The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Selections are free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Mailed paper subscriptions are currently not being accepted (current paid subscribers will continue to receive their paper issues). Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
In the first few years I participated no "switching" was permitted, so the best I could do was allocate my contributions between TIAA (bond-like, guaranteed) and CREF stock depending on how overvalued I though the stock market was. In 1988 TIAA-CREF added more funds and allowed switching among them, so of course I stopped putting any money into the rigid TIAA side and all into the CREF side, using the money-market or newly-created bond funds as alternatives to TIAA.
When my wife and I lost the tax deduction for our IRA contributions in the 1980s (because the tax law was changed and together we made too much money), I decided to open a "supplemental retirement annuity" (SRA) with TIAA-CREF, because it could be funded with before-tax money.
These turned out to be wise choices as, when I retired, instead of winding up with money frozen in TIAA (inside the regular retirement annuity) which could only be moved slowly over a ten-year period or converted into an annuity insurance policy, I would up with an IRA-like pile of money upon which I could draw monthly "paychecks". In the last six months of 2004 I drew upon the SRA, as TIAA-CREF would not let me withdraw from the regular retirement annuity until I was fully retired.
In 2005 I converted the regular retirement annuity to an IRA, as permitted by new College rules established in April 2004, and set up monthly systematic withdrawals to supplement Social Security and also to smooth out cash flow, as my wife's state teachers' pension always arrives on the last business day of the month, and my birth date sets my Social Security to arrive on the fourth Wednesday. I left the SRA alone to grow in value (until I'm 70-1/2, when I must begin distributions).
With electronic deposits into our checking account the second week of every month, this worked just fine. Until November.
I can track these payments on the TIAA-CREF website. On November 8 I checked in, and the monthly systematic withdrawal hadn't come out of my IRA. Checked again the night of November 9, still hadn't happened. My wife checked with our bank the morning of November 10, and the deposit hadn't shown up. So we called the TIAA-CREF Call Center.
It seems that TIAA-CREF is doing a major upgrade of its computer systems, which includes moving massive amounts of data from the old to the new systems. In the process, the monthly systematic withdrawals from IRAs got messed up, because the "money" was in the new system, but the withdrawal instructions stayed in the old system, and it could not make the withdrawals with zero money available. Every day the failure occurred a few hundred more people didn't get their money and the problem grew.... and this had been happening since November 5. The transfers were redirected to "manual processing", but there was quite a backlog and it could be days before you'd see your money.
This happened the same week my stepmother had a massive (and ultimately fatal) stroke, so my wife and I were already edgy. She was apoplectic about the failure (having already written but not yet mailed checks against the nonexistent funds) and was convinced that TIAA-CREF was in trouble.
I, on the other hand, have a long fuse. But by the weekend, when the money still hadn't shown up, I was irritated. After all, what function of an insurance company is more important than delivering its promised payments on time? So I pawed through the glossy propaganda on the TIAA-CREF website and eventually managed to extract both the name and correct mailing address of its CEO, to whom I wrote this letter:
Dear Mr. Allison,
As a retiree, I am receiving monthly systematic (electronic) withdrawals from one of my TIAA-CREF IRAs. Imagine my surprise when my November 8 withdrawal did not arrive at my bank as scheduled.
When I contacted the call center I was advised that TIAA-CREF is doing an extensive computer systems upgrade and that the processing of some IRA payouts was screwed up because of failures in the upgrade process. As a former systems manager I have done numerous computer and server upgrades myself, and I know how tricky they can be. I talked at length with the call center rep, I got a pretty good idea of the nature of the failure, and I could understand how it would happen. Computer systems are complex; these things happen, and they are understandable.
What is not understandable is the way in which TIAA-CREF management dealt with this failure; this is unforgivable.
First, TIAA-CREF gave no notification to us clients that it was doing an extensive systems upgrade, other than the "planned maintenance" messages that have been appearing on the website, and that there was a potential for things to go wrong. One would have to first experience the failure, then contact TIAA-CREF to find out what the hell was going on. Would it have been asking too much to have TIAA-CREF e-mail those people whose payments were about not to happen, or at least put a meaningful message on the website? It is your job to notify us, not ours to notify you.
