GM announced today that it is buying Americredit Inc, which makes loans to consumers with credit scores below 620.

GM, majority owned by taxpayers, is buying a company that makes car loans to shoppers with poor credit. Unlike home loans, though, the risk in subprime auto lending is relatively low and may reward GM. The company hopes to boost sales by making loans and leases to buyers that it must now turn away for lack of financing.

Essentially, GM is using bailout dollars to buy this company. This is moral hazard in action. It isn’t GM’s money so if this deal blows up, who cares. It just seems to me that maybe someone who can’t get financing to buy a car shouldn’t get a new car. Maybe they should be buying Fred G. Sanford’s truck (insert funky music here) and driving a clunker until they can actually afford a new or higher cost pre-owned car. The article points out that these loans aren’t as risky as a credit card because it is secured by the auto. If a borrower defaults, they just repossess the car. Ok, then what? Who do they sell the car to then?

Zero percent financing and subprime car loans helped push GM over the edge in 2008. Clearly, we haven’t learned our lesson. It just makes me want to say, “You big dummy!”

Alan Greenspan appeared on CNBC’s Squak Box this morning. Here is a recap of what he said. Personally, I am glad I went for a run rather than listen to his drivel. But, it just seems that the Costanza principle applies to Greenspan. For those who never watched the show about nothing, George Costanza experimented by saying and acting in the exact opposite way that his instincts told him. He concluded that if every instinct or thought he had was wrong, then the opposite must be correct. It landed George a date with a hot blonde and a job with the New York Yankees.

I think the same applies for Easy Al Greenspan. If he had acted in the exact opposite fashion to what he actually did, we would be in a much better position right now. Most people assume I am merely pointing out the common argument that Greenspan left interest rates too low after the 2000 tech bubble. He certainly did that, and it led to excessive debt consumption and the housing bubble. However, Greenspan’s entire resume wreaks of faulty decisions. He was quick with the bailouts after the Asian currency crisis, Russian currency debacle, and Long Term Capital Management fiasco. Rather than letting the market rid itself of these inefficiencies, Greenspan kicked the can down the road. Of course, the press lauded him for these “decisive” actions.

Even beyond that, he is the sole reason Glass-Steagall died. As you can tell from reading this blog, I am not a huge fan of regulation. However, I feel Glass-Steagall was common sense. For those who don’t know, Glass-Steagall was implemented in the 1930s, and it separated the depository banks from the investment banks. When you hear depository bank, think George Bailey. It is where Mom and Pop put their life savings, which are eventually loaned to mortgagees and businesses. Investment banks should bring to mind Gordon Gekko. These are the Wall Street hot shots that raise capital for companies and take risks with their own portfolios. In the 1930s, the government separated those two. This gave the depository banks that store Mom and Pop’s life savings the backing of the Federal Reserve in case the bank ran into trouble. The investment banks were on their own to suffer the consequences if their risky behavior backfired.

Starting in the late 1980s, the banks wanted to merge those functions. The depository banks wanted the huge profit margins of the investment banks while the Gordon Gekkos wanted the backing of the Federal Reserve should they get into trouble. So the banks worked on Greenspan for years to overturn this law. At first, the Greenspan Fed allowed the depository banks to earn 5% of their revenues through investment banking activity. Then this got upped to 25%. Finally, in 1997, Greenspan felt the banks were managing their risk well so he tore down the wall that separated the two. In 2008, we, the taxpayers, were bailing out the banks who took massive risks thanks to Greenspan.

So Greenspan essentially screwed up every major decision he made while serving as the Fed Chairman. Maybe he should have spent some time watching Must See TV on Thursday night. He may have caught the Costanza Principle episode.

Here is a video interview of Michael Pento. I like Pento because he called the market crisis before it happened as well as the market’s rise. For the recent rise, he knew it was nothing more than a stimulus induce high, but it was going to happen. Now, he is saying the high is over, and the economy is heading for a double dip.

He has some interesting comments. While it isn’t optimistic news, I happen to agree with him. Never has a country or economy gotten rich through debt or money printing. This rally has been nothing more than that.

