want tax deductible contributions. The list goes on and on so where does that leave us? FDR was the first president to use and economic advisor and when the idea was proposed to him he agreed as long as they could find one with only one arm. He reasoned that every economist he had known always answered every question by saying, one hand you can do this and on the other hand you can do that. FDR said he already knew that. Today we have economist who say we need to keep government spending and keep taxes low on the middle class. They say the government will turn the economy around by spending on things like extending unemployment, hiring teachers and firemen and policemen and financing shovel reading projects like bridges and highways. They do this by either borrowing money or printing money. Other economists say we need to get government out of the way and allow private business to determine how they want to expand. They say the energy industry would take off with a little less interference from government and housing will follow close behind. Well the argument has been settled. The President has chosen the first approach and now dares the congress to propose cuts in spending. He has the people on his side. He says to the public that he wants to take care of those in need and specifies the middle class. The people now have the choice of continuing benefits to themselves or reducing their benefits. I wonder what they will choose. I can give you an example from my experience as a financial planner. I witnessed this with several small businesses that I advised regarding pensions. If you had a business where your employees were mostly young people and you asked them if they wanted you to put aside money in a pension for them or would they prefer a Christmas bonus they opted for the bonus. If you had older employees they chose the opposite. The irony here is that the younger group, when they got older criticized you for giving them the option saying you should have known better than to give them a choice. Our elected officials do not know any better. Our only salvation is for the government spending program to ignite the economy and then through growth we can overcome these difficulties. Let’s hope this works!

Payroll tax

A little over two years ago the president by decree lowered the social security withholding tax from 6.2% to 4.2% giving a 2% raise to everyone who works. This is the way to help low income people if that is your objective. Republicans pointed out that most of these people pay no income tax and the Democrats said that they paid payroll tax. After that a war of words was started over taxation. The Republicans like to separate the payroll tax from income tax so they could say these people paid no tax. The Democrats always include the payroll tax so they can say these people do pay tax. As of January 1st this payroll tax reduction is no longer in effect so starting today the paychecks of everyone will be less. For all of those earning less than $110,000 per year this means a 2% reduction. This has not been covered by the news in all of the talk about fiscal cliff so many will be surprised when they see their check this week, especially those who remember that Obama said he would not raise tax on those making less than $200,000. To explain this, the Republicans will now lump the payroll tax in with the income tax and the Democrats will separate it out. This is an example of Washington speak. Most people will not have any idea of what happened but they will see the reduction in their pay. If a man earns $30,000 per year and is paid weekly his check this week will be $12 less and I can assure you he will notice.

Who pays taxes

Whose taxes will go up is still undecided. If the 3% of taxpayers who earn more than $250,000 ante up like the President wants that will bring in about $80 billion. Since there are 5.6 million in that group that comes to about $14,000 each. On the other hand if all those who pay no income tax were asked to contribute $110 per year that will also come to $80 billion. It might be worth considering to placing a special surtax of $100 on everyone just so everyone has some skin in the game. If a person pays zero income tax they really don’t care if taxes are increased and so polls might indicate that the majority of people do not oppose tax increases.

taxation of options

Taxation of Incentive Stock Options (ISO’s) The company offers a stock option in lieu of salary. The option is the right to purchase stock at a predetermined price called the excise or strike price. The stock can be purchased after a given period of time called the vesting date. The difference between the purchase price and the strike price is the spread. If the spread is positive the gain is taxed as ordinary income but no payroll tax is due. For example if your option price is $50 per share and the stock at the time of purchase is selling for $60 per share then you have a profit of $10 per share and that is taxed as ordinary income. If you then wait more than one year from the time you bought the stock and two years from the time it was offered to you and sell, any profit will be taxed as capital gain. I bring this up at this time because in the news today it was announced that the CEO of Apple received 1.4 million in salary, 2.8 million in bonus and 140 million in stock options that vest this year. In addition he got 175 million in options that vest in 2016 and another 175 million in options that vest in 2012. Lets calculate his tax rate. On the 1.4 million in salary he pays 35% and on the bonus he pays 25% on the first million and 35% on the last 1.8 million. The options are taxed at the capital gain rate of 15% so his total tax due is 35% of 1.4 million plus 25% of 1 million, plus 35% of 1.8 million plus 15% of 140 million. His total tax bill is 22 million and his total gross income is 144 million giving a tax rate of 15.2%. That is how Warren Buffett pays a lower tax rate than his secretary. If you want to tax the really rich you have to change the capital gain rate.

Midlife

When I was going through midlife, I had a number of interesting experiences. I joined a men’s group and we met every Sunday night from 7 PM to 9 PM for four years and I believe I only missed one meeting. I had a series of three reoccurring dreams which in later years I understood and helped me prepare for the second half of life. One of the strangest things was a sudden interest I developed in particle physics and that led to a number of new discoveries about my inner self. Midlife for men is a time when we reconnect with our inner self which we have put on the back burner while we develop a strong ego that can go out into the world and compete. I was trained in the sciences and this leads to logic and reason and these two things are often not compatible with the intuition of the soul. As I tried to combine the assets of my heart with my head, I ran into some difficulties and one of the things that helped me cross the barrier was particle physics. The reason for this is while physics is hard science, quantum physics borders on the mystical. Quantum mechanics does not follow the rules as laid out in regular physics. It presents us with situations that the human brain in its present stage of development cannot comprehend. The rules can be proven experimentally but they cannot be understood even by the most advanced physicist, much like many things in the world of the spirit. As I look back on those transition years I am thankful for the pathways that I was presented with, that carried me through the fog and into the light. There is a certain peace and contentment that comes with the recombining of thinking and feeling. One of the best and most practical results is my decision to be more interested in developing relationships and less interested in being right. In retrospect I can see that being right was merely the folly of arrogance and filled with self-deception and getting past that was a reward in itself. Happy New Year to everyone. PS. I know to most of you women out there that this is all just common sense but remember you gals are much more complex than we men.