Second, it is outrageous to expect clients to wait for their contracted, scheduled payments while you get your computer systems straightened out. The most important function of an insurance company is to deliver promised payments to its clients on time. If you can't fulfill your promises, what good are you? How would you feel if your paycheck stopped coming? Those pompous mission statements in glossy brochures are meaningless if you don't meet them.
At the very least, TIAA-CREF should have immediately acted to give retirees the money they were due. If necessary, you should take the retirees' word for how much they're owed - they're not going to rip you off - then adjust your computer systems later. Not providing these funds on schedule is a major failure, one that calls into question the integrity of the entire TIAA-CREF organization.
The call center rep told me that the computer systems upgrade was "institutionally driven".... that is, other financial institutions who use TIAA-CREF's computer services were demanding more than the existing systems can provide. I should not need to remind you that TIAA-CREF's primary mission is not to sell data-processing services to other financial institutions. Nor is it to sell mutual funds to the public in competition with everybody else. It is to provide retirement services to employees of educational institutions. If you can't satisfactorily perform your primary mission, then you should fold up shop.
At the moment, I am not a happy camper. I assume you will pass my letter onto some flunky who will write me a reply. If the reply says, in more or less clear English, something like "Dear Mr. Chase, you are right, this was a major screwup, we apologize, and heads will roll", then my mood will improve. If the reply is a bland, noncommittal stock reply or, worse yet, a form letter written in bureaucratese, I will know that the management rot at TIAA-CREF has not been fixed and I will remain an unhappy camper. Please see what you can do.
The following week (while this letter was in transit), still no money, and repeated calls to the Call Center yielded up the information that it should arrive that day or the next.... but still no money, and it was clear to me that the Call Center folks didn't have a clue. So I called the New York headquarters, whereupon I learned that the news of the failure had not percolated very far up the food chain. My problem was that nobody seemed to know when the problem was going to be fixed, and the very nice lady at the other end of the phone said she would try to find out and, if she could find out, call me back. But she didn't call back, so I assume she couldn't find out.
Two days later my wife, who by this time was totally freaked out and convinced that TIAA-CREF was going belly-up and that we would lose all the money, also called the New York headquarters, and she reached an administrative assistant whom she told, if the money (and explanation) didn't arrive soon she was going to contact the state insurance board and the local newspaper. Oooh, magic words! Less than ten minutes later she was called back by the TIAA-CREF Director of Participant Relations, who was aware of the failure, was very apologetic and who also noted that my withdrawal had been processed and that the electronic transfer was underway. (But since this was late Friday afternoon, it wouldn't show up in our bank account until Monday.) In this and a subsequent phone conversation, he:
1. indicated I was right, this was a major screwup
2. apologized
3. said heads will roll (or words to that effect).
He also said that he was responsible for answering participant letters to Mr. Allison. "Oh", I said, "you're the designated flunky. Please don't take offense when you see my letter", and I went on to explain. I think he has a sense of humor.
Indeed, on Monday November 21 the funds showed up in our bank account, "only" 11 days after they were supposed to be there. A further followup call from Participant Relations, left on our answering machine while my wife and I were out buying groceries with the newly-arrived money, indicated that they had received my letter, and to let them know if we needed any further assistance. They also said a detailed report on the failure would be made to Mr. Allison. At this point, my wife and I consider the matter closed.
Almost. One of the decisions I had made was to consolidate all of my retirement funds with TIAA CREF so, if I should pop off first, my wife would have to make only one phone call to consolidate my TIAA-CREF accounts to her liking or to annuitize them if she wished. I felt that TIAA-CREF offered enough options to sufficiently diversify against the systemic risk that I note each month in "Stock Market Outlook".
But I had not anticipated the need to diversify against the risk of computer failure. So I will be placing a small part of my retirement kitty with another company (probably Fidelity) with a direct pipeline to our bank account so I can web-initiate a one-time withdrawal if needed. This will also diversify somewhat against nuclear terrorism risk (TIAA CREF = New York City and metropolitan New Jersey; Fidelity = Boston).
