The Contrarian's View,
Vol. VII, #6, January 17, 1993
- DEBT OVERHANG -
If you've been subscribing to The Contrarian's View for any length of
time, you know that I have not been very cheerful.... OK, let's be hon-
est, I've been downright gloomy.... about economic prospects for the
next two years. I've suggested that we are at a major turning point in
interest rates.... that they are about to embark on a multiyear rise;
inflation will return, probably virulently; that a major bear market in
stocks lies directly ahead.... probably a "granddaddy" bear market,
like that of 1973-74, in which investors bail out of mutual funds en
masse, and the portfolio managers dump stocks wholesale to meet redemp-
tions; and that the chances of a financial "accident" occurring in the
next two years are as great as they've been since 1929. Why, you might
rightfully ask, am I so pessimistic when stocks have been making new highs,
the economy appears to be recovering, interest rates are as low as they've
been in twenty years, and inflation appears to be under control?
My answer lies in the fact that for almost thirty years our federal govern-
ment has consistently spent more than it has raised in taxes and fees, with
some of the difference being made up with printing-press money, but with
most of the difference being borrowed. Now the federal debt is so large,
and the interest being paid on it so burdensome, that eventually the Feds
will run out of options to keep the government running.... except to mone-
tize the debt (hyperinflation), raise taxes sharply (kills the economy), or
default on the debt (also kills the economy).... or (perish the thought!),
cut way back on spending, especially on "entitlements" benefits.
It was Lyndon Johnson who started the process back in the 1960s by promising
us both "guns and butter".... waging both an expensive war in Vietnam, and
launching "Great Society" entitlement programs. But it is only since the
early 1970s, when Congress took away Richard Nixon's ability to "impound"
(not spend) funds.... the closest thing we had to a presidential line-item-
veto of the budget.... that spending and borrowing really went out of con-
trol. From 1974 to 1981, the annual budget deficit averaged about 8% of the
accumulated federal debt. In the middle years of Ronald Reagan's presidency,
during the "supply-side" silliness that prevailed the time, it bulged, peak-
ing at 15% of the federal debt in 1983. In the past seven years the annual
budget deficit has "settled down" to about 7% of the accumulated national
debt.
Well, that sounds pretty good.... budget deficits are only 7% of the debt
and maybe are declining..... seems like we're gaining control of the sit-
uation.... until you realize what this really means: The federal debt is
growing at a compound annual rate of 7% AFTER adjusting for inflation....
in real (inflation-adjusted) terms, this means the debt, and the interest
paid on it, will double every ten years.
Meanwhile, if historical trends persist, the economy will continue to grow
at 3% per year, which has been the average long-term growth rate for the
U.S. This 4% gap between real growth of the economy and the real (unreal?)
growth of our national debt, annually compounded, if left unchecked will
eventually render our government incapabable of meeting its obligations
(in other words, bankrupt). In the table that follows, I've assumed what I
consider to be an optimistic scenario: The economy continues to grow at
a 3% pace, and federal revenues keep abreast.... that is, taxes are neither
increased or cut; interest rates remain low, so the national debt continues
to compound at only a 7% rate (the gap between growth of federal income and
debt stays constant at 4%); and no new budget-busting entitlement programs
(such as a national health-care system) are voted in. All dollar figures
shown are adjusted for inflation, and are in billions of 1992 dollars:
Federal Annual Federal Deficit As
Debt Deficit Income % of Income
---------- ---------- ---------- -----------
FY1992 $ 4,135 $ 290 $ 1,075 27%
1993 4,425 310 1,107 28%
1994 4,735 332 1,140 29%
1995 5,067 355 1,174 30%
1996 5,422 380 1,209 31%
1997 5,802 406 1,246 33%
1998 6,208 435 1,283 34%
1999 6,643 465 1,322 35%
2000 7,108 498 1,361 37%
Coincidentally, in 1992 the interest paid on the federal debt was almost
the same as the budget deficit: $290 billion. In other words, if there
were no federal debt, the budget would have been in balance. Also coinci-
dentally, the federal government is currently paying about 7% interest
(on average) on its debt, the same as the debt-compounding rate. If both
these trends persisted (unlikely, but I hypothesize it to make a point), by
the year 2000 the interest paid on the debt would be almost half a trillion
1992 dollars.
The revenues raised from the individual income tax (the Form 1040 you fill
out every spring) in fiscal year 1992 were about 45% of the total federal
income, so about 60% of what people paid in taxes went just to pay interest
on the national debt. If this table is an accurate projection of the future,
and if individual income taxes continue at 45% of federal income, then in
the year 2000 82% of all individual income taxes raised will go to pay in-
terest on the national debt.
I say that the figures in the previous table are optimistic because they
don't allow any margin for error. Suppose the economy doesn't grow at a 3%
long-term rate, but the debt drag lowers the growth rate to 1% or 2%, with
the trend punctuated by frequent recessions. Suppose the government per-
versely raises income tax rates so high that revenues actually lag economic
growth because so many people avoid (or evade) paying taxes at the higher
rates. And most probably, suppose interest rates don't remain at current
levels (lowest in twenty years!), but the government's need to borrow for-
ces them higher. In the following table I've projected only one of these
possibilities.... rising interest rates.... as it is the most likely to oc-
cur, and in my opinion, will occur. I've assumed nothing drastic here; just
a gentle, half-percent per year rise in interest rates.... and as a conse-
quence, a half-percent-per-year increase in the ratio of the annual deficit
to the accumulated debt, for four years, until the annual deficit "stabili-
zes" at 9% of accumulated debt, which is the average since the early 1970s.
As in the previous table, all dollar figures are inflation-adjusted in bil-
lions of 1992 dollars:
Federal Deficit Annual Federal Deficit As
Debt As %/Debt Deficit Income % of Income
---------- ------- ---------- ---------- -----------
FY1992 $ 4,135 7.0% $ 290 $ 1,075 27%
1993 4,425 7.5% 332 1,107 30%
1994 4,757 8.0% 381 1,140 33%
1995 5,138 8.5% 437 1,174 37%
1996 5,575 9.0% 502 1,209 42%
1997 6,077 9.0% 547 1,246 44%
1998 6,624 9.0% 596 1,283 46%
1999 7,220 9.0% 650 1,322 49%
2000 7,870 9.0% 708 1,361 52%
Under this scenario, which I feel is more realistic than the deficit-as-a-
constant-7%-of-debt figures given in the first table, by the year 2000 116%
of individual income taxes will be used to pay interest on the national
debt.... in other words, ALL individual income taxes raised, plus ALL cor-
porate and excise taxes (about 12% of federal income, if 1992 ratios pre-
vail), plus 4% of Socal Security payroll taxes. I doubt we would ever reach
this level and still have a stable, low-inflation economy.... something must
give first. Other countries which previously have travelled the route to
bankruptcy we are now following fell apart when their deficits exceeded a-
bout half their revenues, so the year 2000 marks the "danger point" for us
if we don't change course. To bring the situation to a more personal level,
assume you have take-home pay of $50,000 per year, and you carry a $290,000
variable-rate mortgage on your home on which you make interest-only annual
payments of $20,300 at a very favorable rate of 7%..... and the principal
need never be repaid; you can always roll it over. Now, no banker in her
right mind would write you a mortgage with these terms, because the bank
would soon be out of business; but for the sake of the example, I'll assume
you found a stupid bank. Your struggling existence depends on low interest
rates; should your mortgage-loan rate rise to, say, 11%, your interest pay-
ments would be $31,800, or almost two-thirds your income. That doesn't leave
very much for your day-to-day living expenses. But this is the situation our
government might well face only eight years from now.
