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Good Reading -- January 2010

Lots of good reading -- hope 2010 is off to a good start.


  1. "How Inflation Swindles the Equity Investor" -- a Buffett article (and plain text reprint) from 1977 that could be useful to review these days...

  2. "What Makes a Great Teacher" -- interesting article about Teach for America and measuring success in the classroom.

  3. Interview with Justin Fox, author of Myth of the Rational Market. I haven't read it yet but I plan to read it soon, hopefully. Great commentary on the (in)efficiency of markets, value investing, the overallocation of resources to Wall Street, academia, and more. Interview conducted by and courtesy of Miguel Barbosa and his excellent blog, Simoleon Sense.

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  1. Berkshire Hathaway vs. the S&P 500 in the recently ended decade.

  2. Brief interview with Jack Bogle -- worthwhile commentary on a range of topics.

  3. Harsh Lessons We May Need to Learn Again -- Good points from Prof. Stiglitz.

  4. "Inefficient Markets Are Still Hard to Beat" -- Worthwhile read from Jason Zweig on the irrationality of markets and how (not) to beat them.

  5. "Obsession Beats Brains" -- Quick snippet on Warren Buffett's "obsession with obsession" and how he evaluates businesspeople.

  6. "Saving Mexico" -- not the most accurate title, since it's basically an economic analysis of the drug trade through Mexico into the U.S. But the article does lay out cogent and novel arguments for the legalization (as opposed to just the decriminalization) of marijuana, as well as easier access for cocaine entry into the U.S. via the Caribbean, as the only rational strategies in the United States' "war on drugs."

  7. "Rich Cling to Life to Beat Tax Man" -- Death and taxes now linked more than ever thanks to "Congressional malpractice." Truly a bizarre and macabre example of the unintended consequences of arbitrary and just plain stupid tax policies.

  8. Jobs data -- The first chart shows that health care, education, and the government added (a very few) jobs in the U.S. over the past decade; the rest of the economy shed jobs. The second chart shows the BLS projections for job growth by sector in the next decade, which is basically more of the same.

  9. For the majority of America the past 3-4 weeks have been abnormally cold. Global cooling? Global warming hitting some "Day After Tomorrow" reverse feedback loop? The answer is neither -- just a particularly strong Greenland blocking pattern. The atmosphere, not unlike the market, is a massively complex system, full of randonmess and things we don't (and maybe can't) fully understand. The one certainty is that there are very few certainties.

  10. Bernie Madoff cites Social Security as his inspiration...

One on One with Vanguard Mutual Fund Group Founder John Bogle

Tuesday, December 29, 2009

SUSIE GHARIB: While 2009 was a dismal year for the economy, the stock market spent much of it in rally mode. So what's in store for stock investors in the new year and where should they put their money? For some answers, we turned to legendary investor John Bogle, the founder of the Vanguard mutual fund group. I began by asking him for his market outlook for 2010.

JOHN "JACK" BOGLE, FOUNDER, THE VANGUARD GROUP: Susie honestly I don't do one-year market outlooks because the year is unpredictable. But I do in my new book do an outlook for the decade. And I believe that stocks will return something like 7 to 9 percent during the coming decade, because the dividend yield is 2 percent today, around 2 percent, a little above that and earnings growth should be around six. So that would give us an 8 percent business return to underpin the market. So I think that's a reasonable expectation for stocks in the coming decade whether they get any of that this coming year, who knows.

GHARIB: Jack, you mentioned your book, the 10th anniversary edition of "Common Sense on Mutual Funds." Did you make any changes in the book because of what happened during the financial crisis?

BOGLE: Very, very little. You could see the financial crisis coming. You could see that stocks were at unsustainable multiples at the beginning of the decade and you had to realize that the stock market creates no returns at all. It's business returns that count. So the stock market had greatly over done by having sharply rising price earnings multiples, sharply overdone what appeared to be wealth, but it turned out to be phantom wealth and we lost that phantom wealth during the past decade. That probably shouldn't be a plus or a minus in the coming decade. We're about where we should be I think.