Once everything settles down (again) I hope to start
up another tracking portfolio in The Contrarian's
View. But let me warn you ahead of time, it's not
likely to be very exciting - CDs, Treasury bills and
notes, bonds, guaranteed-income vehicles - until the
stock market again reaches undervalue and sports a
reasonable dividend yield.... and that could be more
than a decade away.
The perception that inflation is not a problem so long as "core numbers" remain relatively unaffected will one day be rightfully regarded as one of the poorest collective judgments in an era replete with similar lapses of common sense. - Peter Schiff
In the last 10 years.... the percentage of national income earned by the lower half of earners fell from 15% to 14%. The top 25%, on the other hand, saw their portion raise more than two percentage points - from 62.45% to 64.86%. And the top 1% gained an average of $63,040 in purchasing power. The poor people at the bottom made little economic headway. While earnings rose over the 10-year period, prices of energy, housing and health insurance soared. In the last two years, average earnings have actually gone down in real terms...with annual gains in income less than inflation. - Bill Bonner
The deflation that will be coming to us in our future will not come as a result of a drop in aggregate demand, but as a result of excess production capacity and the rising influence of China and other markets where cheap labor accompanied by the build-up of too much production capacity is driving down production costs. It is acerbated by the continued competitive currency devaluation upon the part of many of the trade partners of the US. This is a tide of deflation that is sweeping the world. It is a global phenomenon, and not isolated to just one economy. My concern is that the United States, in isolation, cannot prevent global deflation from coming to our shores without help from the rest of the world. And to date, we are not getting any help at all. - John Mauldin
What the world is doing right now, is borrowing demand from the future. Japan is fostering this in their Yen carry trade that artificially lowers interest rates in the US, stimulates demand for Toyotas, and indebts the US consumer more, and makes him borrow from his future ability to demand goods. China is fostering demand artificially, by purchasing UST bonds, recycling US dollars back in a massive vendor finance program, and enables the US consumer to borrow more from his future ability to demand goods. Sounds like a massive deflationary force to me. - Chris Laird
There are many who say that deficit spending by the government is bad. But they don't say that deficit spending by the consumer is equally bad, or worse. The American idea that everything good comes from consumer spending is preposterous. - Kurt Richebächer
In a Fed study it was estimated that homeowners extracted $600 billion in cash from their home equity in 2004.Yesterday [November 1] Freddie Mac said homeowners are expected to extract $204 billion this year and forecast the number will drop to $114 billion in 2006. The economy will clearly lose a great deal of stimulus with the consumer tapped-out with debt. - Mike Hartman
Since we know that 17% of the nation's homeowners own less than 5% of their home's value, and since we also know that 42% of first-time buyers made no down-payment on their home purchases in 2004, we can confidently deduce that speculation is INCREASING, even as home prices are also increasing. And the history of markets informs us that asset markets become ever more treacherous as the number of leveraged participants increases. That's because leveraged participants possess no capacity to withstand adverse trends. They become forced sellers into a falling market, which pressures prices even more, which forces more speculators to sell into a falling market...and before you know it, many financially frail home-owners begin to wish they'd never moved out of Mom and Dad's guest house. - Eric Fry
The result [of pricking the real-estate balloon] will be a crack, then a crash. Bonds sold with an assumed government guarantee will go bad, at which point there's no bottom.... The stock market crash did little lasting damage to the U.S. economy because the real estate boom was waiting to replace it.... once the bubble bursts, all the other debts and deficits plaguing the U.S.- imports and government borrowing and all the rest - all those problems will hit at once. It's going to be the Perfect Economic Storm. - Dana Blankenhorn
