Earlier this afternoon President Obama made a show to celebrate the passage of the Cap-and Trade bill in the House Friday. For those of you who do not know, this is plan to issue credits for CO2 production which can be traded among companies as a way to limit greenhouse gases which some believe are responsible for climate change. (for an opposing view watch this.)  Anyway, the President extols California as a good example of how we should do things:


The problem is California is in the worst financial crisis of any state, even worse than Michigan, Because of high taxes and excessive regulations (like those for climate change) businesses are leaving the state in droves (along with jobs) so actual tax collections can't pay for everything they want to do.

The bottom line is that the things California has done which have cost them jobs and destroyed their economy are now what the President wants us to do in the rest of the country. Fortunately for me I invest in a fund which invests in Asian companies, which will pick up the jobs which we are giving up with this new law.

Also, as an aside, the President says that he wants judges to be "empathetic" but, from the tone of his statement on the sentencing this morning, he doesn't seem to mind that the judge had no empathy for Bernie Madoff, the swindler.   

Graduating has found me at an unusual loss of words. I wold like to write something profound but it has been something less than inspiring. This time around has been more like a war of attrition meaning I lost all of the battles but still wore down the opponent, thus winning the war. One thing I think I learned is that studying success can only take things so far. Last weekend I watched a very long (three hours) interview of political and educational gadfly William Ayers. It is scary that Obama praised the man as an advisor for educational programs since he advocates the type of educational malpractice I was the victim of when I was 10. He did the common academic trick of looking for anecdotal evidence and cherry picking examples which confirm his conclusions. So he continues to push a style which has a very bad history because there are a few examples that were not as terrible.

While not quite as blatant as Ayers cherry picking, the business school relies on studying “Best of Breed” businesses and the case studies we read stressed best practices. This misses at least half of the action in the world. I started out in the engineering program and the biggest difference they have with the business program is the stress of failure analysis as part of an engineering education, They spend a good deal of their time analyzing why some things do not work. I think that a drive to study best practices is of limited value if those practices are just layered on top of a bunch of worst practices. What was missing from the business curriculum was how to identify and root out bad practices which may counteract the best ones. I am afraid that my fellow graduates will be frustrated when they get out into the real world.

On a lighter note; all that time I spent in the cafe in the library on the downtown campus paid off...I graduated Magna Cum Latte :)

A few moths ago I saw former GE CEO and business guru Jack Welsh on television and he was talking about how corporate managers lacked “visibility”. He did not mean this in the publicity sense of the word but rather that they lacked any ability to make accurate projections of future business activity. When executives of big companies get into a situation like that they realize that the risks involved in any decisions they make increase and they become very conservative with the company’s money, not making any big investments and certainly not long-term ones. You should take a lesson from that if you are looking to save for some future event like buying a house or retirement. Planning for the future is important but right now the lack of visibility makes doing it more difficult but not doing it is more dangerous.

When people start saving money and seriously investing they tend to look for what type of return they can get for their money. The average person tends to either greatly underestimate the amount of risk involved in their decisions or go too far in the other direction. Risk is simply the probably that you will make the wrong decision. It grows as you have less information to make a good decision. Right now the government has created a cloud of uncertainty, not only for business people, but for anyone planning for their future. You may have been very mad about the whole issue of AIG paying outrageous bonuses to its executives last month but the issue that should worry you was congresses willingness to raise taxes to try to take them away. We in the United States are now in a situation where the majority of people do not have to pay income taxes (they still have to pay other taxes like sales and FICA taxes). I have mentioned before that one of the biggest dangers to a democracy is that the majority will think that they can vote for the government to give them benefits and have the minority pay for those benefits. The balance has now tipped to the point that the majority in the country can demand benefits from the government which they will not have to pay for. This promises to spread from the government not only taking people’s incomes but also their savings too. It is not a big stretch for a politician to whip the people up into a frenzy about rich people making too much money to saying that they just have "too much" also. While I still think it is prudent to save money I think you should consider the possibility that the government will come up with new ways to tax savings in order to pay for the massive debt it is racking up. The uncertainty of this possibility is now in play in a way it has not been before when the majority paid income taxes.

So, what should you do as far as saving and investing? First, keep doing it (or start if you haven’t). Everyone should have enough savings to cover at least six months of expenses and bills in case of an emergency. This emergency fund should be kept in a safe institution like an FDIC insured bank but, considering the changes I have mentioned, you should probably consider keeping at least a month’s worth in cash in a strong box in your home in case the government decides to limit your access to your funds or even starts to confiscate bank deposits. For longer term savings and investments I recommend staying flexible meaning do not make any long term commitments with your money. I would advise not putting any money into tax deferred plans like IRAs or 529 savings plans till the government shows exactly how socialist it will become. The government is in the process of changing a lot of the rules when it comes to money; making good choices based on today’s reality may hurt you in the future when realities change. The main exception to this advice is if you have a 401(k) plan where you work and your employer contributes to it you have to participate because otherwise it is like turning down a pay raise. 

Last fall when I wrote to not panic when the markets collapsed I said there would be a time to start investing in the stock market and I said it would probably be within about six months. I was right and wrong on that. I believe that the American people will ultimately do the right thing and not allow confiscation of their savings and that American businesses will do well again. But while I believe that I am not certain of it; which leads me to advise staying flexible with your plans, not making any major decisions until the government and the economy provide you more visibility.