Bob Fitzwilson: 2012 is the “Most Difficult Year Ever” for End-of-Year Financial Planning
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Bob Fitzwilson: 2012 is the “Most Difficult Year Ever” for End-of-Year Financial Planning
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Chris Martenson: Welcome to another Peak Prosperity Podcast. I am your host, of course, Chris Martenson, and today we are pleased to welcome back Bob Fitzwilson, founder and managing partner of the Portola Group, one of the financial advisory groups that we endorse here at Peak Prosperity.
I have invited Bob to join us again to share his expertise on how the average investor can design a portfolio around the three Es identified in the Crash Course, something Bob calls the “sustainable portfolio.” As I mentioned in my prior podcast with Bob, there is a business relationship between his firm and Peak Prosperity, the details of which are clearly spelled out in the write-up accompanying this podcast (at the bottom). Bob, I am really excited to have you back on the program to discuss end-of-year planning, too.
Bob Fitzwilson: Thanks, Chris. I really appreciate the opportunity. This is probably the most difficult end-of-year planning I have ever seen in my career.
Chris Martenson: Yes, I certainly want to talk about that because I know that there are year-end tax and investment issues that always apply. We will get to those, but perhaps we should start with a potentially new and disruptive feature this year, which is a so-called Fiscal Cliff. Today in the Wall Street Journal, I was just reading an article discussing that some Congress people are already speculating that it might not be too bad if the issues are resolved by the end of January, meaning the Fiscal Cliff provisions will be triggered and then resolved by month end or something. What are your thoughts here?
Bob Fitzwilson: To me, what this is really about is the debt ceiling. The debt ceiling is really a spending ceiling. The spending ceiling is getting in the way of more spending. I think it really comes down to a lot of people believing that the only way to keep this thing going is to keep spending like crazy. So I think the Fiscal Cliff discussion is designed to scare people, and they should be scared into letting the debt – you know, there is talk of even not having a debt ceiling. Call me crazy, but I do not know how that works out. If you are in a family and one of the family members says they are just going to go out with a credit card and just run it up forever, I just do not think that works at the personal level. I do not see how we are going to do it at the government level.
Chris Martenson: It is certainly something – I think you are right. A debt ceiling is a spending ceiling, as it were, and many do argue that maybe we should just get rid of the debt ceiling. It gets heightened almost automatically anyway, but this year it has got a little extra political football wrapped up with it. That is interesting, but I think the larger issue is being skirted here, which is, how much is too much? That is one level on the spending issue, and then the second is, how many years of stimulus does it take before you say this really is not working?
Bob Fitzwilson: I know. I am kind of thankful that I was born in an era where you could have an honest discussion and talk about these things, but it is like people are not being honest about what this means. I saw one statistic that said even if you did away with all the tax bracket reductions that were instituted in the Bush era, it keeps the government running for eight and a half days. So it is almost embarrassing to have and listen to these discussions when they are talking about an issue that extends the government by eight and a half days. There was also a study done years ago that showed that government – regardless of the tax rates, the marginal tax rates – the government managed to collect around 20 percent. So for most of our history, we would still be talking about it and what the problem is.
The money, the whole tax collection process, to me, is really is a sock puppet. We are borrowing 40 percent of what we spend and there is sort of this charade where the Treasury sells bonds and the Fed buys them back. So there really is no governor anymore. The whole tax raising and budgeting issues to me just have become irrelevant, which is not a good thing.
Chris Martenson: No, it is not, and there is not a lot you and I can do about the spending except notice it and observe what the trends might imply for investing going forward, but how about the other side of this Fiscal Cliff, the tax hikes that might come in? They apply to investments, income, all kinds of things. What are your thoughts there?