In America today, you have an inflated service sector trading inflated assets. The assets that you trade do not produce any widespread wealth. They simply produce wealth for the individuals who trade them. The great failure in America is in investment, employment and income growth...and that is tied to manufacturing.... we're living in a world where Greenspan and his associates have told the world that all of America's massive imbalances do not matter. But for any economist who has a little something in his head, the structure of the American economy is one of the most alarming of all time. For a developed economy it is scandalous. The American economists think this is perfectly acceptable. But I find it unbelievable. Like Ben Bernanke blaming the rest of the world for what he calls a "savings glut". This is crazy. Why isn't he, instead, urging Americans to save and to invest? Are the Fed governors really as stupid as they appear? Or are they deliberately stupid? - Kurt Richebächer
Chairmanship of the Federal Reserve is to Wall Street and the media what the golden calf was to the ancient Israelites: a vulgar idol produced by the hopeful imagination of people who know better. They believe the Chairman anticipates what is ahead for the economy, and adjusts the Fed's policy accordingly. This notion is a crock and it stinketh, but to say this to folks who need to hear it will change few minds, if any. Idolatry won't suddenly stop simply because you call it what it is. - Robert Folsom
I am overwhelmed by the incredible load of crap that is spewing out of the media outlets: Greenspan being lauded as a hero to the economy. There are a few minor criticisms. For the most part though, few folks realize how Greenspan and his everlasting bubble-pumping tendencies has set the table for years of economic problems.... I'm just plain sick of wading through all of the misguided praise. Not to sound overly bitter but I will probably have a lot less sympathy for people once the manure hits the fan. They called for it, and they are going to get it in spades. In a perverse way, it is going to be necessary for there to be some real pain (I'm not necessarily saying another Great Depression) just to get everyone back to reality. - Marc Sexton
When Paul Volcker arrived, everyone knew the economy was a mess. Volcker's obvious job was to clean it up. Today, the general perception is that Alan Greenspan will leave the economy in great shape, and that Bernanke's job will be to keep it that way. However, nothing could be the further from the truth. Wall Street's positive reaction to the appointment of Ben Bernanke is yet another example of how completely clueless most investors are when it comes to the Fed and the precipice over which America's economy now teeters.... In an apparent attempt to reassure the markets, Bernanke pledged to continue both Greenspan's agenda and America's prosperity. The reality however, is that we need a Fed chairman willing and capable to do the opposite -- to clean up Greenspan's mess, not make it bigger. - Peter Schiff
Our situation is beyond salvaging as Volcker did back in 1979-1987. It is now inflate or die.... Today's U.S. is not the same U.S. of the 1930s. We are no longer self-sufficient in manufacturing, capital or energy. The savings rate in the U.S. is now negative. The 1930s was a different time. We were a different country. We were morally different than what we are today. In summary a different time and a different country mean a different outcome. Inflation - not deflation - is inevitable. - Jim Puplava
In Bernanke we have a man who is well respected in economic circles, readily accepted by the political establishment, and almost universally hailed by the cognoscenti as the next steady hand on the tiller. And yet this same man has talked openly of letting the printing presses rip, Latin-American style...and if that fails, letting the 8,000-pound gorilla of government wade into the private sector, nationalizing assets for the public good. I do not say this mockingly: God help us. - Justice Litle
Bernanke's big mistake will not be his alleged easy money genes. It's that he thinks he knows the future before it happens. - James Grant
To me, central bankers are dreamers. They are like bad poets, who make the world out to be something other than what it is. For the central bankers, it's always about what levers to pull and what buttons to push. And the accuracy of their tools is highly overrated. They no more control the economy than a weatherman controls the weather. Yet, they can make things worse, much worse. In their capacity to do wide-scale harm, they have no peers on the financial scene. - Chris Mayer
Of course, no one laughs when the Fed seeks to pick the right interest rate to make the world run perfectly. But that mistaken viewpoint has been conventional wisdom for so long that some folks have lost the ability to look at the situation objectively -- and see it as the literally impossible task that it is. - Bill Fleckenstein
Bernanke viscerally believes in the ability of the Fed to stimulate demand and prevent deflation. - John Mauldin
