Permanent Value Inc. - Registered Investment Advisor

President’s Message

UNCERTAINTY BREEDS VOLATILITY…

We are currently in a very uncertain economic environment.  Not many people would disagree with that statement.    While picking which way the market is going from day to day is next to impossible, we like to give you a long-term general sense of the market.   The recovery after the recession of 2007-2009 has been so slow in terms of economic and job growth,  and this is why it’s hard for investors to ascertain where markets are going so they can choose whether to participate in economic growth and or prepare for another recession (according to Warren Buffett, it is “very unlikely” the US economy will go back into a recession.)   That is why you keep seeing such volatility in stocks, bonds, gold, and currencies whenever there is another pronouncement from Europe or Washington.   

This past quarter the federal debt limit was a big part of the news.   There is a lot of misinformation about the debt out there so I wanted to give you a few facts about what is happening.  One of the issues that have to be addressed is not only the sheer size in dollar figures but also the debt as a percentage of our economy.   Authors Carmen Reinhart and Kenneth Rogoff have written a paper (“This Time is Different: Eight Centuries of Financial Folly”) on sovereign debt and its impact on a country’s ability to grow.  The authors conclude that a country’s growth slows substantially once the country’s level of public debt exceeds 90% of the size of its economy (source: Peterson Institute for International Economics, Harvard University).   The USA’s public debt is projected to be 71.2% of the size of our economy in 2012 (source: Congressional Budget Office) which led ulitmately to a downgrade of the Federal Government’s debt by Standard and Poors.   

So what impact does this have on our investments you might ask?   Since we invest in US Treasury bonds from time to time we thought we share a few numbers with you.  The yield on the 10-year Treasury note was 2.57% on 8/05/11, the day that S&P announced a downgrade of the USA from AAA to AA+.  Now 8 weeks later, the yield on the 10-year Treasury note closed last Friday (9/30/11) at 1.92% as funds around the world continue to buy US debt (source: Treasury Department).    Another result of the downgrade was a significant drop in the stock market over the past quarter and in fact the S&P 500* lost 7.0% (total return) in September 2011 [alone], its 5th consecutive down month.  The S&P 500 has experienced 5 consecutive down months only 3 times since 1990 including the negative stretch that ended last Friday (9/30/11).    This all took place in light of corporate profits being significantly higher than when the recession started in 2008.   In fact, the earnings projected to be generated by the companies in the S&P 500 stock index in calendar year 2012 are more than 6 times as large as the actual earnings of the 500 companies during calendar year 2008 (source: S&P).               

*The S&P 500 is an unmanaged index of 500 widely held stocks generally considered representative of the US stock market (source: BTN Research).   

What has a government that is set up to spend more than it saves (politicians don’t get elected on $ they save; they get elected on the $ they bring home to their districts/states) done about the federal debt you ask?    On 2/14/11 President Obama proposed $1.1 trillion of deficit reductions over the next 10 years.  On 4/13/11 he proposed $4.0 trillion of deficit reductions over the next 12 years.  On 9/19/11 he proposed $4.4 trillion of deficit reductions over the next 10 years (source: White House).  So forget about ten years, how is this year going to look?   Fiscal year 2012 (10/01/11 to 9/30/12) began a week ago Saturday.  The most recent projection (released on 8/24/11) for the fiscal year by the government anticipates $2.6 trillion of revenue, $3.6 trillion of spending, and a deficit of $973 billion (source: Congressional Budget Office).

All of this news requires us to be more vigilant than ever so that we can preserve, protect, and ultimately grow your money.  We look forward to meeting with you to discuss your strategy and make any year-end adjustments that will make your strategy more effective.

President’s Message

HALF TIME REPORT…

Given that we are half way through the year, it seems appropriate that we would give you a half time report on the world and how we are adapting your financial strategy to reflect what is happening.  (For you NFL and NBA fans, it might be the only half time report you get all year if they don’t solve their labor disputes!)   The first half of the year had mainly been dominated politically by government change in the Middle East and economically by government debt, the debt ceiling, and the annual deficit not only here in the US but overseas as well.  We are in a period of slow economic and job growth but companies seem to be doing a good job at maximizing their profits.  Congress is finally addressing in a meaningful way the question of how much debt is too much and what is being done to not just reduce it but simply to slow down its growth!   Now you might be asking “what does this have to do with my financial strategy?”  In most financial strategies, we are either growing our income sources for future distribution or distributing from our current income sources.   Current and future interest rates have a lot to do with that and the government sets the interest rates.  Because your income is reliant on interest rates, the higher interest rates are the less you have to save to provide your future income.  Given that the government debt is about to top $15 trillion, they are very motivated to keep interest rates down because even at 2% the government has to pay out $300 billion in interest alone every year.