If you want some impartial analysis about local and national banks, you should head over to Weiss Research. The folks at Weiss is offering free access to the banks on their trouble list as well as the top rated banks by state. Unlike Standard and Poors, Moody’s, and A.M. Best, Weiss Ratings is not paid by the companies they are rating.

The other agencies have an enormous conflict of interest since a bad rating on an institution could mean their revenue dries up. Imagine going into work on Monday and telling your boss she is overweight, obnoxious, ignorant. ugly, and Gomer Pylish. You probably wouldn’t keep your job for long, which is why the ratings agencies are pretty useless. Weiss makes its revenue from subscribers to the service, not the rated companies. So you get better advice.  The Weiss list goes through each state, but I am only listing the banks in Florida and Maryland since I have offices in both locations. I strongly recommend you spend a few minutes to get this information.

If your bank is not on the naughty or nice list, then it is probably a middle of the road bank. Also, just because a bank is on one of these lists does not mean it will go under (for the troubled list) or will survive (good boy list).  Also, if you bank at one of the big boys such as Bank of America, Citi, Wells Fargo, etc., you can probably bet your bank is on the troubled list.

The list goes by the name of the bank, the city location, assets (in $000s), and grade. You might notice that the good banks are outnumbered by the bad boys. Without further adieu…

The top ranked banks in Maryland:

The top graded banks in Florida:

Now for the stinkers in Maryland:

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And for the Sunshine State

Interesting video from a show where money manager Hugh Hendry puts an economist in his place. Economists are like weathermen IMO. They can be completely wrong, but they can continue to make predictions and listened to so long as they get published, make tv appearances, or look like Paul Krugman. So it was fun to see Hendry, who is a volatile Scotsman, slam one to his face.

Most economists failed to understand the size and interconnectedness of the subprime credit mess. They also are not discussing the Alt-A and Neg-Am impending crisis, which is just as large. More importantly, they fail to see how the governments took on the debts of the banking sector, which now creates a sovereign debt crisis. These experts fail to see this is not a liquidity crisis. It is a solvency crisis.

An excellent op-ed piece by Jim Grant, author of Jim Grant’s Interest Rate Observer, in the Washington Post. Grant looks back at the past and finds that bankers use to be personally liable for a bank failure. The government didn’t step in and bail out the banks in the olden days. From 1848 to 1913, the banks had no central bank or Federal Reserve to backstop their ruinous behavior.

The substitution of collective responsibility for individual responsibility is the fatal story line of modern American finance. Bank shareholders used to bear the cost of failure, even as they enjoyed the fruits of success. If the bank in which shareholders invested went broke, a court-appointed receiver dunned them for money with which to compensate the depositors, among other creditors. This system was in place for 75 years, until the Federal Deposit Insurance Corp. pushed it aside in the early 1930s. One can imagine just how welcome was a receiver’s demand for a check from a shareholder who by then ardently wished that he or she had never heard of the bank in which it was his or her misfortune to invest.

Many might say that this system wouldn’t work very well. After all, didn’t the US suffer from numerous banking panics in 1800s. Grant addresses those concerns as well.

a pair of academics who gave the “double liability system” serious study (Jonathan R. Macey, now of Yale Law School and its School of Management, and Geoffrey P. Miller, now of the New York University School of Law), the system worked reasonably well. “The sums recovered from shareholders under the double-liability system,” they wrote in a 1992 Wake Forest Law Review essay, “significantly benefited depositors and other bank creditors, and undoubtedly did much to enhance public confidence in the banking system despite the fact that almost all bank deposits were uninsured.”

This type of system is being used in Brazil right now with great success. Grant notes how Brazil use to be subject to bouts of hyperinflation on a regular basis. Now if a Brazilian bank fails, “their net worths are frozen for the duration of often-lengthy court proceedings. If worse comes to worse, the responsible and accountable parties can lose their all.”

