20 July 2018 FT — Articles to Read

20 July 2018

 Question: According to MSN:Money, what are lessons you need to learn from today’s retirees?

 Decade High – Pg. 11

       The 2% club has a new member.  The yield on the three-month US Treasury bill passed that milestone for the first time in more than a decade as the Federal Reserve remained on course to keep raising interest rates

       The relentless rise in bill yields reflects a steady tightening of interest rate policy by the Bed, while the US Treasury has substantially boosted sales of short-term debt to help finance a worsening budget deficit

       Since the 1960s, periods when three-month bill yields have been greater than the dividend yield of the S&P500 have been relatively rare and have certainly not lasted for as long as the past decade.  The most recent period stems from the Fed’s decision during the financial crisis to cut interest rates towards zero and conduct several rounds of bond purchases, known as quantitative easing

       A further climb in bill yields beckons as the central bank expects to deliver two more 25bps interest rate rises in 2018


Jail terms for ex-traders in Euribor case – Pg. 12

       Two former derivatives traders, including one described by a judge as “perhaps the best in the world”, have been given prison sentences for their roles in a conspiracy to rig the Euribor interbank lending rate

       Christian Bittar, 46, who pleaded guilty to conspiracy to defraud shortly before the Euribor trial began, was sentenced to five years and four months… (Prof Note: Whoa!)

       At one point he earned 47m (sterling) in a year in commission on top of his 130,000 (sterling) basic salary, prompting his bank to renegotiate the terms of his employment

       Euribor is a benchmark interest rate determined by daily submissions from several “panel banks”.  It is tied to trillions of euros of products such as loans and mortgages and was described by an expert witness in the trial as “one of the most globally significant numbers in finance”

       …”greed alone does not provide a full answer” to Bittar’s actions.  He had been motivated at least in part “by the satisfaction of being able to beat the system undetected for so many years”

       (Prof Note: I am often asked by students why I left trading.  I really do miss the “high”.  My group earned 2cents/share in 11 months for Constellation so we were highly successful.  The simple answer, upon reflection, I did not like the person I was becoming/had become.  Of course later I was a fund manager.  It is absolutely possible to get drunk on power and the judge was/is correct, money is not the only motivating factor.  I’ll take a sunset any day over those days though I do miss the euphoric highs.  I can remember one Christmas Eve spent at the office at Constellation.  It was H, K, and me. H was our biller extrodinaire and all around supporter.  K was head of Gas and I was MD.  We had a suppler default the day prior.  I was suppose to be on a plane to Budapest but could not leave with the outstanding issue.  H was rescheduling my flights by the hour to get me on a plane as every hour we thought we had the situation resolved.  K had two young children at home and a wonderfully supportive wife that kept calling him to remind him he was missing his young children’s Christmas Eve.  To the credit of H and K, they would not leave me!  At one point the head of risk at Constellation was yelling at me on the phone, reminding me what day and time it was.  I then proceed to scream over him that I was aware and that WE were all still at the office and for him to do his F’n job!  Oh, what a night that was!  It all turned out well and Constellation/Excelon remains in retail gas to this day.  My MD job no longer exists today due to regulation, i.e. I was in charge of front AND back office.  They do not put events like that supplier default and the corresponding results in text books!  (there are many stories like this….similar but also different…every day was exciting!)

       (Prof Note: Sorry…trip down memory lane.  So, prior to this supplier default, K and I head to Constellation Power Source (It was then CPS) to negotiate quantitative support and potentially a supplier agreement as we had wholesale and retail risk, i.e. the whole enchilada.  So K and I are on the trading floor, looking out to at least 100 traders and analysts, in this massive glass conference room with bagels, coffee, juice, donuts, etc.  We sit down and I explain that we are here for support, potentially a wholesale gas delivery agreement, etc.  The head of CPS looks at me, i.e. my counterpart, and says, “We do not have the resources to assist you!”  I look at him and say, “Are you F’n kidding me!  You are looking at our resources, i.e. 1 K and ½ of me as I also have to manage the Electric business.”  He says, “Then you better start working harder!” Work hard we did!  That business, as mentioned was turned around in 11 months and made 2 cents a share.  I miss those days…I am too old for that level of stress now but I do miss that world!)


