August 2004 Newsletter
Issue Eight, Volume Five

HOPE IS ON THE WAY

By Mike Gasior

I have a difficult time explaining why John Edwards chorus chant from the Democratic National Convention is still ringing in my ears, but on occasion certain catch phrases just stick with me. For example, I am still getting mileage out of the "if it doesn't fit, you must acquit" line from the OJ trial. While I honestly don't remember much else from the largely forgettable speech, I decided to take the chorus as a suggestion to look for something cheerful and hopeful to share with everyone during the waning moments of summer.

The video commentary has also been added to the website and I would really love for you to visit to take a look. I decided to use this month to unveil my brand new set of indicators relating to stock market valuation, which is designed to make it very easy for anyone to determine the level of over or under valuation for stocks. And perhaps even more important, I will actually share with everyone the secret of a successful life and a fun, travel tip. I can't believe I give all this away for free, but please remember that "hope is on the way" from your pal Mike. And by the way; my current level is "taupe".

You can view both high-speed and dial-up versions of the commentary at the homepage of:

http://www.afs-seminars.com

GRAND CAYMAN AND BERMUDA SEMINARS ALMOST SOLD-OUT

I was optimistic that our brand new program "Providing Services to the Hedge Fund Industry" would be timely and popular, but we are now experiencing the downside to popularity with both our Cayman and Bermuda sessions being nearly sold-out. There are still limited slots available in both, and we are working with the respective hotels to find a larger room.

If you would like to review the sessions or register, please visit the following links:

Grand Cayman - September 27, 28 and 29, 2004 http://www.afs-seminars.com/cayman.html

Bermuda - October 12, 13 and 14, 2004 http://www.afs-seminars.com/bermuda.html

HOPE HAS BEEN ON THE WAY FOR QUITE A WHILE

In the middle of this vitriolic political season, the politicians would have us believing that we are witness to the steep decline of civilization. According to the speeches that I have been listening to, it seems though American's incomes make it impossible to make ends meet, afford health care, go to college, protect themselves from terrorism or retire in comfort. Youth violence, drug use and teen pregnancy are rampant. Global overpopulation, poverty and starvation are at epidemic levels. Or is the truth actually something else?

According to various studies and surveys released this year that I have had the chance to read, the situation facing people today is quite different than the one painted by political speeches. The truth is simply this:

In the course of human existence, there has never been a better time to be alive than right now. Period. Paragraph.

Rather than try to illustrate this statement with hyperbole and rhetoric, let me take my usual approach of sharing the facts with you.

--In 1900 world life expectancy was 30 years old. Today it is 67 years.

--In 1970, 35% of the people living in developing countries were starving. By 1996 that number had shrunk to 18% and the United Nations forecasts that the figure will fall to 12% by the year 2010.

--Also according the United Nations, we have reduced global poverty more in the last 50 years than in the previous 500 years.

--Life expectancy in the U.S. has increased significantly in all socio-economic categories, with black men making the largest gain from 60 years old in 1970 to 68.2 years old in 2000.

--Despite all the publicity about the failure of public education in the U.S., Americans have never been better educated. In 1960 only 7.7% of the population held college degrees. Today, 25% of the populations over 25 years old have earned their degree.

--Partially due to more women entering the workforce, real household incomes rose dramatically between 1980 and 2000. Median income for white families rose 19% during that period, and 39% for black families.

--Even with all the class warfare rhetoric in this years campaign, the fact is that 12.1% of American families are below the poverty line. In 1960 that number was 22.2%.

--Figures released by the FBI show the murder rate in the U.S. at 5.5 homicides per 100,000, down from a rate of 10.2 in 1980, almost a 50% decline in less than 25 years.

--Rates of teen suicide, teen pregnancy and youth violence have all shown steady decline during the past decade.

Overall, people are living longer, are safer, have more money to spend and having more fun then ever before.

So turn off the news and the politicians and go enjoy yourself. Life has never been better.

AN ECONOMIC BUMMER

On the heels of my upbeat assessment of life today, there seems there might be truth many of us already knew about the job market. That it might be more important who you know, than what you know.

My background and basis for looking at many things is economics, and I have been often dismissed when presenting positions or ideas that might suggest that markets are inefficient.

But someone much brighter than me is suggesting, that in the employment markets, efficiency may not rule the day. Former Stanford professor, and Nobel laureate, Kenneth J. Arrow is now suggesting precisely that.

If the job market were truly efficient, than workers of similar skill and experience would earn very close to the same amount. Casual observation by anyone knows that this is not the case.

