Time to Focus on 'Return of Capital'

I am more concerned with the return of my money than the return on my money.

- unknown (often attributed to Mark Twain or Will Rogers)

The U.S. Presidential race is now behind us. And this morning the world woke up and realized that all the issues the election postponed now lie before us.

In his victory speech, President Obama focused on moving 'forward':

Obama's re-election puts 'forward' to the test

"You elected us to focus on your jobs, not ours. And in the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together. Reducing our deficit. Reforming our tax code. Fixing our immigration system. Freeing ourselves from foreign oil. We've got more work to do."

That's not a bad list of several of the bigger challenges we face: perniciously high and persistent unemployment, trillion dollar annual deficits, a complex and unequal tax code, overdependence on fossil fuels (domestic as well as foreign, I would add), and population management. These are truly prodigious issues that our nation is struggling with, in many cases for decades without resolving.

But that list of woes is not near complete. Add to it our national over indebtedness and insolvency, our eroded manufacturing base, escalating costs of food/fuel/health care, our outdated infrastructure, our failing educational system, accelerating global depletion of and competition for key resources, an aging population, the most dramatic wealth gap in our country's history, and an unsustainable monetary system. For certain, there are also many other competing problems that can be further added to this 'worry list'.

The hard truth is that these problems are not going to be resolved in the next four years, irrespective of whoever won the election last night.

In fact, as Chris so often states, many of these are not problems; they are predicaments. Problems have solutions. Predicaments have only outcomes. Outcomes that need to be managed. And if you're jawboning about 'solving' a predicament (which our politicians have made a full-contact sport out of), you're wasting precious time.

So, the big question is: what approach exactly are we going to use to move 'forward' from here? From what we're seeing so far, the best I can tell is we are going to continue to throw money at these problems/predicaments until it's clear to all that won't work anymore.

The Bush and Obama administrations have seen exploding debt and deficit levels accompanied by staggering issuance of new money by the Federal Reserve. There is little to indicate that this policy is going to change as long as our economic malaise continues. In this way, the government is taking future wealth from our children's pockets.

And it seems increasingly clear that the government will take more of the current wealth from ours, too. Rather than take the pain of reigning in spending, government demonstrates, time and again, its preference to raise revenues via taxation.

PIMCO's Bill Gross predicts the same:

Gross: Fixing 'Cliff' Will Mean 'High, Higher' Taxes

A newly re-elected President Barack Obama will push for higher taxes -- including a dividend-tax hike that will cause a substantial drop in stocks, Pimco's Bill Gross told CNBC Wednesday.

Obama will get little time to enjoy his election victory Tuesday, as he will have to get to work quickly with Congress to avoid the nation's "fiscal cliff" of looming mandated tax increases and spending cuts.

One likely remedy for revenue-raising will be to take the current dividend tax rate of 15 percent and hike it five to 10 percentage points, said Gross, co-CEO at the firm that runs the largest bond fund in the world and has $1.8 trillion assets under management.

"Obama ran on a higher-tax agenda," Gross said during a "Squawk Box" interview. "Marginal income taxes go from 35 to 40 (percent), capital gains from 15 to 20, dividends from 15 to who knows what...so they could go high, high and higher."

Risk-averse investors prefer dividend stocks, which are common in pensions and mutual funds even though they've largely underperformed other market indexes over the past four years.

Consequently, Gross said, higher dividend taxes would make those companies less attractive and thus take the stock market down 5 to 10 percent.

That's "the ultimate danger here for the stock market," he said. "Dividends are sheltered in 401(k)s, they're sheltered in pension funds. At the margins investors pay dividend tax rates. To the extent that you raise them from 15 to, say, 25 (percent), that implies in terms of equaling after tax rates another 5 to 10 percent down in terms of stock prices. We've been very spoiled for the last 10 years."

Last night, California passed Proposition 30, which approved an increase in the income taxes for 'wealthy' Californians (those with income >$250K). Education is by far the state's top expenditure, yet it ranks at or near the bottom of the nation on most school performance ratings. But rather than tackle the difficult work of determining how to spend their existing budget more effectively, it's far easier for Sacramento to address shortfalls by increasing taxes. Which is why Governor Jerry Brown crafted and championed Prop 30. Pity the Californian taxpayer, who already suffers the highest state income taxes in the U.S.

