First Quarter 2008
My Comments and Opinions

Attention all subscribers to newspapers, listeners of radio and watchers of television: Chicken Little is wrong. The sky is not falling. The end of the world has not happened and there is no deep depression in America, despite reports to the contrary from the Tuesday, April 1, 2008 edition of The Independent, a news and commentary web site from the U.K. Even though many so-called reporters have used scary words in their stories, this is the only source I found that specifically used the “D” word in a headline.

Please indulge me as I tick off a few facts (hopefully no readers). According to the U.S. Labor Dept. our current unemployment rate is 5.1%. U.S. Labor Dept. records show that during the worst months of the Great Depression in the 1930s our unemployment rate was about 25%. In the January 8, 2008 edition of the Enterprise Institute, Edition # 129 the article entitled “The Sub-Prime Crisis in Perspective” makes the point that during 1932-1933 about 10% of all outstanding home mortgages in America were in some stage of foreclosure. As of this date, less than 2% of all home mortgages are in process of foreclosure. Some will be foreclosed. Former home owners will become renters again. Approximately 87% of all home mortgages are NOT sub-prime loans. Many homes are owned debt-free.

The authors of the Enterprise Institute article quoted data from the Federal Deposit Insurance Corporation (FDIC) comparing the economic loss from the Savings and Loan (S&L) crisis of the late 1980s and early 1990s to the current sub prime mortgage mess. The FDIC estimated the cost of the 1990s S&L cleanup at $519 Billion, which was equal to about 10% of our $5 Trillion Gross Domestic Product (GDP) twenty years ago. Our national output has now grown to $14 Trillion. By comparison, the current sub-prime mortgage hit represents about 3.5% of our GDP. We have always had problems to solve. Some of the current concerns begging for solutions include the low U.S. Dollar, high energy prices, and mortgage companies in bankruptcy. Stock and bond markets are volatile. Home prices have dropped in many parts of the country. Bank CD rates are very low. Food costs are high and rising. There are Republicans in the White House and Democrats in the Congress. But stop and think. There has never been and probably never will be a day without trouble somewhere.

In my memory America endured the Korean War, The Cold War, which lasted 45 years, President Kennedy's murder, the Viet Nam War, the murders of both Rev. Martin Luther King and Bobby Kennedy in 1968, the Mid East Wars and 1973 Arab Oil embargo followed by the inflation of the later 1970s. More recently the mass murders of 9/11/01 and subsequent military response has affected all America and much of the civilized world. Amazingly, during the past 60 years or so, the United States of America has survived its troubles, prospered, and continued to innovate and grow. America leads the way for many millions around the world who want the freedom and standard of living we enjoy. As I've said before, you only need to know one thing about a country: Are people trying to get in or get out? The mind is not unlike a modern computer. Put bad data in, get bad results. It's been said that we become what we think about all day long. You can't be a securities or real estate investor if you're afraid of the future. Investing is for optimistic people who believe in the future. The history of the U.S. stock market, using the S&P 500 Index as a proxy, is a series of decades of positive gains interrupted by significant but temporary declines. To get the ups you have put up with the temporary downs. There is no proven way to get in and get out by timing the market. Either stay in or stay out. If you are not comfortable with the securities markets, look at the many other options available. I can help you with those choices. Investors buy assets that change in value and have more short-term price risk. Savers buy fixed-value assets that have more purchasing power risk. Investing requires money, faith, patience and discipline. Saving requires only money.

Consider some of these notable quotes: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Templeton, b.1912, legendary pioneer of global investing. “When everyone thinks alike, everyone is likely to be wrong.” Humphrey Neil in The Art of Contrary Thinking, 1997. “Forecasts usually tell us more of the forecaster than of the future.” Warren Buffet, b. 1930 American investor

So, what's going on in the financial markets and the economy? Well, if it walks like a recession, quacks like a recession and looks like a recession it just might be a recession. Is it? We won't know until at least several months after the slow-down turns back up. It's difficult to see the reef in a storm. Recessions occur every decade or so. Since 1950 U.S. recessions have become less frequent and shorter. Periods of economic expansion have become longer. As defined by most economists, a recession in the U.S. consists of two back-to-back quarters of declining Gross Domestic Product (GDP). GDP is the market value of the services and goods produced by American property (assets) and workers (labor). In my opinion, the primary economic problem in America is political.

Congress refuses to face our biggest economic problem - entitlements. In my opinion our Social Security and other benefit programs should be funded the same way the private sector funds pensions and health insurance. Federal plans should invest some of the contributions of workers. The Social Security "Trust Fund" (which is not a funded trust because there are no assets in it - only government IOUs) could allocate 25% or more of its receipts to a blind trust of global assets which would be managed by a consortium of perhaps 50 of our largest mutual fund companies. The Trust Fund should own real estate, stocks, bonds, and maybe some commodities under a broad investment policy charter. We have gold in Fort Knox and oil under our own land. Why not put some of it in the trust?

The U.S. Government puts demands on companies and individuals that it does not put on itself. As an example, every corporate and individual retirement plan must comply with the complicated rules and regulations of the Labor Dept., the S.E.C. and an alphabet soup of agencies. ERISA, The Employee Retirement Income Security Act of 1974, which does NOT cover government agencies, sets rules for investing contributions.

