The Independent Investor: The Facebook Fallacy
After a grueling two-day inquisition before both houses of Congress, Mark Zuckerberg, the founder of Facebook, has left the building. The question is how much did anyone really learn about the privacy issues of this social media behemoth?
As most readers are aware, the present controversy erupted when it was revealed that a Trump-campaign related firm, Cambridge Analytica, harvested personal data from millions of Facebook users. It spawned a huge controversy over privacy, cybersecurity and Big Data companies in general.
I watched as much of the hearings as I could stomach. What was clear to me was most of our so-called legislators had no idea how Facebook works. While some were obviously coached by their aides, even the answers to their questions drew blank or embarrassed stares. How they expect to regulate something they don't understand is beyond me, but then again, I guess it happens all the time.
It could be any one of us up there grappling to understand an entity that has become so entangled in our everyday lives. The truth is only a handful of Americans truly "get" what Facebook is even though they have been upfront with us since the get-go.
So, let's start by asking a simple question — how does Facebook make money? And yes, Joe, Facebook is a for-profit company. In one word, the answer is advertising. How much is that worth? At last count, the company is capitalized at roughly $543 billion. Clearly, Facebook is not some kumbaya, social network where everything is free no matter how touchy-feely it may look.
Helping two billion people worldwide "connect" is an admirable accomplishment from a social point of view, but it is also a darn good revenue generator. Let's be clear, Mark Zuckerberg has never said it wasn't. He has reminded everyone countless times that "building a mission and building a business go hand in hand."
Selling ads has generated over $39 billion for the company. So, what makes advertisers flock to Facebook when they could just as easily spend their money on tv or radio ads? One word: the product.
"What product?" you may ask.
That's easy. You're the product — along with all the countless billions of bytes that represent the information you have so generously spewed out over years and years of posting personal information about yourself and everyone in your universe. How much of that information you want to share with the world and advertisers is completely up to you.
Through the years, the thousands and thousands of Facebook employees have given you almost every option they could think of to "opt out" of sharing that information. Instead, if you are like me, we blithely pump out more and more personal information to the outside world without a care of how or who is using it. That is until the bad guys start to take advantage of our stupidity.
Suddenly, when that happens, we all feel betrayed by the very entity that tries to protect us when the fact is, in my opinion, that we all have been too lazy to read the material, examine and control who we are sending information to, and doing all that is required to use this social network in a rational way.
We are like the guy who uses 1-2-3-4 as his password on all his accounts. He is then hacked and subsequently sues the company for not providing enough password protection.
You may even admit to the worth of my argument but still insist that you would fulfill your obligations if the safeguards weren't so complex and difficult to use. That's like saying I would practice gun safety if I could figure out which end the bullet came out. The meaning here is you have no business using social media if you don't understand its ramifications to you, your family, and your friends.
No matter how much social media companies try to protect us, who can protect us from ourselves? If you post photos of walking your dog day in, day out at a specific, isolated location, and then someone mugs you there, can you guess why?
The point is that we are Facebook's product. It has always been the case. Yes, we are a lucrative product to them, but it is we who determine what we want to give away. So far, most users have been willing to give away the farm. Are you one of them?
The Independent Investor: Free Trade Vs. Fair Trade
In today's world, talk of tariffs is part of daily news headlines. Politicians use terms like "free" and "fair" almost interchangeably in discussing trade to justify their position for or against tariffs. Maybe it's time to review the difference between the two concepts.
While they may sound similar, free trade and fair trade are often at opposite ends of the pole. Free trade is a world where the gloves are off. It allows international cut-throat competition where the marketplace can drive the cost of products way below the price where anyone can make any money. Free trade makes things cheaper including the money we earn to produce those goods.
Fair trade, on the other hand, is in the eye of the beholder. What may seem fair to you or me, maybe the opposite from someone else's point of view. That's because fair trade places all kinds of restrictions on producers of goods and services. Overall, fair trade tends to make goods more expensive. That's because it costs more money to guarantee a minimum wage or make sure that a coal mine or steel mill's working conditions are safe.
However, throughout history and into the present day, both concepts are abused quite often. Take our country's attitude toward trade. After World War II, for example, North America was the only continent left standing. Europe, Asia and everywhere in-between had been decimated by warfare. Our allies needed help and free trade seemed to be the best answer to rebuilding the world in the shortest time possible.
It was the age of Japanese transistor radios, cheap autos from Europe, and U.S. industrial and food products that could be purchased with extremely easy terms. America opened its arms to anything the world could export to us. The purpose was to rebuild and increase economic growth worldwide for both the winners and the losers. All we required was an adherence to democracy.
We accepted free trade, while allowing our partners to re-build on the foundation of fair trade. The purpose was to allow agriculture, industrial production, and the consumer to recover in war-torn regions. We deliberately looked the other way as countries like France, Germany or Japan set tariffs on our cheap imports to protect their own struggling dairy or textile businesses.
Over the years, we all got used to this kind of lopsided arrangement. After all, America was the leading economic power in the world by a wide margin. We could afford to carry the world's weight on our shoulders.