This is likely a preview of what's to come in future years. As we bump (or slam) into the hard limits of our predicaments, our political leaders will throw greater amounts of our current and future wealth at them. Like a drowning man frantically reaching out for anything that can possibly keep him from going under, our federal and state governments will grab for sources of revenue with equal desperation as they drown under their debts.

The markets are certainly concerned today. The Dow is down over 330 points as I write this.

We are entering the era of investing where the risks are increasingly disproportionate to the downside. The prudent investor should be much more concerned these days with return OF capital, versus return ON capital.

Though, more accurately, the priority should be return of purchasing power. It does no good to get your dollars back if they've been devalued in the interim.

The following steps have become 'no-brainers' at this point:

  • Find yourself a trustworthy financial adviser who will invest your paper capital with these risks in mind (we endorse several).
  • Own some gold and silver as insurance against a currency crisis.
  • Diversify into other hard assets if you're able to, particularly those with potential to produce primary wealth (timber, livestock, vegetables/grain, minerals, energy, etc.).
  • Assess your employment situation – how vulnerable is your income? Invest in ways to make yourself more valuable to your employer, add additional source(s) of income, and/or create your own business. 
  • Invest in increasing your personal resiliency (homestead investments, skill-building, physical & emotional health, and community)

Welcome to the future.

This is a companion discussion topic for the original entry at https://peakprosperity.com/time-to-focus-on-return-of-capital/

Adam, you nailed it my Brother. You know, everything looks like a negative feedback loop to me. Are these your thoughts too? If so, are we going to be able to get ahead of this? It seems that the FED is always late to react, and is this time any different? Everywhere a Predicament so how do you get people to Demand anything when everyone sees the Predicaments?
OT: Your honey is really terrific. What really surprises me is just how long it lasts, its flavors just keep on giving. I have $100 bucks for a worthy cause, and would buy 4 more jars of same. Let me know, whenever.



Adam, I think you make a vaild case for defensive investing and focus on preservation of wealth, at least until the politicians can demonstrate serious resolve to deal with the predicaments. I do not have a lot of faith that this will happen any time soon as they have been all talk and no action when it comes to collaborating. The ideological gulf is wide. I expect they will dilly and dally around the looming fiscal cliff, and then at the last moment, after driving us all crazy with it, they will come to some sort of compromise, once again kicking the can down the road.
There is only one sure thing that you can count on - yourself, and your abilities to take care of yourself. That will be the deciding factor going foward on whether or not you are able to live life prosperously.

Coffee break over, back to work.


Boeing Company Layoffs

This just in from Jan Hatzius of Goldman Sachs (via BusinessInsider: "GOLDMAN: If You Make Over $250K, Your Taxes Are Going Up")

We are making slight changes to the fiscal policy assumptions embedded in our forecast. President Obama has indicated he would veto legislation that extends the 2001/2003 tax cuts for income over $250k, while congressional Republicans have objected to decoupling them from the middle-income tax cuts. In light of the President's reelection, we have opted to assume that the upper-income tax cuts will expire. These are worth $56bn in 2013, and their expiration is likely to increase the drag on growth from fiscal policy by around 0.2 percentage points in 2013, on a Q4/Q4 basis. While there is a clear possibility of a compromise at a higher income threshold like $1 million, this is roughly balanced by the possibility of fiscal restraint from other unexpected sources, or the possibility that Congress fails to address the fiscal cliff until early 2013.


First, as a passing note, I note that neither the President nor Adam mentioned climate change in the "parade of horribles."  Will it take another devastating hurricane or other climate related disaster before climate may again be mentioned in polite society?  What was that third E again?
Moving on to money, the way I read it the USD is headed down, stock markets are now controlled by HFT and bonds are in a bubble that will pop as soon as interest rates rear their ugly heads.  So, where does my money go?

Adam's checklist:

Trustworthy financial advisor - check

Gold and silver - check

Employment situation - retired

Personal resiliency - check and continuing

That leaves only timber, livestock, vegetables/grain, minerals, energy, etc.  How do I acquire them?  futures markets?  That ain't going to happen.  Go into the farming, mining, timbering or oil business?  Seems unlikely.  I suppose I could loan money to local businesses or farmers, but the return of equity seems marginal if not downright risky in today's economic environment.  Any other suggestions?



