May 16

What Barack Obama and Mitt Romney’s Investments Say About Them

Obama RomneyBarack Obama and Mitt Romney both filed their Executive Branch Personnel Public Financial Disclosure Reports as required in order to seek the office of the Presidency in 2011. I have previously described the two men as Pragmatist and Opportunist, respectively, and the financial disclosures further buttress my position. Barack Obama’s investment disclosure (Schedule A) is a mere three pages in length, while Mitt Romney’s disclosure runs a staggering eight pages, with an additional four pages of detailed investments managed in tax-sheltered private accounts. Barack Obama’s investments read like the embodiment of the conservative investment strategies championed by Vanguard’s founder John C. Bogle and investment adviser and author Dan Solin, while Mitt Romney’s portfolio appears to be right at home with noted investment televangelist fraud Jim Cramer’s Lightning Round, during which the shyster offers up investment buy or sell recommendations at breakneck pace out of thin air.

Barack Obama’s largest asset is a diversified group of long term and short term treasury obligations. The bonds and notes are generally regarded as risk-free investments delivering modest returns, even more modest in the current low interest rate environment. Mr. Obama’s personal stock holdings are limited to three retirement accounts, all invested in the Vanguard 500 Index Fund. The fund is not actively managed nor speculative. It simply tracks the performance of the S&P 500 Index, nothing tricky or fancy, or creative. Mitt Romney on the other hand holds pages and pages of individual equities, individual corporate bonds, foreign securities and actively managed mutual funds, many of which are managed in so-called blind trusts. Romney does have significant assets in market tracking index funds as well, but he also has upwards of $500,000 in gold, perhaps the most speculative of all possible investments. While the two men offer very similar policies for Wall Street, the two banal baby-kissers could not be more contrasting in their handling of their own personal fortunes.

So, what does this say about the two men? It has been widely reported that President Obama harbors no adulation for Wall Street, but rather coddles and serves it out of a fear of the political consequences of not doing so. Whether Obama has made a poor political calculation in this regard is a subject for another day. However, Obama apparently views the endeavor of those who have chosen “finance” as their career as facile and uncreative, adding little of real value to society. In fact, during a meeting between Obama’s campaign director and Wall Street heavies, the executives pulled no punches, even demanding that the President apologize to Wall Street publicly.

One of the guests raised his hand; he knew how to solve the problem. The president had won plaudits for his speech on race during the last campaign, the guest noted. It was a soaring address that acknowledged white resentment and urged national unity. What if Obama gave a similarly healing speech about class and inequality? What if he urged an end to attacks on the rich? Around the table, some people shook their heads in disbelief.

“Most people in the financial world,” a top Obama donor later told me, “do not understand how most of America feels about them.” But they think they understand how the president’s inner circle feels about them. “This administration has a more contemptuous view of big money and of Wall Street than any administration in 40 years,” the donor said. “And it shows.”

Mitt Romney on the other hand embraces the myth of creative finance and wealth creation wholeheartedly. Even given his advanced age of sixty-five–by age-based investment strategies at least–he is far too heavily invested in individual equities, individual corporate bonds, and active managed mutual funds. Most responsible fee only investment advisers would counsel the GOP candidate to sell off much of his equity stake in lieu of safer fixed income investments. Mitt Romney however will apparently hear none of that. His investments evidence a heartfelt belief  in the soundness of the American financial system directly in line with his political rhetoric and hyperbole.

Most of us spend decades believing the hype surrounding individual stocks and pimply-faced mutual fund managers fresh from Harvard Business School notwithstanding the mountain of empirical data to the contrary. We call our brokers and financial advisers seeking the next hot tip. After all, they know what they’re doing, right? Study after study reports the ineffectiveness of actively managed mutual funds and investing upon the advice of brokers and commissioned advisers. It is not until we actually sit down and research the subject, or remove our head from Wall Street’s all-encompassing allegory surrounding its brilliance for long enough to pay close attention to someone who actually knows what he or she is talking about, that we adjust our strategy. President Obama, a self described pragmatist, must have undertaken this analysis years ago. He understands that no matter how rosy the claims or how flashy the public relations campaign, that those peddling financial stock-picking advice have a downright pitiful track record. He also understands that to truly reap extraordinary gains from the stock market over time, you must either risk losing your entire fortune on risky bets, or you must be privy to inside and often illegal information. Neither of the preceding two courses of action is particularly appealing to an individual aspiring to the highest office in the land, so hum drum practicality it has been for the Commander in Chief.

