Kaulapi World

More congressional drama this past week, including a last minute deal right before midnight to fund the government at least through September. After that we move from the battle over 2011 spending to 2012. Technically the agreement last friday at midnight was to extend the discussion by a week and then pass the longer term budget in the next few days. Technically there was still a chance of a shutdown yesterday when some of the conservatives in the republican party started voicing their disapproval of the deal that was made. Apparently the $37B in cuts were mostly illusory, programs that had already been cut, with the real savings something in the hundreds of millions.

Immediately following the budget deal the administration announced their own budget plan to cut $4T, mostly in response to the house proposal to cut $5T. Both proposals have been taking their shots along party lines, which has made me even more skeptical that any real progress is going to be made. From what I have gathered so far, it is going to come down to a combination of raising taxes, making significant cuts in government spending, and what neither party wants to talk about, entitlement reform. Going along with this debate there needs to be a fundamental discussion on what is the appropriate role of government, the reality is that we can no longer afford everything we have committed to. It will be better to make the tough choices now and gradually phase programs out instead of having them cut abruptly.

I’ve been taking this as a shot across the bow to cut down on personal expenditures, pay off even more debt, and get ready for the worst case scenario, as well as the several intermediate steps in between. In many ways its a matter of trying to stake out some degree of self reliance in face of forces that I have little or no control over. It is always good to have an exit plan, even if you never actually use it. Needless to say having a family now raises the stakes tremendously, it has opened my eyes how much more prepared I have to be.

The next battle looming is that over raising the national debt ceiling, which is closely approaching mid May or mid July, depending on how you interpret the Treasury department’s comments. Recent discussion in the news has been interesting but frustrating, from the big government folks there is talk of doomsday scenarios that could result from the US defaulting on its debt obligations. From the fiscal conservatives there is talk about drawing the line in the sand that the road back to solvency has to start somewhere. For me hopefully by the time this debate comes up I’ll have accumulated a few more months of savings.

April is here, and the most recent CR is about a week away from expiring. The current one being about 2 weeks old, which was passed in the last 24 hours before the deadline. I’ve been tracking the developments both from official and unofficial sources which has convinced me to prepare the family for a number of scenarios. Looking at various account balances and lining them up in case we have to draw down to take care of expenses without income, be it days, weeks, months, or years.

The latest budget battle is over a very small fraction of the total budget, but it contains a lot of political capital for the players. Federal employees have gotten a lot of flack, much of which is misdirected given the ridiculous amounts of money being spent elsewhere. We’ve already been affected by a freeze on COLA increases, and all hiring and promotional opportunities have been halted due to the budget uncertainty. Every other day I see a new article about proposed legislation to further limit federal retirement benefits, or some other plan to shrink the size of government. Some of these things I can’t disagree with on principle, given that Ive seen my share of waste, fraud and abuse in the federal government, but I can’t take anybody seriously who conveniently ignores the cost of our entitlement, defense, and bailout spending.

I read an op-ed recently that asserted a running a government by CR with the constant treat of a shutdown really is a failure to legislate. It symbolizes that those who were in power before are not willing to recognize the results of elections, and to the most part, the collective voice of the people through their representatives. This failure should be noted to all sitting members, regardless of party affiliation. I remember late in 2010 when the new vocal freshman class was voted in, there was a last minute push to get a massive omnibus budget passed, a strategy that I seriously questioned at the time. Of course it failed, the then minority clearly empowered by the election results, looking forward to the new majority status after the lame duck session. One thing I have learned is that you never underestimate ones adversary, especially when they just achieved the ability to strike back.

There are at least three more battles that are looming: on April 8th, the current CR expires, and without another CR, or a full budget for the remaining 6 months of the 2011 fiscal year, the government shuts down. Then around April 15, there will need to be a vote to increase the federal debt limit. Then later on in the summer, the 2012 budget. If the past 6 months have been any indication of how the congress is going to work on funding matters, then we’re in for another year of uncertainty.

Need to write a quick post to mention the ongoing labor battles in Madison, WI that has been in the news a lot lately. Every day there seems to be another clip of protesters occupying the state capitol, marching down state street, chanting behind the cable newscasters with creative signs. It seemed like it came all of a sudden, after watching a lot of protests in the middle east, thousands of people occupying the streets in Cairo, then there was talk about budget cuts coming to state workers in a small midwestern state that had just celebrated their banged up team go from wildcard to superbowl champs.

