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First they came for the communists,
and I didn't speak out because I wasn't a communist.
Then they came for the trade unionists,
and I didn't speak out because I wasn't a trade unionist.
Then they came for the Jews,
and I didn't speak out because I wasn't a Jew.
Then they came for me
and there was no one left to speak out for me.”

http://en.wikipedia.org/wiki/First_they_came%E2%80%A6

For a county like ours that scoffs at the Old World and its rigid social classes, ours is no less so. Prompted by Buffet’s disingenuous claim that “he pays less taxes than his secretary”, Obam has launched a vicious campaign of class warfare against the “rich”. When/if he does succeed in raising taxes on those making a million or more per year, what do you think will be his next step (or that of those who succeed him)? Will “rich” be refined as “those making more than $250,000 per year”? Wait, that’s something he has already proposed, right? My purpose in raising this topic isn’t “politics” in the distorted sense in which it has been “defined” in another, entirely ignorable forum, but politics as a serious article proposes it could be understood that John Maudlin is hosting on one of his websites, namely, the process by which polices could be decided upon by contesting parties to the discussion. http://www.investorsinsight.com/blogs/john_mauldins_outside_...

As “fixed-income” investors, we are principally bond-holders and, as bond-holders, we typically carry larger-sized accounts than our equity counter-parts. Already we are disadvantaged tax-wise by the bulk of our gains being taxed at ordinary-income rates, though not untypically a portion of them are tax-sheltered at the Federal and/or state level. For several years now, due to various events, interest-rates have been under attack by the Fed as their way to help a spendthrift Congress kick the can of fiscal responsibility down the road. So rather than explicitly raising taxes on us, the Fed has done two other things. They’ve lowered interest-rates while letting inflation rise. The net-effect has been a reduction of spendable income to us. We, turn, have typically responded in two ways. Within debt markets, we have accepted greater duration-risk and greater credit-risk, as Bill Gross of PIMCO has argued is one rational response for fixed-income investors faced with a projected, long period of low interest-rates. Another is to accept equity-risk, and FI investors have poured a lot of money into div-stocks (whose merits and downsides are a topic for another post). But the takeaway from either path (or others that might be proposed) is that two players are competing for the same resources and that the game could end well, or badly, for both of them depending on the compromises each is willing to make. But the most likely event will a single winner who is willing and able to deliver the more destructive threat or who can successfully defend against the worst threat the other player can bring.

Now, let’s go back to Buffet. Even though his effective tax rate might be the same as his secretary’s, he pays far more than she does for earning far more. Furthermore, his income (from all sources) is so far in excess of his needs, his effective tax-rate could be tripled (or quadrupled or quintupled) and he’d still not be materially affected. So what he is proposing is a game of financial chicken. He knows he can beggar his counter-parties in the “Let’s raise taxes on the rich game”, because he brings more chips to the table than anyone else. But where those who have more than others will lose is when they face opponents with more votes. It’s going to happen. That’s just the nature of mob-rule (-- err, democracy.) Them that control the ballot box can steal from those that don’t. But my intention isn’t to turn this post into a libertarian rant, but to ask

“What can we as fixed-income investors do to protect such wealth as we might already have gained?”

With the Fed promising to keep interest-rates low “for an extended period”, and with other forces in the world, such as China, acting to achieve the same effect, what might be a reasonable policy response for FI investors? Hunker down and wait it out? Take on increasing duration-risk and credit-risk? Take on equity-risk? I don’t know the answer, either. I don’t like what I see happening in markets (which are over-extended), nor in policy discussions (which are merely populist froth and not grounded in sound theory or verifiable facts). I do know, like deja vu, that I’ve seen this movie before, and it doesn’t end well. Though I have the resources to survive another ‘30’s style depression with much of my investment account still intact, it’s a challenge I’d rather avoid. But, meanwhile, tools have to be kept sharp and at the ready. So "practice, practice, practice" has been my mantra and policy response against the day when good investing skills might really be needed.
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