1. We expect a year of lumpy, yet moderate growth in the U.S. and developed European economies.
2. This growth will not do much for the U.S. unemployment problem. Job growth will be very slow in the U.S., Japan and developed Europe. We are in a global ongoing march toward redistributing production to lower “all-in cost” regions of the world. Perhaps by 2015 we will be at 6% unemployment in the United States (adding 135,000 U.S. jobs a month to get that result). Source: TIME
3. The areas of less lumpy, faster, more productive growth will be in most of Asia and in developing European and African countries.
4. Central banks of the world (because they need to justify their existence) will continue to follow a path based on the silly/meddlesome idea that monetary policy can create jobs and prosperity. The result of this will be “mature economies” (U.S., Europe) going deeper in debt. The belief that relying on coordinated monetary policies and manipulated “flexible” currency policies are appropriate tools for achieving balanced growth will slowly be eroded, and governments will get out of the way of businesses. They may have to anyway. What will they do if they can’t lower interest rates and can no longer borrow easily?
5. The euro zone debt crisis will become more acute. This could be good for the U.S. dollar’s strength against the euro as well as for gold.
6. Interest rates will stay very low.
7. Inflation in the U.S. and Europe will be considered a risk, but less and less as the year progresses.
8. Cash will be trash – most every asset class will outperform cash in 2011.
9. Companies will start stretching more to grow their markets and acquire other companies. Prices for quality companies will be high. Prices for less-desirable companies will be very low, so these companies will not be given a great deal of attention. This trend is especially good for FIM Group, as we have a history of purchasing quality companies that in turn are sold for great prices.
10. This will be a year where great, investor-friendly companies with great management and products will shine as investments. Indexing as an investment idea will begin to unravel.

 

fimg0z

At the risk of overdoing my seasonal metaphor, being a diversified portfolio manager, I observe that having so much cash invested in assets with miniscule returns and, in fact, losing purchasing power after the impact of inflation and taxation, is like wearing a winter coat in summer. That North Face parka is wonderful for fighting the cold winter wind in the North, but it becomes a major hindrance in July when pruning trees and working in the garden. It’s time for investors and corporations to understand that summer is coming; they need to shed the fear and parka and put some of their piles of cash to work into investments that make real profits, grow wealth and create jobs.

The unwillingness of corporations and individuals to move from cash to “riskier” assets like stocks and real estate is limiting economic recovery and muting the performance of the stock market. According to a recent Bloomberg News article titled “Record Cash Weighing on U.S. Stock Market Returns” by Roben Farzad, U.S. companies accumulated $1.84 trillion in cash on their balance sheets in the first quarter of 2010. The article further highlights that “as a percentage of company assets, cash is at its highest level in a century.” In his recent“Guide to the Markets,” Dr. David Kelly of J.P. Morgan pointed out that an individual’s portfolio of cash on the “sidelines” increased 30% from March 2007, through March 2009 and has dropped only modestly since. Now don’t get me wrong, I like cash. I remember Warren Buffett talking at a recent Berkshire Hathaway shareholder meeting about how he gets his peace of mind by having several billion dollars in cash. Currently he has about $30 billion in peace. However, as a shareholder in some of the cash: rich companies and as a capitalist, I expect more investment savvy from management than stashing away cash with no opportunity for return, like an obsessive squirrel burying more nuts that he can eat in October.

When are shareholders, hedge funds and boards of directors going to demand that management deploy some of this cash for higher returns instead of squirreling it away? When are individuals going to stop accepting negative real returns on “safe” bank assets and move to stocks? I don’t know when, but it will happen. It is irrational to accept negative returns perpetually.

How can we know when summer is coming on Wall Street? Here are three categorical indications of the potential for summer to come to Wall Street:

1. An increase in flows of money out of cash assets like money markets to equities.
2. An increase in merger and acquisition frequency.
3. An increase in the number of corporations willing to increase dividend payments to shareholders.

The facts are promising when considering the flows of money by investors in mutual fund asset categories. According to the Investment Company Institute and J.P. Morgan, the net flows of domestic and world equity funds have gone from an outflow of $233 billion in 2008 to a small inflow of $14 billion through June 30, 2010. This may be an early indication that investors are leaving cash and low yielding bonds for higher potential returns in global equities. More demand to buy equities will eventually increase stock prices.