You can see that the government has an enormous incentive to keep interest
rates low, and especially to bring down long-term interest rates.... because
the lower the rate of interest it pays on its debt, the more debt can be
carried without apparent pain. We think of Federal Reserve chairman Alan
Greenspan as an "inflation fighter"; but I think his actions are more a re-
sponse to the government's financing needs in the absence of sound fiscal
policy.... especially his forcing short-term interest rates to artificially-
low levels, so the government could quickly refinance much of the debt com-
ing due at cheap rates. After all, if he were able bring the government's
overall debt-financing cost down from 7% to 5% (without killing off the e-
conomy in the process), which would lower the "gap" from 4% to 2% in the
first table above, it might buy the government another decade of time to get
its affairs in order. And the last thing we can afford is a robust economic
recovery, as the financing needs of business in competition with government
would quickly drive interest rates (and the deficit) higher.... otherwise,
why does the Fed talk of further monetary tightening as soon as the economy
shows the slightest inkling of recovering from its present comatose state?
Orwell's 1984 has truly arrived; less is more.
I would surmise that Greenspan has decided that if the country is going to
spend itself into bankruptcy, we should go bankrupt honestly rather than by
the hyperinflation route. (Go directly to jail; do not pass GO; do not print
$200 trillion.) But current efforts to keep interest rates artificially low
create an unstable condition, because excessive borrowing and spending ulti-
mately always lead to higher interest rates, both nominal and real. The lon-
ger rates are kept low, the more quickly they will rise when finally torn
free, feeding on themselves (because the government MUST pay interest or de-
fault) in an interest-rate spiral. So, my second table above may also be
overly optimistic because it assumes only a gradual rise in interest rates,
and assumes nothing else goes wrong.... no recessions, not getting sucked
up into any more expensive wars (even while Saddam Hussein continues to be
a problem, and Iran prepares to dominate the Muslim mideast), no accelera-
tion in the deficit-to-debt ratio beyond 9%.
In real life we have Bill Clinton about to charge off in the wrong direction
on his white steed Infrastructure. One of the proposals under consideration
is to loosen bank restrictions to free up $89 billion more in business lend-
ing. This is $89 billion that won't be lent back to the government, thereby
enlarging the deficit by that amount. The resulting stimulus in the M2 money
supply should awaken businesses and their borrowing needs enough for inter-
est rates to nudge upward about 1% IF the government weren't a heavy borrow-
er. But in today's economy direct government borrowing, plus government-
gauaranteed and government-supported borrowing, accounts for about 85% of
all monies borrowed (the private sector has the other 15%), giving about a
3:1 "multiplier" effect.... so short-term interest rates could quickly climb
about 3% on very modest stimulus, in spite of the Fed's desire to keep them
low. Also, if I remember correctly, loose bank regulations and insufficient
reserves are what led to the taxpayer bailout of the savings and loans; the
current problem with banks is not that capital-reserve requirements are too
high, but that the regulators were first, too late, then, too heavyhanded,
in disposing of the assets of marginal instutions, and probably put many
banks out of business that shouldn't have been and thoroughly frightened
the rest.
If Sir Bill unleashes his bank-lending stimulus, plus a modest "economic
recovery" spending program, plus new public spending on high-tech "infra-
structure", plus who-knows-how-much on health-care "reform", public and pri-
vate borrowing needs could easily spike interest rates upward in a rela-
tively short time.... like, double within two years. Then the "danger point"
year would advance to 1996 or 1997; the economy would be under severe strain
by 1995; and the stock market, which frequently leads long-term low points
by about two years, would begin to discount the trouble in.... you guessed
it!.... 1993.
Additionally, the federal government's current "official" $4.135 trillion
debt figure somewhat understates the true size of the debt. An additional
trillion dollars has been borrowed from Social Security "trust" funds and
replaced with nonmarketable Treasury securities.... essentially, government
IOUs.... and spent. The federal government also guarantees an additional
$3 trillion in "nongovernment" debt, such as federally-assisted home mort-
gages, student loans, and so forth, some portion of which will certainly
run into repayment difficulties when interest rates rise.
I still haven't figured out what worthwhile things the government has done
with all of the money it has borrowed. Lyndon Johnson wasted a wad on the
Vietnam war; the government's "war on poverty" seems to have created a per-
manent welfare class, complete with drug subculture.... which has led to
another costly and ineffective "war on drugs"; and a bundle has been soaked
up by expensive and destructive regulation, such as the energy price con-
trols of the late 1970s. Perhaps the only effort where we've gotten a good
return on the money spent was Ronald Reagan's "star wars" effort to bank-
rupt the former Soviet Union in a technological arms race. This was spectac-
ularly successful, but we have become so impoverished in the effort that we
now can't afford to send money to Russia to help vault it into the capital-
ist "new era". (Most financial aid to eastern Europe is being provided by
Germany, which will reap the benefits in the next century.)
I also haven't figured out why nobody in Washington appears to be paying any
serious attention to the debt overhang problem. Maybe Congress is so used to
exempting itself from laws it passes for us peons to observe, that it be-
lieves it is also above the laws of nature. But the mathematics of compound-
ing is immutable: Unless we change course soon, there is no question but
that our government will be bankrupt; we can only argue when. Maybe the pol-
iticians figure they won't be around when the s--t hits the fan; by then, it
will be somebody else's problem. Maybe the economics of deficit spending is
so depressing they close their eyes and pretend the problem isn't there,
hoping it will go away. At least the American electorate isn't as easily
fooled; a fifth of the voters last November felt that continuing massive
deficits were so damaging to the nation's future that they voted for Ross
Perot for president, in spite of his eccentricities. (Want to place any bets
that good ol' Ross will be back again in 1996, stronger than ever?)
I also haven't figured out why we all voted for the turkeys who have done
this bad thing to us. There is no free lunch; why did we let ourselves be
fooled into thinking there was?
I see three possible outcomes as we continue on our present course. The
first, which I think is the least likely, is a "credit meltdown" occurring
in the late 1990s.... 1996 or 1997, most probably. As we enter the middle
1990s, with President Clinton's and Congress' welfare spending and higher
marginal tax rates, the economy is stagnant or in recession, interest rates
are climbing sharply and the deficit is careening out of control. Interest
paid on the debt now consumes 93% of the government's revenues, and the gov-
ernment borrows to continue providing services, the cost of which is now
161% of revenues. The national debt is now at 110% of gross domestic prod-
uct and compounding at the rate of 14% per year, and foreign lenders are
getting very nervous, because they doubt that the U.S. can continue to make
interest payments on this overwhelming debt.... a default appears inevita-
ble. One sunny spring morning in 1996, a European central banker announces
that his country will no longer support the dollar, which had been steadily
declining on world currency-exchange markets for months. This is the signal
the world hoped against hope would never come.... the U.S. is bankrupt....
and panic ensues. In three hours computer-generated futures selling drives
the dollar 40% lower on foreign exchanges, and with it the prices of Treas-
ury securities, before the markets are shut down by regulators.