Fast forward to today. Yes, we are still No. 1, but China is a close second. Europe over the past 50 years has forged their own powerful economic union and yet some of our trade deals have failed to keep up with these changing economic circumstances. Part of that problem, I believe, has been the U.S. practice over the past several decades of exchanging economic benefits for geopolitical influence.
How many times in the past have we given massive amounts of foreign aid in the form of trade deals, or gone along with outrageous tariffs on American imports just to achieve some dictator's promise to forsake communism or socialism and follow our brand of democracy? Clearly there is, and has been, a long list of unfair trade practices by just about every country in the world, including our own. I do not believe free trade exists in the world today. But recognizing that our steel and aluminum industry may need some relief from some other country's dumping practices is not the end of the world.
It appears to me that the present turmoil in the financial markets simply reflects something new and different and to some, a therefore dangerous turn of events. Because it has been so long since our country has stood up for itself in the trade arena, those invested in the status quo fear any change at all — even if it is to our benefit.
I commend the president for addressing this issue. Could he have found a better way to do it? Sure, but then again, I'm not the person sitting in the hot seat. Getting a better deal at the trade table is long overdue for this country, even if in the short-term, it might upset a few apples in the cart.
The Independent Investor: Financial Planners Held to Higher Standard
The Department of Labor's fiduciary rule looks "iffy" at best, thanks to a March court ruling. The 5th Circuit Court of Appeals says the agency exceeded its authority in insisting that financial services firms act as fiduciaries when giving advice to most tax-deferred savings accounts. However, some financial advisers are ignoring the courts and are going the extra mile for their clients anyway.
Over the last couple of years, I have written several columns on this issue. A "fiduciary" is someone who puts your best interests above his own and that of his company's. It is a concept that the financial community does not want to see implemented and has gone to great lengths to squash all attempts to do so.
President Barack Obama, recognizing the enormous lobbying power of the financial sector, tried to do an end-run around the financial community, the SEC, and Congress by urging the Department of Labor to implement a fiduciary rule. He almost succeeded, and then came Trump. Although our "populist" president talked a good game during the campaign, he quickly succumbed to the influences of Wall Street and ordered the DOL to "review" its regulation. The rest is history.
However, while brokers and other wealth management advisers, (as well as the annuity and insurance industry) are breathing a collective sigh of relief, one entity, the Certified Financial Planning Board (CFP), is ignoring the decision and going the other way.
The CFP Board, according to its website, is "a non-profit organization acting in the public interest by fostering professional standards in personal financial planning through its setting and enforcement of the education, examination, experience, ethics and other requirements for CFP®certification." Currently, there are 69,500 members, which represent barely 20 percent of financial advisers. However, they represent the creme de la crème of CFPs so now you know where to go when shopping for a financial planner.
The CFP Board just announced that starting next year, their members will be required to give advice under a new "best-interest" standard in all aspects of financial advice. I asked Zack Marcotte, a 28-year-old, registered investment adviser, who is sitting for his CFP certification this year, what that means to you, the investor.
"The new rule just makes it that much more important that you look for a Certified Financial Planner when evaluating financial professionals. What this all boils down to is if something is recommended to you, it's because it's best for you and not meant to line someone's pockets."
Under the old rules, a financial planner was required to act as a fiduciary when he or she was involved in doing a specific financial plan for their clients. However, financial planners can sell their clients a whole shopping list of services from insurance to brokerage services that were not part of their fiduciary duties. And there was the rub.
It is well-known within the industry that for many financial planners, the actual financial plan itself, is a loss-leader. The idea is to get you, the unsuspecting client, in the door, do the plan for a nominal fee, and make the big bucks by selling you annuities, life insurance, or brokerage services. That changes next year.
By raising the bar, all certified financial planners must act in the best interests of their clients when providing all financial advice. That is great news for consumers. The CFP will be required to recommend only using a brokerage product, annuity, or other insurance product, if it is in the best interests of their clients.
I believe that over time, more and more consumers will seek out only those, like young Zack, who are required by law to act as a fiduciary in all their financial affairs. Hats off to the CFP Board and to all those who have the true interests of their clients at heart.
The Independent Investor: Medicare Premiums and Your Income
We all know that Medicare is not free. Once we enroll in Part B and D, we start paying monthly premiums. What many consumers fail to realize is that how much you pay depends on how much you make.
For most of us, this is a moot point. We assume that we will be retiring at 65 years old (at the same time Medicare kicks in) but that assumption is no longer accurate. The reality is that Social Security, retirement, and Medicare can happen at different times in your life.
Take, for example, Social Security benefits. Every year the target date for full retirement creeps higher. It used to be 65, but now, for many, it is edging up to almost 67 over the next few years. When that occurs, workers will usually sign up for Medicare A but delay enrolling in Parts B and D until after they retire and are no longer covered by their company's health insurance program.
What most applicants don't know, until it is too late, is that your monthly Medicare premiums will be based on your last two years' annual income. But the actual logistics of that can be confusing. Here's why.
