Introduction
“I’m so happy I ought to be committed.”
This was my response this afternoon when I walked in and Mary Kay asked me “Ça va.?” Such happiness is definitely looked on with suspicion here in Paris. People assume there must be something off with me, especially given the global financial markets.
I’m happy in the face of the global financial meltdown because I’m truly becoming convinced that we can make a difference. The reactions to The Plumb Plan that I sent out on October 7th have been enthusiastically positive. If you haven’t read The Plumb Plan yet, you can read it here.] It’s an alternative to the Paulson bailout plan and the more responses I get, the more convinced I am that we do not need to be helpless victims of this financial crisis. This can work because:
THE STARS ARE ALIGNED
A PLUMB PERSPECTIVE EDITORIAL
This is history in the making. CNBC has become The History Channel. This unfolding financial crisis is unprecedented. It is happening right now. And, it is one of the main reasons I began writing the Plumb Performance Portfolio© exactly four years ago this month. In the past four years, I have built up a pretty substantial subscriber base of financially astute readers. Starting from this base to get The Plumb Plan out is a big advantage. We can be part of history instead of just letting it happen to us.
People are angry. They don’t like being victims of someone else’s mistakes. Still, they don’t know what to do about it. The people I admire don’t just complain, they try to do something positive to change the situation. The responses I’ve received so far indicated that people like the fact that they can do something.
We’re Talking Real Money. $700 billion is a lot of money; it focuses the mind. To put $700,000,000,000 in perspective, last year all federal tax receipts totaled $2.5 trillion. I estimate that The Paulson Plan will cost each of my readers at least $10,000. If you want to get a better estimate of your share of the bill ((You may also like poking yourself in the eye with a sharp stick.)), take a look at the total taxes you paid last year. Multiply this by 27% and you will come up with a number that you don’t like (but it will be a rough estimate of your share). But, it will also be a number that will probably motivate you to do whatever you can to try to get something of value for your money.
People crave a fair solution. The plans bandied about so far (including the Paulson Plan) pit taxpayers against one another. Nobody likes the feeling that they are being forced to bail out what they view as their neighbor’s bad behavior. This is a feeling common to all the plans on the table now. Also, people hate the idea of the government deciding who gets to benefit from a plan and who doesn’t. Any plan that makes me resent the fact that my neighbor gets a bailout, but I don’t is a recipe for divisiveness. The Plumb Plan avoids all of this. Everyone can choose to participate, but there are consequences to participation. This is fair. People don’t want to be hard-hearted, but they don’t want to feel cheated either.
It’s Election Season. This works in favor of a creative idea. The financial crisis has pushed every other issue off of the debating table. It’s going to be that way all the way through November 4th. Right now, voters are incredibly angry about the political process. They’re scared and confused, but no candidate has been able to propose any solution that resonates with the electorate. The candidate that can most effectively present a solution that voters can embrace is probably going to win the election. Many people feel very passionate about this election and I think supporters will do everything they can to make sure that their candidates are aware of imaginative solutions that might help them win.
What Can We Do About It?
Given the stakes, I think most of the people reading this want to do something. It is directly impacting their lives more every day. I think the situation is desperate enough that it’s time for us to make the penultimate sacrifice—a trip to the post office.
Changing the direction of the country is going to inconveniently require more than forwarding an e-mail. You can’t e-mail a pdf file to your Congresspersons. We’re going to have to actually print out The Plumb Plan and mail it to our Senators and Representatives. I would also encourage you to mail it to the candidates of your choice and to newspaper editors.
To find the addresses of your Representatives and Senators (including those for McCain and Obama), you can go to: Roll Call | Congress.org
To find your nearest post office, you can go to: United States Postal Service – Services Locator
Insert guilt trip here >> I’ve been writing and distributing this letter for free for the last four years so that I could try to help you prepare for the events that are currently taking place. Now that they are upon us, I’ve tried to develop a plan that I believe will be considerably better than anything that is currently being considered. The people who have written to me about the plan have been enthusiastically positive. Sending a letter to your representatives will likely take less time than it takes you to vote, but it could have a bigger impact. It may not be the most important thing you do today, but is everything you do today more important? << Insert guilt trip here
It would be best if you write your cover letter in your own words, but feel free to paraphrase the following to briefly describe the plan:
The basic idea of the plan involves setting up a Refinancing Fund that Main Street Americans can access to cope with their debt problems. Put simply, any American who so desires would have the option to refinance their existing debt at very attractive terms. In exchange for the attractive terms of this refinancing, the borrower gives up their right to take on any additional debt until they have repaid the Refinancing Fund in full.