I’m seeing a trend that seems to omit the bigger picture. Since the financial crisis there is a lot of anger building up directed at public employees for their pensions, benefits, and job security that were the fruits of organized labor. I would normally say that this is another case of “divide and conquer” being that while there are good benefits for public employees and job security, overall salaries are much lower than the private sector. However what is more significant is that to blindly attack the public employees is to support a huge bait and switch which seems to becoming the norm in America today.

It seems strange to attack the a public school teacher’s benefits and pension while ignoring the wall street executive has their golden parachute attached to their contract regardless if they run the company to the ground and bankrupt thousands of investors. Some of which, by the way, were the major pension funds that are hurting so bad now that they need to increase required contributions or in the case of public pensions, increased funding from the state. It also seems cowardly to advocate for pay freezes of rank and file federal employees but exempt military contractors getting paid six figures to do work that a full time enlisted soldier is fully capable and willing to do. And then there is the question of where the blame for the recession, it wasn’t the public employees or even the unions that crashed the economy. Last I checked, the very ones who were responsible for getting us into this mess are still getting the VIP treatment by the media and still have enough money to influence the next election cycle, whoever ends up back in the positions of power.

Back in DC, we are bracing for a shutdown of the federal government coming this Friday. There has been talk about a short term extension deal that is being hammered out behind the scenes, but that only delays the shutdown for another two weeks. This is coming on the back of a 2 year freeze of annual cost of living adjustments that are normally designed to cancel out inflation, and additional rhetoric from congress about hiring freezes and reductions in force. The talk of a shutdown comes as a big political battle to shrink the size of the federal bureaucracy and the role of government. However like much other things in DC, the devil is in the details as federal salaries, even money spent for foreign wars is nothing compared to the major entitlement programs of medicare, social security and medicaid.

Earlier this week the president announced a 2-year freeze in pay for federal employees, a move that has stirred up quite a bit of discussion, from the rapid approval of recently elected tea party candidates and other republicans who are suddenly fiscal conservatives, to the ire of federal employee unions and big government democrats.

However after the dust settled, and people started digging into the details of the plan, it became apparent that this is not much more than a symbolic gesture at trying to address the budget deficit, and actually may be a very bad policy move for Obama, as well as anyone who is expecting the economic recovery to continue along.

First not what the pay freeze is, but what it isn’t, in other words, what positions/agencies are exempt from the freeze: Lets start with the military, judiciary and the entire legislative branch, including congressional members and their staffs, partly due to the separation of powers, as the president has power over the executive branch only. The freeze also does not count for what is known as step increases and grade increases, which is when an employee is given a raise due to completing years of federal service, or applying for a position with more responsibility, which is for all respective purposes is meets the conventional definition of a “raise” in itself.

Then there are the overall budget implications that the pay freeze has in the aggregate, I’ve read anywhere between $28B to $30B over the next 5 years, meaning about $4B tops for 2010. All it takes is to google the amount of total expenses and outlays for the federal government to see that this is peanuts to the total. The big pieces of the pie are in entitlement spending, social security, medicare, public assistance programs.

I suppose a more meaningful cut might be to cut federal salaries or the workforce. This is worth discussing, but like everything else, where to cut, and more importantly, what is the most politically acceptable area to cut? FBI agents? Agriculture and food safety inspectors? The diplomatic corps? USAID? enlisted military members? How about at the banking and financial regulators? Judgment calls all around, but without taking a partisan angle on where I personally think we should cut, I’ll say that over the past few years I’ve seen my own share of waste, fraud and abuse.

The economic argument that this will result in an anti-stimulus is the one that I’m most interested in considering. Because the cuts are coming from reducing salaries for as much as 15% of active participants in the real economy, this will have a counter effect of the recent stimulus efforts made by the current administration. And its not just the $28B-$30 of lost consumer spending, but since we’re talking about anticipated salaries going forward, there will be a collateral effect among some federal employees to delay large purchases, decrease consumption, and build cash reserves. In such a consumption based economy, this is by definition an anti-stimulus.