In the merger and acquisition category, recent headlines note some indication of corporations’ willingness to invest cash by acquiring other companies. At the risk of being a bit presumptuous, a search of financial news headlines shows a trend toward an increase in merger and acquisition activity. For example, Sanofi-Aventis recently indicated an interest in an informal acquisition approach to biotechnology drug maker Genzyme Corp. I am sure Genzyme shareholders were pleased by the 15% increase in per-share value on this announcement.

A further scan of headline news illustrates the potential evidence of future increases of dividends by cash rich companies may be in play. On July 23, 2010, General Electric announced that because of a stronger than expected cash position, they were increasing their dividend 20%. GE also said they will restart a stock buyback. On the news, GE stock appreciated more than 3%.

It may still be winter on Wall Street as evidenced by high corporate and individual cash positions but there are a few early signs of investor willingness to put the cash to work. Individual and corporate investors should shed their winter parka of fear and begin allocating the piles of cash to investments that can provide good long-term investment returns. Those who see summer coming first will enjoy it the most.

Roth IRA Conversions

This year is important for Roth conversions for several reasons. Starting in 2010, income limits have been eliminated on eligibility to make a conversion to a Roth IRA. There are a variety of reasons to consider a Roth conversion, including the ability to avoid mandatory distributions from your retirement account during your lifetime as well as pass a portion of your assets tax-free to your beneficiaries. This year taxpayers also have a onetime opportunity to choose to pay taxes on the converted amount in 2010 or spread the tax payments over 2011 and 2012. An important consideration for spreading out the tax payments over 2011 and 2012, as well as for determining if a Roth conversion is right for you at all, is whether you expect your marginal tax rate will be lower in 2010, in the next two years or in the future when you would begin to take taxable distributions if you don’t convert. One thing looks likely at this time – tax rates going up next year for taxpayers in the higher tax brackets … which leads us to the next topic.

Marginal Tax Rates

Today there are six marginal federal income tax rates. Without additional legislation these will expire at the end of 2010. The lowest 10% bracket will disappear, and the remaining brackets will return to pre-2001 levels, as shown below:

Other Key Tax Rate Changes

The tax rates that apply to long-term capital gains are changing as well. This year if you sell a capital asset (like a share of stock) that you’ve held for more than one year, the gain will generally be treated as a long-term capital gain, taxed at 15% if you are in one of the top four marginal tax brackets or 0% if you are in the 10% or 15% tax brackets.

These rates are also scheduled to expire at the end of 2010. In 2011, a 20% rate will apply, except for taxpayers in the lowest marginal tax bracket who will pay a 10% rate on long-term capital gains.

Qualifying dividends are treated similarly to long-term capital gains in 2010, taxed at 15% for the top four brackets and at 0% for taxpayers in the 10% and 15% tax brackets. In 2011, they will be taxed as ordinary income.

Of course FIM Group will continue to manage all of your accounts (taxable accounts, IRAs, etc.) to take advantage of the unique structure that each account offers in order to maximize tax efficiencies.

Looking ahead, new taxes related to the recent health care legislation will take effect in 2013. A new Medicare payroll tax of 0.9% will be assessed on wages exceeding $200,000 for individual taxpayers and on combined wages exceeding $250,000 for married couples filing jointly.

Also beginning in 2013 is a new Medicare surtax of 3.8%. Single filers with income exceeding $200,000 and joint filers with income more than $250,000 will be assessed the surtax on the lesser of: 1) net investment income, or 2) modified adjusted gross income (MAGI) in excess of the income thresholds. If either 1 or 2 is zero, there is no surtax. Net investment income includes taxable interest, dividends, capital gains, distributions from annuities, rent and royalty income, and passive-activity income. It should be noted that distributions from a traditional IRA are counted in MAGI and could trigger the surtax, whereas Roth withdrawals will not.

Estate Tax

This year we saw the temporary repeal of the federal estate tax. Many expected Congress to move quickly to reinstate the tax, but to date we are still waiting. The chart below shows a summary of the changes, and as you can see the estate tax returns in 2011 to the pre-2001 level of $1 million with a top tax rate of 55% unless additional legislation is passed.

All of this uncertainty makes it especially important to review your estate plan to ensure that it effectively carries out your wishes.

This summary covers some of the more significant federal tax opportunities, changes and uncertainties for your tax planning consideration. This is by no means an exhaustive list but rather highlights some of the changes that may affect many of our clients. The impact and applicability in individual circumstances needs to be reviewed on a case-by-case basis. Please contact your FIM Group adviser if you would like to discuss any of these matters further.