Next day, several major money-center banks find that insolvency threatens
as they struggle to repay overnight loans to foreign lenders who are clam-
oring for their cash.... in their own currencies, not in dollars. Quickly,
the banks begin calling in domestic loans for cash to buy foreign currencies
before the dollar plummets further in value. By midafternoon the President
has imposed an emergency freeze on all domestic loan calls, and has directed
the Federal Reserve to provide to foreign central banks whatever funds are
needed to cover foreign loan redemptions (through their banks, not ours).
U.S. stock and bond markets fail to open because the crush of sell orders
has driven projected prices well below what would be permitted by the trad-
ing "collars". The public, sensing danger, causes a run on ATM machines as
they withdraw cash up to their maximum daily limits; by 2 PM all banks have
disabled their ATM systems, but most of the machines were already out of
cash anyway. By 4 PM, when the President directs all banks to close their
doors for the day virtually every bank in the country is insolvent on paper.
The rest of the week sees a bank holiday, and stock, bond and commodities
markets remain closed. But on foreign markets, which have reopened, Treas-
ury securities trade at 10% to 30% of their pre-panic prices. The following
Monday, the banks reopen and customers wanting cash are paid in "scrip"
(bank paper), which can be redeemed for cash as soon as government printing
presses can crank out enough to meet demand. Checks will not be honored; all
use of credit cards is prohibited.
This is the worst of the crisis; but in the ensuing weeks, as the liquida-
tion of assets behind callable loans begins, prices drop sharply, and the
country rapidly slides into depression......
I say that this outcome is the least likely because it does not include any
monetizing of the deficit/debt my the Federal Reserve; the path to bankrupt-
cy ends in sudden panic with the Fed still hanging tight. I think it is much
more realistic to assume that when the immovable compounding of debt over-
whelms the intransigence of the Federal Reserve, the Fed will blink. After
all, the mathematics of compound interest cannot be changed; the only alter-
native is default, but people (even Greenspan) can be replaced.
So a more likely outcome is that a large chunk of the debt will be inflated
away, leading to an inflation-induced boom preceding a deflationary col-
lapse. It is spring of 1995; for two years the economy has been struggling
along under the weight of steadily-increasing interest rates. The Fed has
been trying to steer a middle course, printing enough money to keep the
economy above water, but not so much that inflation gets out of hand. But
now M2 is growing at a rate greater than the 9.5% per year Fed upper target,
and a strange kind of inflation is underway; the values of assets continue
to decline in real terms, as they have been since 1989.... houses and com-
mercial real estate, businesses, farmland, natural resources (except prec-
ious metals, which are holding up quite well after a 1992 bear-market bot-
tom).... but the cost of food, manufactured goods (especially those made
mostly overseas) and services is escalating way beyond the ability of most
people's incomes to keep up. Stocks have been in a bear market for two-plus
years, as corporate profits have vanished in the increasingly inflationary
environment; people are instead buying coins, jewelry, antiques, art.... any
kind of collectible that looks like it will appreciate faster than infla-
tion. The $900 billion annual deficit is now more than half the government's
intake of $1.7 trillion; and because entitlements are indexed to inflation,
and because investors expect higher inflation ahead, the government is pay-
ing 16.3% interest on 20-year bonds, causing the deficit to spiral out of
control.
The dollar has been sinking on foreign-exchange markets for almost two years
now.... since mid-1993.... and it has recently been able to maintain parity
with the deutschemark ($1 = DM 1) only through massive intervention by the
Bundesbank (the German central bank). On a fine day in May (at least, the
weather is fine!), as the Treasury's quarterly bond-refunding is getting un-
derway, the head of Germany's central bank, speaking for the entire European
community of nations, states that Germany will no longer support the dollar
until the United States puts its fiscal affairs in order. The dollar quickly
collapses on the world's exchanges to DM 0.72, and suddenly, there are no
buyers for the Treasury bonds. Well, the Treasury can't call off the auc-
tion because the government MUST roll over the debt coming due, or default;
but the only bids coming in are from the Japanese at a yield equivalent of
24%.... so in steps the Federal Reserve, and it buys the entire remaining
Treasury offering (about 85% of it) at par for its own account.
This action is clear for all to see; the Federal Reserve has changed its
policy, and will now monetize all Treasury debt that cannot be auctioned in
the open market at "reasonable" rates of interest. In New York, the bond
market tanks, but stocks take off like a bolt, rising 15% the next day a-
lone, and 32% for the week. Inflation is now official (rather than unspoken)
government policy; the name of the game for survival is to borrow, and pay
back with cheaper dollars. The economy picks up, for awhile, as entire em-
pires are built by new entrepreneurs on borrowed money; although the qual-
ity of goods manufactured and productivity decline, and crime rises, as peo-
ple devote an increasing amount of time and energy trying to stay ahead of
inflation.... now at 8% per month, and still rising.... instead of making an
honest living.
By the summer of 1996 inflation is running at 30% per month, and the credi-
tors of America.... largely middle-class savers and retirees on pensions....
have been wiped out by the inflation. They now swell the welfare rolls, as
the government is the only source of income that keeps pace with the price
increases. Tax collections have broken down; lawlessness is prevalent, and
people are prisoners in their homes at night. But there is hope; the voters
are furious, and in the fall elections Ross Perot's America First party cap-
tures 93% of the seats in Congress and Perot himself is elected president
virtually by acclamation. In early 1997 the Perot government freezes gov-
ernment spending at current levels, drastically cuts welfare benefits and
throws most recipients off the dole, and issues new dollars, backed by Fort
Knox gold and interchangeable with newly-minted gold and silver coins and
convertible for a brief period at $N1 for 1200 old dollars. The old Treasury
debt is replaced with new notes, also at a 1-for-1200 ratio, whose interest
is payable either in new dollars or (to foreign holders) in gold bullion.
Inflation stops dead in its tracks, and the economy stabilizes at a depres-
sed level, but the damage has been done. The middle-class savers, especially
retirees, were wiped out, while the people living on borrowed money ulti-
mately came through OK (at least, better than most everybody else). The Uni-
ted States enters the 21st century as a maligned, discredited banana repub-
lic: The world's only remaining superpower has died......
You will note that in both of these hypothetical outcomes I have projected,
the end comes rather quickly, and this is an important point. How, you may
well ask, can I project such chaos when at the moment things appear to be
quite normal, and look like they will continue that way indefinitely? By way
of analogy, let me offer up the recent history of IBM. IBM has been having
difficulty maintaining market share for several years, but in spite of per-
iodic restructurings it seemed that the company would continue to be profit-
able and that the dividend was safe; after all, IBM's corporate managers are
among the best in the world, and it appeared to all they knew how to adjust
to change. Then in the fall of 1992, IBM said its computer mainframe markets
were collapsing, which is exactly what happened to the stock; it cratered.
