In a recent study by the University of Chicago - Booth School of Business, the researchers found not only a pervasiveness of misconduct but developed a rating system to rank the worst misconduct brokers, who are all retail brokers (brokers who sell to the public as investment advisers). The 30 worst are listed here.
While the U.S. Department of Labor has proposed a limited fiduciary rule, the financial services industry is is desperately trying to further limit the rule, kill the rule, or change it to continue the ability of salesmen to portray themselves as "advisors" implying fiduciary duty while providing "advice" which is conflict of interest based.
I have long maintained that fee only fiduciary advisors need to be regulated separately from the SEC and FINRA (I personally would prefer the Consumer Finance Protection Bureau regulate SEC and State licensed fee only investment advisors to separate them from the continual and purposely wolves in sheep's clothing of those who sell or act with conflicts of interest).
Even less appreciated is my belief that current educational requirements are totally inadequate and that no professional designation provides sufficient educational requirements. Even the so-called Masters Programs in Financial Planning are merely CFP course material, which lack academic rigor, primarily designed to provide revenue to the universities which offer them. I have indicated verbally and in letters that fee only fiduciary advisors should have a Masters in Finance. It would have to be at least a two year program which covered macroeconomics, CFA material, CMT material, current research on investment allocation and portfolio construction, ethics and law, and retirement planning and distribution. This does not make me professionally popular.
I intend to write more about Fiduciary Duty and the financial services industry's desire to continue some form of public deception (confusion), but I will want to create Goggle Doc containing the research.
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Tuesday, May 10, 2016
Saturday, August 15, 2015
Self-Delusion and Investing in Gold
Over the years as an advisor as well as during the years of the radio show, one consistent self destructive myth keeps surfacing, accepting no denial, and refusing to accept factual history: gold. Gold has a repetitive history of going up and dropping sharply. It is not a hedge against inflation, particularly in a period of low inflation. In the unlikely scenario of economic and social collapse, bullets would be far more valuable than gold. There are always marketing vultures preying on fear and economic/political prejudice. It makes no difference how many times, or over how many years, they are wrong.
The fact is, with gold, if you did not buy between 1997 and 2002, you underperformed.
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The fact is, with gold, if you did not buy between 1997 and 2002, you underperformed.
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Friday, August 7, 2015
Is Schauble Afraid of European Unity?
There has been a great deal of speculation that Germany's Finance Minister continues to desire the compulsory exit of Greece from the European Monetary Union (EMU). Wolfgang Schauble has written how he believes Germany should be an essential player in the New World Order, because western democracy has failed to provide the leadership to go beyond political parties and boundaries towards the bigger picture of unity.
Unfortunately, his concept of unity finds western democracy, bank union, and fiscal union which would complete a democratic political union as far less desirable than an Order of Rules that dictate actions without regard to democratic elections and nationally elected governments. Democratic political union would require shared responsibility and governance.
The Troika has shown an intense desire to make any agreement with Greece impossible or, at the very least, totally unsustainable by the Greek government. The Blog, Mean Squared Errors, asks if Schauble is actually afraid that the EMU will have to assist Greece when the Single Resolution Mechanism (SRM) takes effect on January 1, 2016. The SRM wold require liquidity support for Greek banks, while during the Troika negotiations with Greece and the Greek referendum, the ECB was used as a political war machine depriving Greek banks of liquidity.
Is Schauble desperate to enforce the Rules before Law takes effect on January 1, 2016, in order to avoid a de facto economic transfer union?
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Unfortunately, his concept of unity finds western democracy, bank union, and fiscal union which would complete a democratic political union as far less desirable than an Order of Rules that dictate actions without regard to democratic elections and nationally elected governments. Democratic political union would require shared responsibility and governance.
The Troika has shown an intense desire to make any agreement with Greece impossible or, at the very least, totally unsustainable by the Greek government. The Blog, Mean Squared Errors, asks if Schauble is actually afraid that the EMU will have to assist Greece when the Single Resolution Mechanism (SRM) takes effect on January 1, 2016. The SRM wold require liquidity support for Greek banks, while during the Troika negotiations with Greece and the Greek referendum, the ECB was used as a political war machine depriving Greek banks of liquidity.