Bob Fitzwilson: It is going to be a disaster. In California, we just got a little taste of it with the passage of Prop 30. It was retroactive to the first of January. I have seen some of the revised estimates of tax liabilities for a few clients, and I think people are just going to be dumbstruck by the extra amount of money they are going to owe. That is just at the state level. All of these entities are essentially broke, and not just domestic. It is international. I saw an article that a woman who was managing a portion or of all of the Greek pension funds just said that they had to drastically increase their contributions and they physically attacked her at the meeting. So there just is not money almost anywhere.
So taxes are going to have to go up. And in an ordinary world, there would not be the taxes, because history shows that if you really try to overtax, you get less taxes. But what is very dangerous is this dissociation between spending and tax revenue. At least in the United States, we have the mechanism to just create whatever spending we want through the printing presses. History is really clear that there is an end to that, and it is not pretty.
Chris Martenson: Right. And here we are, as you mentioned, spending – I think 40 cents out of every dollar spent by the government right now is borrowed. Of course, it is just round-tripped back through the Federal Reserve. This is just, to me, completely shocking. If somebody five years ago told me, hey, Chris, in five years what is going to happen in 2013 is the Fed is going to print as much money in that year as had been generated during the first 240 years of our country’s history…what do you think? I would say you would be nuts. Not just nuts that such a crazy thought would be entertained, but that the dollar would be relatively stable and all of the asset markets would be relatively stable and everybody would just sort of be walking around investing and keeping their assets parked, as if this were somehow normal or unavoidable or everybody is doing it. I do not know. It just feels – it is surreal. I am going to use that word.
Bob Fitzwilson: I like history, and I was noodling this morning about these grand ideas that show up throughout history. If you are on the opposite of the idea, you think it is almost cancerous. So if you were King George and saw this founding of the Republic, you would have viewed that as a metastasizing cancer, and probably the people who had been in power up to that point saw it in that fashion. It was not a good 100 or 200 years for the kings and queens. So what we have now is this spreading belief that money is free. People do not know where it comes from. It just comes from the printing press. So it is like a cancer; it is metastasizing all over the planet. There is probably not a lot that we can do to stop it. It just requires, unfortunately, pain and suffering at the end. For individuals, we are just people. There is nothing we can do. We can only do things at the family level or at the community level. So I think that is what people need to focus on is just make a list of the uncertainties and the kinds of things that they have the capability to do and just tick them off one at a time and resolve whatever issues you can and then just hope for the best.
Chris Martenson: All right, so here we are facing the Fiscal Cliff as a first consideration. What are you doing to position for that right now?
Bob Fitzwilson: From a portfolio standpoint, it is a heavy emphasis on real assets, particularly gold and silver. As you know, we also like energy. We like food-related issues, water, things like that, the basics. From a tax planning standpoint, there are a number of issues that need to be addressed. Time is short. Some are state tax issues. Some are income tax issues. Some are retirement issues. We could talk about those.
Chris Martenson: All right, let’s do that. What is coming up? Where would you like to start on that list?
Bob Fitzwilson: The large number issue – I do not know how big it is. I mean, people are facing this, but there is this expiration of this 5,120,000 lifetime exemption.
Chris Martenson: For state taxes?
Bob Fitzwilson: For state taxes. And it is going to drop back under what people are talking about to a million dollars, I believe, next year. So for people who have those kinds of assets, there is this mathematical decision they are going to face about what to do, and it does not have to be the full five million each. It is whatever excess net worth that they would want to pass down that they would have to deal with. So one decision is, if you can do it, do you want to do it? That gets into the issues. If you gift these kinds of funds to your kids, for example, the question is, do you want to give them that kind of money? I have had these discussions where somebody has got a young child and they can afford to give a full ten million plus to their kids, but you do not know how your kids are going to grow up and what kind of people that are going to be. Oftentimes having that kind of money, let alone the appreciation on it, can cause problems – if not for them, for their spouses or their friends. So people have got until the end of the month to meet with their estate planning attorneys and talk about that.