I am quite unsettled by the idea of putting tax hikes that impact one segment of the population to a vote.  It brings to mind this quote:

"When the people find they can vote themselves money, that will herald the end of the republic."

            — Benjamin Franklin.

What's next, a ballot initiative to take the private assets of 49% of the population?  I know that's extreme, but the idea of asking the majority what it thinks of taking more money from a minority is somehow just not in the spirit of things for me.  Just too many ways for all of that to end badly.

I know it's been said, but the whole idea that the schools in CA have been 'rescued' by this tax hike (yes, that's the language being used) demonstrates a complete failure to address the core of the problem.  Perhaps the schools have become too expensive for some reason or there are better and more cost effective ways to run things or any of a number of other essential starting points for the conversation?

Here's a prediction:  the state will collect less than it thinks, some will be diverted (or 'borrowed') for other-than-school purposes, and nothing will be fixed except that the population of people earning over $250k in CA will shrink.  In just one or two years the schools will have chewed through whatever additional funds came their way and the whole problem will resurface.

My gut tells me this is the tipping point. We are now at the point where the individuals on government assistance have the ability to vote themselves raises at the expense of the producers and those with assests.  In California we received an even bigger hit - the Democrats now own 2/3 (super majority) of the legislature and can raises taxes at will.  Prop 13 will probably get gutted before too long.
Recently Erik Townsend researched the best place to live on this planet.  His goal was simple - where to best ride out the coming storm.  Maybe Erik could do the same for the 50 states with the 3E's and freedom in mind and Chris could interview him. 


After last night election , on my way home, I felt scared. Obama's care is real.
I spoke to my insurance people two weeks ago about employees' insurance in 2014. There is no way we employers can meet the reqirement. I spoke to my suppliers,business is very slow everywhere. Obamacare 12 month from now,will kill many business in one shot.

So the first thought is "sell" the business while it still worth some money in next 6 months. The last 6 months near 2014 will be too late if more people realize what will happen,right?

I know many business will try to cut into 30 hour mark. The way of running a business will be change forever. At least, the office,shopping center's store hours being cut. So the rent $ per sq ft no longer valid. It will be too high. It will cribble the commercial real estate again. People running two 29.5 hour job or one 29.5 hour job will not spent money  as today with one full time job. The spending habbit will change although they may have same amount of income since lay off and cut hours everywhere. People will be scared. The worse of all, business will not expend and reinvest untill "dust settled". We are looking at a very probable  "Depression" in front of us now.

There will be more jobs fly out of America, or we call it "out sourcing" again.

So my "Time to Focus on 'Return of Capital' may be sell-sit-watch three step mode.LOL.

Prop. 30 was designed to fool the California electorate, and it did.
No On Prop. 30: Gimmick, Not A Solution (October 9, 2012)
"The California School Board Association pointed out that the governor's initiative "…does not provide new funding for schools." Instead, under Prop. 30, politicians can take existing money for schools and use it for other programs and then replace that money with the new taxes. The official title and summary of Prop. 30 states "these additional revenues would be available to fund programs in the state budget." It is clear that Prop. 30 is just another budget gimmick."

I wouldn't call it a gimmick. I'd call it holding a hostage to collect ransom.

But the real reason California's education system is in such trouble is because of several factors. Amongst them:

  1. Reductions in education funding from the state government.
  2. Academic bloat. As Charles Hugh Smith has pointed out, in about 20 years' time, the University of California at Davis grew its managerial/administrative staff from 3.2 per 100 students to 12.9 per 100 students. (You would think that technology and process improvements would reduce that need.)
  3. Unfunded pension and health care liabilities that need to be met - especially after poor stock market performance and money lost after investing in AAA-rated mortgage-backed securities that the banks knew were bad.
  4. The one thing no one dares mention: Free public education for the illegal immigrants ($8,700 per student per year - which is less than the average $10,000 in other states), and at the college level, in-state tuition and eligiblility for free financial aid (Cal Grants) based on income and need. Close to 10% of California workers are undocumented. Half of illegal immigrant households have children. You do the math.