Some things are obvious and measurable, such as education, age, experience and intelligence, but these things only explain about 50% of the discrepancy in paychecks claims Dr. Arrow. To explain the remaining amount, one must look at the social and professional connections of the individuals.

For example, reading a resume gives a very shallow and limited view of an applicant's abilities. However, if the applicant used to work with a current employee of ours, or knows the applicant through a social, religious or other setting, we might be better able to judge other personal traits that a resume does not convey. These personal things might be dependability, teamwork or a person's sense of humor and they may cause a company to more aggressively pursue the applicant and pay more than it might for an unknown person. So, simply stated, the more connections you have to more companies through acquaintances, the more you can theoretically expect to earn.

Dr. Arrow, along with former Stanford colleague Ron Borzekowki created a mathematical model that tries to estimate how much these company connections might mean to ones earning potential.

In their model, a person having only one corporate connection had an expected income of $19,570. A person having connections with five companies would be expected to earn $30,410.

While none of this information is probably striking you as "news", it once again demonstrates the constant attempt by economists, mathematicians and scientists to explain everyday phenomenon. What might be the important lesson of this latest research is how their findings might be able to help individuals better utilize resources when looking for a new job. And it might also help other governmental and social agencies better serve the people they seek to help.

ONE WARNING ON SOCIAL SECURITY

I've probably written too much about Social Security over the past five years, including just a few months ago, but now I find it back in the news thanks to Chairman Greenspan making comments out in Wyoming.

The fact of the matter is that neither presidential candidate, nor ANY of the people running for the House or Senate have made an earnest suggestion on how to fix the Social Security system. They are, by and large, an enormous group of cowards who are doing great harm to this important safety net by shirking responsibility they should be shouldering onto some future group of politicians who will be handed this gigantic bag of poop.

President Bush started talking about "personal retirement accounts" four years ago when he ran the first time, where workers would put part of their Social Security contribution into an IRA type account. This proposal, although interesting and fun for Wall Street to consider, doesn't fix anything currently wrong with the program and will likely never happen. It does, however, serve as a wonderful distraction and makes it appear outwardly that he has a plan for the problem that is digestible by voters who have no idea what the answer is anyway.

I have become increasingly disgusted with John Kerry because he will say how he plans to solve the health care crisis, get the U.S. out of Iraq, fight a more "sensitive" war on terror, help with college tuition, as well as many other issues facing Americans. The only thing missing from any of these ideas are the actual plans on how it is going to happen. The campaign he is running reminds me a little too much of Richard Nixon's campaign in 1968 where he claimed to have a plan to get us out of Vietnam, but he couldn't tell voters how he would do it. Instead we were asked to "trust him". Well, we know how that situation played out.

In his speech just days ago in Jackson Hole, Wyoming, Chairman Greenspan simply stated that the U.S. Government shouldn't keep lying to Americans regarding how much they should expect to receive from Social Security and that telling them the truth would at least allow them to prepare better for taking that responsibility on themselves. Here is the exact text of what he said:

"If we have promised more than our economy has the ability to deliver, ... as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels," he said. "If we delay, the adjustments could be abrupt and painful."

Here is the warning I wanted to extend to you in this regard. In a recent speech in Ohio, and also on the Kerry/Edwards website, he might have made his intentions fairly clear, and I have been very surprised that the mainstream media has not jumped all over this statement.

Senator Kerry stated multiple times, in a variety of places that he would consider "making sure that high-income beneficiaries don't get more out than they pay in" in taxes during their working years.

That statement would mean cutting Social Security benefits for that group by 80%.

And don't go thinking that you might not be part of that group either.

Let's say that are someone who earns enough to pay in the maximum allowable amount, which is currently a gross income of $87,900 and is regularly adjusted. The Social Security tax rate is currently 6.2% according to Internal Revenue Service Circular SS, so you would have paid $5,449.80 into the system for this year. Let us also say that you are turning 65 years old this year and have worked since you were 21 years old and have paid the maximum into Social Security during your working life. You have paid a grand total of about $82,066 into the program.

According to the Social Security Administration, someone like you would begin receiving annual benefits of $22,000, or $1,833 per month. Not necessarily a life of luxury, but at least something for your 43 years of hard work. With an annual 2% CPI inflation rate, you'll end up getting about $440,000 over the remainder of your life.

Well, unfortunately, someone reaching 65 years old in 2004 can be expected to live until they are 82 years old. What is unfortunate isn't you living to be 82, but that means you'll be on Social Security a total of 17 years.