The US has created a system whereby the bankers enjoy the profits on the way up while the taxpayer pays the losses on the way down. You can’t have capitalist gains and socialized losses. Of course, this is exactly what the bankers want. I have a few articles discussing how the Federal Reserve was created for this very purpose. The Federal Reserve is one of the most anti-capitalist structures in the world. A small cartel of bankers who sit behind closed doors and attempt to manipulate the market. They tell us they know what is better for us than we know what is in our best interests. The reality is the Fed allows banks to make tons of money and avoid any losses when things head south. Anyone who argues the Fed was created to maximize job creation while controlling inflation has been drinking too much of this (excuse my French):

What bothers me the most is the complete disconnect between risk and reward with the banks. As a small business owner, I will be worried about feeding my family if my business goes kaput. So, if my business does really well, it stands that I should do well financially. I shouldered the risk. Bankers, on the other hand, get a home in the Hamptons if things go well. If failure ensues, the bankers get a home in the Hamptons. This applies to the corporate world in general. CEOs receive massive compensation packages without any downside for failure. Of course, this applies double with bankers since they hold the potential to bring the entire economy to its knees if enough of them screw up.

Even worse, we are finding that having the government backstop the banks doesn’t work. Europe’s action to bail out Greece was really a backstop to the banks. By buying Greek bonds, the European Central Bank (ECB) is ensuring the banks that loaned money to Greece don’t suffer any losses. Of course, this isn’t working. Fears now exist that the currency, the Euro, might fail. This will come home to America some day as well. Mark my words. This means that you and I will pay the ultimate price for the bankers failure without even receiving an invite to a picnic at the banker’s mansion.

Good article in Yahoo today about things your advisor won’t tell you. Being a fee-only financial planner, I agree with all of them. I really see no reason to work with a commission planner anymore. That is so 1950s. You should be hiring someone to provide objective advice, not sell you product. My big piece of advice is to make sure the advisor is fee-only, not fee-based. Fee-based is another way to say commission-based. Usually, these guys put the word fee in their description so people think they are getting a fee-only advisor, but most of these guys still earn 70% of their revenue from commissions. This is a wolf in sheep’s clothing IMO.

Interesting story from 60 Minutes last night about walking away from an underwater mortgage. As I have stated several times, I think you should walk away from a mortgage if you can rent an equivalent place for considerably less than your current mortgage. This is a contract between two parties. Each party should understand the risk they are undertaking when the contract is signed. The banks failed in this regard miserably. They gave mortgages to folks who should have never received a mortgage. Further, the banks required no skin in the game as far as a downpayment, and the banks put pressure on home appraisers to meet the rising prices in the market. The banks did this because they were making tons on writing these mortgages as the investment banks securitized these mortgages.

Now that their gravy train has run its course, they are pulling the old moral argument out to guilt borrowers from following the proper business move. Of course, the banks aren’t afraid to walk away as Morgan Stanley walked from a $5 Billion commercial development in San Fran, and the mortgage bankers association just short saled their headquarters in DC.

When making a decision to stay or walk away, one needs to examine several factors such as how long they plan to live there, is this their dream house, are kids in a good school, etc. However, the cost of ownership relative to renting must be one of them. Think logically, not emotionally. Also, see a real estate lawyer before making any final decision on walking away.

Watch CBS News Videos Online

The big banks have been reporting big earnings this quarter so far. However, the vast majority of their profits come from trading, not traditional banking activities like lending. In the real banking functions, the big banks are still losing their shirts. Citigroup just announced a $4.4 billion dollar profit this quarter. Eight billion of revenues came from trading, especially bond trading. Citi borrows from the Federal Reserve at near zero percent and purchases Treasuries yielding 3.5% or so. It is easy to make money that way. Citi is still losing money on its lending operations. It lost $8.4 Billion on loan losses though this is down from $10 Billion last quarter.

As you can see, the banks made quite a bit of money by reducing their loss provisions. In order to cover losses on mortgage, credit card, and other defaults, the banks must set aside money to cover these expenses. As you can tell, the more they set aside, the less profits for shareholders. J.P. Morgan made $3.3 billion this quarter – again mostly from trading activities. Their earnings also comprised of a much smaller loss provision amount. In the fourth quarter of 2009, JP Morgan set aside $8.9 billion to cover losses. This quarter that dropped to $7.0 billion. Effectively, $1.9 billion of the $3.3 billion of earnings came from a lower loan loss reserves. The same is true for Bank of America, which reported profits of $3.2 billion for the quarter with $3.6 billion in lower loss reserves.

