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V o l u m e 1 6 , Is s u e 5
S c h r o e d e r, B r a x t o n & Vog t I n c .
November 1, 2011
I NVESTMENT U PDATE
W O U L D C H AO S R E S U LT I F T H E U. S.
INSIDE THIS ISSUE: PA I D O F F T H E N AT I O N A L D E B T ?
Investors and savers 2 U nited States politi-
cians and voters have en-
should think in real gaged in heated debate this
terms, that is, after year over the skyrocketing
inflation. debt owed by the federal gov-
ernment.
401k loans are popu- 3
Over the last decade the
lar but also dangerous debt has ballooned to nearly
to borrowers. $15 trillion. Some taxpayers
and politicians, angered by
Young investors favor 3
the legacy being left to their
cash, gold is overrated children, have argued that the
as an investment, and U.S. should balance the
more. budget and pay down the
debt.
Some compare today’s 4 Many may have forgotten
stock market to the that just 11 years ago we
1930s market. were on track to pay off the
entire debt by 2012. What we
didn’t know until now was
that the prospect of an end to
U.S. debt sent government
officials scrambling to put
together an emergency plan These days the United States is swimming in debt. But 11 years ago govern-
Points of interest: ment planners worried about the effects of paying off the debt.
to deal with the event.
That’s because the U.S.
• The U.S. budget was in
debt—in the form of Treasury was recently obtained by Na- taxes? It needs to earn inter-
surplus in 2000, and the bills, bonds, and notes—is tional Public Radio through a est but it also needs a rock-
government began paying considered the world’s risk- Freedom of Information Act solid security that will guaran-
off its debt. free asset and safe haven, request. tee payout later in this cen-
serves as the most important It shows how worried tury when the retired popula-
• Projections assumed the interest rate benchmark, and tion increases.
some in the Treasury Depart-
debt would be completely is used by the Federal Re- ment were about the pro- Fed left high and dry
gone by 2012. serve to implement monetary What would the Federal
jected debt elimination.
policy. Reserve use to manage
• Planners worried about U.S. Treasury securities
A p o t e n t ia l c r i s i s have become a ubiquitous monetary policy? Currently
the effects of a debt pay- In the last year of the holding for large and small the fed buys and sells Treas-
off on the financial mar- Clinton Administration econo- investors, foreign countries, ury securities in order to in-
kets. mists at the Treasury worked and even the Social Security crease or decrease the money
on a secret report speculating System, and there is no clear supply and interest rates. It
• Today the debt nears $15 on the effects of the debt idea how disruptive the ab- needs a large, orderly, and
trillion. paydown and on alternatives very liquid market to achieve
sence of such debt would be.
that the government and mar- its objectives, and the Treas-
kets could use in place of For instance, where ury security market is made to
Treasury securities. That re- would the Social Security
order.
port, titled “Life After Debt,” System stash the billions it
was never publicly issued. It collects daily from payroll (Continued on page 2)
Investment Update Page 2
A LT E R N AT I V E S T O U . S . T R E A S U RY
S E C U R I T I E S P R OV E D T O B E R I S K Y
that time the market for
(Continued from page 1) their securities was not big
enough. In retrospect we
The report proposed know that the two agencies
alternatives to using U.S. went bankrupt in 2008
debt. However, in light of what and limp along today with
happened during the financial government aid.
crisis of 2008, such alterna- The swaps market,
tive instruments appear to be where banks and other
a lot riskier today than they institutions swap liabilities,
did in the year 2000 when the was also identified as an
report was written. alternative because it was In 2000 the U.S. was paying off lenders.
The report identified “remarkably liquid” and a
government backed agency “vibrant market.” However
securities issued by the giant that market froze solid in even though our debt may be
mortgage companies Fannie 2008 and has not fully recov- too big now, there may be
Mae and Freddie Mac as al- virtue in always having some
ered since then.
ternatives. However, even at debt outstanding as a back-
The report shows that stop for world markets.