And why? Because it became clear to all (especially to the analysts, who
were caught flatfooted) that IBM management had lost control of IBM's desti-
ny, and whatever it had been doing to regain control to date was wrong, or
was insufficient. But the ILLUSION of being firmly in control had kept the
stock afloat until the illusion was shattered.
And that's the way it is with our federal government.... The president, Fed-
eral Reserve, Treasury and even Congress offer the ILLUSION of being in con-
trol of the economy when in reality they are rapidly losing control.... in-
deed, have lost control.... of the situation; only the illusion remains.
The illusion is supported by the bond rating services, which continue to
insist U.S. debt is top-quality when, if any private entity had the current
debt overhang of the U.S. government, its bonds would long ago have been
downgraded to junk status. (The government's greatest asset is the ability
to tax its unwilling subjects; but even this capability has limitations.)
Furthermore, the private economy relies on this illusion to stay healthy and
continue on course; does anybody doubt that if it were suddenly apparent to
everybody that the government is bankrupt, that a large part of private debt
would also suddenly become uncollectible? It need not be a foreign central
banker that shatters the illusion.... the shock could come from any source,
but once the illusion is shattered, the markets, the economy.... and very
possibly, the government.... would quickly unravel. This is why I have said
that during the next two years, while the debt overhang becomes ever larger,
we are highly vulnerable to a financial "accident".
Apocalyptic though this may seem, there is plenty of evidence that our econ-
omy is having trouble coping with the debt overhang, if we would only choose
to open our eyes and see it. The oil depression of the 1980s (following the
"recycling of petrodollars"); the savings-and-loan bailout; the riots in Los
Angeles (the system is NOT working for some minorities); the commercial
real-estate depression and scattered insurance-company failures; the lever-
aged-buyout and junk-bond busts; Congress' creation, then repeal of cata-
strophic-illness insurance for the elderly..... these are not signs of an
economy that is humming along smoothly, but of one that threatens to come
apart at the seams; and certainly, of an economy which cannot absorb any
more social-welfare programs.
Now, having offered up two possible outcomes to the debt crisis, let me
say.... I don't think either one is how things are going to turn out. To un-
derstand why, we need to look at the other side.... who owns the government
debt. Although too much debt is bad, the interest the government pays on it
doesn't just disappear into the ether, never to be seen again; somebody is
collecting that interest, and saving or spending it. About 15% of U.S. gov-
ernment debt is owned by foreigners; the rest is held domestically. Although
statistics are hard to come by, I think we can safely say a good chunk of
the debt is held by banks as supposedly-"riskless" reserves (in lieu of be-
ing lent to customers); another good chunk is held by the public, mostly as
E and EE savings bonds; but I would say the largest chunk is held by state
and local governments and insurance companies as reserves for pensions and
retirement annuities, and by individuals in IRAs, 401(k) and similar tax-
deferred retirement plans.
We also need to look at where the government spends its money: About 52% of
the budget for fiscal year 1992 was spent on "entitlements"; this percent-
age creeps up a little bit each year, as this is the fastest-growing part of
the budget (after interest paid on the debt). Now "entitlements" includes
things like aid to welfare mothers, farm price supports, food stamps and the
like, but the largest part is paid out as Social Security, Medicare and Med-
icaid benefits.... "welfare" for the middle class. At our behest, the gov-
ernment has promised us that it will "take care" of us.... all of us.... at
least at some minimal level, in our golden years.
When Social Security was first implemented, it was a welfare program (al-
though it certainly wasn't advertised as such at the time). Life expectancy
was much less, and lucky was the person who lived long enough to collect
full benefits at the government-mandated age 65. The program had 30 workers
paying in for every person collecting benefits, and "premiums" (taxes) were
2% or less of each employee's pay. Social Security certainly saved many an
elderly widow from being shipped off to the local poorhouse (which was the
alternative available at the time), but a useful retirement plan it wasn't.
With the passage of time, life expectancy increased, and what was originally
a welfare program mutated into a middle-class entitlement program, with many
retirees collecting benefits for 20 years or more. The addition of Medicare
and Medicaid in the 1960s met another real need.... to keep the elderly from
descending into poverty from high medical expenses.... or to keep elderly
folks from dying just because they couldn't afford medical care. As for many
well-intentioned government programs, technology has raised the ante, be-
cause through the miracles of modern medicine people can overcome all sorts
of "aging" diseases and live to ripe old ages.... at high cost.
In the "old" days, before the government "safety nets" for the aged were in
place, people were expected to provide for their own retirement, or die
while still working. If your resources ran out, you moved in with the kids,
and they supported you 'til you died. Rarely was there anything left for the
kids when you passed on.... more likely, they were financially (and emotion-
ally) drained from caring for you in your final years. Only folks who had no
close relatives still living wound up in the poorhouses.
Today we not only have "entitlement" programs.... Social Security and Medi-
care.... whose benefits are (mostly) distributed without regard to financial
need (i.e., everybody collects), but many families find that the government
support systems actually encourage elderly parents to shed assets to their
kids, then live on Social Security, Medicare/Medicaid and food stamps (with
a little under-the-table help from the children) until it's time to be ship-
ped off to the nursing home - at government expense.
So not only do we have, maybe, a third of our retirement income promised to
us by the politicians, but many baby-boomers will find.... indeed, are plan-
ning on... their parents leaving them good-sized estates at death. Not all
elderly folks are well-off, of course, but as a class the retired are no
longer poorer than most Americans.... they are better off.
In effect, the government is bankrupting the country (and indirectly, all
of us) to support the largely-comfortable lives of current retirees, and
to ensure even more comfortable retirements for the baby-boomers. (When
Bill Clinton talks about "controlling" health-care costs, he's not refer-
ring to your company health-insurance plan, where presumably you have sev-
eral competing choices and you can choose the benefits according to what you
are willing to pay. What he really means is that the money the government is
shelling out in medical care for the poor and elderly is busting the budget,
and he means to bring it under control by fixing prices rather than expli-
citly cutting benefits.) This is especially so for the upper-middle-class,
which has the means to take advantage of tax-deferred savings programs, such
as IRAs and 401(k)s, to supplement the government programs.
If the government is not to go bankrupt, it needs to at least reach a "stea-
dy-state" growth rate of the national debt.... it should grow at a real rate
of no more than 3% per year, to match the growth of the economy. That would
still leave quite a debt overhang and interest bill to pay, but at least the
problem wouldn't get worse. To close the 4% gap, it will have to go where
the money is.... not to workers, because to increase their taxes would kill
off the economy.... but to retirees and retirement plans, where there is a
lot of money piled up, and where benefits are (from the government's point
of view) much too generous at others' expense.
One step would be to raise sharply the age you must reach before you can
collect Social Security and Medicare benefits, say to age 70.... which would
keep people working longer and, ultimately, collecting less before death.
