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!

DWM 2Q12 Market Commentary

Detterbeck Wealth Management sherpaAfter the investor party that took place in the 1st quarter, 2q12 started like a bad hangover with most stock indices getting hit hard in May. Fortunately the best month of June (at least for the S&P500) since 1999 helped recoup some of the early losses. 

For the record, the average US diversified stock fund posted a -4.6% return for the second quarter yet remains up 7% so far this year! That’s pretty amazing given the soft economic conditions here in the U.S. and the turmoil overseas. And speaking of overseas, the international markets continued to lag the domestic markets in the second quarter as evidenced by diversified international stock funds dropping 7.1%, yet still up 3.8% Year-To-Date (“YTD”). It should be noted that international outperformed domestic in the month of June, a trend we expect to continue. Another note was value outperformed growth in 2Q12. 

With stocks trending down most of the quarter, investors gravitated to safety as expressed by the relatively strong showing in the bond world. The Barclays Capt’l US Aggregate Bond Index was up 2.1% for the quarter and now up 2.4% YTD. Yields on 10-year Treasury notes fell to 1.5% last week, near the lowest levels in generations, reflecting market dreariness about the economy and also possibly the anticipation of more action by the Fed. 

Turning toward alternatives, our DWM Liquid Alternatives portfolio did its primary job of protecting first, participating-in-upside second, up almost 1% for the quarter and now up almost 5% on the year. During the quarter, we successfully merged in alts like real estate, gold, and other commodities that were held in strategic models into the LA portfolios for more-focused strategy tracking moving forward.    

Going forward, there are many challenges: 5 of 17 Eurozone countries have received a financial bailout in the last 2½ years with more on the horizon. Let’s face it, its not just the PIGS (Portugal,Ireland,Greece, and Spain) that we need to worry about; the whole Eurozone faces recession. Move Far East, and even China is slowing down. Back in the homeland, our latest readings show slowing new orders, production, etc. Three years after the end of the nation’s most recent recession, the U.S.employs almost 4 million fewer Americans than when the recession began and 12.7 million people remain jobless. And the worst is that Joe Consumer is not spending as much as he did just last year. In the political arena, we are now in the Presidential Election wait-game with not much getting done in Washington D.C.before that wraps up. And frankly there’s a lot that needs attention politically… Did you know that Federal spending on Social Security, Medicare and Medicaid has risen from 16% of total government spending in 1967 to 41% of spending in 2011 and the percentage is only going to go higher unless serious changes are made?

The good news is that almost all of the major global central banks are taking steps to bolster economic output. U.S. Fed Head Bernanke said last month “We are prepared to do what’s necessary”. We think they’ll keep this attitude for the near future and hence don’t anticipate rates/inflation moving up any time soon. This should create an environment where stocks are volatile, bonds have modest returns, and alternatives are the key driver in your portfolio’s total return.  

In conclusion, here are a few more general comments on the stock market. Of course, stocks (equities) only represent a minority allocation for our clients’ portfolios. Diversification amongst stocks, bonds, and alternatives is the key to achieving a stable, long-term return. But equity is the asset class that gets the most headlines. So I thought it would be fun to remind people that as gloomy as the stock market may seem, the S&P500 is now entering its 41st month in the current bull market and has gained 115% (total return) since bottoming 3/09/09. Here’s another tidbit: The average bull market for the S&P500 since 1950 has lasted 58 months. It’ll be fun to see if this current run, even though it may not feel like one, can eclipse the average. As a reminder, if you haven’t already done so, please download the DWM Mobile App to your smartphone so you can see your portfolio at any time and take advantage of the many features within. Enjoy your summer and we hope to connect with you again soon! 



Obamacare Court Decision May Impact Roth Conversion

Roth Conversions and ObamacareOn June 28, the Supreme Court affirmed Obamacare. Numerous tax changes were included in the law. Some have already gone into effect and others are scheduled to kick in over the next several years. A new 3.8% surtax on investment income will start on January 1, 2013. Capital gains rates will increase from 15% to 18.8%. And, if Congress allows the Bush tax cuts to expire, the top rate would be 23.8% on capital gains and 43.4% on dividends.