Many analysts look at the lower loss reserves and conclude that the banks balance sheets are improving. Before jumping for joy that credit fundamentals are improving, we still face a situation where the banks are not realizing their losses. Just take a look at the number of foreclosures and delinquencies 90 days past due for mortgages.

We have more homes in the foreclosure pipeline than we did at the peak of the housing crisis. However, the Federal Reserve and government has created a game of chicken. The Fed and the government altered the rules so banks don’t have to mark assets to market prices. This allows banks to keep assets artificially inflated so they do not have to raise capital to improve their balance sheet. It also allows the banks to hold the assets, meaning mortgages, so the banks don’t have to foreclose.

Essentially, it is cheaper for the banks to let someone live rent free than foreclose and lose 25% on the asset. If they had to mark the asset to market prices, the banks would have already written the asset down by 25%. The Fed is hoping that the banks can make enough profits over the next few years from trading activities to raise enough capital to cover the losses from the mortgages. So banks will probably slowly foreclose on homes as they have the profits to cover the losses. To date, the banks have billions in cash to cover these losses, which is good.

In theory, this seems to be a great plan. Slowly leak foreclosures on the market so the banks can take advantage of the Fed’s low rates to make money from trading activities. However, it seems like a game of chicken to me. If the banks put their assets in Treasuries and don’t lend to consumers and businesses, we will experience a slow growth, or worse, a no growth economy. The only party that will get capital in this arrangement is the government. The government is not going to create anywhere near the economic growth of small business or the private sector. A slowing economy will mean more foreclosures and debt defaults, which only extends this game of chicken and perpetuates a low growth economy.

The other reason this is a game of chicken is we are in a debt deflation environment. We have too much debt, and it is time Americans reduce their debt burden. This can be done over time as more money goes towards paying debt as opposed to spending. Or, it can be done through default.

So what happens if the amount of debt defaults overwhelm the banks’ loss reserves? What if the trading activity slows if the market takes a turn for the worse? If trading revenue declines, earnings will get crushed.  While the Fed and banks hope to recapitalize over time, they may be playing a game of chicken that could get ugly real fast. Only time will tell. In the meantime, I recommend you Move Your Money from the big banks. For more on that please visit, “Move Your Money.”

Thoughts from the Frontline Weekly Newsletter
Is This a Recovery?
by John Mauldin
April 2, 2010

In this issue:
Is This a Recovery?
This Time is Different
The End Game
Some Good News on Unemployment
The Effects of a Tax Increase
The Health Chair, Phoenix, San Diego, and New York

Last week I wrote a letter to my kids trying to explain what Greece meant to them. Reader Ken V wrote: “Great letter, John. Now you should write one for the adults who are retired and don’t have the long future your kids do. If the US becomes Greece, things won’t recover in time for much of the rest of my life to be more than one grim, dreary period. What is your investment advice for those with roughly a 10-year horizon, not 30-40-50 years?”

A very good question Ken, and one that was asked more than a few times. So today I will touch on that thorny issue, as well as look at the employment numbers for what we see about the potential for an actual recovery.

First, let me say that what I am not doing here is giving you, gentle reader, specific advice. To be able to do that I would need to have specific knowledge of your situation, assets, location, needs, health, etc. But what I will try to do is give you a general assessment of what I see for the economy over the next few years and what the investment climate might look like. I am also going to refer to a lot of previous letters I have written, for those of you who want to do further research.

Is This a Recovery?

First, we are in a nascent recovery from the depths of the Great Recession, but the question is “what kind of recovery?” Many suggest that we will see a typical recovery, like we have seen with every recession since World War II. As regular readers know, I don’t think we’ve gone through a typical, garden-variety recession, and to expect a typical recovery is more faith-based than factual. We had a deleveraging recession and we are still deleveraging. The process, as shown in studies I have written about, takes years to conclude.

When I started talking in 2002 about a Muddle Through Economy for the rest of the decade, I had a lot of people giving me a hard time by 2005-6. But as we closed out the decade, average growth of US GDP for the entire decade was less than 2% annualized, which by my definition is Muddle Through. For the US economic machine, that was pretty anemic growth. It resulted in a lost decade for stocks, except for the NASDAQ, for which it was merely a dismal decade. Traditional 60-40 (stocks to bonds) portfolios did not fare well, coming nowhere close to the projections of standard-issue money managers.