We can’t predict what Congress will do, but as in recent years it is likely we will see additional legislation between now and the end of the year making it important to stay informed.

Patrick, my two-year-old, shrieks so loudly when he wants mine or my wife’s attention that we sometimes keep our windows closed. He indeed triggers an emotional response just as readily as today’s writers, idea evangelists and marketers desire to get our attention, grab headlines and sell people on their ideas. For Patrick, however, it’s gummy bears or playing basketball with his 15-year-old brother, Keeston, even though it’s bedtime. What’s interesting about the emotional “fear-greed” paradigm that we have been seeing so much of lately is that we are all still raw from the crisis of a few years ago and still see little in the way of “fixes” from our leaders. In times of crises, many governments seem to default to taking a shortsighted, myopic, easy path and “just say yes” to things like bailouts, dishonesty, and self-dealing by firms and individuals, and enact irresponsible policies that are just as unhelpful in the long term as saying yes to gummies or basketball. Any parent, adult or common sense-infused sibling knows that to say “yes” to Patrick’s rants is a short-term gain that sets us up for extreme long-term pain. Because Patrick is my third child, I have the sensibility to let him shriek till dawn rather than give in to his demands. Governments, too, should have the sensibility to impose more austere measures regardless of the populist shrieking.

Feeding our fear at this moment in time are the now well-documented, sound byte-grabbing “three Gs”: 1) Gulf (oil spill), 2) Greece (Euro breaking down) and 3) Goldman (ethics and excess). Each of these is a real threat, and politicians and the press have an unrelenting desire to feed our emotions with fear, greed and lust-caused actions. So again people are selling, but really there is no sell without a buy. When someone sells a German bond, Swiss holding company, Hong Kong conglomerate, Spanish utility or French energy company, they’re likely saying, “I like a U.S. money market instrument better.” But on the other side of the transaction, another investor is buying the security and taking advantage of the emotional behavior of the seller. The question, however, in any buy, sell or hold decision is, “What was the logical thought map of the decision?” Was this the best financial advice? Was it logical in the long term or just a quick emotional response to the market’s and media’s shrieks? The world’s government experts, our representatives, heads of state and their advisers seem to have forgotten to think long term with their decisions and are responding to the shrieks of their constituents. Years ago a mentor told me, “Paul, before you can teach well, you need to be a good parent, husband and businessperson. Once you have mastered those skills, then you can teach.” Our representatives need to learn a thing or two. Fortunately, history tells us that while many mistakes are likely to be made, the entrepreneurial spirit of capitalism will prevail, and we will muddle through and fix our problems.

The Greatest Generation

My wife, Amy, and I had the privilege of hearing Tom Brokaw, author of The Greatest Generation, speak and field questions when he came to Traverse City. His thoughtful answers were inspiring and filled me with a hope that only rational analysis could bring. When asked about today’s political, economic and polarized world, he smiled and chatted about Watergate, the Kennedy assassinations, Oswald, Martin Luther King, Agnew, Vietnam and the economic mess that we pulled out of in the ’80s. Also with a smile and a wise demeanor that only someone who had “been there – done that” could have, he talked about what he called “the greatest generation”– those who survived the Great Depression only to find themselves in two major wars, a Holocaust and the devastation of most of the world (except the U.S.). He did not want to trivialize today’s problems, but when he compared them to the world’s scenario during the ’60s and ’70s, we had to feel like our current situation was not something unmanageable. Things are not as bad as they seem in the political arena … just like in the investment arena. As part of our disciplined approach to looking at companies, I often use SWOT (strengths, weaknesses, opportunities and threats) analysis – the same method I used when working toward my MBA. I got to thinking about the world’s economy and we have reason to be either optimistic or negative – it’s our choice.