That might solve the problem of how to pay the retiring baby-boomers their
Social Security from the trillion-dollar "trust" fund surplus that really
isn't there; but it doesn't solve the current cash-flow problem. For this,
the government must turn to the incomes of present-day retireees to steal
the money it needs.... and I think there are several ways it could do this.
The easiest.... and I think, the most likely.... would be to steal away your
money at death, by sharply lowering the estate-tax exemption and by raising
estate taxes (probably by eliminating the capital-gains forgiveness that
occurs at death). Dead people don't vote; and this would certainly cut down
on the massive transfer of wealth to the baby-boomers that otherwise will
occur over the next two decades. (It provides a strong incentive for the
elderly to give away their accumulated wealth while they're still alive....
which might not be such a bad thing, because the parents can enjoy seeing
their children and grandchildren benefit from their largesse. I never did
understand why some people hang onto every last nickel until they die, never
knowing how their offspring benefit from their estates, and in some cases
passing on their estates when the recipients are themselves too old or in
too poor health to enjoy them to the fullest.)
We might also see substantial changes in laws affecting insurance.... an
imputed "appreciation" portion of term and whole-life insurance could be
made taxable at death; and the use of various kinds of insurance to pass on
assets tax-free at death could be severely curtailed. Again, the government
collects more when you die.... the only recourse you have is: Don't die!
(Just kidding, folks.... last time I checked, death was still inevitable.)
Even these changes wouldn't be enough to solve the problem.... eventually,
Congress would have to restrict Social Security benefits to current reci-
pients. The most obvious way would be to make Social Security benefits ful-
ly taxable (just as all other retirement benefits are, the politicians will
tell you). Currently, recipients between ages 65 and 72 lose $1 of Social
Security payments for each $2 of earned income above a threshold; this
could be extended to ALL kinds of income (including tax-exempt bond inter-
est), not just wages and salaries. And finally, if the government perceives
that you have done too well on your own, it could simply cut off all Social
Security payments to retirees above a certain income level, and/or apply a
"supertax" to private pension benefits. If the Social Security outlays could
(through taxation) effectively be cut in half, "saving" the government about
$200 billion in 1992 dollars, that would go a long way toward reducing the
deficit; it should certainly close that 4% gap.
Because the Social Security system is a political "sacred cow", you can be
sure the politicians won't do much until the country is at the brink of a
crisis so plain to see that even they cannot ignore it. But given the choice
between bankrupting the government and triggering a depression too horrible
to imagine, or breaking its retirement "promise", I have no doubt that it's
the promise that will go. Isn't this unfair, when you've been planning your
life around a promise that will no longer be kept? Sure it is, but politi-
cians are always making and breaking promises.... they even break them with
retroactive legislation.... so it's completely in character for them. And
even though it will be grossly unfair and it will be a bitter pill to swal-
low, we will swallow it, becase the alternatives are worse: We can accept
having the government steal part of our retirement away in taxes, or have
all of our savings wiped out in a hyperinflation or the value of our assets
demolished in a vicious deflation. All choices make us poorer; which is the
least painful?
Once the government's retirement promise is broken, the Social Security
system will lose its middle-class support and will revert to its original
function as a welfare system. The middle class, cheated out of much of
its retirement benefits, will probably insist that Congress spread the pain
around a little, so other welfare payments, especially to those who are
not poor.... farm-price supports, for example, or funding for public radio
and TV, or research grants, or maybe even food stamps.... will also be elim-
inated. As we enter shell-shocked into the 21st century, realizing that the
party is finally over, a new Congress with a new sense of fiscal responsi-
bility might actually start running budget surpluses and retiring some of
that debt overhang.... and the country might not become a banana republic
after all.
What does this mean for you, especially if you are a baby-boomer? First, I
think you should expect to pay somewhat higher taxes as a worker.... mostly
coming through the back door, as a reduction or elimination of income-tax
deductions, or as an implied increase in income.... making health-care ben-
efits taxable, for example. I think you should expect to fully fund your
own retirement (don't expect to get any Social Security benefits), especial-
ly if you want to retire earlier than the government would like you to; and
I think you should expect your retirement income to be fully taxable (bey-
ond what you paid in), maybe in a tax superbracket. And if your parents are
getting along in years, ask for your money now.
There is a fourth possible outcome that I have not previously mentioned, be-
cause the chances of it happening range between zero, zilch and none: Con-
gress sharply and immediately cuts spending, especially in entitlement pro-
grams, without raising taxes; in fact, it cuts the capital-gains tax to
bring in more revenue.... and balances the budget. Fat chance, right?
Now I think it becomes clear why I am not too cheerful about the stock mar-
ket's prospects during the next two years. Congress will, I think, take us
right to the brink before doing something about the debt overhang.... hope-
fully, it will be in time.... and I think stocks will spend the next two
years discounting the approaching crisis, and will be especially vulnerable
to bad news because the economy's ability to absorb any unexpected shocks
will be much reduced. The brightest outlook for stocks.... that of hyperin-
flation.... would bring us a roaring bull market in 1995, as people shed
cash and bonds for anything with tangible value; the other outlooks call
for subpar performance until..... one way or another..... government spend-
ing is finally brought under control. I feel at least a small part of your
assets should be in precious-metals stocks.... highly-leveraged vehicles,
such as the warrants of Atlas or Amax, or the long-term LEAPs of ASA, Home-
stake, or Placer Dome will do, as the cash outlay is small, but they will
soar in value should a financial crisis strike and will provide excellent
"insurance" for your portfolio in a time of distress.
- *** -
P.S. Have a Happy New Year.
- HOPE YOU ENJOYED THE BOOKLET -
Because the "essay" part of this month's issue is so long, it is coming to
you in "booklet" form; the rest of the January 1993 issue herewith follows
in the regular format. Save a tree.... plus, because I feel the message in
the booklet is an important one, and because it outlines my reasons for be-
ing bearish on the next two years (time will tell if I'm right!), it is a
convenient form in which to get the information to new subscribers. I actu-
ally finished doing the booklets at the end of last month, and even in only
two weeks it's amazing how quickly parts of it have gone out of date. Saddam
Hussein is not just a "problem"; his presence, it appears, will require con-
tinuing (and expensive) military action. Also, is that the sound of Clin-
ton's campaign promises being broken that I hear? Suddenly, "the deficit" is
much worse than he had imagined, and it looks like you can kiss that middle-
class tax cut he envisioned during the campaign goodbye, as well as his re-
marks that he would halve the deficit in four years. Clinton's budget direc-
tor, Leon Panetta, says "everything is on the table". Translation: Benefits
will be cut, and your taxes are going up; and the government will spend it
all, and more, making the deficit worse.
- STOCK MARKET OUTLOOK -
In this space I normally comment on the outlook for stocks for the next few
months; but because the outlook is so blah.... rising interest rates will
keep stock prices in check in spite of a (temporarily, at least) recovering
economy until late spring, when things will begin to fall apart.... I think
I'd rather comment on Bill Clinton's presidency. I've noticed two things a-
bout Clinton: One, he needs to be liked by people.... which means he'll be
much more anxious to try to buy votes through government programs than do
unpleasant things like cut the deficit. Two, he tends to micromanage, like
Jimmy Carter, instead of trusting and delegating authority to his appoint-
ees. Ultimately, both will be his undoing, because big government is a very
inefficient provider of services, and because lack of trust in subordinates
leads to petty squabbling among them. Because he has Kennedylike charisma,
the honeymoon period may last longer than for the average inept president;
but two years from now, I think an unhappy public will be facing a plethora
of broken promises and visions destroyed.... and a pretty sick economy....
and will be blaming the man at the top.
