US Budgets and Debt: A Non-Political Primer

U.S. Budgets and Debt are key issues in the Presidential Race. Budgets, of course, represent priorities and choices. Just as elections do. I thought a quick recap of budget and debt might be helpful to each of us as we cut through the election rhetoric and try to evaluate various proposals for the future.

The U.S. fiscal year ends September 30th. The budget for the 2012 fiscal year ending in four weeks is expected to generate a deficit of $1.3 trillion. Our total revenue is $2.5 trillion, yet we willl spend $3.8 trillion. Our current debt is roughly $16 trillion and growing.

Revenue comes primarily from taxes:  50% from individual income taxes, 10% from corporate income taxes and 30% from payroll taxes.  Expenses are grouped into three major categories: Mandatory programs, Discretionary Programs and Interest.

The chart above shows the relative amounts spent on various items. Mandatory expenses, including social security, medicare,  medicaid  and federal pensions, account for 56% of the expenses. 37% of expenses are “discretionary” expenses, of which 20% is defense spending and 17% is everything else. “Everything else” includes education, transportation, veterans’ benefits, environment and others. Fortunately, interest rates are at historical lows, so interest on the $16 trillion of debt is “only” 7% of total expenses.

Hopefully, this provides some perspective on where the dollars come from and where they go currently.

Annual deficits of $1.3 trillion are not sustainable. You may recall that in 2010, the National Commission on Fiscal Responsibility and Reform (often called the Simpson-Bowles Commission) was formed to review and propose changes. The bipartisan committee delivered their final recommendations on December 1, 2010.

Their proposal was designed to save $4 trillion (through program cuts and revenue increases) over the next decade. Its five main “steps” were:

  • $200 billion reduction per year in discretionary spending, which included defense cuts of 15% and cutting the federal work force by 10%
  • $100 billion in increased tax revenues including an increase in gasoline taxes and restricting certain tax deductions
  • Controlling health care costs
  • Reducing entitlements, including farm subsidies, federal pensions and student loan subsidies.
  • Modifying social security to raise the payroll tax and retirement age.

Unfortunately, the commission fell short of the supermajority of 14 or 18 votes to approve the report and send it to Congress for a vote.  

A year ago, Congress voted to raise the nation’s debt ceiling (to $16.4 trillion). At that time, they established a super committee to identify at least $1.2 trillion in savings and submit them to Congress for a vote. If there was no approval, then automatic reductions of $100 billion per month would start as of 1/1/13. The supercommittee was unable to reach a budget deal last November and Congress has not moved forward with its own plan. Now, the automatic cuts scheduled for January represent part of the current “fiscal cliff”. The other part is the planned expiration of the Bush tax cuts.

There is much at stake in this election. Budgets and Debt are key issues. I hope this information helps.

FRAUD: Protecting Your Identity

Identity theftIt’s probably something you’d rather not think about, but identity theft affects more than 10 million Americans every year and is growing rapidly. If you haven’t been a victim, you probably know someone who has. Thefts range from an unauthorized charge on your credit card to a complete loss of your identity.

Many thieves have financial motives like taking out a loan, opening bank or credit card accounts, or using your account information to create counterfeit checks or cloned ATM cards to drain your accounts. They may use your information to get government benefits like Social Security payments.

Other thieves use your information to get a driver’s license, rent an apartment, open cell phone or utility accounts, or get a job using your social security number. Perhaps the scariest scenario of all: someone gets arrested and gives the police your information. When they don’t show up for court, the arrest warrant is issued in your name.

The good news is there are things you can do to protect yourself:

1.   SHRED everything with sensitive information. (Anything you wouldn’t hand to a total stranger). Ask your accountant how many years of tax returns to keep, and shred the oldest year’s return and related records each time a new one is filed. Shred old statements and credit card offers. Don’t leave receipts at ATMs or gas pumps.