Lunch in the USA

I had lunch today with a Zambian born immigrant, and we chatted about Africa, where 30,000 of its citizens die of starvation and preventable deaths every day. He is hopeful about Africa’s fixes, but sad that corruption, “live only for today” mentality, aid that causes dependence and its fear-based system seem to bog down any progress. Throughout U.S. history, we have had men and women rise from obscurity to be leaders at times when they were needed most. When I think of how lucky we are, and how events from 234-plus years ago shaped our nation, I can see only reason to be optimistic. This young Zambian’s father worked in the copper belt and spent his meager mineworker’s income to educate his children. That was his only priority. That was his only goal. I’m becoming more and more optimistic that Africa will figure it out, too. When we look at Singapore, China, Brazil and scores of other countries and the progress they’ve made, it is so easy to be rationally optimistic. When the likes of George Washington, Mahatma Gandhi and Nelson Mandela appear when their citizens need them most, it is easy to be optimistic. The Fourth of July is just around the corner, and I am so proud that I was born in the U.S. I am most proud of the fact not that we have fought and won wars and overcome the Great Depression, but that we have fought against complacency, negative attitudes, laziness, despair and had little tolerance for mediocrity throughout our history. We Americans have “good bones” and a great legacy. In a few years, we will look back on the three Gs as an interesting footnote in history. Life goes on, and I am optimistic, because when I perform a SWOT analysis on the U.S., I see the opportunities and strengths boxes filled to the brim and the threats and weaknesses boxes chock full of opportunities to fix.

Effective this year, any taxpayer may convert a Traditional Individual Retirement Account (IRA) to a Roth IRA. In previous years, this was restricted to those taxpayers with a modified adjusted gross income below $100,000. While this change may seem minor at first, serious consideration should be given to converting IRAs for several reasons. This article will explain the difference between a Traditional IRA and a Roth IRA and discuss the pros and cons of converting a Traditional IRA to a Roth IRA.

Created in 1974, Traditional IRAs provide taxpayers an immediate tax deduction for contributions made into the account. There are no income taxes paid on the account until funds are withdrawn. As long as withdrawals are 7) Priced right – this area has a tendency to get overpriced as overzealous “Wall Street marketers” hype stock prices to unreasonable levels Thankfully the market tsunami of early last year brought energy stocks down to reasonable levels and in some ways separated the common-sense winning strategies from those that were inflated on hype. We are pleased that we were able to buy such a quality portfolio of solid energy companies at great prices. Some of FIM Group’s client holdings include: Criteria Corp, Pargesa and Cheung Kong Holdings, which provide exposure to both traditional and alternative channels of energy. For example, Hong Kong-based Cheung Kong Holdings owns a large chunk of Hong Kong Electric, which built Hong Kong’s first commercial-scale wind farm – Lamma Winds. For more information on our wind and other alternative energy investments, visit www.fimg.net. There, you’ll find links to the World Wind Energy Association (www.wwindea.org) and the websites of the companies mentioned above. *Please Note - made after age 59½, they are taxed as ordinary income. Withdrawals can be delayed until age 70½, at which point annual required minimum distributions (RMD) must be taken.

In contrast, contributions to Roth IRAs, which were created in 1997, do not result in a current income tax deduction. However, as long as withdrawals are made after age 59½, no income taxes are due. In addition, Roth IRAs are not subject to the RMD requirements.

In general, there is no economic benefit of a Traditional vs. a Roth IRA for most individuals as long the following assumptions are made:

• Future income tax rates are the same as current income tax rates.
• Assumed earning rates are the same for all time periods.
• There is no estate tax liability due on the IRAs upon the death of the account owner.

For 2010, current tax law allows an individual to convert a Traditional IRA to a Roth IRA and elect to pay the income taxes currently or defer the tax liability by reporting one half of the amount converted in 2011 and one half in 2012. It is important to note that this is the taxpayer’s option, giving more flexibility and more income tax planning opportunities.

In most cases, it is not beneficial to pay the income taxes due on conversion from the IRA account itself.

For those individuals whose estate may be subject to estate taxes upon their death, the Roth conversion would result in a lower taxable estate, since the income taxes paid upon the conversion would reduce the total assets of the estate. In addition, married taxpayers may want to consider a Roth conversion as a way to reduce future income taxes for the surviving spouse. Since the surviving spouse will be required to pay taxes at higher single taxpayer rates, converting to a Roth IRA will not only eliminate future RMDs but would also result in any withdrawals being income tax-free.

In general, a Roth IRA is more “income tax-friendly” to a non-spouse beneficiary, since any withdrawals are not subject to income taxes.

One often overlooked aspect of Roth IRA conversions is the ability to “recharacterize” a converted IRA. This in effect allows you a “do over” if the value of the converted IRA suffers a significant drop in value from the date of conversion to the due date of the tax return including extensions (currently October 15 of the following year).

Recharacterizing a Roth IRA is an “all or nothing” option; one cannot pick and choose which investments within the account can be recharacterized. However, a taxpayer can create multiple Roth IRA accounts, giving one the option of only recharacterizing those accounts, if any, that drop in value.