Now you can do the math yourself. You paid a total of $82,066 into the system so divide it by the 17 years you are going to live. Now your total annual benefit is about $4,800, or a total of $400 per month.

Clearly, I am totally biased on this issue (and very willing to admit it) as someone who has paid the maximum into the system his entire working life and will probably do so the remainder of my working years, only to potentially get robbed later. I don't like the idea nor do I agree with it in any aspect, but I did warn you.

The solution is simple if addressed soon. Raise the retirement age somewhat since Americans are living longer, and perhaps the wheels stay on a little longer. If not, then brace ourselves for the "abrupt and painful" realities forecast by Chairman Greenspan.

THE "DREAM TEAM"

First and foremost, let's put that name away until the United States once again assembles a group of 11 NBA players who are all first-ballot Hall of Famers, with the 12th member being one of the best college players ever.

I will never admit to actually rooting against the U.S. men's basketball team, because I didn't and wouldn't. There is, however, a somewhat smug satisfaction to witnessing something I already knew was true; that the current crop of NBA "stars" are selfish showboats, unskilled in the fundamentals and disciplines of basketball. With perhaps the exception of Tim Duncan and Emeka Okafer, the remaining members of the team don't know as much about the science of basketball COMBINED than a Larry Bird. Michael Jordan has forgotten more about the game than the assemblage of them will ever know.

If you had approached me even four years ago and wanted to bet me that a team of NBA starters would ever be beaten by Italy, Puerto Rico, Lithuania or Argentina I would have certainly wagered against it. If presented with the prospect of the U.S. men losing to all four within a month and I would have bet the ranch that it could not happen. Clearly I would be a poor man today.

In a perfect world, the beaten American team will take this experience as a lesson learned about the value of teamwork, hard work and a good attitude, and use it to leverage their enormous talent and ensure future victories in life. In a less than perfect world, there will be a sea of excuses and finger pointing in an effort to explain how they managed to get their clocks cleaned by four teams who didn't have a single player who was familiar to even a casual NBA fan like myself. This will be unfortunate, but probable, and the U.S. men may find themselves at the beginning of a long drought in Olympic basketball.

The only thing that was clear to me as I watched the games get played while shaking my head in disbelief much of the time. This was not any sort of upset. The U.S. simply didn't have the best team in the tournament. When Tim Duncan was sitting on the bench during a lot of the game versus Argentina, it was difficult to discern any substantial difference in the talent of the two teams. Now I dare you to name a single member of that Argentina team, or guess if any of them make over a million dollars a year to play basketball. My guess would be that Alan Iverson will make more playing this season than the entire Argentina team has made playing basketball in their whole careers and that you couldn't name anybody.

YOUR MONTHLY BRAIN TEASER

This month I have chosen a brain teaser that actually conforms to the theme of my monthly newsletter, and reveals an astonishing fact I learned myself only days ago. There is no tricky math to be done, nor do you need to worry about the relationships of any group of people. Actually, the question is extremely straightforward.

Here is this month's brainteaser:

"Measured by assets under management, what is the world's largest financial institution?"

I fancy myself pretty darn smart about such matters and the answer was truthfully astonishing to me. You can view the answer at:

http://www.afs-seminars.com/brainteaser_Aug2004.html

Many, MANY of you wrote to let me know that the answer I had posted for last month's brain teaser was actually off by 4/100's of a percent. The funny thing is that the problem resulted from a typing error on my part when I put the question into the newsletter. I was SUPPOSED to type that the room numbers started with 101 and by mistake I typed 100. This resulted in the answer I posted being wrong, and I caught the mistake after the newsletter has already been sent out.

As a social/psychological experiment, I chose not to try and remedy the situation after the fact, and instead keep track of how many people would feel compelled to write me and tell me I was wrong. Here are the statistics of this highly, unscientific experiment:

--477 people wrote to point out that my answer was wrong by .0004.

--Of the 477 people, 401 included some sort of an apology for writing me to tell me so ("Mike, I'm sorry for having to point out....")

--Of the 401 people who felt the need to apologize for being so particular, 255 felt the need to use their profession as the reason for the apology.

--Of the 255, there were 199 who explained they were an accountant, and there 44 who said they were an actuary. ("I'm sorry for being so anal Mike, but as a CPA I just can't let the error go by me....").

So the answer I gave on the website was that you had a 20% chance. However, due to my typing mistake, your TRUE odds were 19.96%. Thank you to everyone who wrote to point out the mistake. At least I know there are a few people who read this thing all the way to the bottom.

http://www.afs-seminars.com

Copyright 2004, Michael Gasior. All Rights Reserved.

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