Then the traditional forms of tax planning or issues: Do you accelerate or you defer income, and do you accelerate or defer deductions? Nobody has any idea about what the tax rates are going to look like for next year, so you kind of need to make a decision under extreme uncertainty. Traditionally what you would do is you would defer income and accelerate deductions, but if tax rates are going to go up a lot, then it may be better to accelerate the income and defer the deductions when the rates are probably going to be a lot higher. One area for that is in capital gains; if you believe what they are saying and you just look at the arithmetic of the deficit, these things are going to have to rise. So a lot of people are just booking the capital gains, and I would argue even for short-term capital gains because the tax rates have to go up dramatically. So that is an issue that people need to look at – and again, we only have until the end of the month to make that decision.
You can mitigate that by gifting to charity. You can give a long-term appreciated stock to charity if that is something that is – not everybody wants to do that, but if you are charitably minded that is an option. There are other vehicles, such as a charitable or major trust, that allow for large amount of gift and can generate a tax deduction and distributable – in effect – income from doing so. That is another option.
In general with estate planning there are two issues: There are fees, and there are taxes. The fees come from the resolution of estate; a lot of people call probate fees. If you think of sort of a T account on the right hand side, the fee question, the primary way to deal with it is common sense, like keeping well-kept records. There is a thing called a “living trust” that is also called a “revocable trust” and “inter vivos trust” and all of that. It is a living will. That is something people should talk to their attorney about, because it is relatively straightforward. It basically just organizes things and minimizes the transaction costs of settling an estate. Sometimes people confuse that with the tax issues, and my understanding is that the same tax issues can be dealt with in a regular Will and it does not have to be in the revocable trust or inter vivo trust. The main purpose of it is to minimize the cost.
When you go to the other side of the ledger, and that is taxes, it is a really simple question: Do I own it? Most estate planning techniques are about not owning things; gifting them. There are all kinds of techniques, and a sharp estate planning attorney can virtually give away your entire estate, and so the first place to start is, do you have enough money? We talked about that in a prior podcast; we have proprietary technology that figures out how much is enough, and if you do not have enough or you are just at the level where you have enough then you probably, regardless of all of these topics and issues, you probably should not make the gifting. But if there is an excess, then the question is, you have the ability to gift, but do you want to give it, and how much? Most of estate planning is about giving away things in various formats.
Chris Martenson: That all sounds very reasonable. I am sure that anybody who is looking at this pretty steep potential fall-off from five million to one million has got to be thinking about this. Because it turns out, in today’s world, it is not that difficult to accumulate a million or more in assets, particularly for people who own small businesses or business of any form. How do you advise people who have assets that are not as liquid? Say, I have got a family farm, or something like that, and it is over a million, clearly, but there is not an easy way to parcel that off and hand it out to children. How do you handle something like that?
Bob Fitzwilson: Well, there is a technique called the “family limited partnership.” In the right circumstances and properly done it can accomplish a lot of things. It goes back to the early days of limited partnerships, from what I understand. People invested in real estate partnerships, and when they passed away, they owned a percentage of a big partnership. The IRS position was that if the person owned 1%, he would take the value of the real estate times one percent and that is the value of the estate. The people on the other side said no, it is 1% of the partnership, but it is illiquid. So there has been a battle over this for probably 30 years, but I think done properly, it does work.
What you get is, you not only transfer in a variety of assets, and illiquid real estate is a good thing to put in there, and you wind up getting a discount. So you are not only able to give in X amount of dollars, but you are able to get more money, more value at least, because the assets going in are considered to have a discount. It also allows for control. So, the parents, they can set up a family limited partnership transfer in illiquid assets, and I think they can still own as little as 1% but still maintain control of how it is managed and all of this. So a family limited partnership can, in the right circumstances, be great and accomplish a lot of things, but it cannot be abusive, of course. People have gotten in trouble where they try to take ridiculous discounts and things like that, and that is not going to fly, but properly done it is a great vehicle.