President Obama’s changeable challenger is the consummate opportunist. He believes that actively managed funds offer superior returns to stock index funds and bond index funds. He believes that those Wall Street boys clad in $5,000 suits while extracting 2% or more of the wealth of their clients in return for poor advice actually enjoy some level of expertise. It is not all that surprising in that Romney himself spent much of his career surrounded by folks who made their livings bilking people of onerous fees by touting “exclusive” yet utterly perfunctory “proprietary analysis” while poorly managing their investments. The crowd in which Romney moves honestly believes its own claims of brilliance. In contrast to the con-man who knows precisely how valueless his products are, the Romney’s of the world believe their advice and knowledge has some real value. They are, in a essence, delusional borderline sociopaths. Some have opined that Romney’s portfolio is overly conservative and carefully crafted to avoid any political pitfalls. This analysis only makes sense if the author continues to himself or herself subscribe to the long-since-discredited strategy of actively managing investments. Even in 2012, those who advocate for a strategy based upon empirical data and sound experiential reports continue to swim upstream. A testament to the depth and reach of the myth of the stock-picker.

I believe that the duo’s investments speak volumes concerning each man’s approach to governance. Obama almost certainly charges his staff and advisers with the responsibility of researching each and every social issue or economic policy question inside, up, out, and down, leaving no stone unturned. It is in his nature to do so. He is then presented with each and every data set and potential effect prior to his coming to a practical and pragmatic conclusion. That very conclusion is then simmered on low heat through a Bearnaise sauce of political consequences and an ultimate decision is reached. This is precisely how Obama handled the gay marriage debate. He understands that practically speaking gay marriage is of no consequence to him, his marriage, or the orderly functioning of society or government. He has no moral objections to the idea. He has said as much in the past. However, once placed upon the hot stove of electoral politics, he made a poor decision, and his statements on the issue during the 2008 campaign were overly-complicated, forced, and disingenuous. This is almost certainly how he has approached the closing of Guantanamo Bay Prison since being elected, among a whole host of other issues and questions that have but one clear and obvious practical solution.

Mr. Romney in part still believes in  making “gut” decisions. It would be unfair to cast him among the same ilk as George W. Bush and his nearly unexpurgated lack of reliance on data and practical effect, as Romney can indeed be a thoughtful and realistic man. However, having no occasion in his life to doubt the efficacy of efficient markets, Mr. Romney is almost certain to believe much of what he spews on the campaign trail. I am unquestionably confident that he believes that tax cuts spur economic growth and lead to job creation in the face of reams of data to the contrary. He almost assuredly believes that  military power can be used to solve centuries old civil and religious conflicts and restore peace. He without question holds the position that income inequality will not eventually erode society as a whole. If he is elected it is likely that Mr. Romney will make many poor decisions based upon an honest belief that he is correct notwithstanding opposing information. However, he will also make his share of practical decisions. The question is which of the two categories will be out of balance.

In 2012 we do not have to chose between an ideologue and a pragmatist, or a true believer and a statistician–assuming a vote for either of the two mega-parties. Neither of the major candidates ultimately believes in anything strongly enough to be swayed by ideology or morality alone. Each man can be swayed from a practical common sense solution by politics, so both men are inherently dangerous. One need only look to Obama’s treatment of Wall Street and Romney’s continual conversion on policy for evidence. It is ultimately irrelevant how thoughtful and pragmatic a leader may be at his or her core if practical considerations have no place at the policy table. In analyzing the two men’s investments, it is clear that one man is a practical sound decision-maker at his essence, and one man is practical yet inclined to surrender to his belief in the advantage of risk and reward. Whether it is more desirable for a leader to make poor decisions based upon an honest yet misguided belief in the anticipated results, or to make poor decisions based upon a political calculation in the face of a deep understanding of information to the contrary is a choice that each of you will have to make on your own. I however would like a third choice.

Apr 11

Obama Hits a High Note

Every once in while President Obama reminds us all why we were so hopeful in late 2008. While regularly according lip service to the middle class and castigating bankers immediately prior to retreating into conference rooms to cut deals that aggrieve the middle class and reward bankers, he occasionally makes a point so eloquently that it is worth publishing. In a recent speech in support of the Buffet Rule–a change in the tax code requiring the wealthy to pay a minimum income tax rate of 30%–he succinctly made the case for investments in the middle class.

