Monthly Archives: September 2013

Is a Government Shutdown a Good Thing?

In the middle of all the media and political hoopla about the government shutting down, people who keep their heads when others are losing theirs may ask the important question about a government shutdown: is it a good thing or a bad thing?  Government shutdowns have happened before.  In fact, most people many not be aware that from 1976 to 1996 there were 17 shutdowns totaling 110 days.  Remember the horrors that were predicted in the run-up to the “Sequester.”   With the exception of the news media, almost no-one noticed.  From First Trust, we get the following comments:

It looks like House and Senate won’t  come to a budget agreement by midnight and, as a result, the federal government is going to partially shut down starting Tuesday morning. Run for the hills?  Armageddon: right?  Nope!

As we said a few weeks ago, a shutdown is not as scary as it seems.  Money still flows into  the Treasury Department and money still flows  out, for Social Security  or to make interest payments on the debt, for example.

The military, border control, food inspections, air traffic, prisons, weather service, and post office, all keep going.  And, as long as the Treasury Department has room to continue its “extraordinary measures” or if the  debt limit goes up in the meantime, Treasury still pays the debt as it comes due, without missing a beat.

The downside is that if you need a passport or want to get into a national park, you are out of luck.  Non-essential services stop and non-essential federal workers get furloughed.

So what happened in those previous shutdowns?  The economy kept perking along.  Keep in mind, in our country a government shutdown does not shut down the economy.   Here is what followed the longest one:

That was the three-week shutdown from mid-December 1995 to early January 1996 under President Clinton.  Real GDP grew 2.3% in the year before the shutdown, a 2.9% annual rate in Q4-1995  and then at a 2.6% pace in Q1-1996,  despite  the shutdown and  the East Coast Blizzard, a multiple day massive snowstorm in January that was followed by large floods. The real result of the 1995-96 shutdown was that politicians could no longer hide the fact that government was overspending.  And when politicians can’t hide, when the public finally finds out the “Emperor Has No Clothes,” there is a political reaction.  In the late 1990s, that reaction slowed government spending relative to GDP dramatically and the US eventually moved into surplus.

Is that likely to happen today?  Well, we doubt that we’re headed for a budget surplus, but the predictions of doom are overstated.

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Critical Planning Documents for College Kids


When your kids go off to college, who will be able to make medical care decisions for them if they are injured?  Here’s a story that will make you think.

One estate planning attorney told the Journal about two clients whose college-age children were in car accidents that left them hospitalized and unconscious. Medical officials refused to release “even basic information” to the clients about their sons’ condition until the boys regained consciousness and authorized their doctors to speak to their parents. A third client was forced to sue for the right to become his own daughter’s temporary legal guardian after an accident landed the girl in a coma that lasted weeks.

The medical privacy laws can make it impossible for parents to make critical medical decisons for their children once they become legal adults.  The answer is to make sure that the proper forms are signed before they leave, such as Health care proxies and a HIPAA release — which allows doctors to share medical information with designated people.

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Private Jet Flying – now by the seat.

Have you daydreamed about at least taking a ride in a private jet?  In the beginning, unless you were flying somewhere on a company plane, the only way you were going to ride on a private jet was to buy one.  If you are one of the ultra-rich, like Oprah Winfrey, that was your only option.  Since that was out of the reach of even the common multi-millionaire, the industry developed the shared lease program where you bought a number of hours of flying time on a jet you shared with others, the plane being owned by the leasing company, like Net Jets.  But that still costs hundreds of thousands of dollars.  The newest concept is the “per-seat charter” where you share the ride with others who have bought their seats on the same ride.

As a per-seat traveler, you give up the luxury of having the cabin to yourself, the control of specifying when you want to take off and, in some cases, what airports you want to use. But you still avoid hassles ranging from security lines to the delays and cancellations that come with airline travel. And per-seat savings over traditional charter can be considerable. BlackJet guarantees a seat on a Los Angeles–New York flight for $3,500, its highest fare. Xojet, which helped bring transparent, point-to-point pricing to the charter industry, charges $25,300 or more for that route. And per-seat providers pledge to maintain the quality level associated with charter.

If you’re among those who have always wanted to have the experience, let us know.  We provide a great many concierge services for our clients.

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Stop worrying about the Federal Reserve

There are lots of people fixated on trying to figure out what the federal reserve is going to do with interest rates and when they are going to do it.  If you are a retail investor, you are not going to beat the professionals in that game, so stop trying.  Instead, let the pros handle it and relax by looking at the view from 30,000 feet.  Here’s what the bond experts at Oppenheimer are telling us in a messge titled Why Fed Watching Is Likely a Waste of Your Time

What to Remember for the Long Haul

For long-term investors, I believe there are essentially five important points to keep in mind.

1) Overall global economic growth is slow but most likely the worst is over. While there may be hiccups every so often, it is unlikely that we will revisit the financial abyss in the near-to-medium term.

2) Real interest rates are quite low. Over any reasonable investment horizon, they are going to go up. That is true irrespective of what the U.S. economy looks like this quarter or who the next Fed chair is.

3) Because interest rates are so low now, the likelihood that returns from any part of the bond market will get you to a comfortable retirement based on their real returns is virtually zero. You most likely have to have a significant portion of savings in assets that provide better real returns, albeit with greater risk.

4) That said, you can’t just put all your money in stocks. There will be future periods of equity underperformance. In order to make sure you don’t panic and go all cash at the worst point in the cycle, have some part of savings devoted to bond or bond-like instruments now. Even if they aren’t generating a lot of income, those investments may provide protection during equity downturns, which is as important.

5) Income, not price appreciation, is typically going to be a significant part of overall returns. Therefore, wherever you can, and whatever risks you are comfortable with, seek out income-generating investment options. As always, past performance does not guarantee future results.