Advisers and investors are now looking at ways to accelerate income into 2012 and considering other long-term strategies, such as converting a regular IRA into a Roth IRA.

Regular IRAs have been characterized as “deals with the devil” that taxpayers make with the IRS. Money invested is not taxed when contributed but later, after the amounts have grown over the years, and then the tax is based on the full amount of the IRA, including earnings, at the then current tax rates. 

With a conversion to a Roth, a taxpayer ends the “arrangement.” Taxes are paid on amounts not previously taxed. The taxpayer can continue to grow the Roth account from that point without tax and pay no tax at the time of distribution(s). Furthermore, the taxpayer and their spouse are not required to take regular minimum distributions starting at age 70 ½ as are required for traditional IRAs. Hence, a Roth account could grow tax free for decades without tax and could continue to grow tax-free during the beneficiaries’ lifetimes as well, though annual distributions are required once mom and dad die.

So, the question is, does it make sense to convert now, based on new taxes going into effect in 2013 and the likelihood that income taxes will increase in coming years? And, if so, when should the conversion be done? Here are a few rules of thumb:

  1. If you are likely to leave money to your heirs, then a Roth account is the best possible asset you could leave them. Investments within a Roth account grow tax-free. Hence, inheriting a Roth account is better than cash. Consider converting.
  2. If you are likely to spend your IRA(s) in your lifetime, conversion is probably not the best idea. In this case, your earnings in retirement will likely be less than your working years. Hence, even though tax rates are higher overall, your individual tax rate may be the same or lower.
  3. If you are not sure, then you should have your fee-only, independent Registered Investment Advisor run some scenarios for you of conversion or not, using hypothetical tax rates during working and retirement years. Taxpayers can get a real “bang for their buck” when using non-IRA funds to pay the income taxes on conversion to a Roth.

Check with your CPA before you make your final decision. If you do decide to convert, you may want to convert over time, perhaps 5-10 years, so that the income produced by the conversion doesn’t push you into a higher tax bracket. The special conversion election in 2010 to split the income and report it in 2011 and 2012 no longer applies. However, conversion still is available regardless of the income of the taxpayer(s).

Fourth of July-Be Happy and Safe!

4th of JulyEveryone at DWM hopes you and yours have a happy and safe Fourth of July.  In honor of our national holiday and courtesy of National Geographic, we’d like to share six memorable myths that turn out to be more fiction that fact.

1) Did Paul Revere ride solo? No, he didn’t. Yes, patriot Paul Revere really did ride the night of April 18, 1775 to warn the countryside that the British troops were on the move. He and two other riders, William Dawes and Samuel Prescott were, in fact, part of a highly effective, early warning system. Longfellow’s 1860 poem “Paul Revere’s Ride” fails to acknowledge the other two riders or that all three were, in fact, captured that night by the British.

2) Did a raucous Independence Day Party in Philly crack the Liberty Bell? No, the State House bell cracked soon after its arrival in 1752. The bell was recast and recracked several times but was intact during the Revolutionary War.

3) Did patriots flock to fight for freedom? Not really. There was a surge of initial enlistees. However, as it became clear that the struggle for independence would be long and difficult, the enthusiasm began to wane. Many colonies resorted to cash incentives as early as 1776 and states were drafting men by 1778.

4) Did John Adams die thinking of Thomas Jefferson? Incredibly both Adams and Jefferson died on the same day, July 4, 1826, exactly fifty years after the founding of America. However, Jefferson actually died a few hours before Adams and there is no evidence that supports the myth that Adams whispered these final words: “Thomas Jefferson survives.”

5) Did Betsy Ross Make the First American Flag? There is no proof that Betsy Ross played any part in designing or sewing the American flag that made its debut in 1777. Her participation was only revealed nearly a century after the fact by her grandson. There is no evidence, on the other hand, to prove she was not the seamstress.

6) Does the Declaration of Independence hold secret messages? The movie National Treasure was based upon a “coded map” on the back of the Declaration of Independence which would lead to the lost “national treasure” of precious metals, artwork and other artifacts accumulated over many millennia. Of course, that is not true. The National Archives acknowledges that there is something written on the back of the document. It is merely a label stating: “Original Declaration of Independence dated 4th July 1776.”