So is a Roth IRA conversion right for you? This is not an easy question to answer. On one hand, you are in effect “pre-paying” income taxes. This has to be weighed against the benefits listed above and what income taxes will be in the future.

If you would like to explore the Roth IRA conversion further, please contact a FIM Group wealth management advisor who will be glad to evaluate your personal situation.

America’s Relevance

FIM Group has always been about investing globally, so it is nothing new for our clients to hear about the robust opportunities that exist all over the world. In some ways I think that the world is realizing that the good ‘ole USA is not as necessary to their security, safety, well-being and economic prosperity as it once was. There is a new generation globally, and they have little patience for the stories told by their old folks of how the U.S. helped in their country’s development. I think the U.S. got lazy. Now after many years of benign neglect our political clout, through an unfocused and politicized myopic foreign policy, especially around economic issues, has helped us lose some of our relevance in the world. In addition, the world (especially Asia) has simply grown. What is heartening to me as a proud American is that as a percent of the world’s big, fat economy of around $60 trillion, the U.S.’s share has been pretty constant. Europe has been the bigger GDP loser, and while Africa and Latin America have had benign growth, Asia has been where the big change has taken place. Asia is coming into its own, saying, “Hey, we are relevant, we are strong and we can sit at the table of the world’s richest nations because we earned it!” Like a teenager that forgets all the help and guidance of the parents, Asia (as will other countries as they develop) will wish to cut the umbilical cord to the West and with national pride be indifferent to those who helped them along. The talk show hosts that got mad at France, chatting of boycotts and changing the name of “French fries” a few years ago for differing with us on our foreign policy, are a good illustration of this. The U.S. exists because the French helped us kick the English out. It’s that simple! Most of Asia exists because 60 years ago we helped China and other Asian countries defeat Japan’s armies.

About 16 years ago I was on a rickety boat off the coast of Mersing, Malaysia. An older man who was navigating among the fishing vessels in our small boat heard my American accent and said, “Oh, you’re an American! Thank you! I vowed to always say thank you to every American I meet for all the help you gave our country.” I am a proud American because of encounters like that. However, in the world we see today, our military influence has much less clout in today’s world where economics rules. The free world today gets a free ride on America helping to police the world, and just as Rome, England and the warrior Kings of Africa learned, military might does not tend to evolve or help maintain economic might. Healthy countries want to take care of their own security needs; naturally they will take our help for free, even if they don’t need it. The economic drag of America’s war machine, the conflicts in which we are engaging, our aging population … all these things will contribute to the fact that big opportunities for our wealth is overseas, in countries with lower taxes, younger work forces and lots of room for development.

I hope that my comments will not make readers feel worried, sad or even angry. They are not intended to be political, and they should not be taken as a statement of my personal political opinion. The U.S. needs a strong defense, because the world is an unsafe, scary place. There are plenty of people who would like to see the West destroyed. Fortunately we can afford to have a giant military that costs more than all other defense spending in the world combined. But, unfortunately the cost is growth, our clout in the world, higher taxes and our brave men and women fighting in Afghanistan and Iraq.

We Are Rich!

According to the UN News Centre, America has around $144,000 in wealth per capita vs. the global average of $20,000 average and just $1,100 in India (data based on the year 2000). Both the U.S. and the world’s wealth have grown since then, but we still are the richest country per capita.

America is so rich that even though we have some erosion effect from our burgeoning government spending and aging population, we will always be rich. We work hard, believe in education, solve problems and learn from our mistakes. Right now we are finding our place in the world with wars, a new president, special interests and a plethora of other issues. It is natural that our foreign policy will be centered on the handful of countries with whom we are fighting. Meanwhile, China, Europe and others have policies that nurture relationships with resource-rich nations, and the buyers of their goods and services ensure their future growth. Bottom-line growth in America will be slower than elsewhere.

Invest Slow or Fast? Easy Choice

Investors are silly folks. They are collectively stubborn. Because of endowment behavior most investors will stay with an investment even if they expect it to under perform, because their brains are wired to do so. Many investors will naïvely invest in benchmarked or indexed portfolios of mainly U.S. stocks or bonds even though they know that many areas of our economy, such as real estate, retail and banking, have crummy prospects. They will stay in U.S. bank CDs even thought they believe the U.S. dollar is destined to continue to erode in purchasing power and inflation is most likely around the corner.

