S and P Downgrade - Case Study

Originally Published on forbes.com on August 7th,2011

______________________________________

I blog on tax issues.  Looking at my statistics though it looks like people only want to read about the S and P down- grade of Treasury securities, so I thought I would share my personal experience with the fall-out.

Being a CPA is probably one of the least hazardous professions in existence – if you ignore the possiblity of being forced into bankruptcy from a lawsuit.  Somebody like me that would just mean I would leave the profession with the same net worth that I started with.  That compares favorably to coal mining or the infantry.  People will talk about the stress of long hours during tax season, but really that is just emphasized to make our lives look like they have some drama.  We are even fairly insulated from the seemy side of life.  Physicians, educators, lawyers, depending on their specialties, and certainly social workers are called to serve the wretched of the earth.  The truly wretched rarely, if ever, require the services of certified public accountants.  There are hazards, though.

One of them is that if we are doing well, we are unikely to be doing nearly as well as many of our clients.  This can lead to envy, which can lead to bad decisions and even lead some CPA’s to forfeit their liberty.  I wrote about that last fall.  There there is the volunteer problem.  If you ever want to help a not-for-profit, the executive director will be bound and determined to get you to be the treasurer or chair the finance committee.  I’ve finally resigned myself to that one.  The one compensation is that you get to experience being the client torturing the auditor.  Then there are the financial planners.  Don’t get me wrong, I like financial planners and investment advisors and I think that they do a lot of good for a lot of people.  It’s just that every financial advisor that I have ever met has explained to me why his group or system or whatever is better than the other ones.  “Yeah, yeah, we know all about the efficient market hypothesis, but take a look at these charts ……..”  So even though I’ll sometimes refer clients to them ( ”Why don’t you talk to this guy ?  I have no reason to think he is worse than any of the others.”), I’ve never really relied on one.  Instead, I rely on my own foolish notions.

I just marked  a really big half birthday.  Last month, I turned 59 1/2.  I wanted to take something out of my IRA just because I could, but I restrained myself.  It got me thinking about the IRA.  It’s not my entire net worth, but its a good chunk.  It mostly comes from a 401(k) rollover that happened when the professional corporation I was part of merged out of existence.  Hey I went from being a staff member in the second largest firm in Worcester, Mass to being a partner in the second largest firm in New England without everlooking for a job.  There really is something to showing up.  Anyway my personal focus is more on avoiding poverty than achieving wealth.  If you had grown up in Fairview NJ, you might understand that.  So I came up with this scheme.  I took a little more than half the account, about $160,000, if you want to be nosy, and put it in cash.  Then I got my advisor,  (I didn’t say I don’t use them.  I just don’t rely on them.), Ryan Belanger of Morgan Stanley in Worcester to build me a ladder.  Ryan’s a good kid.  He inherited me from Bruce Nass, God rest his soul.  (Bruce had been pretty old.  When I called Bruce in the midst of the 1989 crash to ask him if he had ever seen anything like it, he didn’t miss a beat – “Cuban missile crisis”).  Anyway, the ladder is of treasury zero coupon bonds.  The ladder will give me $22,000 in 2022 when I am 70 and more each year finishing with $36,000 in the year I am 79.  I’m thinking that I’ll add a year each year between now and when I’m 70.  I have not had a male relative live to be 90 or even 80, but my big brother, Bob, is giving me hope.  He’s why I remember the Cuban missile crisis.  While I was in Little League his ship the Randolph was hunting Russian submarines.

What exquisite timing.  Just as my ladder hits the wall of the castle the S and P minions come along to push it back by downgrading US treasury obligations.  Really, I shouldn’t bother looking at the values between now and maturity, but I couldn’t help my self.  They are down by about 1%.  I’m not concerned in the least.  The only thing that is bothering me is the puzzle of the pattern of their decline.  The earliest one is down by the least.  Each successive year is worse until 2025.  Then they start getting better with the furthest out one being only slightly worse than the nearest.  There is probably a bond genius somewhere that could explain that to me.  Some sort of kink in the yield curve or something I guess.

I read the Standard and Poors report and I’m not impressed.  I don’t think I will take their advice and shift over to Germany or the United Kingdom.  We are going to get through this mess.  I think listening to Winston Churchill is better than listening to Standard and Poors when it comes to evaluating the current situations.  He said:

Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.

________________________________________________________________________________________________________________ 

About the image - I promised myself that if I ever got to mention my brother in a post that would be the image I would use.  It is the United States Navy Memorial - The Lone Sailor:

The founders of the Navy Memorial envisioned this Lone Sailor at 25 years old at most, a senior second class petty officer who is fast becoming a seagoing veteran.

Thats my brother in 1963 – electronic technician second class on the USS Randolph.  Recovered two astronauts and kept the missiles out of Cuba.

“You would want this guy at your battle station when it’s not a drill,” former Master Chief Petty Officer of the Navy Billy C. Sanders says of The Lone Sailor©. “He is the classic American sailor. That statue looks like bronze, but there is plenty of salt, paint, sweat, fuel oil and courage stirred in.”

 Every 10 year old boy should have a big brother like that.  I did.