2.   SHOPPING ONLINE is safe as long as you are on a secure website. The internet address should start with “https” and have a padlock icon in the lower right hand corner.

3.   COMPUTER SECURITY: Use anti-malware/spyware and anti-virus programs and keep them up to date. This will prevent hackers and malicious software programs from gathering data unbeknownst to you.

4.   TELEPHONE SCAMS: Never give out information to someone who calls you claiming to be from your credit card company, bank, etc. If they are legitimate they already have that information. Call the company yourself using a phone number from the back of your credit card or bank statement.

5.   In PHISHING SCAMS a thief sends a legitimate-looking email from a company you have an account with and asks you to reply with information or click on a link. Instead, contact the company directly through the website or phone number you would usually use. Watch which website you go to: there are scammers who set up websites that look legitimate but aren’t. (ie or

6.   USE A SAFE for all your important documents including your social security card. Keep your birth certificate, passport and other identifying documents in a bolted-down safe at home and use the hotel safe when you’re travelling. Losing any of these documents makes it extremely easy for someone to steal your identity.

 7.   CREDIT FILES can be protected by placing a security freeze on your credit reports. When a freeze is set at all three credit bureaus, a thief cannot open a new account because the potential creditor will not be able to check the credit file. When you need to apply for credit, you can lift the freeze temporarily. See:,, and

8.   Order a free CREDIT REPORT through from one of the three agencies every four months. You are entitled to one free copy a year from each agency so you can rotate your requests. Watch activity and check for inaccuracies. Also, be sure to close credit accounts you don’t want; don’t just cut the cards up.

9.   BE AWARE of who’s around when you are at an ATM, on the phone, or online in public. Someone may be eavesdropping. Hackers can steal personal information from nearby laptops and smartphones. Set a strong password (a combination of letters, numbers, and symbols) on these devices that automatically locks after a certain period of inactivity.

10.   MAIL envelopes with any sensitive information from a Post Office mailbox or secure mail slot, not your home mailbox where mail could be stolen. Eliminate credit solicitations by ‘opting out’ with companies you do business with and sign up for the Do Not Mail ( and Do Not Call registries (

This is one situation where Ben Franklin’s old adage “an ounce of prevention is worth a pound of cure” is certainly good advice.

An Investment Plan for the Truly Fed Up

From the Charleston Mercury, Aug. 23:

“The deck is stacked.” “The game is rigged.” “The system is unmanageable.”

No, these words were not spoken by another loser in Las Vegas. Instead, they were written by Ron Lieber, columnist for the New York Times a few weeks ago. Mr. Lieber’s article, “A Financial Plan for the Truly Fed Up,” was one of the most e-mailed for over a week.

It’s not surprising. Many people are upset. They’re fed up with Wall Street and they’re fed up with feeble or non-existent investment returns.

Lieber cites the recent frequency of “unfortunate” events including funky trading programs at Knight Capital, the “London Whale” debacle at JP Morgan and the LIBOR scandal as reasons why some people want nothing to do with big banks. Mr. Lieber isn’t the only one. Neil Barofsky, the former special inspector general of TARP, has just released a new book entitled “Bailout.” In it, Mr. Barofsky details his experiences and argues that the Treasury Department has worked with Wall Street firms to increase their profits at the public’s expense.

At the same time, returns on most equity indices over the last five years have been flat or negative, while the cost of living has increased 2% per year. And, what about those other concerns, like inflation and living longer?

O.K. So you’re fed up. Understandable. But, it’s not time to give up. You need to get returns that exceed inflation. Here’s a format to consider:

Group your investment portfolio in two pieces, Strategic and Alternative. The strategic piece would consist of long-only investments in stocks and bonds, utilizing mutual funds and/or ETFs. The alternative piece may consist of stocks, bonds and alternative assets and may hold both long and short positions, both liquid and illiquid depending upon your situation.