It is rational to have a diversified portfolio, and we are believers in diversification. With more than 50,000 stocks and millions of bonds to invest in, an investor would be either silly or lazy to choose investments that they know have poor prospects going forward, like U.S. banks and real estate. So sometimes when I am lying awake in bed, I reflect on our investment year and ask, “What am I missing?” It seems so rational that there will be – although lumpy – growth in energy, food, agriculture, health care, telecommunications and emerging countries, and that inflation with pockets of deflation is most likely in our future. Therefore, those are the themes that are well-represented in our diversified portfolios.

Retired and Portfolio-Dependent Clients

Many of our clients are retired and dependent on their portfolios for income now and in the future. That future might be the next 40 years or next month. I can tell you with certainty that the future will have inflation, deflation, recessions, corporate scandals, Wall Street greed, war, booms and changes in tax laws, high interest rates and low interest rates. Dividends will be taxed a little, and they will be taxed a lot. I can tell you that thousands of books and tens of thousands of articles will be written stating the absolute best way to invest. I also can tell you that most investors will fail to meet their goals, because they fail to have a common-sense long-term view, and clear goals and objectives of what they expect from their portfolios.

At FIM Group we are guided by a common-sense philosophy and fiduciary duty, and each portfolio has goals and objectives that are built into their construction and management. Investors not guided by goals and a long-term view often panic in crashes and are seduced by slick salespeople and logical-sounding strategies (note the Dalbar chart on the right).

Lying in bed, in my head, I go over each portfolio’s position. I ask myself, “What if we have hyperinflation, another crash or a super-strong economy?” Or, “What if rates stay near 0% for money markets, CDs and other so-called ‘safe’ investments?” CDs and the like don’t give inflation protection, nor do they protect against U.S. dollar weakness or an eroding currency environment. I scenario out the possible futures and “stress test,” so to speak, our portfolios against each scenario.

To learn about wealth management advice from the best wealth management firm, Financial & Investment Management Group -more please visit www.FIMG.net or call 800.632.5528.

One of my all-time favorite comediennes is Gilda Radner who appeared in the late 1970′s on NBC’s Saturday Night Live. I especially love her extremely hysterical character, Roseanne Roseannadanna, who periodically gave editorial replies to current issues on the show’s Weekend Update segment. In the article below, I provide a tribute to a special gal who always put a smile on my face. And while I do not look much like Gilda, we both shared a common belief on style, basing “most of our fashion taste on ‘what doesn’t itch.’”

Hello, and good whatever the time of day it is that you might be reading this. Welcome to the November issue of Current Observations. Here now is the top story:

I’m Suzanne Suzannadanna, and a Mr. Harvey Skooner from Manalee, New Jersey, sent me this holiday limerick that says:

Dear Suzanne Suzannadanna,
This holiday is depressing for me. I gotta stay home in Man-lee. My cash is low, My business is slow. ‘Cause I don’t understand those economists, you see.

Well, Mr. Skooner, I don’t know you, but I know exactly what you’re goin’ through ’cause this weekend, I, Suzanne Suzannadanna, was just complaining. Yes, it’s true. My head was a sayin’ but my lips were not a movin’, I’m depressed, I gained weight, my face broke out, I’m nauseous, I’m constipated, my feet swelled, my gums are bleedin’, my sinuses are clogged, I got heartburn, I’m cranky and I’m worried I might have the swine flu! While I don’t mean to make a you sick with my disgusting innuendos, Mr. Harvey Skooner from New Jersey, my two cents on your cash dilemma (full pun intended) is you need an understanding of slumps, bumps and downturns.

Those fancy-schmancy perceived ivy-leaguers like Alan Greenspan, Ben Bernanke, Bill Gross, Larry Kudlow, and I can go on and on, have big words like “recession” and “depression” to describe those economic smacks. While I, Suzanne Suzannadanna, am neither weakened nor wasted by the infirmities of old age, there is an old economist joke about those big words, and it goes something like this: A recession is when your neighbor loses his job, and a depression is when you lose your job. SERIOUSLY, who in their right mind would call this a joke? Is anyone laughin’? Economists! I’m with you Harvey, o-nay omprend-cay. Little hint: it’s Pig Latin for “I don’t get it either.”

So, are you listenin’ to me, Mr. Harvey Skooner? The difference between depression and recession is not well-understood by many, because the economists think it’s some sort of a joke. Ha ha economists, nobody is laughin’ at your joke. Honestly Skooner, there is no worldwide agreement on the definition of these words. Now if I, Suzanne Suzannadanna, asked 100 of those droll economists to define both recession and depression, I, Suzanne Suzannadanna, would get not a one, not a two, not a even a 52… I would get a 100 different answers. Ugh!