Is Schauble desperate to enforce the Rules before Law takes effect on January 1, 2016, in order to avoid a de facto economic transfer union?
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Tuesday, June 23, 2015
When Will Illinois Learn How to Budget?
Illinois has until June 30 to pass a new budget. At present the General Assembly has proposed a budget with a $4 billion revenue shortfall, because they want to continue funding educational and social programs, as a reaction to public concerns over proposed deep cuts, the Governor wants to cut even more and they want the Governor to publicly advocate the revenue solutions. It is what has become the usual game of tug and pull rather than debate and compromise. Illinois has played financial games with its budget since the second administration of Governor Jim Edgar in the 90's.
The Volcker Alliance has published Truth and Integrity in State Budgeting, which details how a State budget should be constructed and the information in State budgeting and financial operations accessible by the public. Its checklist is:
1) Complete budgetary information, including how balance was achieved and whether one-
time revenue sources were tapped, should be easier to find and interpret,
2) Short-term revenue forecasts should be transparent and supportable by historic growth
trends. Past projections should be assessed for accuracy to help improve forecasting methods,
3) Recurring costs should be paid with recurring revenue,
4) The proceeds of borrowings should not be used to cover operating expenses,
5) States should move away from strictly cash budgeting and toward the type of accounting, used in their audited comprehensive annual financial reports, that shows the true present value of future spending obligations, and
6) States must build rainy day funds to safeguard essential services during economic down-turns. The size of the funds should be adjusted for revenue volatility, and they should be replenished consistently after they are tapped.
Illinois has the worst funded State pension systems in the United States, because it does not understand these basic budgeting rules. Illinois has a revenue problem. It has put off required pension funding to future periods. It has been sweeping (raiding) special funds for money with no intention of paying them back. The Executive and both parties of the General Assembly have not been able debate, communicate, and compromise in the best interests of the people of Illinois for the last five Governors. No one wants to take the revenue problem and own it by solving it and accept the political consequences.
With respect to information, you would have to read and analyze the General Assembly's budgeting bill (Good Luck) or you could get the Governor's position here. You can go to COGFA and get forecasts and projections. You can go to the Illinois Auditor General to find agency and department budget results (I particularly like reading the audit report for the Teacher's Retirement System as I find it far more informational than the TRS website). Try finding the current balance of the Budget Stabilization Fund (rainy day fund); at least you can get FY2015 and FY2016 projections as of March 2015 here. As of FY2013, the Budget Stabilization Fund had $276 million, which was less than 1% of General Fund revenues.
Illinois needs to get its act together. Unfortunately, this requires politicians to work together and compromise rather than continuously posture in the public circus.
Update:
The credit downgrades have begun.
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The Volcker Alliance has published Truth and Integrity in State Budgeting, which details how a State budget should be constructed and the information in State budgeting and financial operations accessible by the public. Its checklist is:
1) Complete budgetary information, including how balance was achieved and whether one-
time revenue sources were tapped, should be easier to find and interpret,
2) Short-term revenue forecasts should be transparent and supportable by historic growth
trends. Past projections should be assessed for accuracy to help improve forecasting methods,
3) Recurring costs should be paid with recurring revenue,
4) The proceeds of borrowings should not be used to cover operating expenses,
5) States should move away from strictly cash budgeting and toward the type of accounting, used in their audited comprehensive annual financial reports, that shows the true present value of future spending obligations, and
6) States must build rainy day funds to safeguard essential services during economic down-turns. The size of the funds should be adjusted for revenue volatility, and they should be replenished consistently after they are tapped.
Illinois has the worst funded State pension systems in the United States, because it does not understand these basic budgeting rules. Illinois has a revenue problem. It has put off required pension funding to future periods. It has been sweeping (raiding) special funds for money with no intention of paying them back. The Executive and both parties of the General Assembly have not been able debate, communicate, and compromise in the best interests of the people of Illinois for the last five Governors. No one wants to take the revenue problem and own it by solving it and accept the political consequences.