I think we are in for yet another Muddle Through period, at least for 5-7 years and maybe for the decade, depending on a few scenarios I will come to in a minute. As my friend Prieur du Plessis outlined for us in last Monday’s Outside the Box, if we measure the stock market by either earnings or dividend yields, valuations are in the top 10% historically. Average (!) returns, going out for ten years, are 2.6% real, with some historical 10-year periods being negative. Below is the range of returns, based on dividend yields. It does not look much different from the chart based on earnings. We are currently at the far right-hand bar.

This does not suggest a happy outcome for those who espouse buy-and-hope portfolios, at least not if you have expectations or needs of 7-8% or more.

This Time is Different

If you are a new reader, I suggest going to the archives at http://www.2000wave.com/archive.asp and searching on the name “Rogoff,” to read the letters I have written on his and Carmen Reinhart’s must-read book, This Time is Different, which shows us that it is never different this time. They looked at 266 financial crises in over 60 countries across a span of 200 years.

Debt crises have sadly similar conclusions: they always end in pain and tears. And although we have stopped, as private citizens, from accumulating debt (or in some cases, such as mortgages, have just walked away from the debt), our national government has stepped into the breach and is borrowing at mind-boggling levels.

Below is a chart that is a wonderful illustration of an economic truth: if something can’t happen then it won’t happen. We cannot borrow $15 trillion in the next ten years. Not at anywhere near the low interest rates we enjoy today, and probably not even at nosebleed rates. (Note that the chart was created before the health-care reform bill. Add at least another trillion to the total. Anyone who thinks that bill was revenue neutral is kidding themselves.)

The End Game

Something has to change. We have two paths to choose from. We can either slowly bring the US budget deficit back into balance (or at least to a level less than the growth in nominal GDP) or we can continue on the current path and become Greece or Japan. (Again, go the archives and search for “Japanese Disease”.)

The first choice is a bad one, but the latter choice would be disastrous. If we take the first choice, which I call the Glide Path Option, a meaningful reduction would have to be on the order of $200-250 billion a year. That, along with reduced spending by state and local governments could (and probably will) amount to reducing spending by a little more than 2% of GDP.

I have written several letters on the equation GDP = C (consumer and business consumption) + I (investments) + G (government spending) + E (net exports) (again, searchable). The Keynesians point out that when “C” is reduced in a recession, “G” should be increased to offset the effects of reduced consumption. And they are correct that a deficit will help overall GDP in the short run.

But we are coming to the end of the Debt Supercycle. There are limits to what even the US government can borrow, and the sooner we recognize that as a nation the better off we will be in the long run.

But if we start to reduce our deficits (the “G”), it will be a short-term drag on GDP. There is no way around it. That means that if inflation is 2% and we have a reduction in “G” of 2% of GDP, then the nominal growth in GDP will have to be 6% in order to achieve after-inflation growth of 2%. Two percent as in Muddle Through.

But wait, John, didn’t we just grow at 5.6% last quarter? Why are you being so gloomy? For several reasons. First, the growth was largely statistical. Part of it came from inventory accounting, as inventories had got as low as they could go. Note that an increase in inventories will increase GDP but possibly result in a lower future GDP as the excess inventory is depleted. And inventories are still rising, but not by as much.

Secondly, a significant portion of the increase in GDP came from the stimulus. As noted above, an increase in “G” will be reflected in current GDP. This stimulus begins to go away in the second half of the year, and I think there is little reason to believe there will be anything other than an extension of unemployment benefits past two years, by way of “stimulus” this year.

I rather think the last half of the year will show a slowing (though still positive) economy. Unemployment will be closer to 10% than 9% at the end of the year, as the large number of temporary census workers will no longer be employed by the government.

Some Good News on Unemployment

The good news is that employment rose by 162,000 jobs last month, with about 48,000 of those being census workers and another 82,000 coming from the birth/death ratio, a way of guessing how many new businesses are started. The birth/death ratio is eventually squared up when we get real statistics, but it will be several years before we know the true picture. So, while the headline is good, the reality is not quite as good. But let’s take what we can. The direction is positive, and it should get better over time.

