Tuesday, May 24, 2011

Storm Clouds?

I generally prefer an optimistic tone to our blog posts. There is plenty of pessimism out there to satisfy anyone looking for it and in the long run I am definitely an optimist.  That said, there are reasons to be nervous about the ongoing economic recovery.  Here is an editorial from this morning's Wall Street Journal, where Stanford economist Ronald McKinnon predicts that we are again entering a period of Stagflation, that dreaded economic malady that we haven't seen since the late 70's.  Here is another WSJ piece, this time about how Nobel Economist Robert Mundell thinks we are headed for deflation and another recession.  Finally, SmartMoney says we are in a stock market bubble.

I have no idea if any of these predictions is correct, although my experience tells me that most predictions are wrong and it is nearly impossible to identify the correct predictions in advance.  Harvard Economist Greg Mankiw recently wrote an Op-Ed in the New York Times where he admits that economists really have no predictive skills:

"So those are the three questions that puzzle me most as I read the daily news. If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear."

Since we really can't predict what will happen next, I'll end with some good news.  This CNN article says that going on vacation can make you smarter! Maybe we could get all of the economists to go on vacation for a while.

Tuesday, May 17, 2011

How Much Can I Spend?

One of the most important questions we help answer for our clients as they near retirement is how much they are able to spend from their investment portfolio each year.  A common approach to dealing with this issue to determine how much interest and dividends are being paid into the portfolio and then to spend that amount each year.  We have always felt that this is a somewhat flawed approach. Rather than focusing on yield, we prefer to focus on the total investment return of a portfolio and then to calculate a reasonable, sustainable withdrawal rate.

Well, here is an academic's answer to the same question.  The video below comes from the Fama/French Forum. Here is the introduction from that site:

"Should retirees limit their spending to the interest and dividends they receive? Ken French says investors should be indifferent to how they raise cash, whether through dividends and interest, or through the sale of shares--a method Merton Miller called "homemade dividends." Despite the economic logic, some investors focus on dividends and interest. While this approach may encourage disciplined spending, Ken explains that it also can distort one's investment approach--for example, when investors choose dividend-paying stocks over broad diversification, or chase higher yields by holding riskier bonds. In an effort to get more, they actually lose."

Monday, May 2, 2011

Economics Rap II

Almost a year and a half ago, I posted this video, which is a rap video about two of the most influential economists of all time: John Maynard Keynes and F.A.Hayek.  Well, the group that made the first video is at it again:

Just like the last one, I really think it is worth your time to watch the video.  The rap lyrics are very clever in the way they describe the fundamental debate between Keynes and Hayek which has been raging for almost a century and which is particularly pertinent during the current "post-financial crisis recovery".

Which economist do you think I side with?