Answer: (1) Plan for the retirement you want (Prof Note: What have I been saying for years!  Understand the expense in today’s dollars and plan for passive income, after-tax, that will provide that retirement); (2) Review Employer matching contributions (Prof Note: At least invest to the match to get the free money); (3) Social Security won’t pay for everything (Prof Note: Understand this!); (4) Pay off high-interest credit card debt (Prof Note: This is debt that, barring a medical emergency, really should not even exist); (5) Don’t put your investments on autopilot (Prof Note: Also see the advice of experts.  Do NOT be scared or hesitant to ask someone their credentials.  Would you taking sailing advice from an English major that never has seen the water?); (6) Costs of living in retirement can vary dramatically; (7) Start saving early (Prof Note: At birth!); (8) Consider investment returns before paying off debt (Prof Note: I CANNOT stand this statement!!!  If you payoff your mortgage at 4.5% that is risk-free return!  You may, MAY, earn the historical average of 8.00% in the S&P…MAY!); (9) Borrow from your 401(k) only as a last resort (Prof Note: No McFly!  Get yourself a finance degree!  Many 401(k) plans allow borrowing as an option with a stated interest rate, i.e. 6 or 8%.  If that money goes back to you, which it often does, and the money was taking from a money market or ultra-low risk bond fund, where are you better served?  It is a question worth understanding the answer!); (10) Execute Powers of Attorney (Prof Note: I have been ranting about this for years.  However, it is NOT enough to have PoAs executed.  My bank still will NOT recognize my financial power of attorney drafted by K&L Gates!  It is not always textbook.  The bank insists that I execute there PoA…ridiculous!); (11) Create an Estate Plan (Prof Note: YES!); (12) Don’t forget beneficiary designations (Prof Note: You need to consider if the recipient can handle the inflow of cash…very important); (13) Retirees value people over activities (Prof Note: I am truly blessed with some of the best people in life…thank you all!); (14) Don’t sacrifice your retirement savings to pay for college (Prof Note: Remember children have a great ability to pay it back.  Also, in your estate plan you can leave wealth to your children to pay off their debt or reimburse them for having to pay for it initially); (15) Don’t assume everything will go right (Prof Note: Little Willy is down AGAIN!  I continue to get water in the fuel.  Never did I think I would become a Little Willy expert but I am getting there.); (16) You might not spend less in retirement (Prof Note: What kind of life do you want to live in retirement.  I still remember a story on Nevis.  A hard-charging expat female came ramming through the gates at Cat Ghaut.  Trust me, as a mischievous redhead, I know when an older adult woman is angry and this one was furious.  I was ready!  Turns out the ire was not directed at me, thank god, and she was furious at a local bank as she had not gotten a check and was unable to pay her contractors in a few days.  Never could she have expected that.  I offered to help, she accepted and paid me back immediately when check cleared.  Moral of story: the unexpected does happen.); (17) Talk to your children about money (Prof Note: Or possibly take a class together.  I am amazed at how few people truly understand money); (18) Life a healthy lifestyle (Prof Note: just back in from a 4.5 mile jog.  However, sadly, scale said I was up!); (19) Income Roth accounts in retirement planning; (20) Personal connections matter more as you get older (Prof Note: Friends, especially long-term friends, are the best.  I just had dinner with Margot R from Hopkins.  We talked all about Mike A!); (21) Don’t ignore investment fees (Prof Note: Do not ignore fees of any kind!); (22) Take advantage of catch-up contributions; (23) Gray divorce is increasing (Prof Note: Divorce among people age 50 and older increased by over 100.0-% between 1990 and 2015); (24) Consider long-term care policies; (25) Social Security benefits might be taxable; (26) Keep your home in good condition (Prof Note: All my home renovations on Nevis are being completed in stone.  Yes, it absolutely looks wonderful but also my motto: one and done!); (27) Your ability to borrow is based on income (Prof Note: Not quite true but largely so.  I get so angry over this!  Income does not equal cash.  Also, higher income equals higher taxes.  So it is best to target optimal income.  This is a moving target largely not discussed in the classroom but lived day-to-day by many!); (28) Health savings accounts have multiple uses; (29) Don’t try to time the market (Prof Note: While I absolutely agree with this for the average investor, I will admit my powder is dry at the moment); (30) People will ask you for money (Prof Note: Sadly, this is VERY true!  The main reason for the P(Gain) Foundation is absolutely to give back.  However, an added benefit is that it shields me from individual support requests.); (31) You might still have student loan debt; (32) Be prepared for changes