Small businesses have at least stopped laying people off, according to my friend Bill Dunkenberg, chief economist of the National Federation of Independent Business. The improvement is due to fewer reductions in jobs, not gains in new hiring.

There are not a lot of job openings, according to the survey that goes along with this note from The Liscio Report: “The probability of a person unemployed in February finding a job in March fell to from 20.1% to 18.7%, an all-time low for this series (which goes back to 1948).

This reenforces a letter I wrote last November, talking about the prospects for longer-term employment rates. Even the rosy scenarios still have unemployment above 8% in four years. That assumes a total of 1.5 million new jobs can be created this year and two million every year thereafter, with no recession.

Remember, we need about 125,000 new jobs a month to just keep up with the growth in our population. Though if you look at today’s employment release, they added a whopping 398,000 people to the civilian labor force (a huge number when compared to the 162,000 new jobs – a discrepancy you didn’t read about in any report.). What kept the unemployment rate from rising significantly was that they deducted 238,000 people who are no longer considered unemployed, due to the fact that they have given up looking for jobs. The U-6 unemployment rate rose to 16.0%, however. The U-6 rate includes people who have part-time work but wish they had full-time work. That part-time number rose above 9 million again this month, in a rather large monthly jump.

You can read the whole November letter and see the other two scenarios.

The Effects of a Tax Increase

I have written about the effects of tax increases in several letters. Basically, tax increases have a negative impact on GDP of three times the size of the tax increase. (Again, in the archives, search for “Romer”, as in Christina Romer, Obama’s head of the Joint Council of Economic Advisors and co-author with her husband of the research).

Taxes may be going up by as much as 2% of GDP in 2011, when you include state and local increases. This could be as much as a 6% drag on GDP over the next three years (probably somewhat front-loaded).

So, let’s add it up. We will likely see a reduction in government spending (from all levels) over the next few years, a really nasty set of tax increases, which will hit small businessmen the hardest, and continued high unemployment, and all of it coming in a weakening economy by the end of the year.

I put the odds of a double-dip recession in 2011 at better than 50-50. Not a sure thing, as maybe sanity flowers and they phase in the tax increases over 3-4 years. Plus, the American economy and businesses are more resilient than we think, and it is possible we Muddle Through 2011. Not much growth, but perhaps we avoid that recession.

Deflation in the US is the dominant force. There is little likelihood today of a worrisome increase in inflation. I have written letters about why this is the case. (Search for “elements of deflation” and “velocity”). Actually a little inflation (2-3%) might be welcome as a protection against slipping into outright deflation, if we slow down next year.

Let’s try to sum it up. We have a Muddle Through Economy this year (not much more than 2% overall growth for the year), with a slowing economy next year. Unemployment stays high. If we get our deficits under control, we lock in a slow-growth economy for 5-6 years, but after that we could get back on track. A recession puts that brighter outlook out a little farther. Unemployment would go north of 12%. I might note that the stock market drops an average of 40% during a recession.

Or we do not get our deficits under control. We can go on borrowing for a lot longer than most of us think. But the Rogoff and Reinhart book makes clear that there is an end. You can’t solve a debt crisis with more debt. Ask Greece in about 6-12 months, as the “fixes” are temporary. Things go along until there is a loss of confidence in the bond market, and then all hell breaks loose. When is that? Who knows? But it is not ten years away, and probably not five. Rates skyrocket and the currency takes a hit.

And then we are presented with a conundrum. Would the Fed really enable the government to run huge deficits by monetizing the debt? It would be a crisis decision. If they just stand by, interest rates soar and the economy goes into recession or worse. If they print, we could see inflation and a crashing dollar, with rates soaring. As I said above, this would be a disastrous scenario. I think we avoid it, as there will be a growing backlash at the polls against government deficits. But then I am an optimist. If you think the politicians cannot muster the will to make the cuts, then bet on the disaster scenario. Think gold and hard assets and foreign assets and absolute-return funds.

But optimist though I am, I can’t rule out disaster. So, either we have a slow-growth economy for 5-6 years, or we hit the wall all at once. Think depression if it’s the latter. Either way, it’s a tough investment environment.

So, how about those with a 10-year time frame, like the reader I opened with? First, lengthen your time frame. There are some amazing new medical therapies coming your way and you are likely to live longer. I would plan on it. You will need more than you think you will.