INFLATION…

We have been in a very low interest rate environment for some time and with the federal debt situation it looks like we will continue to do so.  This tells us that we will have to save more and acquire more incoming-producing assets than in years past.  Inflation is also a key factor because the government’s chief tool to keep down inflation is to raise interest rates and it is not able to do so effectively until it starts reducing its debt.   We’ll give some statistics on the state of current inflation in the Planner’s Perspective of this newsletter.

So we have to be aware of inflation in everything we do because it erodes the value of the money we save every year.  In fact, since 1950, the value of the dollar has declined over 90%.*   Taxes are also a key ingredient in this mix because ultimately it’s what you keep rather than what you earn or have saved that is most important.  So the three key factors in long-term investing and your financial strategy are inflation, interest rates and taxes and we have to keep all these in mind with every investment that we make.

*Source: Bureau of Labor Statistics. Web: http://stats.bls.gov/.

SUMMERTIME…FALL…

Understanding the dynamics of how your financial plan navigates these economic forces is crucial to reaching your financial goals.  Your financial strategy is a fluid and dynamic plan that updates and adjusts but doesn’t change its core principles (accumulating or distributing, protection, low volatility or high volatility, etc.).  Every meeting we have together builds upon the foundation we have established to make sure your financial goals are achieved.  We look forward to meeting with you in the fall to discuss your strategy and make any year-end adjustments that will make your strategy more effective given any income and asset changes you have made throughout the year.  Have a wonderful summer and we’ll see you this fall.

Finish Strong

FINISH STRONG…

On April 3rd, I completed my first triathlon, the Lavaman Triathlon in Hawaii and learned a few lessons that I want to share with you.    The first one is that a strong start and especially a strong finish are the key to not only races but many endeavors (particularly financial) in life.   At the start of the triathlon, I was determined to get into a good early rhythm and make sure that things were working as smoothly as possible.   This was all made possible by our coach who prepared us for every possible scenario based on his 30 years of coaching and participation in over 280 triathlons himself during the past 50 years.   We spent five months preparing for the race where I made sure I could complete all three distances but the three days prior to the race on location were by far the most valuable.  I tested swimming in the bay that would be our race course (with and without a wetsuit); biking and running on the actual course as well as what nutrition I would take prior to the race itself.  I was thus fully prepared and had gotten all my mistakes out of the way before the gun (actually a conch shell) sounded for the main event.  This helped me to have a mistake-free race and I even had an unexpected but pleasant surprise when my son Jordan ran with me the last quarter mile to the finish. 

Now how does this apply to my finances you might ask?   Being prepared and getting sound coaching is essential to having a successful financial strategy.  You can take simple steps like making retirement plan contributions automatic and on time, keeping a working budget and establishing a healthy surplus every month.   While I had a head coach and a nutritionist, I also had a separate run, swim and bike coach for each event in the triathlon.  I asked them a lot of questions and always consulted them when I was not getting the results I wanted in training.  You have us, your financial advisor, as your head coach; you also have coaches in estate planning, taxes, and risk management.   You need to see all of them when appropriate, test their advice on your own financial situation and take their advice in a timely fashion to make your strategy the most effective it can be.  Finishing strong is critical in planning because that is when mistakes can have the biggest impact.  If you tested your strategy early in your financial life and are confident in the race you are running you are likely to finish strong.  Having someone to help run you in to the finish and encourage you (like your financial advisor) certainly helps make it more worry-free and pleasant as well. 

SPRINGING INTO SUMMER…

We look forward to meeting with you in the next few months to discuss your strategy so we can help you make all the critical adjustments necessary for you to be successful.  We would like to review all your finances two to three times per year depending on your schedule and will be calling to get your help in gathering the information we need so the meeting can be as efficient and effective for you as possible.   Thank you in advance for your cooperation and have an enjoyable spring and summer.  We look forward to seeing you soon.