You may want to look up Pressing Problems/Economic Factors online if you'd like to get an estimate of the magnitude of our economy and our current and potential problems. For example, because our national debt is over $9.4 trillion, each one of the 300,000,000 people in America "owes" more than $31,000 as his or her portion of the federal debt. The national debt is not the same thing as the national budget deficit. The deficit is the difference each year between how much the U.S. Government spends and how much it collects in taxes. The individual states must balance their annual budgets. Not so the Congress of these United States. It has been widely reported that one definition of insanity is "doing the same thing over and over, hoping for a different result." The blame, alas dear friends, is with We, the People. We continue to vote in most of the same characters year after year. Presidents come and presidents go. Election to Congress in so many cases seems almost like a lifetime appointment. The senior senator from Massachusetts has been in Congress for 46 years!

The interest on the national debt grows by about $1 billion per day. Our national debt grows by some $2 billion per day. In the past our debt was paid with an increasing GDP. The dirty little secret is in how our Federal Government pays off yesterday's IOUs. It's with cheaper dollars. At 3% inflation per year, in 25 years the dollar the government owes is only worth fifty cents in purchasing power. Hey kids! Don't try this at home. Leave going into debt to the politicians.

The problem for us is built-in inflation and loss of purchasing power over time as the dollar is devalued. A proven way to keep up with or even beat inflation is to purchase assets that have the best chance of moving with or ahead of inflation. Historically, portfolios of real estate and equities (stocks) have produced the kind of results patient investors seek. U.S. residential real estate has grown on average about 6.4% per year since 1964 (source: Median House Prices, U.S. Census). A basket of large American stocks (the S&P 500 Index) has increased on average about 10.5% per year since 1925. Bonds have barely kept up with inflation over the last eight decades. (source: Ibbotson Assoc.).

Who are the ones placing their bets on future U.S. prosperity, even in this volatile time? Answer: Foreigners. Sovereign investment funds are making large investments in U.S. major banks. Why would some of the smartest and wealthiest investors on the planet want to own bank stocks that have dropped a lot? Answer: For the right reason. They're so low.

What drives otherwise very intelligent people to follow the herd? It's either group fear or group greed. When all is heading up, where are the grumblers? We're all happy to go along and get along as assets are re-priced higher and higher, as long as we own those assets. When house prices were on a tear, there were very few complainers. Now that prices have come down the news media would have us believe that we'll all be homeless and bankrupt. The cartoon character Homer Simpson sings “If I didn't have bad luck, I'd have no luck at all.” The news media sing “If we didn't have bad news we'd have no news at all.” It's not all as bad as the doom and gloomsters would have us believe. The American Dream is alive and well. Years ago my ancestors came from Europe to America for opportunity, not guarantees. There were no guarantees for them. no Social Security, Medicare, Medicaid, or Prescription Drug Benefit - not much of anything except the opportunity to work in a new, free nation.

As there is no perfect American, America herself is not perfect. But want of perfection is not just cause for condemnation. Listen carefully to those who want to represent us in local, state and federal government. Do they understand the philosophical, moral and ethical foundations that built our nation? Will their proposals promote the greatest good for the greatest number of us? Will their policies help form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity? That's what their policies should do, wrote George Washington and the other Framers of the Constitution of the United States.

Wealth can NOT be redistributed. It can ONLY be created or confiscated. Wealth in the hands of the unprepared will almost always get squandered. I listen to the politicians. Some of them are, by any measure, wealthy. Some of these wealthy office seekers have spoken openly about their distrust of wealth. I've heard more than one stump speech attacking certain industries, the very same industries that my clients own as individual stocks or as parts of mutual fund portfolios. Business organizations, from the smallest to the largest, that produce products and services that people need and want, create jobs, tax revenue and, hopefully, wealth for those employed. Government does not create wealth. It is a net consumer of wealth. Government services are delivered by the political process. The only way a government employee can be paid is from tax revenue, not agency profits. There is no such thing as Department of Labor profits. Or, how about Congressional profits? What exactly do they build down there in Washington that can be sold at WalMart for a profit? Answer: Nothing. Now this is not to say that we can do without government. Au contraire. Government is necessary because “men are not angels.” Taxes are not paid willingly in my experience. Taxes are imposed as needed.

To you, my clients who have been patiently holding on during the recent market volatility, Bravo! In order to benefit from the gains one must endure the downs. No one can predict when the top will arrive. No one can predict when the bottom of the market cycle will arrive. In every decade since the 1950s there have been, on average, two Bear markets. They arrive unexpectedly and depart the same way. In every decade since the 1950s there has been, on average, one recession. Buy when others are selling. Buy when others are pessimistic. Buy when you have the money. Add to your portfolios regularly.

Wishing you success,

Robert W. Brimmer, CFP™

BRIMMER FINANCIAL
rbrimmer@nationalsecurities.com
59 Finlay Road - P.O. Box 2806 - Orleans, MA 02653
tel. 508-240-0320 fax 508-240-2309 toll free 800-237-9322
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