The strategic portion of the portfolio should be seen as the “core” piece representing the majority of your portfolio, say 70-80%. This portion is driven by the risk, return, and correlation of the equity and fixed income asset classes within. Hence, it incorporates a higher beta, or correlation with the market (and when we say market, we mean both the stock market and the fixed income market).

The alternative portion of the portfolio should be seen as the “satellite” piece representing the minority portion of your portfolio, say 20-30%. This portion is not driven by the usual market forces – it may employ hedge-fund type risk management components and strategies that are designed to protect the downside and participate in the upside – hence less reliance on beta and more reliance on alpha (defined as the value added by the investment manager).

Combining the “core” and “satellite” pieces gives you an overall portfolio that should enable you to participate from your market or beta-like exposure but also will protect you by your alternative/absolute return/alpha-seeking exposure. Of course, your overall asset allocation must be reviewed regularly. And both the strategic and alternative portfolios require ongoing rebalancing to adjust to targets and to take advantage of opportunities to increase return and/or reduce risk.

Yes, there are solutions for those ready to embrace them.

Les Detterbeck is one of a small number of investment professionals in the country who has attained CPA, CFP(r) and CFA designations. His firm, DWM Financial Consultant Group, Inc., a fee-only Registered Investment Adviser, has offices in Charleston/Mt. Pleasant and Chicago. Les may be contacted at 843-577-2463 or 

Where Have All the Investors Gone?

Where Have All the Investors Gone?Many non-DWM clients are upset. Their investment portfolios have stagnated or declined. Lots are so fed up, they have taken “their ball and gone home.” They are sitting in cash and/or C.D.s. That’s likely not the right answer.

On Sunday, August 19th, the Washington Post ran an article by Barry Ritholtz entitled: “Where has the Retail Investor Gone?” The article outlines reasons why investors are dropping out. Coincidentally, I submitted my latest article to the Charleston Mercury two weeks ago with the title: “An Investment Plan for the Truly Fed Up.” The article will run this Thursday, August 24th.

Therefore, I thought you might like a “two-fer” blog this week. Today we review reasons why people are fed up and, later this week, a better solution than dropping out. It’s the DWM approach- used by us personally and by our DWM clients.

Mr. Ritholtz is quick to point out that there is no one reason why investors are leaving the markets. He detailed ten reasons weighing on “people-formerly-known-as-stock-investors:” Here are some key ones:

  1. Secular cycle. We’ve been in a bear cycle since March 2000. Stock markets are effectively unchanged since 1999, except for the Nasdaq, which is still off 40% from its 2000 peak. There was a somewhat similar secular bear market from 1968-1982. However, many investors today were not investors back then.
  2. Psychology. Investors are scarred and scared. There has been a psychological shift from love to hate to indifference with stocks.
  3. Risk on/risk off. Central bank intervention has “trumped” fundamentals. 
  4. Poor returns across various asset classes. There have been booms and busts in equities (2000 and 2008-9), real estate (2006-?) and even gold (2011-2012). Some people are sick of the “investing game.”
  5. Wall Street scandals. First the bankers help to blow up the markets in 2008, and then they are bailed out. Individual investors got nothing but the invoice. It continues. Recently, MF Global, Peregrine, Knight Trading, the LIBOR scandal and JP Morgan Chase have also made investors quite uneasy. Theft and incompetency appear to have run rampant.
  6. Trendless economy and markets. Our economy continues forward slowly. Unemployment is still high. Real wages are flat and consumer spending is unremarkable.

It’s easy to understand why investors are fed up.  What’s not easy to understand is why investors would “drop out” or continue with an investment plan that doesn’t work.  Later this week, our next blog will suggest a better solution for fed up investors. 

Love that Cash!

Love that Cash!Ever wonder where worldwide currency gets printed? Certainly, here in the United States, our U.S. dollar banknotes are printed by the Bureau of Engraving and Printing in D.C. and Fort Worth, Texas. Of course, our Federal Reserve keeps them busy. Like the U.S., most large countries do their own printing. The smaller countries, and those under a time crunch, outsource the job.