Now that he doesn't have to run for reelection again, expect Obama to seize 401k's and "manage" them for us. More automatic money for the stock market, Goldman Sachs and fiends will take most of it I'm sure. Fiends was a typo but I felt fiends fit better than friends.

If some people asked to take a 29.5 hour job, is it better off to claim unemployment? Yes, it is most of the time. Mish, you maybe wrong. Unemployment rate may go up.

I believe that the power is again gridlocked with one side controling one house and the other side controling the other.
Fascism is when Capital becomes the Government.

The Fascists in the USA like gridlock. Expect no substansive Law reform to emerge from the Sturm und Drang. Max Keiser's Rape and Pillage of the financial wars will continue.

Divide and conquor works at the top as well.

Hi! everyone,
In 2008 I was part of the nre revolution, today I just want to cry.  I do not think the world will end, but the future will be very hard and difficult for most.  Families will be dislocated and fragment away, many will die, starvation and epidemics will over take some and a few will survive.  I am 65 years old and preparing as best I can, but I have no illution about surviving the next downturn. After reading the CRASH COURSE, I see clearly for the first time what the future holds for us.  Thank you for the warning Chris  I hope other hear or read your words and do something about it.  I am going to go on and prepare as best I can.  Maybe I will last long enough to teach others to prepare and face the future with some hope.


Good summary, Adam. As my wife noted yesterday, "there is never an option on the ballot for improving efficiency."
Chris raises something I've discussed at length, the Tyranny of the Majority.  The top 1% pays 34% of federal income taxes, the top 10% pay 70% of the Federal income tax, the top 25% pay 87%. The bottom 50% pay 2% (not counting 7.65% Social Security payroll taxes, of course). With roughly half of all households already receiving direct government checks/assistance/transfer payments, we are probably already at the point where the 51% approve tax increases that fall mostly on a minority.  

While those who only work part-time simply don't make enough to pay more taxes, what's happening is the least productive sectors of the economy (those protected by the Central State) are increasingly being subsidized by whatever is still nominally productive in the private sector. The "ratchet effect" is in full force: government can expand but it is incapable of shrinking. Yet how can a government keep expanding while the economy stagnates?

What nobody dares discuss anywhere is the rising pressure a la Greece to move one's income to the underground cash-only economy to escape taxation. When is "paying your fair share" enough? What is a "fair share"?  

Add up all taxes and many of us are already paying 50% or more: 13% self-employment (soon to revert to 15.3%), 25% Federal on any income above $34,500, state income taxes, sales taxes, $12,000 in property taxes annually, and $13,000 in stripped-down healthcare insurance that would be paid out of taxes in "socialist" countries. In effect many of us (not rich but not poor) are paying "socialist" tax rates but without the mostly "free" higher education and healthcare you get in countries like France. 

As one member noted here, the option is to opt out before taxes/healthcare go even higher.

Take a look at the history of the income tax.  Rates were much higher during the Great Depression and World War II.  Just saying.
I cringe at some of the anti-tax currents being voiced here, but have to remember that many of you are posting within the context of what is coming…and I am in fact in the same boat.  I don't want my tax dollars just thrown away. 

Just think some taxation is worth it, however, maybe I need to devote more time to preps.  The more the goverment takes, the less I have to prep with. 

are folks who don't receive state/federal welfare and on the other end, don't prosper/benefit from the money printing that circulates and pools around elites with contacts in cronyism, etc.  Folks who see their purchases buying less, far less, than it used to and suffering from the "benefits" experienced at the extremes are, in a very real way, paying more and receiving less…sure sounds, feels, and hurts like increased taxation to me.  I feel like an eskimo floating on an ever shrinking patch of ice.

To fear those who would debase or seize our money, while at the same time calling for better "population management", as Adam did, is a bit short-sighted.  Who is qualified to manage population and make the life and death decisions?  Surely it is not the state.  We've seen the barbarity of state-sponsored population management as practiced in China.  Let's stick with the inalienable right of life, endowed by our Creator, that the Declaration of Independence speaks about, and stay away from "population management."