Brief disclosure: I currently work for Uncle Sam, although my salary, even including liberal interpretation of non-salaried benefits puts me several tens of thousands below the numbers I’ve seen thrown around recently as an “average” federal salary. I also started working in the public sector way back when it was considered foolish to take a pay cut over more lucrative positions in the private sector.

Not to add to the ton of news stories and blog posts out there about the flu outbreak in Mexico, I thought I’d mention a few observations from my end.  I’ve been keeping an eye on the news reports as things come out, its looking like there’s more and more cases and suspected cases coming to light.  The recent news in the Wapo is that there are a few suspected cases in the DC metro area, kind of makes you feel icky thinking about it.  So far I haven’t seen any hospital masks on the people riding the train into work, I think tomorrow might be a different story.

The sad thing is that whats most likely is that if the government decides to start taking precautionary measures it’ll probably be backward looking, in that it will be only after the city is overrun with new confirmed cases of the flu.  I’m wondering at what point will the decision-makers think that there needs to be a shift in focus and policy.  There has been some talk about this whole thing being overblown out of proportion, given that the seasonal influenza comes through every year and sickens a large number of people and kills a bunch all over the world.  I dunno if I’m really into that analysis, after having a few bad bouts of the flu over the years, I don’t want to get anything like it, not this time, not ever.

At work I remember reading a memo announcement a while back about continuity of operations plans, essentially, setting up people with the ability to telecommute or telework instead of physically coming into work.  It sounded excessive at the time I read the memo, but lately I’ve come to appreciate the extra preparations that could and should be made just in case.  I’ve been working with an episodic telework arrangement to work around my class schedule, its been a real plus to be able to work on things remotely, it saves the hassles of commuting back and forth from class to home to work and back.  I remember going to an external training session sponsored by my workplace that had a speaker focusing on the vulnerabilities of modern society to any kind of health care epidemic.

Ides of March, just got through some of my taxes for 2008.  In many ways its been a sign of getting older in that filing has gotten more complicated as opposed to years past.  It seems as the income slowly creeps upward there are additional forms to fill out, calculations to double check, and accepting the fact that some deductions and credits simply don’t apply anymore.  In a strange way I actually enjoy the number crunching part of it, Hana jokes that maybe I should’ve considered accounting instead of law.  The other part of the madness this time around is the nagging issue of the market uncertainty the world has been seeing, and the begging question of how to plan for savings and retirement account contributions with all the market volatility.

Personal finance and overall economic stability has been a major distraction for much of the last 6 months now.  In every angle of analysis I come to the conclusion that we’re in decent shape, and could weather a storm or two, should something happen.  However there is that uncertainty of not being fully prepared for the possible sudden downturn, or major event that turns everything upside down, like a black swan event or something.  I’ve read a bit about personal risk tolerances when it comes to finances, and I’m relatively risk adverse in many aspects.  This could be reflected why I’ve decided to work on my law degree part-time, while working full time, why I purposefully minimized the amount of student loan debt I took on over the past four years, and the fact that I’ve made every effort to live well below my means, even paying off interest and principal while still in school.  Still I worry that even with all the preparations, it might not be enough to survive sometime that comes along and blindsides us.

One conclusion that I’ve come to is that there is really no such thing as a safe asset class, given this uncertain environment, and the unprecedented steps that the government is doing, you can’t pump in Trillions of dollars one way or another without having some kind of unintended consequences, any of which could be disaster to the overall market confidence.  I hear people talking about this environment as being the time to buy, with many blue chip stocks at historic lows, and housing prices plummeting, mortgage rates also very low, especially for those with good credit.  The thing is that all of this stuff is really a form of legalized gambling, and that there is always a form of risk here and there, it all depends on how much you can first of all afford, and can stomach.  There’s also this concept that paper price asset reflects an actual value of a stock, regardless of the production power it may have in the form of the company’s profitability, or fiscal health.  Who cares how much the stock price is relative to the price you purchased it if it doesn’t produce any income as dividends?  After all the only way you can profit from a surge in a stock price is to sell it, and then get whacked with the capital gains taxes. By this rationale, real estate at any price in general is not an investment at all, its just a form of shelter.  I think that the sooner people start to recognize these things, maybe it’ll mark the beginning of the the long road to recovery and stabilization.