South Sudan seceded from Sudan on July 9, 2011. It needed currency quickly for its new country. Of course, like all cash, it would have no intrinsic value, but it needed to appear of value to inspire public confidence. The product needed to be durable and secure. South Sudan needed millions of copies of their six bills produced cheaply yet safe from fraud. Ten days later, on July 19, 2011, the government introduced the South Sudanese pound, which included the image of John Garang, deceased leader of their independence movement.

South Sudan couldn’t have accomplished this without De La Rue, a British company and the world’s largest commercial banknote printer. De La Rue got started in early 19th century, obtaining a Royal Warrant to print playing cards. Today, it also prints passports, drivers’ licenses, stamps and bank checks. Its customers include 36 central banks, including the Bank of England, the Bank of Greece and the European Central Bank. There aren’t many worldwide “security” printers. Trust is one huge factor. A long history and established relationships with central bank clients are others. De La Rue’s two main competitors also both date back to the 19th century.

The Wall Street Journal on August 13th reported that African countries want to replace the U.S. dollar with their own. Angola, Mozambique, Ghana and Zambia have all recently enacted laws to reduce U.S. dollars in their countries. In copper-rich Zambia, the central bank has banned dollar-denominated transactions and now requires the kwacha be used. They’re serious about this. Violators may spend 10 years in prison. The desire is more than national pride. Small economies like Zambia do not want complete reliance on foreign currency. It’s working. Their recent changes have heightened demand for the kwacha and have pushed their currency to its highest level against the dollar in more than a year.

The financial crisis has also been good for banknote printers. The collapse of Lehman Brothers in 2008 has led to people holding more cash. Around the world, low interest rates and fear of banks in general have resulted in more cash being stuffed in mattresses. Furthermore, if, in fact, Greece exits the euro, commercial banknote printers will undoubtedly be asked to produce, in secret, millions of drachmas in a very short time. And, can you imagine what would happen to the banknote printing industry if the euro zone splits apart?

Will the Peasants Go Medieval on Bankers?

Peasants go Medieval on BankersWall Street bankers are under siege. Everyone from Tony Blair to Nouriel Roubini is debating whether they should be “hung.” Are changes coming, or will we have a repeat of the Peasant Revolution of 1381?

People have always been touchy about their money. 3,700 years ago in Babylon, violators of a financial contract were “put to death as a thief.” In medieval Catalonia, if a banker went bust, he had to live on bread and water until he repaid his depositors in full. In Florence, during the Renaissance, money-changers who cheated clients were tortured on the “rack.” Dante’s Inferno is populated largely  with financial sinners, including “misers”, “thieves”, “usurers”, and even “forecasters.”

The LIBOR scandal is just the latest black mark for banks. Leading banks have been alleged to manipulate a financial benchmark determining the interest rates charged to millions of borrowers and used in derivative contracts worth hundreds of trillions of dollars. The Economist describes it as the “rotten heart of finance.” Emails that have come to light re the scandal include: One employee after being asked to submit false information, answered: “Always happy to help.” And another, recruiting a colleague in the fix, wrote: “If you know how to keep a secret, I’ll bring you in on it.” 

Neil Barofsky just added new fuel to the fire. He is the former special inspector general in charge of oversight of TARP, the bailout fund and has just released his book Bailout. In it, Mr. Barofsky argues that the Treasury Department worked with Wall Street firms to increase their profits at the public’s expense. Mr. Barofsky told Bloomberg that “Americans should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable.” Further, Mr. Barofsky indicated that the “American people should be revolted by a financial system that rewards those who drove it to the point of collapse and will undoubtedly do so again.”

People are very mad. Nouriel Roubini told Bloomberg recently: “Nobody has gone to jail since the financial crisis. The banks, they do things that are illegal and at best they slap on them a fine. If some people end up in jail, maybe that will teach a lesson to somebody. Or someone hanging in the streets.” Last week, Tony Blair, former British prime minister and current senior adviser to JP Morgan, responded, “We must not start thinking that society will be better off with 20 bankers at the end of the street.” We agree with Tony Blair on that point.

