Prepubescent & Bankrupt.

August 27, 2012

Across the developed world, the debt situation continues like a slow moving train wreck.
To your left, the baby boomers. They consumed, spent and borrowed to a previously unseen extent. In so doing, they ran up deficits to unsustainable levels and rewarded themselves with programs the nation cannot afford.
To your right, our nation's children. Like my five and nine-year old sons. Innocent. Wide eyed. And massively in debt. The sacred promises the nation supposedly owes the boomers will fall squarely upon their shoulders. The result will likely be less wealth, a lower standard of living, and fewer benefits than any previous generation since their great, great grandparents.
These sacred cows, the promises and programs we feel beholden to pay, even as the boomers rendered them untenable, were made without consulting with those likely to foot the bill. My sons' financial awareness ends with the knowledge that, if they help their old man get the garbage to the curb, feed the cat and keep their rooms clean, they will get an allowance. I simply haven't had the heart to tell them that they are trillions of dollars in debt. Once they get back into the swing of school and they're naively optimistic moods turn a bit more somber with the return of homework, I'll probably break it to them.
"Good night, guys... oh, umm, last thing... Your mother and I wanted to let you know that the nation's current debt and unfunded mandates will likely relegate you to a lifetime of fiscal bondage and economic slavery. Now make sure you use the potty."
According to Congressional Budget Office forecasts, the government's debt will top 101 percent of GDP by 2021. By 2035, publicly held debt could top 190% of GDP.
Imagine your family owing 100 percent of this year's income in credit card debt. Now, imagine this being true for every family in the nation. Now, welcome to the United States of America.
If our politicians were business owners they'd be doing time. Because the level of chicanery and embezzlement is unfathomable.
Anyways, back to those who will actually pay these debts... our children. Someday, they will want answers.
"How did things get to this point? Couldn't you dumb ____________ see that you were spending too much?"
Truth is, we could and did. At least everyone outside of Washington, D.C., that is. Because like individuals who cannot spend more than they make, government cannot spend more than it collects (Unlike individuals and families, governments make nothing... earn nothing... they take, via tax receipts).
Spending must come down to a level that matches tax revenues. In Europe. In the U.S. The world over. Because eventually, the means to finance the debt evaporates. And it happens quickly. Just look at 2008.
The size of the baby boomers, in Europe and in the U.S., vastly outnumber the youth who will eventually inherit their debt. In other words, we cannot afford to keep the promises our government made to the boomers. There are not enough milking cows, err -- children, to pay the bills.
Speaking of getting paid, this brings me to my next topic.
Not everyone has been a fiscal deadbeat these last few years. At least not everyone outside of D.C. With interest rates so low, there have been a number of investor classes working hard to put cheap capital to efficient use. We have lately become enamored with one such class of investments.
Some of the smartest real estate investors in the nation run entities know as Real Estate Investment Trusts (REITs). These investment entities came into being following Eisenhower's signing of the REIT Act, in 1960. REITs provide the antithesis of that vast sucking sound emanating from Washington, D.C. They are legally beholden to pay their investors 90 percent of annual income. This structure forces REIT managers to 1) Wisely invest corporate capital and, 2) Take care of investors.
Perhaps we should reestablish The United States of America as a REIT? Can you imagine our alleged leadership wisely investing capital? Taking care of constituents?
In fact, one could argue that Washington, D.C. is already a REIT - for the politicians who inhabit it. How so? Once elected, you spend the rest of your life getting paid by lobbyists and taxpayers at excessively generous rates of return. But, I digress.
REITs have long made since, even before today's low interest rate environment.
Since 1929, the S&P 500 has returned 9.16 percent to investors on an average annual basis. Dividends have accounted for 46 percent of those annual returns.
Since 1972, REITs have averaged an annual return of around 10.5 percent. And nearly two-thirds of that return has been from dividend income. Imagine being able to reliably depend on nearly 8 percent average annual income! REITs have done as much for investors for the last three decades.
When one invests in a stock for appreciation alone, the investment's entire value is comprised of all future earnings discounted to the present date. So, if the prospects for those future earnings fall slightly, the stock can plummet. Yet, much of a REIT's value comes from the dividend yield. So, modest declines in future growth prospects can have significantly less impact on the stock.
Hyde Park Wealth Management tracks about a dozen REITs. Each yields between 7 and 15 percent. So, even in a sideways environment, investors get paid on invested capital.
Contact us if you care to learn more about the REIT sector, and the current opportunities therein.
Before I let you go, allow me one more thought on the first part of this week's missive. We are not naive enough to think that the government could ever operate in a consistent surplus mentality without being forced to do so. Which is why we should force the issue. It would be a prudent gesture for one of the two presidential candidates to promise to implement a balanced-budget act.
Under such an act, the government can only make discretionary expenditures when it is operating at a surplus. The Federal budget would have to be balanced every quarter. If the majority of the quarters within a politician's term sees the budget balanced, he can stand for reelection. If the budget was not balanced, he must step down.
If a politician's future prospects were held hostage by the need to balance the budget, it would be done next week.
Until we implement a balance budget act, our children will be destined for the same treatment that we've gotten. 25 percent of them will pay the taxes. 75 percent of them will supply the votes. All of them will be marginalized, disenfranchised and pitted against each other. And the only growth sector of the U.S. economy will remain the nation's political class.

Securities offered through Dempsey Lord Smith LLC – Dempsey Lord Smith LLC, Rome, GA Member FINRA / SIPC / MSRB.

Advisory Services offered through Dempsey Lord Smith, LLC, an SEC Registered Investment Advisor. Clearing through and accounts held at Charles Schwab & Co., Inc.

Dempsey Lord Smith, LLC nor Hyde Park Wealth Advisors LLC provides tax or legal advice and you should consult your accountant and/or attorney if considering an investment of this type. Hyde Park Wealth Advisors LLC is not controlled by or a subsidiary of Dempsey Lord Smith LLC. Investing in Alternative Investments come with a variety of risks that could result in a complete loss of principal investment.

Alternative Investments offered as private placement securities are offered only to qualified accredited investors via confidential private placement memorandum. Income and returns are not guaranteed and there are no assurances investments will meet their stated objectives.

© 2024 Hyde Park Wealth Advisors. All Rights Reserved