As my sweet Bubby used to say, “Like milk and honey, let’s make it nice and easy.” Moons before the 1930′s Great Depression, any fall in money-making activity was considered depressing, so the economists termed the expression “depression.” Then, in order to get fancy and to differentiate excessive downturns from relatively eensy-weensy downturns like those that occurred in 1910 and 1913, the term “recession” was coined. Simply, a depression is a recession that has a longer duration and a much broader negative effect on financial activities.

Society has heard the word recession a lot these days. The not-so milk and honey definition is when the gross national product (GNP) declines for two consecutive quarters. GNP is the total market value of all the goods and services produced by a country’s residents no matter where they live in the world during a given period of time. Technically, when the U.S. economy is shrinking and producing fewer goods and services, that is when we are in a recession.

A depression hits once the real Gross Domestic Product (GDP) shrivels by more than 10 percent. GDP is the total market value of all the goods and services produced within the boundaries of a country. So, if you, Mr. Harvey Skooner (assuming you are a U.S. citizen), can make some cash from some overseas investments, that cash would be included in GNP but would not be included in GDP. And the value of the goods produced by the foreign-owned business on U.S. land by a fictitious Mahoode Shiradadod from a fictitious Indocamisia would be included in the GDP calculation, but not the GNP. Just remember this, Harvey, when you are cryin’, it’s a big deal, and you are in a depression. When you feel bad and your nose sort of sniffles but your eyes don’t tear, then you are in a recession.

So, in 2009, it appears as though we have an extended case of the sniffles, and we are in a recession.

There is some encouraging news about recessions, Harvey Skooner. In recent years, the U.S. government has done a better job of managing recessions, so they have less of an impact on the average American and are over sooner. For example, according to the National Bureau of Economic Research, the six recessions that took place throughout 1919-1945 lasted 18 months on average, compared to the 10-month average since 1945. In addition, inflation tends to be lower during recessions, so the cost of all the things we buy doesn’t increase drastically.

My advice to you, Harvey, is to find your happy place for the holidays. And if it’s not one thing, then it’s another. It just goes to show ya, it’s always something. All fun aside, at FIM Group we do understand investing during diverse economic cycles. During a recession people tend to put their dollars toward necessities such as food and utilities, so it is important to have holdings that are resilient. In addition, it is important to look at a company’s advertising. Find companies that have cash to advertise and understand how those advertising dollars are being spent? Companies that can afford to advertise will win consumers, and this helps their resilience. During a recession we need to maintain the “price always matters” philosophy, do our homework and not overpay for securities. In an economic slowdown earnings might decelerate or even become non-existent for many companies. We look for promising cash-healthy companies and are always patient with our prices paid.

Good day and have a pleasant tomorrow.

To learn about wealth management advice from the best wealth management firm, Financial & Investment Management Group -more please visit www.FIMG.net or call 800.632.5528.

Here we are in the fall of 2009, with a Democratic president, Democratic Congress and a federal government that has deliberately kept interest rates low to encourage borrowing. With all of the “bailout” decisions we are a contributing factor to a declining U.S. dollar, we have citizens screaming and yelling at town hall meetings and we have our ongoing issues of war, deficit, unemployment, terrorism, taxes, potential inflation, deflation, recession and depression. As I explained in the last post, we seem to be in a “Just say yes” political climate.

My President

I should be apolitical in my writing so I don’t offend our clients. More important, I need to think clearly and not let my dogma lead me off track. I will say, however, that I lean toward a more libertarian form of democracy that is full of virtuous citizens – which really tells those reading this essay very little, because my realistic, practical side wins every contest. I am an old-school thinker and believe that, regardless of the team I voted for, the president deserves my support. He is commander in chief, our appointed leader. It is not helpful to vilify our president, even if I am a Republican or Democrat. It is American to talk about weaknesses in a platform, policy or legislation – but to draw horns on our president’s character is not helpful. Today, the debates about health care, unemployment, wars, global warming, creation care (environmental issues) and even personal lifestyle issues seem to have taken on the tone I have seen only when being evangelized by someone who believes that those who don’t share the same viewpoint are evil.