Your reported income follows a governmental processing chain where once the IRS processes your tax returns, they pass that information on to Social Security, which, in turn, feeds the data to Medicare, which then determines your premiums based on those numbers.
Let's say you are applying for Medicare B and D right now. For starters, most of us are just now filing our tax returns for 2017 (even though we are already approaching the second quarter of 2018). It will take months before the IRS gives Social Security your 2017 tax returns and even more time before that data gets to Medicare. Bottom line: there is a big-time lag between your current income and when it shows up in your Medicare premiums.
That means if you are retiring now and made less than $85,000 (as a single taxpayer or $170,000 filing jointly) in the calendar year 2016, your premiums would qualify at the base rate of $134 a month for Part B and $13 a month for Part D.
Above that income level, your premiums increase to $267.90 and $33.60, if you make over $85,000-$107,000 ($170,000-$214,000 jointly). They jump again above $133,500 or $267,000 jointly. And again, and again, until you can be paying as much as $428.60 and $74.80 per month when your income exceeds $160,000 or $320,000 jointly. If your spouse is also retired and on Medicare, then double that premium amount. For those couples making above $320,000 a year, for example, they will be paying $503.40 per month or $6,040.80 a year.
Social Security determines what you pay each year, based on your modified adjusted gross income (MAGI) as reported to the IRS. MAGI would include things like wages, dividends, rental income, capital gains and non-taxable Social Security benefits. If you earn more (or less) the following year, Social Security will adjust your monthly premiums. They call it your income-related monthly adjusted amount. That premium will be deducted from your Social Security income check or, if you are not taking Social Security yet, it will be billed to you.
Theoretically, your premiums should be adjusted every year with a lag. So, if you report a high-income number to the IRS for the two years prior to retirement, you can expect to pay a lot in Medicare premiums. What happens when your income drops, as it usually does once you retire?
You can petition for a Request for Reconsideration to reduce your Part B premium if you feel there is a compelling reason why you should not be paying a higher premium. The most common reason most petition is that income has dropped dramatically in retirement. Other reasons might include marriage, divorce or being widowed. The loss of income-producing property and changes or termination of a pension would also count.
Appeals work some of the time, but not all the time. It is a lengthy process and you still must pay your premiums while the petition makes its tortuous way through this process. It costs nothing to petition, however, and you might win in the end.
A much better approach, if you can manage it, is to reduce your income as much as possible two years prior to signing up for Medicare B and D. That is not always easy to pull off. You might reduce your hours and compensation, for example, if your employer is flexible, or, if your spouse works, and has family health coverage, you could retire, delay Medicare coverage for two years, and then apply. It comes down to what you can afford to give up now for future benefits in the years ahead.
The Independent Investor: The Economy and What Could Go Right
The markets are in a funk. Concern that Trump's tax cut will be too much, too late, has investors riled up. But there may be a flip side to this argument that bears watching.
First, the negatives, as authored by me way back when the tax cut was still being contemplated and the markets were riding high in anticipation of such. At the time, I voiced my concerns and it is worth repeating them.
Fiscal spending because of the Republican-inspired tax cut adds $1.5 trillion of stimulus to an economy that is already growing at a 3 percent clip. I bemoaned the fact that this tax cut was about eight years too late. Back then, I wrote that the fastest way to pull the economy out of recession and reduce the unemployment rate was by the passage of a massive fiscal stimulus package. The Federal Reserve Bank agreed with that strategy.
But it was the Obama years and Republicans voted down everything and anything that might have helped the economy. Instead, they argued that the deficit had to be reduced, and, in the end, they cut spending at the absolute worst time. As a result, the economy and the employment rate languished for many years.
The Fed continued to single-handedly pull the country out of recession. The economy started to finally gain momentum last year, and that growth is accelerating. At the same time, unemployment has shrunk to historically low levels, while the deficit grew anyway, despite the spending cuts.
Now that Republicans control the House, Senate and White House, they passed a tax cut, which economists say should have never been done this late in the economic cycle. This unprecedented fiscal stimulus, economists fear, will lead to too much growth. The economy will overheat, which will cause wages in a tight market to spike higher causing inflation.
This will cause the central bank to raise rates much higher than expected. In turn, these higher rates will cause the stock market to crash and the economy to fall until recession is all but inevitable. The tax cut will, contrary to GOP expectations, be the demise of both the economy and the market.
However, the flip side of this doom and gloom scenario could result in an opposite conclusion. Clearly, tax cuts increase productivity by increasing business spending on things like capital equipment, technology and the like. New equipment allows businesses to produce goods at lower costs. As such, managers can raise wages and keep their selling price the same. Why is that important?
If the end price of a company's product does not increase, inflation should not rise. Instead, you get higher economic growth, higher wages and lower costs, which results in the same end price to the consumer. It would be the best of all worlds: lower taxes, coupled with lower regulations. It is normally called "supply side" economics. We have heard little to nothing from this side of the economic argument for many years. Maybe it's time to consider the possibilities?