Chris Martenson: All right, on a more mundane side of investing, what are other considerations are usual for this time of year?
Bob Fitzwilson: Well, we are getting lots of calls about the retirement assets. It is now on the table, at least behind the curtains, that there are proposals to change things around dramatically. And some are as extreme as forcing people to exchange their retirement assets for a new form of retirement, the government-guaranteed annuity. So everything is up in the air. One of the issues is, do you even fund these things anymore? I had an interesting conversation with a client this week about this. He is putting a small amount of money to fund this year’s contribution to his SEP IRA. It was his words not mine, but he said I am 70 years old. In 30 years I will be gone, so I would rather have the tax savings now, and I probably will not spend what I have in there. I thought about it, and if you already have a retirement plan and it is a large amount, then whatever is going to come down the pipe next year, it is going to affect the bulk of it anyway, and so the current contribution is not that great.
If you do not have a large amount, or you are not at his age, then you have to consider whether you want to defer income at low rates and then have it come back at higher rates, let alone being forced to convert it into a new government annuity. So there is some flexibility as to when it has to be paid. What we concluded with his accountant is the accountant said that he did not have to make the full contribution until he filed the return, so he was going to put in a small amount and then gross it up once the final number was in.
Another thing is Roth conversions. Booking the income now – meaning paying the tax up front – given the rules that we understand now, it means you will not get the higher rates down the road. All of these things – that is why I said it was the most difficult year ever, as basically Congress can do anything, and so there is almost no rule that they cannot change. So the best thing you can do where you can handle it is to generate some certainty by booking the taxes and paying it.
I mentioned last time that the healthy way to look at this is, you really are in partnership with the government when you fund these retirement plans. And it is like having a business partner who has a percentage of the account but also has the right to change the percentage at any time they want. So at this time it may be best just to cash out with your partner and say thank you very much. It is extreme uncertainty everywhere you look.
I used to program the tax code for almost 20 years, and it is not a logical thing. It is not an architected program, and so you cannot apply logic. The way to do any kind of tax or estate planning is you need to say, if I do not do something, here is the effect, and if I do something, here is the effect and then the difference between the two is the marginal effect on whatever you are considering doing, both income and deductions. You cannot approach it from a high-level conceptual level. You have to sit down with your accountant and your lawyer and you have to work through the numbers specific to your situation and then make a tough decision.
Chris Martenson: I know there is never very much certainty when it comes to taxes. However, given where we started this conversation, around debt and spending at the federal level that the seeming inability of our crop of leadership – both at the state levels in many states and at the federal level – to really reign in prior expectations and spending habits and all of that, it seems like the odds of the tax code being amended to increase tax rates and overall fees, burdens, levies, surcharges, excise taxes, whatever they are calling these things in the future, it seems like the chance of those going up is much, much higher than the chance of them remaining flat or going down. Would you concur?
Bob Fitzwilson: I think it was Friedman that said taxes are what the government spends. So that is why it is sad, but when I look at all of these discussions about marginal brackets and fiscal cliffs, they are all just sock puppets. They are diversions from what is really happening. What is really happening is, this transition from actually collecting taxes and having budgets to just we will print whatever it takes.
There is a book about France’s experience called Fiat Money. In France, it was the second time they blew up their financial system in the late 1700s, and you hear the politicians made these comments that if we stop, we have to keep printing. And I think the German politician said at the end of World War I that we have to print, otherwise the thing will collapse. Hello, we are doing the same thing, and it does not work long term. So for me, we have to play the game and play along and we have to pay our taxes and deal with whatever degrees of freedom we have, but the big picture issue is that we have transitioned from money and taxes to electrons and printing.