Democracies are rough and tumble. They are messy (they don’t need to be rude), inefficient and cumbersome. But, in my opinion, democracy is the only system consistent with human nature. However, I have chatted with communists in China, and they think our form of government is too idealistic and impractical.

Can’t Spend or Tax Our Way to Prosperity

President Obama has continued on with President Bush’s policy to just throw money at problems. President Bush threw our money under a “spend and spend more” policy, and President Obama, along with Congress, seems to be throwing it everywhere their predecessors did, and in good political form a few new places, too. All those trillions of dollars, combined with low interest rates, need to go somewhere, and just like they did in the past they will cause rising prices and rising production. The fact is, and history confirms, that if the U.S. stays the course and continues to irrationally tax and spend, then inflation is the inevitable outcome.

The problem with taxing the top 1% of earners who already pay 40.5% of income taxes is that it could send them away. There are many beautiful places where rich Americans could potentially move to lower their tax rates. Australia, Canada, Greece, Hong Kong, Singapore, Switzerland, India, British Virgin Islands and even France all have tax codes that could potentially save millions for wealthy Americans willing to swap passports. Just like the story of “The bird, the worm and the man,” which my minister once told to illustrate how our character can be eroded, it also can illustrate the issues when a country’s wealthiest decide to take flight because they just can’t give one more feather.

The key, then, is to grow the taxpayer group that does not fall in the top 1% of earners. We tend to label them “middle class.” They are the professionals, entrepreneurs, craftsmen, managers and builders who make a decent living, educate their kids in their trade or a new one, support their schools and their communities, vote, and work hard. I think President Obama would coin them “the responsible Americans” if he could, but he can’t for fear of offending those who wish to say they are victims who the system failed.

I do believe that even those who resent the wealthy of our society would agree that we can’t have a healthy economy built on getting 40.5% of our income from 1% of our citizens. We also can’t use the wealthy as a metric for measuring success, because the solution lies in growing our economy from the grassroots of the middle class, while discouraging the “victim class” from thinking that it is acceptable to live off welfare, collect unemployment and sustain themselves through government assistance. When I was younger, one of my teachers said, “In a democracy we have no freedoms, only responsibilities.” So I like it every time President Obama says the word “responsibility.”

How will we get there? And where is “there”? I think it is where we have balanced budgets and people feeling that they are part of the political process, where we all feel like we should pick up a piece of trash in our park or on the street, and where pride and responsibility are balanced. After the floods in New Orleans I heard a news interview where a man in an unemployment line was asked why he was there and not in line at a fast food chain that was offering bonuses just to get workers. He replied, “I ain’t flipping no hamburgers.” I know we have gone too far in entrenching an entitled welfare class, which is not helpful in any economy. The rich and those blessed with a job and security, however, must not feel entitled either. From Luke 12:48 there is a statement that says, “to whom much is given, much is expected.” Governments cannot create income or wealth it is left up to us as individuals to make our own way.

So Much Room for Optimism

We have deep structural problems in America; our system has worked for some and not for others. But it is still unclear how we will create jobs and get the economy going. We have allowed Americans to feel entitled. Entitled to not work for a day’s wage, entitled to stay home and receive sustenance from welfare. We have taken the spirit from some of our citizens. We have grown a giant military industrial complex that is wasteful and expensive and seems to answer to no one in our country. We have overspent and been wasteful through laziness, apathy, ignorance and good intentions.

What we are seeing now in America’s political process is acknowledgment of the issues. The process to fix the issues is what ails us. We are continuously slowed down by special interests, politics, differences of opinions and the fact that we think government needs to solve the problem. We will have trouble agreeing on what the problems are. We will also have trouble agreeing that we should do something about the problems. Some believe the brother-in-law who has a problem with drugs and alcohol should be ignored – others think the family should act to help him. In America, we have some who think that simply admitting we have a problem is “un-American.”

Regardless of the issues I am still optimistic. As a country we have lots of feathers, we will be wiser in their use, and history shows we solve our problems. We are one of the richest, prosperous countries, and we are blessed to have these types of problems. I can think of few countries I would want to swap problems with. Many of us get to worry about taxes and inflation rather than where our next meal will come from or where we will sleep tonight.

Thanksgiving season will soon be upon us. It is truly a unique American holiday that makes me proud to be an American. It is a holiday where we can be grateful and give thanks . . . now that is a reason for optimism.

To learn about wealth management advice from the best wealth management firm, Financial & Investment Management Group -more please visit www.FIMG.net or call 800.632.5528.