INVESTORS S H O U L D K N OW R E A L R E T U R N S
Many investors and most hurdles: a volatile stock mar- Dimensional Fund Advi-
savers probably think about ket that has had some sharp sors, a Santa Monica-based
their returns only in “nominal” drops over the past five years, investment company, notes
terms. That means they only and a very low interest rate that the popular press has re-
take note of the yield or re- environment that has pushed ported investors are “shifting “Investors ultimately
turn on their investment be- yields at banks and money their portfolios to money mar-
fore accounting for inflation. market funds close to zero. ket funds… with the intent to may lose wealth even as
return to stocks and bonds
In that view a 2 percent A s l o w d e c l in e
when the economy shows signs they try to protect it.”
bond yields 2 percent. A 6 The market’s roller
percent annual gain on a bas- coaster ride has caused many of improvement.”
ket of stocks is a 6 percent investors At the same
gain. to pull time, however,
However, the proceeds of money out “investors ulti-
savings and investments are of their mately may lose
not spent or exchanged in an portfolios wealth even as
unchanging world. Every min- and put it they try to protect
ute of every day relative into cash it,” DFA says.
prices of goods and services holdings, The loss can
are changing. In aggregate mutual come from two
they almost always go up over fund indus- sources: the ef-
time. That’s the basis of the try statis- fects of inflation
concept of inflation. tics show. Inflation is running at a rate three on the purchas-
Those who times higher than average bank inter- ing power of their
T h e s i l e n t k il l e r are hunker- est rates and is steadily eating into the cash, and by the
Inflation is the silent ing down in value of your savings.
enemy of anyone who is trying loss of opportu-
cash may nity to profit in the stock market
to accumulate capital. It con- think they are protecting their
tinually eats away at the value when investors delay reinvest-
nest eggs, but, with consumer ing their money, DFA says.
of one’s savings and invest- inflation running at over 3
ments. It can turn even an percent in the past 12 “The problem with this
investment perceived as months, savers have actually strategy is that no one can con-
“safe” into a wealth destroyer. been losing money that they sistently time markets, and the
Investors these days thought was safe from the signs are never clear,” DFA
have been faced with two stock market’s volatility. concludes.
Investment Update Page 3
401K L OA N S A R E A T A X T R A P T H AT
C A N DA M AG E R E T I R E M E N T C H A N C E S
Almost a quarter of em- lated a sizeable ac-
ployees who have 401k retire- count can borrow a
ment savings accounts are significant amount of
using them as piggy banks, money.
according to a new study by The median loan is
four finance professors from about $4,000, and
Stanford, Yale, and Harvard. most loans range be-
Although employees who tween $1,050 and
use such loans apparently $26,000, the study
see the advantages, the po- found.
tential retirement and tax Taxes and more
booby-traps are not so evi- The tax-deferred
dent, the study found. nature of 401k plans
Hidden traps works against borrow- Loans from your retirement plan can backfire
Borrowers are hit by dou- ers. When money is and cause unexpected taxation.
ble taxation of the loan pro- contributed, the worker
ceeds and they may hurt their escapes income taxes Borrowers are required
overall investment gains. They on that amount. The worker to pay interest on their loans,
also can get hit by unex- pays taxes later, when the usually at the prime rate. But
pected taxes and penalties if money—and its earnings—are since that rate currently is
they lose a job while the loan withdrawn in retirement. very low, at 3.25 percent,
is outstanding. But someone who bor- employees may not get higher
The typical borrower is a rows from their plan must market returns on their ac-
middle-income employee repay the money in after-tax counts while repaying.
making between $40,000 to dollars, says James J. Choi of Finally, if an employee
$60,000 who has been with Yale, one of the study’s au-
the employer between 10 and thors. “Your 401k loan inter-
leaves or loses a job while “Borrowers are hit by
repaying a loan, the loan usu-
20 years. est payments face double
Borrowers can only take taxation, since they are made
ally will come due. If the em- double taxation of the
ployee can’t repay the entire
with after-tax dollars and then
out up to one-half of the value
get taxed again when you
amount, he will owe taxes on loan proceeds and they
of their accounts, to a maxi- the balance, as well as a 10
withdraw them in retirement,”
mum of $50,000. That means
he told the financial news site
percent early withdrawal pen- may hurt their overall
only those who have accumu- alty if younger than 59.5.
Marketwatch. investment gains.”