GHARIB: People are now trying to assess because it's the beginning of the new year, of where to put their money. What's the best advice you can give individual investors?

BOGLE: Well, first a lot of negative advice. Don't put your money in last year's winners. Don't put your money in high cost funds. Remember in asset allocation that bonds are there to help you, although bond returns will be smaller than stock returns in the coming decade. They'll give you an element of stability. And just be careful and invest for the long term or put it another way, rely on the wisdom of long-term investing and forget the folly of short-term speculation because it's a loser's game.

GHARIB: One thing that we've seen, one trend that we've seen recently is individual investors are reluctant to put their money into stock equity funds. We've seen a lot of fund flows into bond funds, but not into stock funds. What do you think it's going to take to change that? What has to happen for investors to feel confident about putting money back into stocks?

BOGLE: Well, we've learned in this last cycle that investors are their own worst enemy. They look backward and say, well, bonds did better than stocks last year, so I'll put my money in bonds. So this year bonds probably account for 95, 90 percent of all the money flowing into mutual funds and when you get to that last 10 percent, more than all of it, there's international funds which are doing well this year and investors are really taking money out of U.S. funds this year. So I would regard that as investors are their own worst enemy as a sign that maybe international is getting overdone and U.S. markets are a little bit under valued.

GHARIB: There are some new products coming out that are hedge fund- like that are being offered to individual investors as a way to hedge against volatility. Do you think that's a good thing?

BOGLE: Well, these new hedge funds and Andy Lowe has one, Dr. Lowell up at MIT and at AQR has one and they call them the Boglization of the hedge fund industry. What they're doing is mimicking the returns on hedge funds, but doing so at a very, very low cost and so I applaud that development, even as I remain deeply skeptical of hedge funds, because a hedge fund is such a big category there are going to be some big winners and some big losers and honestly I don't know how to tell them apart in advance.

GHARIB: All right. Thank you for all of your good advice, Jack. Wish you a happy new year and hope to see new 2010. BOGLE: Same to you, Susie, thank you.

Harsh lessons we may need to learn again

By Joseph E. Stiglitz (China Daily)

The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity - costs that were unnecessarily high given that we should already have learned them.

The first lesson is that markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith's invisible hand often appeared invisible: it is not there. The bankers' pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well. It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks.

Under the threat of a collapse of the entire system, the safety net - intended to help unfortunate individuals meet the exigencies of life - was generously extended to commercial banks, then to investment banks, insurance firms, auto companies, even car-loan companies. Never has so much money been transferred from so many to so few.

We are accustomed to thinking of government transferring money from the well off to the poor. Here it was the poor and average transferring money to the rich. Already heavily burdened taxpayers saw their money - intended to help banks lend so that the economy could be revived - go to pay outsized bonuses and dividends. Dividends are supposed to be a share of profits; here it was simply a share of government largesse.

The justification was that bailing out the banks, however messily, would enable a resumption of lending. That has not happened. All that happened was that average taxpayers gave money to the very institutions that had been gouging them for years - through predatory lending, usurious credit-card interest rates, and non-transparent fees.

The bailout exposed deep hypocrisy all around. Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world's largest welfare program. Those who had argued for free market's virtue of "transparency" ended up creating financial systems so opaque that banks could not make sense of their own balance sheets. And then the government, too, was induced to engage in decreasingly transparent forms of bailout to cover up its largesse to the banks. Those who had argued for "accountability" and "responsibility" now sought debt forgiveness for the financial sector.

The second important lesson involves understanding why markets often do not work the way they are meant to. There are many reasons for market failures. In this case, too-big-to-fail financial institutions had perverse incentives: if they gambled and succeeded, they walked off with the profits; if they lost, the taxpayer would pay. Moreover, when information is imperfect, markets often do not work well - and information imperfections are central in finance. Externalities are pervasive: the failure of one bank imposed costs on others, and failures in the financial system imposed costs on taxpayers and workers all over the world.