Regardless, it’s time for a change. Crony capitalism and radical deregulation in finance, particularly in the last 15 years, have hurt our economy and our country. Barry Ritholtz, chief executive of Fusion IQ, said it well in the Washington Post on Sunday, “We should be finding ways to definancialize the U.S. economy and reduce bankers’ influence.” 

The question is whether public outrage over the LIBOR scandal and other financial misdeeds will lead to reforms. Or will we have to wait for a new peasants’ revolt until we see any real changes?

Charleston Mercury: Six Keys to Financial Independence

From the Charleston Mercury July 26, 2012

Ever worry about running out of money during your lifetime? Many people do these days. The primary concerns seem to be the likelihood of living longer, reduced investment returns and future inflation.  Here are six rules of thumb, which followed, can help immensely:

1) If you are retired, limit annual withdrawals from your investment pot to 4%. This assumes an annual investment return of 5.5%, inflation of 3%, and the individual(s) withdrawing money for up to 30 years or more. A 65 year old couple, newly retired, with an investment portfolio of $1 million should be able to safely withdraw $40,000 in year one and 3% more each year thereafter. Note: a withdrawal rate of 6% will dissipate this investment pot in roughly twenty years.

2) If you are still working, target an investment pot equal to 25 times your expected annual withdrawals during retirement. A couple expecting to need $60,000 of annual withdrawals from their investments upon retiring at age 65, for example, will need to save and accumulate $1.5 million. Please note that annual withdrawals are calculated by adding all expenses, including taxes and then subtracting income such as social security, pensions, part-time employment, etc. Inflation must be included in the calculation.

3) Your annual investment returns need to exceed inflation by at least 2-3% per year. If not, your investment pot will vanish quickly. Currently, inflation has been running at roughly 2.5%. If inflation increases, then investment returns need to as well.

4) Focus on your housing decisions. The total cost of housing includes taxes, mortgages, maintenance, insurance and opportunity costs for the non-invested equity in the house. These costs can be 8-10% of the value of the house per year. In addition, your house may have substantial equity which may need to be “unlocked” in the future.

5) Control your expenses. Expenses are the most controllable factor in determining whether or not you will accumulate a sufficient nest egg and/or run out money. We all have the opportunity and responsibility to determine how we spend, save and invest our money. These decisions result in spending levels which directly impact the amount of our nest eggs and whether we outlive our money.

6) Don’t forget insurance and risk management. Negative financial surprises can destroy an otherwise solid financial plan for the future.

So, now it’s time for self-evaluation. If you’re in retirement, is your withdrawal rate sustainable? If you’re working, are you on track to meet your investment nest egg goals? What’s the return on your investments over the last 1, 3 and 5 year periods? Are you beating inflation? Can you afford your house? Will you need to tap into its equity at some point? Are your expenses under control? Do you monitor and review your expenses regularly? When was the last time you had an independent review of your insurance and risk management? Do you have the right coverages and are you paying the right amounts?

Finally, if your self-evaluation has added more worry than peace of mind concerning your financial future, do find the best financial counsel available.

Lester Detterbeck is one of a small number of investment professionals in the country who has attained CPA, CFP® and CFA designations.  His firm, DWM Financial Group, Inc., a fee-only Registered Investment Adviser, has offices in Charleston/Mt.Pleasant and Chicago.  Les may be contacted at 843-577-2463 or

Going for the Gold in London

London OlympicsThe Olympics open in London on Wednesday, July 27th. You won’t see any sponsor logos on the athletes or in the stadium. Similarly, in ancient Greece there we no logos on clothing either. Of course, back then, the competitors were naked.

Even so, the Olympics today are big business. 