Second, really think about your commitment to equities in general. By that I mean the usual index funds. If you have (or your manager has) some real skill in picking stocks, then that is different. But I think it is very possible we’ll see another lost decade for stocks in the US. If we do have a recession next year, the world markets are likely to fall in sympathy with ours. At the bottom, it is quite possible that emerging-market stocks will finally decouple from the developed world, so for those who should be in stocks (those with a longer time horizon), think about going beyond the developed world.

For most of you, caution is appropriate. Do not plan to make 8% a year from your portfolio, or to spend 7% of your savings. As Ed Easterling has shown, there are historical periods where people taking 5% a year from their portfolios would be left with nothing after 30 years. In fact, about 50% of those portfolios would run out of money in an average of just over 20 years. The key? Starting valuations. http://www.crestmontresearch.com/pdfs/Stock%20Retirement%20SWR.pdf

For most people already retired, a fixed-income portfolio should be your first choice. High-quality corporate bonds, high-quality state and municipal bonds (do your homework – don’t trust the rating agencies!), and a “ladder” of not not more than 4 years. I know that does not yield much, but you should be protecting your principal.

If you have enough income from a portion of your assets to live on, then think about absolute-return-type funds.

Ken, if your time horizon really is ten years, then safety should be your number-one objective.

Also, I know some people are managing their wealth for the next generation. That may make my note of caution not as emphatic, assuming you really do have enough to make your expected time horizon and more.

All that being said, I am still bullish about certain businesses. As I noted a few weeks ago, I see an opportunity in bleeding-edge software consulting for media and other businesses that have to innovate or die, and I’m investing in such a startup. I am also investing in small-cap biotech stocks, with a 10-year horizon. Remember that birth/death ratio? While I do not believe it is as high as they estimate, there are businesses being started all over the country. That is what a free market does.

If I had the stomach to deal with renters, I would be buying distressed homes at prices where I could more than make a reasonable return. For some of you, that may be a way to get income. (Commercial real estate will soon become a real potential as well, for experienced investors.)

The US economy is not coming to an end. There will be lots of opportunities, but it will be harder than in the past. More like swimming through peanut butter. But nothing is ever easy. For the next few years, I simply think being more cautious makes sense – but choose your targets. There are funds and managers I like.

A 10-year time frame? There is not much I can say that will make you happy. 20 years? That should be another thing. One way or another, this deficit crisis will resolve itself, and then we can get back to doing what we do best.

The Health Chair, Phoenix, San Diego, and New York

Speaking of new businesses, I was in Albuquerque yesterday visiting rock-star dentist Gary Sanchez. He has designed what I think is the best chair I have ever sat in, and I have bought dozens in a search of something to help my sore back as I sit in front of the computer all day. Gary’s side business in the Health Chair has become quite successful, even in today’s economy. If you have something people want, it will sell. I highly recommend the chair for those of us who sit at desks all day. You can learn more about it at www.thehealthchair.com/jmep.html.

And why Albuquerque for a dentist? It turns out I needed a lot of work done – seems you should get your fillings replaced every 20 years, especially if you have the old amalgam fillings. The local dentists I talked with wanted to do a lot of sessions. Gary would sit me down and do it all in one seven-hour session, while I was out, and do it a lot cheaper than local estimates. And he is a helluva nice guy, and the flight is quick and cheap. Nice website for a dentist, too: http://www.sanchezdental.com/

Next Wednesday I fly to Phoenix, where I speak at a Thunderbird School conference, then off to La Jolla where I will attend Rob Arnott’s annual Research Affiliates conference through Sunday, then home for an evening before I take off to New York, where I do some speeches and media and even an interview with Steve Forbes, which I am really looking forward to. And all the while reading and keeping up and writing.

It’s time to hit the send button. Have a Great Easter. We will gather a lot of the kids for Sunday brunch, which I look forward to. Right outside my office door is a picture of Tiffani and Melissa when they were 5 and 3, in their Easter dresses. They were so cute! And now it is almost 30 years later, and granddaughter Lively will be all decked out at 4 months old. It goes so fast!

Your enjoying the times analyst,

John Mauldin
John@FrontLineThoughts.com

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