The third lesson is that Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster. Other countries succumbed to the old orthodoxy pushed by the financial wizards who got us into this mess in the first place.

Whenever an economy goes into recession, deficits appear, as tax revenues fall faster than expenditures. The old orthodoxy held that one had to cut the deficit - raise taxes or cut expenditures - to "restore confidence." But those policies almost always reduced aggregate demand, pushed the economy into a deeper slump, and further undermined confidence - most recently when the International Monetary Fund insisted on them in East Asia in the 1990's.

The fourth lesson is that there is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked.

The fifth lesson is that not all innovation leads to a more efficient and productive economy - let alone a better society. Private incentives matter, and if they are not well aligned with social returns, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation. For example, while the benefits of many of the financial-engineering innovations of recent years are hard to prove, let alone quantify, the costs associated with them - both economic and social - are apparent and enormous.

Indeed, financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership - with the consequence that millions have lost their homes, and millions more are likely to do so. Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly.

We will soon find out whether we have learned the lessons of this crisis any better than we should have learned the same lessons from previous crises.

Regrettably, unless the United States and other advanced industrial countries make much greater progress on financial-sector reforms in 2010 we may find ourselves faced with another opportunity to learn them.

The author is an Economics Nobel laureate and university professor at Columbia University. He has many books, including Globalization and Its Discontents and The Roaring Nineties, to his credit. His latest book, Freefall, will be published in January.

Inefficient Markets Are Still Hard to Beat


Can't anyone here play this game?

With the market so erratic at pricing stocks, it is tempting to think you can do better.

Between the Dow Jones Industrial Average's record in October 2007 and the bear-market low in March 2009, Bank of America's stock fell 94%. Then, by year-end 2009, it went up 380%. It wasn't just financial stocks that acted like yo-yos: Over the same period, Alcoa's stock fell 87%, then more than tripled.

How can such crazy swings in price be "efficient"? As millions of smart buyers and sellers compete to maximize their wealth, they update stock prices with all the relevant information that's available. That's what an "efficient market" means. It presumes that the market price is the best estimate of a stock's intrinsic value, or what all its current and future cash flows are worth.

But the fact that the market price is the best available estimate doesn't mean that the market price is right.

In 1974, the great financial analyst Benjamin Graham wryly described the efficient-market hypothesis as a theory that "could have great practical importance if it coincided with reality." Mr. Graham marveled at how Avon Products, which traded at $140 a share in 1973, had sunk below $20 in 1974: "I deny emphatically that because the market has all the information it needs to establish a correct price the prices it actually registers are in fact correct."

Mr. Graham proposed that the price of every stock consists of two elements. One, "investment value," measures the worth of all the cash a company will generate now and in the future. The other, the "speculative element," is driven by sentiment and emotion: hope and greed and thrill-seeking in bull markets, fear and regret and revulsion in bear markets.

The market is quite efficient at processing the information that determines investment value. But predicting the shifting emotions of tens of millions of people is no easy task. So the speculative element in pricing is prone to huge and rapid swings that can swamp investment value.

Thus, it's important not to draw the wrong conclusions from the market's inefficiency. "The evidence does suggest that the market is not rational," says Meir Statman, a finance professor at Santa Clara University in California. "But watch out for the voice of the devil inside of you saying that therefore it must be easy to beat the market."

For one thing, hindsight blinds you to the truth. Last March, in the bowels of global financial panic, it was far from clear that Bank of America would survive and that the stock was dirt cheap.

The market had priced such companies as if they might go out of business because plenty of information suggested that was a possibility, and because fear was then so pervasive that optimism felt almost like a form of irrationality.

So, while it may seem obvious today that Bank of America is a survivor, most investors didn't think the market price for the stock was too cheap last March. As Prof. Statman puts it: "The market may be crazy, but that doesn't make you a psychiatrist."