Meanwhile in the other March Madness, Wisconsin got in at a low end, 12-seed in the Eastern Division, up against a surging Florida State, hopefully it won’t be a mirror of the bowl game this past football season.  If Bucky can pull off the upset, then they’ll probably have to face a tough road, likely facing Xavier and then Pitt.  Who knows, typically Wisconsin does better when no one is expecting them to go anywhere.  The final four bid from a few years back was an example of that.  I’ve filled out a bracket or two, just for fun, been pretty distracted this year so I can’t say that I know much about the strength of picks.

Keeping an eye on the markets today, as I have been a lot lately, and noted that the DOW checked in just about 50% of the peak we saw this past summer 2008.  That’s a pretty significant statistic, 50% down now if your portfolio tracked the major stock indexes.  Before I shutdown my workstation for the day I took a look at a few of my account balances and cringed the thought of what the latest -3% drop might do for some of my long term accounts already in a sea of red for the year.  I’m sure that I’m not alone in this boat, a lot of people I talk to are talking about painful losses, others just don’t bother to check in since they know that its bad bad bad.

All this got me thinking about a possible breaking point for 401k contributions, and the start of what might just be an overall downward trend, if things were to continue going this way.  In breaking point I mean that at some point I could see a significant number of 401k participants might just fold their cards down and refuse to play.  It goes to the statutory structure of 401k deferred tax retirement plans.  You pay a portion of your paycheck tax free into a retirement account that you can’t touch without penalty, until you are of retirement age.  To sweeten the pot, your employer matches a certain percentage (1%, 5%, 10%, 15%, etc.) as part of a benefit package.  Depending on the setup, you can then invest this money into regular securities on the market, or certain designated index funds proscribed by your employer.  The additional benefit is that any gains you make on your account are tax deferred until retirement, at which every withdrawal from your account is subject to income tax.

Logically, there are several benefits to participating in a 401k program, but most powerful are the tax deferred incentive for contributions, and the tax-deferred status for gains.  However both of these benefits are tied to a single assumption that has been challenged in the recent market trends – an aggregate positive rate of return over time.  Everything is fine when the market is appreciating at an exponential rate in boom time, but in prolonged recessions marked by triple digit losses in almost all sectors on consecutive days, weeks, at some point the incentives for contributing to a 401k, will be canceled out by compounding losses in the stock market.

I’m getting a sense that what might be coming up, could be a breaking point for 401k contributions to zero, or at the very least, to the minimum employer match.  Depending on each company’s set up, and fund allocation, we’re most likely looking at a 10%-15% drop on the year so far across the board, given the drops in the major indexes.  With a SWAG estimate of 20%-25% tax rate, you can see that if the mounting losses continue, at some point in the near future they’ll meet or cancel out any tax benefit from a 401k contribution.  If and when this happens, I could see a shift in behavior for those who are able to scraped by to meet the max ($15,500 for 2008, $16,500 for 2009) for the past few years, even despite all the economic turmoil in the markets, to one of cash savings and liquidity.  In other words, things are so bad that even the most aggressive 401k contributors would conform to 401k deposits of 5% or lower.

One would think that a change in investment strategy of this magnitude would surely have a significant affect the overall market, which would indicate an accelerating or a market sell off.  From a very basic sense, I think this makes a lot of sense.  I’ve been looking at what has been happening lately with the markets, and have been feeling more and more discouraged, thinking “whats the point?”  Why save the money for later when it can just depreciate by double digits in a single day?  I’d be better off putting that money into cash, and then eventually into US treasuries or some kind of short term CD.  This might lose against inflation, but at least it wouldn’t go down in value.  Then again, maybe the best strategy for this market in the short term is to simply not play.

Lame disclaimer: I own some publicly traded stocks, bonds, and other securities in the market, some in regular investment accounts, others in tax deferred accounts and others in retirement accounts none of which are doing particularly well so for in 2008 or 2009.  Therefore, none of this commentary is intended to, or should be taken as investment advice in any shape or form, express or implied.  These are all just random thoughts and observations that a novice could do in these interesting financial times.

Sticking with almost an annual tradition for me, MLK day has been a day of personal reflection generally, kind of a like a new year of sorts.  For the most of the past several years it has come at the start of a new spring semester, still in the new calendar year, it seems fitting to take a look back and forward.  Looking back I still reflect on the significance of MLK Jr. in general to me in terms of a historical figure and human rights activist.  This year around there are constant reminders of the historic inauguration of the first black president one day after the holiday that has been designated to honor the MLK.