I think the legacy of Greenspan will be complex, but he's turning over the US economy with record imbalances, higher dependence on asset markets than ever before, and I.... believe strongly that his legacy could be Ben Bernanke's albatross. We'll have to wait and see. - Stephen Roach
In truth, Greenspan's proclivity for dollar creation was not altogether a bad thing. Had he not acted in this fashion Americans would have missed the additional years to enjoy the good life, because we would have already likely been in the throes of the worst economic period since the Great Depression.... I have to wonder if Greenspan's exit will foster a degree of concern in the mind of the American public as well as across the globe. No longer will the omnipotent Greenspan be there to save us if a major problem arises. It is impossible to measure, but I believe that a level of fear, doubt and uncertainty is growing in the minds of the world's inhabitants. This in and of itself can turn an average market decline into a major sell-off. - Richard Appel
In spite of what I think of Greenspan as an economist, he has been one hell of a Fed chairman, prolonging and forestalling what I had thought to be the inevitable for more than five years now. But his term ends in Jan. 2006 and will his replacement have the same acumen and worldwide trust to carry on successfully? Even if Ben Bernanke, the new Chairman, is every bit as flamboyant as Greenspan was, how long can one central banker go on manipulating and fooling the whole world, let alone us lowly Americans? - Aubie Baltin
It has been war that has been the driving force in monetary depreciation throughout history. If Bush had been forced to raise the hundreds of billions that he has spent on his Iraq caper through taxation, his supporters would be far less supportive, and his policy more honest. Instead, he has been able to count on the inflationary finance of his friends at the Fed to make it all possible.... Fiat currency engenders conflict of all sorts, unbalances the economic structure, and puts everyone's savings at risk. It is for this reason that Alan Greenspan once wrote that the cause of freedom is bound up with the cause of the gold standard. - Llewellyn H. Rockwell, Jr.
The only difference between an insane asylum and the Congress is the fact that the inmates are running
Congress. - John Loeffler
Stocks.... or at least, the popular averages.... have held up well and, indeed, have gone up in the face of a weakening technical condition as evidenced by the advance/decline line and new highs/new lows; these indicate that stocks are under distribution. It is all part of a long, rounding top the downslope of which we will begin to see in early 2006.
In the meantime, the holidays are here. In the past few years the so-called "Santa Claus rally" has shifted to earlier and earlier in the season, with the result that it's now largely over by the first week in December. So from Thanksgiving to the end of the year, I rate the stock market (also the bond market) "neutral" overall. The most likely time for a quick bull rally in stocks is the last week of the year, particularly if the averages are then slightly positive for the year, because the funds will rush into those stocks that went up for the year to gild their portfolios. (Stupid manager games.... lowers your overall return.)
The risk of systemic failure is currently about 10%-15%,
where it will remain until 2006.
A. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $20,044.27
Increase: $ 9,345.27 [+87.35%]
COMMENT on "PIG": There is no change from the last issue.
TIAA/CREF 403(b) retirement plan; I switch between indexed stock/bond/money funds:
(No transactions since June 30, 2004 due to my retired status. Update soon, I hope!)
Values, 23Nov2005: stock, 206.68; equity-index, 83.58; MM, 22.57; bond, 75.75; inflation-indexed bond, 45.88; real estate, 236.62; TIAA current yield
in SRA, about 4.92%. Current money-market yield is 3.73%.
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993:
3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%; 1997: 5.38%; 1998: 5.72%; 1999: 5.12%;
2000: 9.99%; 2001: 1.11%
Gain, January 1 through March 31, 2002: 0.97% (3.86% annual rate of return)
Total gain since January 1, 1988 (14.25 years): 223.43%
Compound annual rate of return: 8.59%
Gain shown excludes the impact of additional monthly cash contributions.
(Please note that I have not had the time to calculate my rate of return beyond March 2002, and
may not get the time until 2006)
Buying CREF stock on January 1, 1988 and holding it gained 422.38%, for a compound annual rate of
return of 11.46%.
COMMENT on NYSE "Timer's Trend": We are currently on a (whipsawing) BUY signal of November 18, 2005.
COMMENT on NASDAQ "Timer's Trend": We're on a BUY signal given November 21, 2005. This signal looks like it might whipsaw.... and it sure took a long time to turn bullish, so I urge caution.
NEXT ISSUE - will appear near the end of December.