Looking back at how cheap stocks got last spring, you may conclude that any idiot should have known to be buying them hand over fist. But mutual-fund investors sold out of stocks all year long; in March alone, at the very moment when stocks were cheapest, fund investors dumped $25 billion worth.

Furthermore, money managers chase whatever's hot and shun whatever's not. Those who are the best at this game attract more money in rising markets and lose fewer clients in falling markets, pushing prices further away from Mr. Graham's "investment value." These are the last people who will go against the grain to buy cheap stocks at the bottom.

In the short run, at least, the herd behavior of the pros makes it even harder for you to take a winning bet against the "speculative element" in a stock's price. It takes superhuman courage to buy into a hurricane of selling.

Finally, even money managers who can beat the market may leave clients lagging behind the market. Consider a fund manager who outperforms the averages by 2.5 percentage points annually, before expenses; that's a spectacular return. But his trading costs and management fees are likely to eat up at least 2.5 percentage points, leaving his clients no better off than if they had bought an index fund that simply mimics the returns of the overall market.

That's why, even after the crazy swings of the past decade, index funds still make the most sense for most investors. The market may be inefficient, but it remains close to invincible.

January 10, 2010

Warren Buffett: 'Obsession beats brains'

In this excerpt from Management Secrets, Mary Buffett and David Clark look at the investment guru’s obsession with ... obsession

WARREN BUFFETT said his prototype for occupational fervour is the Catholic tailor who used his small savings of many years to finance a pilgrimage to the Vatican. When he returned, his parish held a special meeting to get his first-hand account of the Pope. “Tell us,” said the eager faithful, “just what sort of fellow is he?” Our hero wasted no words. “He’s a 44 medium.”

In Buffett’s world the perfect manager is someone who gets up in the morning thinking about the business and at night is dreaming about the business. As he says: “Obsession is the price for perfection.” Buffett’s obsession led him to memorise the Moody’s stock manual. One of his favourite all-time investors was a guy with very little education who became so obsessed with water companies that he could tell how much money they made every time someone flushed the toilet. Guess what the guy made his millions investing in? Water companies, of course.

A simple question that Buffett uses to determine a manager’s passion is to find out about his early drive to be in business. He says we can tell more about how successful a manager is going to be by whether he or she had a lemonade stand as a child than by where he or she went to college. An early love of business equates later in life to being successful.

In Buffett’s world it is not how smart we are: it is how obsessed we are, how much we love what we are doing. If we are smart too, well, that is just the icing on an obsessively delicious cake.

Warren Buffett’s Management Secrets, by Mary Buffett and David Clark (Simon & Schuster), is available post-free for £13.49 from Books First on 0845 271 2135

Saving Mexico

To weaken the cartels, some argue the U.S. should legalize marijuana, let cocaine pass through the Caribbean and take the profit motive out of the drug trade


Mexico City

In the 40 years since U.S. President Richard Nixon declared a "war on drugs," the supply and use of drugs has not changed in any fundamental way. The only difference: a taxpayer bill of more than $1 trillion.

A senior Mexican official who has spent more than two decades helping fight the government's war on drugs summed up recently what he's learned from his long career: "This war is not winnable."

Associated Press

A man accused of involvement in a shooting of federal police officers was presented to the press at a news conference in Tijuana, Mexico, in October, holding an unloaded gun allegedly connected to the crime.

Just last week, Mexican Navy Special Forces swarmed a luxury apartment tower in a central city and gunned down Arturo Beltrán Leyva, a drug trafficker whose organization helped smuggle several billion dollars worth of cocaine and marijuana into the U.S. during the past decade, according to the Drug Enforcement Administration.

Within days of Mr. Beltrán Leyva's death, Mexican officials were already trying to guess which of his lieutenants would take his place. Almost no one expected the death of Mr. Beltrán Leyva to slow down the business of drug trafficking or the horrific drug-related violence in Mexico that has claimed around 15,000 lives in the past three years. On Monday, hit men gunned down several family members of a Mexican naval officer who had been killed in the Beltrán Leyva raid. Four people have been arrested in connection with the killing, though Mexican authorities say the hit men are still at large.