In fairness, this will not all be Clinton's fault; the debt overhang, and a
declining standard of living would destroy all but the strongest people (or
the best actors, like Ronald Reagan). What the country really needs is a
Maggie Thatcher, to remind us that though the demands on government by its
citizens may be infinite, the government's resources are not. And Bill Clin-
ton certainly is no Maggie Thatcher....
- PORTFOLIO REVIEW -
A. "Hedger's Delight" - model portfolio, includes commissions:
14Jan93
Shrs Description Bought Sold On Sold At Cost Is Value
---- ------------------------------ ------- ------- ------- ------- -------
1 Wal-Mart LEAP put$50/14Jan93 3Jun92 14Jan93 .00 263.05 -263.05
****************************************************************************
100 Amax Gold wt$21/8Jan96 21Feb92 {AUws/ase} 181.10 112.50
100 Atlas wt$15.625/perpetual 15Jun89 {AZws/ase} 490.00 187.50
100 Atlas wt$15.625/perpetual 31Dec91 263.60 187.50
125 Aurora Electronics SHORT 30Nov92 1331.48 -1515.63
100 Aurora wt 1.25sh/$8.60/15Nov96 30Nov92 {AURws/ase} 487.50 475.00
200 Campbell Resources 15Sep88 {CCH/nyse} 220.00 68.75
300 Campbell Resources 14Dec88 206.25 103.13
125 Campbell Resources 26Dec90 47.50 42.97
2 Coca-Cola LEAP put$32.50/Jan94 13Mar92 {WKOMM/cboe} 338.05 500.00
1 GE LEAP put$60/22Jan94 30Jun92 {WGEML/cboe} 191.55 75.00
100 Glamis Gold .12 1Jun89 {GLGVF/otc} 109.00 400.00
75 Hasbro SHORT 30Nov92 2582.70 -2446.88
300 Hasbro $18.92per4wts/12Jul94 24Oct90 {HASws/ase} 1293.75 1068.75
25 Horizon Resources 21Nov89 {HRIZ/otc} 192.50 37.50
100 Horizon Resources 30Dec92 167.35 150.00
100 Magma Copper B SHORT 4Jan93 1294.75 -1350.00
100 Magma Copper wt$8.50/30Nov95 4Jan93 {MCUws/nyse} 875.00 775.00
200 Navistar wt$5/15Dec93 (xtd 99) 19Oct90 {NAVwsA/nyse} 112.35 62.50
100 Pegasus Gold .10 25Apr91 {PGU/ase} 1122.33 1287.50
20 Safeguard Scientifics SHORT 6Dec85 181.78 -357.50
100 Sunshine Mining 15Dec88 {SSC/nyse} 371.25 46.88
CASH 3097.90 3097.90
------- ------- --------
5390.71 9766.98 3008.37
SUMMARY - "Hedger's Delight":
Original cost: $10,455.77
Present value: $ 8,399.08
Increase: $-2,056.59 [-19.67%]
Yield: $ 22.00 [0.21%]
COMMENT on "Hedger's Delight": I have added 100 shares of Horizon Resources
(formerly Horizon Gold) to the portfolio by good-til-cancelled order filled
on December 30. The original 25 shares (which, you may recall, resulted from
a reverse stock split) are a good candidate for tax-loss selling after the
share price recovers a bit. I have also "Regulation T" sold short 100 Magma
Class B common at 13-1/2 by GTC order filled, and I have "bought" the war-
rants from the "Crapshooter's Folly" portfolio at their closing quote on the
day of the short sale of the common. For sure, I have locked in a $300 prof-
it on the hedge, though the current spread is greater since the warrants
trade at a premium. It is not a sure thing that Magma common will go down
with everything else in the coming bear market, because a byporoduct of cop-
per mining is silver and gold; we shall see what happens.
The Wal-Mart LEAP put expired worthless on January 14. This was my effort to
hedge against a bear market arriving earlier than the early-1993 time frame
I envisioned. It didn't, and Wal-Mart stock remains overpriced. Still, it
was, I think, worthwhile insurance.
B. "Present and Future Income" - includes commissions:
14Jan93
Shrs Description Bought Sold On Sold At Cost Is Value
---- ------------------------------ ------- ------- ------- ------- -------
1 Apache 1Oct00cvbd($19.18)75.00 14Jan92 {APAP/nyse} 1037.35 1115.00
1 Apache/Key 15Jul2001cvbd 90.00 26Sep86 {otc} 914.06 940.00
100 Bank of NY wt$62/14Nov98 2Oct90 {otc} 222.35 975.00
100 British Petrol'm wt$80/31Jan93 11Dec91 {BP.ws/nyse} 181.10 1.56
83 Citizens Utilities 'A' 1.88 28Sep90 {CZNA/nyse} 1152.35 2344.75
162 Citizens Utilities 'A' 1.88 8Apr91 2781.63 4576.50
13.7 Duke Realty Investments .40 14Dec87 {DRE/nyse} 66.00 54.80
14.3 Duke Realty Investments .40 15Dec87 68.75 57.20
32 Duke Realty Investments .40 14Nov88 193.60 128.00
300 Hanson wtB,300pence/30Sep97 15Jan92 {HANwsB/ase} 126.10 131.25
1 IBM call $55/17Apr93 16Dec92 {IBMDK/cboe} 425.55 175.00
100 Manville wt$9.40/5Jun96 16May90 {MVLws/nyse} 167.35 175.00
100 Manville wt$9.40/5Jun96 26Oct90 71.10 175.00
3 Union Carbide 15A12 cvbd 75.00 24Sep90 {UK.EE/nyse} 2102.35 3027.00
2 Union Carb LEAP c$17.5/21Jan95 {VCBAW} 4Dec92 -407.47 -425.00
2 Union Carb LEAP put$15/22Jan94 16Dec92 {WCBMC/ase} 303.91 225.00
CASH 444.25 444.25
------- ------- --------
9850.33 14120.31
SUMMARY - "Present and Future Income":
Original cost: $ 9,548.98
Present value: $14,120.31
Increase: $ 4,571.33 [47.87%]
Yield: $ 876.24 [9.18%]
COMMENT on "Present and Future Income": There is no change from the last
issue.