Send me an email confirming that you have sent something out, and I will add your name to the mailing list for future issues of the Plumb Performance Portfolio©, locking-in the low, low lifetime price of free. If you do not want to mail anything to your representatives, but still want to be on my subscriber list, please e-mail me to that effect (but I will be forced to double your subscription price). In the absence of any e-mail from you, I will assume that the Plumb Performance Portfolio© is not your cup of tea.
Finally, if any of you have the expertise, I would be indebted (although, I wouldn’t be a commercial bank) if The Plumb Plan pdf could be posted on a website so that it can be downloaded by anyone who so desires.
At the end of each issue of the Plumb Performance Portfolio©, I write:
We can’t control the direction of the wind, but we can adjust our sails.
Maybe, this is one time we can control the direction of the wind coming out of D.C.
Happy Birthday
The Plumb Performance Portfolio© turns four years old this month. It seems like only 48 months ago that I sent out that first tentative issue to 25 friends and family. It’s grown remarkably (and not just in length) since then. It’s distributed globally and sometimes parts are translated into two different languages. This growth is thanks to you. I have not actively promoted the letter. New subscribers have requested the letter because you forwarded it to them. I never would have thought that I’d be able to come up with four years worth of interesting things about which to write. You may think I have proved it, but you can’t say I haven’t given you your money’s worth.
I started writing the Plumb Performance Portfolio© because I was very worried about the things that are unfolding now. I wanted to let people know what I thought and how I was preparing for it. For the first three years, there were only hints of what was to come. During those years, three of my most important and oft-repeated economic topics have been:
- The Housing Bubble: I first started writing about the U.S. residential housing bubble in March 2005. At that time, the S&P/Case-Shiller Home Price Index stood at 199.21. It peaked 15 months later at 226.29 (an increase of nearly 14%). As of July 2008 (the most recent report), the index was at 178.46. This is a 10% decline from March 2005 and a 21% decline from its peak. I expect this decline to continue.
- The Money Supply: My feeling was that we would see a rapid increase in the money supply as a “solution” to many of the problems facing the U.S. economy. The dollar printing press has, indeed, been going full blast. The average growth in the money supply (M3) from 1959 through 2004 was 7.9% per year; since then it has been 11.6% per year. I expect this to continue.
- The Dollar: I thought that (in part, because of the first two events) the dollar would decline against other currencies. Since I started publication, the dollar has declined a total 11.8% against the Fed’s Broad Trade-Weighted Exchange Index. I expect this to continue.
I thought the impact of these economic phenomena was going to be significant enough to warrant a very unconventional asset allocation. This allocation emphasized hard assets (precious metals and commodities), more bonds than equities and a strong allocation to unhedged foreign investments ((For the first two years, I also allocated 5% to REITs; for the last two years, I have allocated nothing to REITs.)). Overall, I haven’t changed the Plumb Performance Portfolio© asset allocation very much over the last four years. The average asset allocation since I began publication is shown below:
This has worked out well. For the last four years, the Plumb Performance Portfolio© has returned 10.4% per year (versus 3.8% per year for Vanguard Total Stock Market Fund and 3.7% per year for Vanguard Total Bond Market Fund). The Plumb Performance Portfolio© has outperformed more than 95% of all mutual funds that have survived for the last four years.
What Now?
I think the financial crisis is going to get worse. This will exacerbate all of the trends that I have described above. As a result, I don’t anticipate radical changes in my asset allocation. Gradually, however, stock valuations are becoming more attractive. Also, the yields on bonds (except for nominal Treasuries) are getting more appealing. If this continues, my allocation to both stocks and bonds will continue increasing. Finally, once things begin to stabilize, I will revisit allocating a portion of the portfolio back into REITs.
I will have plenty to write about in the years ahead, but I will leave you with this. For investors who believe it’s too late to reposition their portfolio into something more closely resembling the allocation of the Plumb Performance Portfolio©, I want to stress that if I didn’t believe the current allocation was the optimal allocation for long-term investors, my allocation would be different. Most assets in the portfolio are less expensive than they have been for a long time. Your portfolio is probably down right now. You may be beating yourself up for things you didn’t do. But, shoulda, woulda, coulda and 8 3/4 ¢ will buy you some Lehman debt. The game is not done. It isn’t just about how much your portfolio is down; it’s about how you position your portfolio today to benefit from an eventual rebound. You don’t have to be mentally wedded to your current portfolio waiting for the things that are down to come back. A football game doesn’t end at halftime. The team goes to the locker room and makes halftime adjustments. Nobody looks in the newspaper to check the halftime score.