Eleven global companies have paid almost $1 billion for their four year commitment (2009-2012) as a top Olympic partner (“TOP”). There is only one TOP sponsor for each commercial category. Coca-Cola for soft drinks, Visa for credit cards, McDonald’s for fast food and so on. Unable to advertise inside, the sponsors must advertise outside, by way of posters and packaging and every other platform available. So every sponsor links their advertising back to the Olympics. The International Olympic Committee (“IOC”) has made a policy against “crass commercialism” and the result is worldwide advertising by the TOPs of the upcoming Olympics. What a fantastic deal for the IOC. And, it must be working for the TOPs as well- many have been doing this for 25 years or more years and fees are up 10.5% in this quadrennium.

London OlympicsThe IOC has raised almost $5 billion in sponsorship and broadcasting rights for 2010 Vancouver and 2012 London. Broadcasters have paid $3.9 billion for television rights. NBC Universal has paid $1.2 billion for the rights to the London games. According to the Economist, to date, NBC has sold $950 million in advertising and will undoubtedly sell more ads at the last minute. Add in the cost of cameras, computers, and communication and they are expected lose $200 million. Not to worry. NBC will be paying $4.4 billion for the games from 2014 to 2020. NBC’s plan is to make big inroads on ESPN. Of course, they will be fighting time zone differences and many Olympic sports that don’t interest Americans. However, there will be 3,500 hours of coverage, many online, this year. Get your smart phones ready.

Lastly, London will invest almost $15 billion to be the host. They’ve invested heavily in a new Olympic Park, a grand Velodrome and a new $400 million aquatic center. They’ve built roads and spent billions on revamping and revitalizing parts of East London. David Cameron, Britain’s prime minister, has promised a return of $20 billion. If he is right, it will be a rarity for most modern day Olympics hosts. However, Britain, alone among recent hosts, has focused on “legacy.” The Olympic Stadium will hold 80,000 during the games but will be dismantled afterward to hold 25,000. Many sites are temporary venues that can be dismantled and reused afterwards. It’s a tough time. The British economy is currently in a recession and Cameron hopes that the Olympics will boost GDP by .2% in the third quarter. London has had the wettest summer in recent history. The hoped-for tourist boom doesn’t seem to be happening. Finally, due to the congestion, London employers have been encouraged to send their employees home for two weeks and work from home. Ultimately, there may little impact on the UK’s GDP, but at least London employees can spend some time on the couch watching their telly.

Kudos to the Real Job Creators: Small and Mid-size Businesses

Job Creators: Small and Mid-size BusinessesWe all know that job creation is critical for increasing economic growth. The question is: Is it big business or small business that is creating jobs? The answer: It’s not big business.

Let’s first take a look at job growth since the end of the recession, July 2009. Since that time, according to Federal Reserve Economic Data, 2.6 million net new jobs have been created in the private sector. Small companies (those with fewer than 50 employees) have added 1.3 million new jobs. Mid-size companies (those with 51-500) have added 1.4 million new jobs. Big businesses (those more than 500) have cut payrolls by 100,000 people.

The U.S. Small Business Administration (“SBA”) also knows how important small businesses are. They tell us that businesses with fewer than 500 people represent 99.7% of all employer units and about ½ of all private sector employees. In addition small and mid-size businesses have generated 60 to 80% of net new jobs annually over the last decade and have created more than half of non-farm private GDP.  Ronald Reagan knew this. Back in 1981 he said “Let us not overlook the fact that the small, independent business man or woman creates more than 80 percent of all new jobs and employs more than half of our total work force.”

Just last week, the L.A. Times ran an article by John Bunzel suggesting that we need to “nurture the real job creators-big business.” His article, along with others we have seen recently, would like to have us believe that, according to Mr. Bunzel, “big business remains the primary driver of economic growth and job creation.” The facts, as outlined above, just don’t support that conclusion.

If there is any nurturing to be provided, let’s give it to the real job creators in our country- small and mid-size businesses.  Kudos to them!