C. "Crapshooter's Folly" - includes commissions:
14Jan93
Shrs Description Bought Sold On Sold At Cost Is Value
---- ------------------------------ ------- ------- ------- ------- -------
100 Chyron 21Dec89 30Dec92 88.82 206.13 GAIN:
100 Chyron 18May90 30Dec92 88.82 117.35 1606.20
100 Equimark 27Dec90 24Dec92 765.64 222.35
125 Equimark 22Jan92 24Dec92 957.05 250.00
100 Magma Copper wt$8.50/30Nov95 22Jun90 4Jan93 875.00 139.85
100 Somerset Savings Bank 26Apr90 11Jan93 98.90 332.35
****************************************************************************
100 Allou Health and Beauty 6May92 {ALU/ase} 425.27 837.50
100 Allou wtB,$7.50/10Jul94 14Nov89 {ALUB/ase} 115.98 237.50
1000 Altex Industries 22Feb89 {otc} 137.50 93.75
100 American Explor wt$2.75/3Jan93 2Apr90 {AXws/ase} 126.10 1.56
100 American Explor wt$2.75/3Jan93 4Mar92 84.85 1.56
100 AM Int'l wt$5.834/28Feb96 5Mar90 {AMLws/ase} 71.10 6.25
200 AM Int'l wt$5.834/28Feb96 29Oct90 29.85 12.50
200 Avitar 16Jan92 {otc} 167.35 87.50
100 Baker-Hughes wt$36.75/31Mar95 2Mar92 {BHICW/otc} 222.35 112.50
2 BancTexas 21Apr86 {BTX/nyse} 24.50 4.75
14 BancTexas 17Jul87 51.50 33.25
200 BancTexas 1Aug89 55.00 475.00
300 BancTexas 6Feb90 43.60 712.50
100 Brock Exploration 25Feb92 {BKE/pse} 153.60 200.00
200 Chemex Pharmaceut wt$6/31Mar94 4Dec89 {CHMXL/otc} 82.50 25.00
2 Chyron 21Dec89 {CHY/nyse} 4.12 1.75
101 Chyron wt$.20/31Jan96 21Jan92 {CHYws/mse} 101.00 63.13
100 CII Financial 16Jan92 {CII/ase} 727.35 475.00
100 Citicorp 12Jan93 {CCI/nyse} 1465.71 2225.00
33 Continental Mortgage EqTr .06 14Jun89 {CMETS/otc} 326.70 206.25
100 Energy Service Co. 1Jun89 {ESV/ase} 241.25 112.50
100 Energy Service Co. 3Dec91 167.35 112.50
100 EquiVest 17Jan92 {EVI/ase} 222.35 362.50
100 Falcon Oil and Gas 4Mar92 {FLOG/otc} 277.35 100.00
100 Geodyne Resources 6Feb92 {GDR/ase} 98.60 100.00
44 Goldwyn wtA,$2.20/6Dec93 18Dec91 {SGwsA/ase} 9.01 8.25
162 Goldwyn wtB,$3.75min 18Dec91 {SGwsB/ase} 16.44 5.06
200 Gulf Canada Resources 1Dec92 {GOU/ase} 579.85 487.50
100 HemaCare 10Jan92 {HEMA/otc} 407.35 687.50
100 Information Display Technology 15Apr92 {IDT/ase} 153.60 75.00
100 MHI Group 14Nov89 {MH/nyse} 110.00 200.00
100 MHI Group 26Dec89 55.00 200.00
200 National Enterprises 27Nov89 {NEI/nyse} 110.00 75.00
100 Nabors Indust wt$5.50/28Aug93 16Nov89 {NBRws/ase} 27.50 150.00
4 NBI 1Dec89 {NBI/pac} 110.00 1.50
4 NBI 6Feb90 57.35 1.50
100 North Canadian Oils .20 17Jan92 {NCD/ase} 902.35 812.50
8 Northeast Utilties wt$24/5Jun97 5Jun91 {NUWTW/otc} 6.58 23.00
100 Patten Corp. 3Jul89 {PAT/nyse} 139.85 325.00
100 Pride Petroleum Services 30Jan92 {PRDE/otc} 469.85 375.00
39 Scios-Nova wt$26.75/30Jun98 19Dec89 {SCIOZ/otc} 165.00 131.63
100 Smith Intern'l wt$8.28/28Feb95 27Dec91 {SIICW/otc} 304.85 212.50
13 Southwestern Prp wt$6.25/1Ja94 16Feb89 {SWPws/ase} 3.25 56.06
100 Tide West Oil wt$3/21Jun96 17Jan92 {TIDEW/otc} 71.10 15.63
200 US Home Corporation 17Aug90 {UH/nyse} 139.85 175.00
100 US Home Corporation 15Jan91 29.85 87.50
100 Unit Corp. wt$4.375/31Aug94 13Nov89 {UNTEW/otc} 68.75 25.00
1 Unocal LEAP call@$30/22Jan94 30Jan92 {WULAF/pac} 235.05 262.50
1 USX/M'thon LEAP call@25/22Ja94 10Mar92 {WXMAE/ase} 363.05 31.25
100 Vet Centers Am wt$7.20/10Oct96 10Mar92 {VCAIW/otc} 126.10 156.25
100 Wendt-Bristol Hlth wtA/1May94 18May92 {WMDws/ase} 139.85 62.50
CASH 4028.39 4028.39
------- ------- --------
14252.65 15270.77
SUMMARY - "Crapshooter's Folly":
Original cost: $10,817.13
Present value: $15,270.77
Increase: $ 4,453.64 [41.17%]
Yield: $ 21.98 [0.20%]
COMMENT on "Crapshooter's Folly": On December 24 I sold the Equimark in the
portfolio at 8 as a day trade. In real life I own(ed) more Equimark common
than is shown in the portfolio, plus a few shares of the convertible prefer-
red, which will now become shares of Integra in the merger. On the computer
warmline I had listed a sell of 300 Equimark @ 7-5/8 fill or kill, to be
sure that all 300 shares sold at once; but it seems "fill or kill" and "GTC"
are incompatible.... so I waited until a day I was sure to get a price of at
least 8, then entered my fill-or-kill order for that day. On December 30 my
sell order for 200 Chyron was filled, leaving me with a tax loss to help
offset the Equimark gain; the warrants are sufficient to participate in the
success of Chyron should the stock take off.... and this company still has a
long way to go before it really turns around. I have also "sold" the Magma
Copper warrants to the "Hedger's Delight" portfolio, where I discuss them;
and sold Somerset Savings Bank at a loss. The latter is on the mend, but the
bear market (and rising interest rates) is still likely to do a number on
the stock before it recovers for good, and an offsetting loss in the hand is
worth more than a very long wait for a long-term gain hiding in the bushes.
The Citicorp $12.50 LEAP call due to expire on January 14 was well in the
money, so I have exercised it. I will try, and expect, to write (that is,
sell) a January 1995 $20 LEAP call against it at 6 or better, which means
I will have bought 100 shares of Citicorp for about $9 per share; and should
the stock be called away at 20, I will have made about $600 on a $165 init-
ial investment (and a $900 investment from now until the stock is called, if
it is). Market fluctuations may allow me to "trade up" this LEAP for one at
a higher price and/or buy "put insurance" on the position.
D. "Discards" - stocks even I have given up on for one reason or another
(bankrupt company, too much paperwork, held too long with no profit, corrupt
management, or change in personal objectives). This model portfolio in-
cludes commissions when I have actually sold my holdings, but does not in-
clude commissions when I still own the stock that was transferred to here
from one of the other portfolios. (In the latter situation, I would probab-
ly have to PAY the broker to take the stuff off my hands.) I make no claims
for the performance of this portfolio; I'm as curious as you are to see how
it turns out.