If we’re going to keep giving somebody like me, or some of the people in this room, tax breaks that we don’t need and can’t afford, then one of two things happens. Either you’ve got to borrow more money to pay down a deeper deficit, or you’ve got to demand deeper sacrifices from the middle class, and you’ve got to cut investments that help us grow as an economy.

You’ve got to tell seniors to pay a little more for their Medicare. You’ve got to tell the college student, `We’re gonna have to charge higher interest rates on your student loan, or you’re going to get smaller student loans.’ You’re going to have to tell that working family that’s scraping by that they’re going to have to do more because the wealthiest of Americans are doing less. And that’s not right. The middle class has seen enough of its security erode over the last few decades. And we shouldn’t let that happen.

We’re not going to stop investing in the things that create real and lasting growth in this country, just so folks like me can get an additional tax cut. We’re not going to stop building first class schools and making sure that they’ve got science labs in them. We’re not going to fail to make investments in basic science and research that could cure diseases that harm people or create the new technology that ends up creating entire industries that we haven’t seen before.

With each passing day the argument that tax inequality and wage unfairness moves closer and closer to playing a substantive and important role in the November election and beyond. It is quite possible that the occupy movement, the 99% Spring movement, and other collateral progressive grassroots movements across the country will  make it untenable for even the most duplicitous of politician to ignore the importance of economic fairness. I certainly hope so. It would certainly be refreshing to live in a time in  American politics when the middle class conclusively annihilates the practice of voting against its own interest.

Ironically, if the Republican Party somehow manages to retake the United States Senate and maintains a controlling position in the House of Representatives, they could find themselves governing during a period of extreme unrest concerning the economic path of the country. Economic injustice generally, real wage stagnation, retirement insecurity, tax inequality, Social Security, Medicare, unemployment insurance, health benefits, increased demands on worker productivity could each become primary issues in 2013  and beyond. Republicans would be forced to either repudiate their ever shrinking ultra-conservative base or face the prospect of defeat. Democrats would be forced to return to the progressive policies they have so long ignored.

The Buffet rule is polling well, but it will not alone carry Obama to reelection. The true test is whether or not the American people will ultimately abandon the failed economic policies of both parties and fight back, sending each politician packing who fails to understand that we will not be bullied by corporations, Wall Street and special interests any longer.

Mar 12

AYE! Bonds!

From time to time we will be posting informational pieces highlighting little known or little discussed investment options and strategies. In the world of bonds, there is no option perceived as being any more boring than savings bonds, namely Series “I” Savings Bonds.

I-Bonds are a federal government issued bond which is guaranteed not to lose value.  The bonds also earn interest, and are ideal for individuals and families with smaller amounts to invest and park for a period of time greater than one year. The interest that I-Bonds pay comes in two parts: a fixed interest rate and a variable interest rate. The fixed-rate portion is set when you buy the bond and remains with the bond for its life. Remaining interest payments come from the variable-rate portion, which changes twice a year based on inflation, as measured by the Consumer Price Index (CPI). The most recent adjustment set the combined rate at 3.06% (0% fixed rate + 2X (CPI of 1.53%)). The fixed rate has been set at 0% for much of the time since the most recent recession began, and while it’s clear that the federal government is attempting to favor larger investors in traditional government bonds, the fixed rate will eventually be raised.  Even with a fixed rate of 0%, the 3.06% blows away any savings account or CD available right now from any large bank.

In other words, it’s not bad compared to your .25% savings rate at Bank of America!

Keep in mind that there are purchase limits however, which can be found here. The current limit is $10,000 per calendar year for individuals in purchases of electronic bonds.

You will receive interest from your I-Bonds until you cash them in or they mature. So you don’t have to pay tax on the interest as it accrues.  The interest will compound monthly and you can easily track it by logging into your treasurydirect account.

At maturity or redemption, interest on I-Bonds is subject to federal tax, but not state or local tax (Another advantage for those who live in states with income taxes). And if you meet certain requirements, interest may also be exempt from federal tax if you use the bonds to pay higher-education expenses.  If you need to sell the bond less than five years after you bought it, you’ll lose three months of interest.

I Bonds can easily be purchased through treasury direct. The security measures are very protective of your information, and the process for setting up an account reflects that. Come on, help Uncle Sam, and tell that big bank that you found a more attractive place to keep some of your savings.