CASH I S K I N G , G O L D ’ S FAU LT S , & MORE
Investors—younger ones market until there is a and whose value is completely
especially—are making a dash “meaningful change” in the dependent on investors’ contin-
for cash, a survey by the in- economy. ued faith in it… We think that
vestment firm MFS found. Why gold? gold’s effectiveness as an infla-
An unstable stock The managers at tion hedge has been nothing to
market caused a quarter Tweedy, Browne Fund write home about.”
of those surveyed by Inc. are not impressed T i m e s h a v e n ’ t c h a n g ed
MFS to liquidate a por- with this year’s increase Here is a timely quote on
tion of their portfolios in gold prices, they write professional Wall Street inves-
during 2010 or this year in their semi-annual tors from the wonderful 1940
because of market con- report. classic investment expose,
cerns, despite cash in- “We believe there are “Where Are The Customer’s
terest rates that are better ways to address Yachts?” by Fred Schwed, Jr.:
close to zero. economic uncertainties “At the close of the day’s busi-
Generation Y inves- than to speculate in a ness they take all the money
tors say they have close commodity that pro- and throw it up in the air. Every-
to 30 percent of their money duces nothing in the way of thing that sticks to the ceiling
in cash, and won’t reenter the income, costs money to store, belongs to the clients.”
Schroeder, Braxton & Vogt Inc.
1412 Sweet Home Road
Suite 7
Amherst, NY 14228 News from Schroeder, Braxton & Vogt Inc.
Phone: 716-634-6113
The planning staff got an exclusive look inside the bond markets
Fax: 716-810-9445 when they met Dan Fuss, legendary manager of the Loomis-
E-mail: invest@sbvfinancial.com
Website: www.sbvfinancial.com Sayles Bond fund. Richard had breakfast with Dan at the Buffalo
Club. Rosanne, Steven, Sean, and Alan attended a lunch at the
Buffalo Club that featured Dan as guest speaker. SBV uses
Loomis-Sayles to manage portions of client accounts.
The greatest compliment we The planning staff also met with representatives of the Vanguard
can receive is a personal Group and Pimco to get updates on their views of the markets
referral of a friend, coworker, and of their current investment activities. Both companies
or family member. manage portions of our client accounts.
Richard was interviewed live on WBEN-AM radio the day the
European debt accord was announced and an improved U.S.
gross domestic product report was released.
A R E W E R E P E AT I N G T H E 1 9 3 0 S ? F O R
T H E M A R K E T S T H AT C O U L D B E G O O D
The deep recession crease in the S&P 500
and big declines in the helped investors recover
stock market in late 2007 most of the losses they
through early 2009, ac- suffered at the beginning of
companied by a lackluster the decade.
economic recovery, have However, as always with
some observers compar- the market, the 1932-36
Schroeder, Braxton & Vogt’s ing the present day situa-
Investment Update, ISSN # rally did not proceed in a
tion to the dreary 1930s straight line—there were
1089-6600, is published
monthly by Schroeder, Braxton & Great Depression. dips along the way, includ-
Vogt, 1412 Sweet Home Road, Surprisingly, investors ing monthly declines of 18
Amherst, NY 14228. (716) 634- may only hope that this is percent, 11 percent and at
6113. the case, since a good least one stretch where the
© 2011 by Schroeder, Braxton argument could be made Is the stock market today comparable to the market fell four months in a
& Vogt. All rights reserved. market after the Crash of 1929?
that the markets hit their row (note that American
Information has been obtained lows on March 9, 2009 stocks fell in similar fashion
from sources believed to be suffered a severe downturn
and that the recent downturn from June through September
reliable, but its accuracy and from the October 1929 crash
completeness, and the opinions is just a blip in a long upturn, this year).
writes investment newsletter through June 1932, with the
based thereon, are not
Standard & Poor’s Index los- Analogies are dangerous,
guaranteed and no responsibility analyst Mark Hulbert. Hulbert notes: there is no way
is assumed for errors and ing nearly 83 percent. But
“Contrary to the popular during the summer of 1932, of knowing whether his anal-
omissions. Nothing in this
imagination… the 1930s actu- when things looked blackest ogy to the 1930s rally or other
publication should be deemed
as individual investment advice. ally contained one of U.S. and millions remained out of analysts’ making comparisons
Consult your personal adviser history’s most powerful bull work, the market began a to the worst of the 1930s are
and investment prospectus markets,” Hulbert wrote in powerful rally that helped it legitimate. But it may be a
before making an investment September for the financial increase in value four-fold good sign that many analysts
decision. Performance data website Marketwatch. compare today to the 1930s,
published herein are not over the next four years.
The U.S. stock market because bull markets often
predictive of future performance. The 386 percent in- climb a wall of worry, he says.