14Jan93
Shrs Description Bought Sold On Sold At Cost Is Value
---- ------------------------------ ------- ------- ------- ------- -------
500 Breakwater Resources 26Jun91 {BWRLF/otc} 250.00 93.75
100 Conn Bancorp 2wt$5.50/26Jun94 26Nov91 {otc} 6.25 6.25
600 Hotel Investr wt$16.95/16Sep96 13Sep90 {HOTws/ase} 18.75 9.38
310 Integrated Resources jcvpf4.25 20Sep90 {otc} .00 .00
37 Keystone Camera Products 26Nov90 {otc} 9.25 .00
11 Lancer Industries A 26Apr91 {otc} 42.42 42.42
1 Lancer Industries B 26Apr91 {otc} 3.86 3.86
20 Mesa 5Jun90 {MXP/nyse} 577.37 82.50
100 One Bancorp 26Apr91 {otc} 12.50 12.50
200 Union Valley wt$10/31Jy94/.4sh 26Nov91 {otc} 12.50 12.50
------- ------- --------
932.90 263.16
SUMMARY - "Discards":
Original cost: $ 1,152.72
Present value: $ 263.16
Increase: $ -889.56 [-77.17%]
COMMENT on "Discards": There is no change this month.
E. Commerce/INVEST IRA - real portfolio, includes commissions:
14Jan93
Shares Description Bought Sold On Sold At Cost Is Value
-------- ------------------------- ------- ------- ------- ------- -------
32 Berkshire Gas 1.08 11Apr88 {BGAS/otc} 560.00 464.00
100 Boston Five Bancorp .28j 4Dec89 {BFCS/otc} 640.00 737.50
5 CIGNA 10Jul2010cvbd 82.00 12Oct90 {CI.CC/nyse} 3915.00 5175.00
100 Commonwealth Edison 1.60 11Apr88 {CWE/nyse} 2728.83 2450.00
200 New Germany Fund .50 20Dec91 {GF/nyse} 1977.50 2000.00
200 People's Bank of CT .72j 15Nov89 {PBCT/otc} 1690.21 1150.00
100 Tuscon Electric Pwr 1.60j 4Oct89 {TEP/nyse} 2437.21 250.00
Money market & accrued interest 1637.34 1640.63
--------- --------
$ 15589.38 13867.13
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $13,867.13
Increase: $ 5,540.94 [66.55%]
Current yield: $ 753.68 [4.84%]
F. CREF Pension plan; I switch between indexed stock/bond/money funds:
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991, 27.93%
Gain, January 1 through September 30, 1992: 4.74%
Total gain since January 1, 1988 (4.75 years): 97.58%
Compound annual rate of return: 15.41%
Gain shown excludes the impact of additional monthly cash contributions.
In January I can usually report my full-year results in my pension plan; but
this year, for some reason, the TIAA annual statements are late, so my re-
port will have to wait until next month. When the results are in, I think I
will show about a 10% gain for the year; by comparison, the S&P 500 gain for
1992 (total return, including dividends) was 7.61%. What's really frustrat-
ing is that I can't jump on the "small-stock" bandwagon in TIAA/CREF....
they have no small-cap mutual fund.... otherwise, I would have waited until
the third week in January to switch into cash, instead of doing it in the
third week of December.
COMMENT on "Timer's Trend": We are still on a BUY signal given on October
28; but since stocks are overpriced and market risk is high and upside po-
tential is limited, and because I have no way of following the rush into the
NASDAQ issues with my pension money, I have elected to remain in cash since
December 23.
============================== TIMER'S TREND =================================
Tue 10 Nov 92 . | # | 3225.47 | + *
Wed 11 Nov 92 . | . # | 3240.33 | .+ *
Thu 12 Nov 92 . | # | 3239.79 | .+ *
Fri 13 Nov 92 . | #. | 3233.03 | .+ *
Mon 16 Nov 92 . # . | 3205.74 | + *
Tue 17 Nov 92 . #| . | 3193.32 |+. *
Wed 18 Nov 92 . | # | 3207.37 |+. *
Thu 19 Nov 92 . | .# | 3209.53 |+. *
Fri 20 Nov 92 . | . # | 3227.36 | + *
Mon 23 Nov 92 . |# . | 3223.04 | + *
Tue 24 Nov 92 . | .# | 3248.70 | .+ *
Wed 25 Nov 92 . | . # | 3266.26 | . + *
Fri 27 Nov 92 . | . # | 3282.20 | . + *
Mon 30 Nov 92 . | . # | 3305.16 | . + *
Tue 1 Dec 92 . | .# | 3294.36 | . + *
Wed 2 Dec 92 . | # | 3286.25 | . + *
Thu 3 Dec 92 . | .# | 3276.53 | . + *
Fri 4 Dec 92 . | . # | 3288.68 | . + *
Mon 7 Dec 92 . | . # | 3307.33 | . + *
Tue 8 Dec 92 . | . # | 3322.18 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 9 Dec 92 . |# . | 3323.81 | . + *
Thu 10 Dec 92 . | #. | 3312.19 | .+ *
Fri 11 Dec 92 . | # | 3304.08 | .+ *
Mon 14 Dec 92 . |# . | 3292.20 | + *
Tue 15 Dec 92 . # . | 3284.36 |+. *
Wed 16 Dec 92 . I# . | 3255.18 |+. *
Thu 17 Dec 92 . | .# | 3269.23 |+. *
Fri 18 Dec 92 . | . # | 3313.27 | + *
Mon 21 Dec 92 . | # | 3312.46 | .+ *
Tue 22 Dec 92 . | .# | 3321.10 | .+ *
Wed 23 Dec 92 . | # | 3313.54 | . + *
Thu 24 Dec 92 . | # | 3326.24 | . + *
Mon 28 Dec 92 . | # | 3333.26 | .+ *
Tue 29 Dec 92 . | .# | 3310.84 | .+ *
Wed 30 Dec 92 . | . # | 3321.10 | .+ *
Thu 31 Dec 92 . | . # | 3301.11 | . + *
Mon 4 Jan 93 . | # | 3309.22 | . + *
Tue 5 Jan 93 . | .# | 3307.87 | . + *
Wed 6 Jan 93 . | .# | 3305.16 | . + *
Thu 7 Jan 93 . | #. | 3268.69 | .+ *
Fri 8 Jan 93 . |# . | 3251.67 | + *
Mon 11 Jan 93 . | .# | 3262.75 | .+ *
Tue 12 Jan 93 . | # | 3264.64 | + *
Wed 13 Jan 93 . | # | 3263.56 | + *
Thu 14 Jan 93 . | .# | 3267.88 | .+ *
================================================================================
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (}) signal
[, ] = 4% exponential change unconfirmed by 10% exponential (not a signal).
@ = market overbought or oversold. I (on baseline) = 10% exponential SELL.
NEXT ISSUE - will appear about February 26. /Nick Chase