The talking heads have been at it all day making comparisons between MLK and Obama 24/7.  I still think that many of the comparisons are being disregarded, while others are being played up too much.  Unsurprisingly they are so obsessed by the racial backgrounds of both men, careful to mention every other word that we are witnessing history in the making as the first black president takes the oath of office.   Looking forward I’d like to see more realistic take on what BO can and cannot do for the nation and the world. I think it does the American people a disservice to draw simplistic comparisons between historical figures and current leaders, it sets up an expectation gap which inevitably leads people astray and down the wrong path.

The thing is that as inspirational and unifying as the memory of MLK was, I don’t think it would’ve been a good idea for him to be elected president, or being in charge of any political office.  I think his role in history was to get people thinking about what was possible in American society, what could be, if we broke out of the box and started judging each other by the content of our character instead of the color of our skin.  The similarities between Obama and MLK are really two fold, first is the color of his skin, and the style of his oratory, which is very preacher-like.  Neither of which by themselves qualify him for being the president.

I say like any other elected official, Obama should be given the opportunity to really change the country and take charge, but when he screws up he should be scrutinized and judged and resisted just as much as Bush.  The real danger of making premature comparisons to historic figures is that it stifles legitimate discussion about policies and overall dissent, as dead men can’t respond, and instead are given the benefit of history to tell their stories.  Obama should not be compared to MLK, FDR, or Lincoln, and other dead leaders, all this amounts to is noise and static to difficult road ahead.

Looking back to the last four years, I have to say that I am not in the same mind set that I had visioned, I was thinking that this time of year in 2009, I would be finishing up law school, getting ready for the next step, optimistic about the change of the guard from 8 years of Republican rule.  I remember being hopeful for how much more knowledge about the system and the world I would have gathered, and again, positioning myself and my family for the next step, whatever that might be.  This time around I feel a lot more uncertainty than ever before about the future of the nation and the world in general.  I am seeing and reading a lot of signs that cause reason for worry in the near and distant future.

Gotta love capitalism, especially gray and black markets.  Of course I’m referring to the underground market that has sprung up, mostly online for tickets to witness history in the making, the for the inauguration Barack Obama.  Craigslist is pretty busy with people with all kinds of tickets for sale, scalpers lucky enough to get their hands on some tickets will make a decent amount of change.  The prices themselves range from $100, $250 for seats along the ticketed mall viewing area, $500 for the standing area, and as much as $3500 for seated tickets.  That’s a hefty chunk of change for being a witness to history.

But what are the tickets really worth?  On the demand side there are ample numbers of potential buyers that price being part of this event as very high, in the hundreds and thousands of dollars.  Also driving the demand side is the emotional stakes that are attached to this event, I notice often that discussion goes from being a “witness” to history as to “being a part” of history.  For the faithful, saying that they were in the crowd on a cold January morning is in itself a priceless experience for which no price is too high.  On the supply side, there are a limited, finite number of tickets in various levels of grading, that is closer to the steps of the capitol.  Also these tickets are not for sale, they are in available only through the congressional offices, which each member having the full discretion to allocate them in the way that he or she sees fit.  All of these factors have all the makings of an interesting economic case study of price discrimination.

The disconnect between the relative value of the good is easily exploited by potential buyers coming from out of town that have never seen the capitol, the national mall, or the distances that are involved.  This also goes to the disconnect that people place on the value of the tickets themselves, to a certain extent, the value is more to the allure of them being a hard to come by commodity, and a symbol of the ticket holder’s savvy or connection to some high political office.  Maybe its that ultimately like any other material good, there is a certain amount of value associated with social status symbols.  That is people want to feel that they are special or elite through what they have.  Another disconnect are those that have never attended an inauguration in person either, so they don’t have any experience to gauge an appropriate price.  I really hope that in trying to get tickets, people would just calm down and save their money, especially in these tough economic times.

I went to the 2005 inauguration, and remember how far away the seats were from the actual podium, I ended up watching the whole thing on the jumbotron.  Of course I wasn’t too thrilled at the time about the results of the election, but I was more or less interested in just going for the sake of going.  This time around I’m happier about the overall results, I’m not as sold yet on the bigger picture and long term direction that the new administration is proposing.  But its still a big event, and I’m still intrigued that I’ll be in town to witness the event.  As for me, I think I’ll stick to some taking some pictures of the crowd, and collecting some commemorative metro tickets instead.  Maybe buy a T-shirt.