Growing numbers of Mexican and U.S. officials say—at least privately—that the biggest step in hurting the business operations of Mexican cartels would be simply to legalize their main product: marijuana. Long the world's most popular illegal drug, marijuana accounts for more than half the revenues of Mexican cartels.

"Economically, there is no argument or solution other than legalization, at least of marijuana," said the top Mexican official matter-of-factly. The official said such a move would likely shift marijuana production entirely to places like California, where the drug can be grown more efficiently and closer to consumers. "Mexico's objective should be to make the U.S. self-sufficient in marijuana," he added with a grin.

Culiacan, Sinoloa is the unofficial capital of Mexico's drug-trafficking business. Given the shortened lifespan for drug traffickers, shrines and mausoleums honoring fallen narcos have become an integral part of the city's landscape. David Luhnow and Jose de Cordoba report from Mexico.

He is not alone in his views. Earlier this year, three former Latin American presidents known for their free-market and conservative credentials—Ernesto Zedillo of Mexico, Cesar Gaviria of Colombia and Fernando Henrique Cardoso of Brazil—said governments should seriously consider legalizing marijuana as an effective tool against murderous drug gangs.

If the war on drugs has failed, analysts say it is partly because it has been waged almost entirely as a la w-and-order issue, without understanding of how cartels work as a business.

For instance, U.S. anti-drug policy inadvertently helped Mexican gangs gain power. In the late 1980s and early 1990s, the U.S. government cracked down on the transport of cocaine from Colombia to U.S. shores through the Caribbean, the lowest-cost supply route. But that simply diverted the flow to the next lowest-cost route: through Mexico. In 1991, 50% of the U.S.-bound cocaine came through Mexico. By 2004, 90% did. Mexico became the FedEx of the cocaine business.

That change in the supply chain came as Colombia waged a successful war to break up the country's Cali and Medellin cartels into dozens of smaller suppliers. Both moves helped the Mexican gangs, who gained pricing power in the market. Before, the Colombian cartels told Mexicans what price they would pay for wholesale cocaine. Now, Mexican gangs play smaller Colombian suppliers off of each other to get the best price. Mexican gangs are "price setters" instead of "price takers."

Some Mexican officials say privately that the U.S. should seriously consider allowing cocaine to pass more easily through the Caribbean again in order to squeeze Mexican gangs. "Would you rather destabilize small countries in the Caribbean or Mexico, which shares a 2,000-mile border with the U.S., is your third-biggest trading partner and has 100 million people?" one official said.

Today, the world's most successful drug trafficking organizations are found in Mexico. Unlike Colombian drug gangs in the 1980s, who relied almost entirely on cocaine, Mexican drug gangs are a one-stop shop for four big-time illicit drugs: marijuana, cocaine, methamphetamines and heroin. Mexico is the world's second biggest producer of marijuana (the U.S. is No. 1), the major supplier of methamphetamines to the U.S., the key transit point for U.S.-bound cocaine from South America and the hemisphere's biggest producer of heroin.

Associated Press

An agent carries marijuana plants at a large plantation found near San Cristobal de Coyutlan in August.

This diversification helps them absorb shocks from the business. Sales of cocaine in the U.S., for instance, slipped slightly from 2006 to 2008. But that decline was more than made up for by growing sales of methamphetamines.

In many ways, illegal drugs are the most successful Mexican multinational enterprise, employing some 450,000 Mexicans and generating about $20 billion in sales, second only behind the country's oil industry and automotive industry exports. This year, Forbes magazine put Mexican drug lord Joaquin "Shorty" Guzman as No. 401 on the world's list of billionaires.

Unlike their rough-hewn parents and uncles, today's young traffickers wear Armani suits, carry BlackBerrys and hit the gym for exercise. One drug lord's accountant who was arrested in 2006 had a mid-level job at Mexico's central bank for 15 years.