Chris Martenson: It is the same thing however we term it. However, I think you just made a great point, which is that once you begin down the road of printing – I think I could agree with the assessment of the French in the late 1700s and the Germans in the early 1900s – it is the same as the situation we have today, which is, once you start down that road of printing, it is true, if you stop, there is going to be an extraordinary amount of pain, if not a collapse of a sort or whatever term we are going to use. But I think the Fed is really boxed in, and they are going to have to keep doing what they are doing, and they have not disappointed me in four, what are we going on, five years of printing now. It is just remarkable. I do not see any way out of this. So it seems to me that printing is part of it, and governments are going to need more and more revenue, as well because that is just the nature of the beast.
Bob Fitzwilson: You see, I actually think that that is the plan. I think there is a group of people who have run the numbers, too. They are not stupid, and there are not any multi-hundreds if trillions of dollars to pay for all of these promises. I do believe that a new currency is in our future, and so the spending is a way to accelerate the end of the current monetary scene and do a reboot. Whenever somebody will say well, we need to spend X number of billions or trillions, they get upset about that. To me, they are getting upset at what in aggregate is the plan. They have to push the monetary system over the cliff – that is what is going over the cliff – so that they can do a restart probably with at least a commodity-based currency, perhaps with just traditional gold.
The vast majority of people around the planet have no money, so I expect sometime in the future there will be a press conference where they will say things like, we are embarrassed about the decline in the paper money and we are going back to sound currency and 99 percent of the people on the planet are going to say that sounds really good. So the people who are exposed are the ones who have accumulated wealth and so there is a short time left. As we discussed before, you have to take care of your health and your family, food, your wellbeing, and all of that stuff, but if you have accumulated wealth beyond that, you have to start protecting it in ways against that press conference, which I believe is in our future.
Chris Martenson: Hard to predict when, but I do not know. History does not suggest that there is anything else besides that press conference in our future. I cannot think of a single example where a country went down this path of printing and came out of it with its currency sound and intact.
Bob Fitzwilson: In your Madrid speech, you talked about the one country that climbed about of a pit somewhat similar, but I think we are going to be in a far worse pit than even those people. To me it is just arithmetic. I mean if we are all adults about this, there is no resolution other than we need to do a reboot.
Chris Martenson: That one example was England, and they had a sound currency at that point in time and they stayed on it. They actually just went ahead and paid their debts back. They got into a debt hole that was about 260% debt-to-GDP. Of course, our own is allegedly only at 100 % here in the U.S. right now, maybe 80 if you only count the debt held by the public, but when you include all the entitlements and whatnot, the numbers range anywhere from 450% to 1,100% of GDP. So those numbers have never been recovered from things like that.
You and I had a really interesting discussion the other day where you were asking me about my near-term thoughts on gold and silver, which is one way, I think, to avoid a reboot of the system moment. I was really intrigued with your thoughts there as well. Maybe we could recreate that conversation here for our listeners because I think it was pretty instructive. Share your thoughts why you think precious metals might be poised for a run from here.
Bob Fitzwilson: So we went through this historic period where we have gotten away from gold and silver. Silver is a wonderful metal that has had burgeoning uses, and it tends to be used in small quantities. And so it is out there somewhere in the environment, but we have pretty much used all of the above-ground stocks that we have accumulated over time. From what I read, the estimate is about a billion ounces available and with the price of silver at $32, $33, any large entity if they could get it could swallow up the entire supply at a time where there are medical uses, solar uses, all of those. So forgetting all of the money-printing aspects; I just think that long term, the supply and demand of silver is phenomenal.
As far as gold, I believe that most of the gold did go East, like it has done throughout human history, and so we are in this period where the central banks are realizing that they need to have this wonderful asset that has proved for 6000 years that it can hold its value, but it takes time to mine it and accumulate it. I think we are in this phase where I do not expect the price to skyrocket in the short term, because I think it is in the interests of powerful people to keep the price right where it is while the rebuild their stocks that they have been giving up over the last 20 or 30 years.