Good advice.

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Who’s Middle Class and who wants to move up?

The New York Times has an article  titled: When Labeling Yourself Middle Class Can Hold You Back.  It cites some interesting statistics that point out the “middle class” is a mindset rather than an income level.

If you think I’m exaggerating, take a look at a recent Wall Street Journal/NBC News poll. The results revealed that what we define as middle class has more to do with how we think of ourselves than any particular number. Not too surprisingly, we tend to compare ourselves against what we know:

■ 48 percent of people earning $40,000 – $50,000 consider an income of $50,000 middle class.

■ 50 percent of people earning $50,000 – $75,000 consider their income middle class.

■ 39 percent of people earning $75,000 – $100,000 consider their income middle class.

The larger point is that many people who think of themselves as middle class are holding themselves back because they don’t take advantage of the tools that are available to them.  The so-called “rich” use professional investment managers to protect what they have and get richer.  Why shouldn’t the middle class also use experts to do the same thing?  Do you want to send your kids to college, buy a bigger, better house, save and invest for that really great retirement?  From the article:

There is no reason we shouldn’t be using every tool available to help us improve the odds we’ll reach those goals. It doesn’t matter that we may not have as many options as those available to an investment banker. We owe it to ourselves to understand the options we do have and then make plans that get us to where we want to go.

We’re making a similar mistake if we assume we won’t find people to help us when we do need more help. The reasons often come down to money. Time after time, people will tell me they aren’t seeking help because they can’t afford it.

The problem with this assumption is that it ignores the professionals — C.P.A.’s, lawyers, advisers — who make it their mission to help people who don’t have seven-figure balance sheets. There are plenty of them out there; we just need to take the time to find one if we need help.

At Korving & Company, that’s our mission and we take it very seriously.  We put our clients’ interests ahead of our own.  Get in touch today!

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A castle that costs less than a NYC apartment

There was a fascinating article in BuzzFeed that had the interesting (to me) title: 6 Castles That Cost Less Than An Apartment In NYC

Here is the first pair:

Castle in FrancePRICE: $1,621,200

This 13,993-square-foot, 6-bedroom castle sits on 24 acres of land overlooking the countryside of Midi Pyrenees. Features include a large entrance hall opening to the courtyard, salon with a fireplace, grand staircase, elevator, large dining room with fireplace, two kitchens, a bedroom wing with a hall onto the courtyard, study rooms in the towers, two garages, and access to the chapel and east wing.

Apartment in NYPRICE: $1,650,000

Here’s a 1-bed, 1.5-bath, 1,200-square-foot apartment on East 30th Street. It’s conveniently located near nothing interesting.

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Interest Rates

10-year-yields-and-30-year-fixed-since-2008[1]  The graph at left shows how the interest rate on the benchmark 10 year has changed from January 2008 till today.

Note that the 30-year fixed rate mortgage tracks this almost perfectly because banks us the rate in the 10-year treasury bond to set the rate on fixed rate mortgages.

The rise in rates in the last year was triggered by the Federal Reserve’s hints that it would stop “easing” at some time in the future.  The recent announcement that it would not stop easing yet has caused the 10-year bond yield to decline from nearly 3% to about 2.65%.

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The “Middle Class” and Financial Advice

Americans love the concept of the middle class.  It defines people who have a home, a car, a good job, take a yearly vacation and plans for retirement.  But millions of people may be neglecting their financial welfare because they think of themselves as middle class, and not “wealthy” enough to need financial planning.  Nothing could be further from the truth.

The middle class have doctors, they have lawyers prepare their wills, take their cars to be serviced by mechanics, yet somehow they believe that they don’t need or can’t afford professional financial guidance.  Unlike doctors, lawyers and mechanics financial guidance is designed to make you money rather than cost you money and the fees are usually less than that of other professionals.

They may not be aware that the new RIA (Registered Investment Advisor) model includes a large number of professionals who are fee-only and don’t sell products to get commissions.

They may not be aware that RIAs provide a broad range of advice from tax planning, retirement planning, estate planning and more.  We even wrote a book about it.

They may not be aware that RIAs can be a crucial aide if the client has to go into a nursing home, or when a widow is left alone after her husband has died.

Advisors naturally want to attract wealthy clients, and to that end, many market their services with a subliminal promise of leisure and luxury. But there are a lot more in the middle class and they deserve the same kind of skilled guidance that the rich get.   You can’t afford not to.

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Why Does a Vicuña Jacket Cost $21,000?

We turn our attention away from the market for a moment to ask the really important question: who can afford a $21,000 sports coat and what makes it so expensive?

Vicuna Sports Coat  The Wall Street Journal tells us that Incan royalty wore it exclusively. In the 1500s, King Philip II of Spain slept under vicuña blankets. Last century, it was favored by wealthy entertainers: Greta Garbo wore vicuña, as did Nat King Cole and Marlene Dietrich.

  The Italian tailoring house Kiton makes only about 100 vicuña pieces a year; an off-the-rack sport coat costs at least $21,000, while the price of a made-to-measure suit starts at $40,000. A single vicuña scarf from Loro Piana is about $4,000. Ermenegildo Zegna produces just 30 vicuña suits a year. Each is numbered, and the most affordable model goes for $46,500.

  The vicuña, a camelid that looks like a smaller and more elegant llama, is found primarily in the Peruvian and northern Argentine Andes. For centuries, it was poached for its valuable cinnamon-colored coat, a marvel of evolution that, although unusually light and fine, keeps the animals warm in the freezing altitudes above 15,000 feet.

   The vicuña are wild.  To gather the hair, the local population forms a circular human chain (as the Incas did) around the animals and then slowly closes in on them, before taking them into small tents where they’re sheared.

If you have a vicuña jacket or suit, we’d like to hear from you.


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