With respect to information, you would have to read and analyze the General Assembly's budgeting bill (Good Luck) or you could get the Governor's position here. You can go to COGFA and get forecasts and projections. You can go to the Illinois Auditor General to find agency and department budget results (I particularly like reading the audit report for the Teacher's Retirement System as I find it far more informational than the TRS website). Try finding the current balance of the Budget Stabilization Fund (rainy day fund); at least you can get FY2015 and FY2016 projections as of March 2015 here. As of FY2013, the Budget Stabilization Fund had $276 million, which was less than 1% of General Fund revenues.
Illinois needs to get its act together. Unfortunately, this requires politicians to work together and compromise rather than continuously posture in the public circus.
Update:
The credit downgrades have begun.
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U. S. Economy in a Snapshot
The Federal reserve Bank of New York has just started a monthly report on the U.S. economy.
Here is the first 18 page report for the month of June.
Update:
Here is the July report.
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Here is the first 18 page report for the month of June.
Update:
Here is the July report.
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Chicago Public Schools Bond Fire
We have recently brought the problems of the City of Chicago and the Chicago Board of Education budgeting, financing, and outstanding bonds to readers attention through three articles by Kristi Culpepper.
Since then the Illinois General Assembly fortunately failed to pass a property tax freeze, passed a delay program for Chicago pension funding payments (which has not yet been signed into law), and the City of Chicago has authorized the issuance of $1.1 billion in GO fixed rate bonds to be used to restructure short term outstanding debt and pay other current obligations, including $75 million in back police pay. The City of Chicago had earlier issued an over subscribed fixed rate bond issuance that allowed it to convert $918 million in variable rate bonds to fixed rate bonds.
The Chicago Board of Education is, with the help of a former banker as Board President, in far worse financial condition with variable rate debt which lacks the backing a credit facility, a need to terminate its swap payments by probably depleting its $174 million debt service stabilization fund, the CBOE is looking at a $350 million budgeting shortfall and the school system could be out of cash as early as this summer, and the CBOE looking for a $200 million line of credit and $935 million to address its next year deficit.
Kristi Culpepper covers the CBOE bond risks is far more detail in this new article which you should read. She does an outstanding analysis.
Update:
The legislation to delay pension funding is being held hostage to the Illinois budget impasse between the governor and the General Assembly with the State without a budget for over a month while the Governor insists on diminishing collective bargaining rights. Meanwhile, the Chicago Public School System has pulled its one year contract offer demanding a multi-year contract and that teachers pay full pension costs with no School system contribution, which may precipitate another teacher's strike.
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Since then the Illinois General Assembly fortunately failed to pass a property tax freeze, passed a delay program for Chicago pension funding payments (which has not yet been signed into law), and the City of Chicago has authorized the issuance of $1.1 billion in GO fixed rate bonds to be used to restructure short term outstanding debt and pay other current obligations, including $75 million in back police pay. The City of Chicago had earlier issued an over subscribed fixed rate bond issuance that allowed it to convert $918 million in variable rate bonds to fixed rate bonds.
The Chicago Board of Education is, with the help of a former banker as Board President, in far worse financial condition with variable rate debt which lacks the backing a credit facility, a need to terminate its swap payments by probably depleting its $174 million debt service stabilization fund, the CBOE is looking at a $350 million budgeting shortfall and the school system could be out of cash as early as this summer, and the CBOE looking for a $200 million line of credit and $935 million to address its next year deficit.
Kristi Culpepper covers the CBOE bond risks is far more detail in this new article which you should read. She does an outstanding analysis.
Update:
The legislation to delay pension funding is being held hostage to the Illinois budget impasse between the governor and the General Assembly with the State without a budget for over a month while the Governor insists on diminishing collective bargaining rights. Meanwhile, the Chicago Public School System has pulled its one year contract offer demanding a multi-year contract and that teachers pay full pension costs with no School system contribution, which may precipitate another teacher's strike.
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Friday, June 5, 2015
Biofuels Subsidies Raise Global Food Prices
On my radio show, I repeatedly discussed the subject of biofuels subsidies which divert corn grain products from the food supply to motor vehicle fuels. Tim Taylor has a new article which nails the resulting global food price increases and how biofuels are economically inefficient and counter productive as a policy.
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