We also talked about the miners, and the miners are in a tough spot. Not only are their costs going up, but the people that run the countries in which they have their mines, they are a lot more sophisticated than they used to me. So not only energy and labor costs are going up, but just the extraction-related costs are going up. With the price in this trading range, it is squeezing them. So I think for pure gold and silver investors and for investors in the miners, it could be a wait. But ultimately my belief is that once everybody has got the restored levels of metals, then everybody is going to want the price to go up. And so there will come a time when instead of being in a trading range, everybody is going to be on one side of the table, all scrambling to try to buy this stuff. So there will be a rocket ship moment, but it is anyone’s guess as to when that is going to happen.
Chris Martenson: You and I, when we were talking, this was three days ago, compared to when we recorded this podcast. At that time, I noted the Commitments of Traders Report to the CBOT showed that there was a record of short positions in the commercials, and those are always associated with a downward price spike in metals going forward. Sure enough, just a couple days later, there was a raid that started on gold that started at 12:45 a.m. in the morning, classic time for a big trader to unwind a position if you wanted to use CNBC’s explanation for that move, but the people who I know who have exchange data looked at that and said, yeah, that was just somebody coming in and just dumping with an idea of pushing the price around. Thin market and this is just a game that has been going on. I do not really think anymore that gold or silver are singled out.
I see the same behavior in the oil markets. It happens in grains. It happens in certain equity issues. It is just sort of the game that we have going on. I have had this conversation before where you are of the mind that they can go ahead and play those games. What they do is they actually create opportunities for people who are aware of the underlying fundamental trends. Because these price movements that I just noted, they do not have any to do with supply and demand on the markets. They have to do with a trader’s book and how they are exposed, and can they make money by really dumping in the futures market but owning the other side of the trade in the options market or something like that.
At any rate, I truly that believe that, like you mentioned with silver, with only a billion ounces available, $32 billion total dollars’ worth out there, that is less than a month of Fed printing. It is an absolute bargain at this price given its utility and scarcity even now and increasing rarity as we go forward given mine yields, ore grades, things like that. So I am just of a mind that they can go ahead and play their games all they want and I will thank them for these wonderful low prices while I continue my own accumulation program.
Bob Fitzwilson: So two comments. One is that I was thinking about the holders, and it is only like one percent of the people own any gold and silver. I just had this image of animals in a cage in a zoo. So these gold and silver holders are in this cage, and the powers that be left to poke a stick in the cage to upset them, and the goal is to show the other animals not in the cage that they had better behave themselves or you could be in the cage, too. So people need to ignore the sticks coming through the cage. You just, as you said, treat it as opportunities.
The other thing is, in my mind, if I really step back and look at what they are doing, they are creating money out of nothing, and what they are doing is they are buying up all of the real assets. They are buying Treasurys; they are buying real estate; they are buying mortgages; they are buying stocks; they are buying metals. So what really is somewhat disturbing is that they are doing what we and your listeners should all be doing, which is getting rid of the stuff that they are printing and playing along with them and buying real assets. There is this term called “seniorage” – which is the right of kings to make money, print money – and seniorage now is 100 percent. My advice to everybody is do as they are doing, and do not hold the paper assets, and buy real assets along with them.
Chris Martenson: This is sort of the cornerstone of your sustainable portfolio idea, too, right? We mentioned the trends before. You have got food, water, energy, precious metals, real things, that this is an age where owning the real stuff makes a lot of sense. Just let me know if I have mischaracterized that at all, but for me the idea if we were printing trillions and trillions of dollars – on the one hand we have an economy that seems mired in low growth. I have my own reasons for why I think that is a permanent condition. And if that is true, when you are shoving markers against the economy – which is money – you are just shoving that just at extraordinary amounts of it into an economy, hoping the economy comes back to life. But the economy cannot come back to life; you are just creating the pressure points between which two things exist. There are fewer goods and services, and there is more money and money-like equivalents floating around. That is the world we live in. So far it has been fairly resistan
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