After a busy but tough 2008, the new year is already in full swing.  This year brings a lot of things to look forward to, a new assignment at work, a new division chief,  new semester of law school, and of course the ever present buzz around the district these days, a new administration taking on white house.

One of the good things about my work is that it allows for some flexibility on job assignments, so that if one assignment doesn’t work out for the better, either because of the subject matter, the workload, or the personalities on the team, it’s really just temporary.  Not uncommon in staff management at my agency, I’ve been going through the grueling transition period between assignments, which means that I have multiple sets of bosses and work styles to adjust to.  In the 5 years I’ve been at the agency I’ve never experienced a clean transition from one job to the next.  It really puts you at a tough spot, you want to get some closure on the old assignment, but you want to get off to a good start on the new one.  I’ve also noticed that I prefer to do short-term and periodic projects as opposed to being bogged down on one long-term project, even if it means that I have to multi-task.

My courses this semester started last week and are looking pretty good so far, and they are shaping up to be a good final set to close out at least the classroom portion of my legal education.  I have Professional Responsibility and Practice, which is basically a course on the rules of professional conduct and ethics that all lawyers are supposed to be versed in before entering practice.  My Bar prep course for the semester is Sales & Leases, basically a continuation on commercial transactions law and contracts law, looking into the application of the Uniform Commercial Code (UCC).  On the elective front I’ve got Debtor and Creditor Rights, a course that I think is pretty contemporaneous to the meltdown on wall street and the consumer credit markets.  My last elective course is White Collar & Business Crime, something that I think might come in handy again, given the times we are living in.

The entire DC metro is in an inauguration frenzy mode, it seems like daily we get new announcements or updates on the developing security plans, road closures, metro service outages.  I’ve gotten a kick at the uptick on the Obama merchandising and lyrical symbolism and imagry around town.  The street vendors that usually sell bottled water and FBI shirts are all decked out in Obama gear, the metro fare cards now have his smiling face printed on the card stock.  And there are the obvious corporate bandwagoners like IKEA and Pepsi. There is talk around town about who has gotten tickets to the ceremony and the balls, and whether the tickets are to THE ball that Obama and Biden are making an actual appearance at.  All in all I hope that most of the 2M+ estimated people coming to the district for the inauguration are coming with an open mind, its going to be a logistical mess out here with the crowds.

Meanwhile for the policy wonks and politicos, there is the talk about how the new administration will be replacing the old, what changes will be made, and I mean real structural change to the federal bureaucracy, not the campaign slogan, which so far is appearing more and more to me to be just that, a catchy phrase to run an election on, nothing more.  I happen to be in that category of people skeptically optimistic, but really waiting to see how if he can effective transition his administration from one that ran an effective campaign to one that can run the federal government.

One indication that this might not be the case is the decision to open this office of the president-elect, supposedly to assist with the transition period between the election and the inauguration, and to respond to the historically unprecedented challenges the nation is facing.  The fact is that the president-elect does not have any of the executive powers until he is sworn in on Jan 20, it really is dishonest to putting himself out to the American people as if he can do anything in the interim.  Presidents are human beings, they are not super humans that we make them out to be, they rely heavily on their cabinet and staff in the executive branch agencies to get their job done, that is, run the federal government.  As of November 5, 2008 when the office of the president-elect was established, there were no cabinet members confirmed by the senate, and therefore no means to do anything at all but plan for the transition.  Maybe there’s a reason why the Constitution doesn’t provide for an office of the president-elect?

The other point to consider is more of a tactical, and that is that really one of the risks of establishing the first office of the president-elect is that you automatically open yourself up to criticisms with how you and your staff conducts themselves in the interim period, perhaps even before you’ve established your system of spin doctors and public relations.  I think the whole mess with Ill. Gov and the Treasury Secretary nominee not paying taxes might not have been as prominent had the office of the president-elect been pumped up.  Almost like a damned if you do, damned if you don’t, it may have been a better idea to keep a low profile, do things behind the scenes and then take the White House by storm on Jan 20.