Recently, Mexico's deputy agriculture minister, Jeffrey Jones, told some of the country's leading farmers that they could learn a thing or two from Mexican drug traffickers. "It's a sector that has learned to identify markets and create the logistics to reach them," he said. Days later, Mr. Jones was forced to resign. "He may be right," one top Mexican official confided, "but you can't say things like that publicly."

Mr. Jones says he stands by his comments.

Because governments make drugs illegal, the risk associated with transporting them translates to high rewards for those willing to take that risk. The wholesale price of a single kilo of cocaine, for instance, costs $1,200 in Colombia, $2,300 in Panama, $8,300 in Mexico, and between $15,000 and $25,000 in the U.S., depending on how close you are to the Mexican border. At a retail level on the streets of New York, it can run close to $80,000. With markups like that, the business is bound to keep attracting new entrants, no matter what governments do to stop it.

Governments also have a hard time stopping the drugs trade because, like any good business, trafficking organizations innovate and adapt. Mexican customs has stumbled upon a long list of ingenious methods to transport cocaine, including one shipment of liquefied cocaine smuggled in red wine bottles. Another recent bust yielded 800 kilos of cocaine—worth an estimated $40 million—stuffed inside a batch of frozen sharks.

After Mexico restricted the importation of pseudoephedrine to slow the manufacture of methamphetamines, drug gangs found another way to make the drug using different, unrestricted chemicals widely used in the perfume industry. "I've always thought these guys had a good research and development arm," says one exasperated Mexican official.

Advocates for drug legalization say making marijuana legal would cut the economic clout of Mexican cartels by half. Marijuana accounts for anywhere between 50% to 65% of Mexican cartel revenues, say Mexican and U.S. officials. While cocaine has higher profit margins, marijuana is a steady source of income that allows cartels to meet payroll and fund other activities.

Marijuana is also less risky to a drug gang's balance sheet. If a cocaine shipment is seized, the Mexican gang has to write off the expected profits from the shipment and the cost of paying Colombian suppliers, meaning they lose twice. But because gangs here grow their own marijuana, it's easier to absorb the losses from a seizure. Cartels also own the land where the marijuana is grown, meaning they can cheaply grow more supply rather than have to fork over more money to the Colombians for the next shipment of cocaine.

Several U.S. states like California and Oregon have decriminalized marijuana, making possession of small quantities a misdemeanor, like a parking ticket. Decriminalization falls short of legalization because the sale and distribution remain a serious felony. One of the big reasons for the move is to reduce the problem of overcrowded and costly prisons.

While this strategy may make sense domestically for the U.S., Mexican officials say it is the worst possible outcome for Mexico, because it guarantees demand for the drug by eliminating the risk that if you buy you go to jail. But it keeps the supply chain illegal, ensuring that organized crime will be the drug's supplier.

Making pot legal might actually increase violence south of the border even more in the short term, with drug gangs fighting over a smaller economic pie of the remaining illegal drugs. But it would eventually reduce the overall financial clout of cartels.

If more radical options like legalizing prove impossible, then some analysts say Washington and Mexico City should at least refocus the battle against drugs along economic lines.

Until recently, Mexican police almost never looked at a cartel's finances. During a 2006 raid of a drug traffickers Mexico City home, police found a hand-written ledger describing the cartel's cocaine business for a single month: the price paid to Colombian suppliers ($3,500 per kilo), the sale price here in Mexico ($8,200 per kilo) and the cartel's net profit of $18 million. Police didn't bother to keep the piece of paper, according to people who participated in the raid.

"We've been attacking the players rather than attacking the industry. We need to focus on shrinking their markets and raising their operating costs," said Alberto Islas, a 40-year-old with an economics degree from MIT who runs a private security consulting company in Mexico City.

For the first time, Mexico's government is paying more attention to drugs as a business. A new 2% tax on cash deposits greater than $1,250 in bank accounts gives tax authorities a better picture of Mexico's cash economy—the currency of the drugs trade. Just this year, authorities found five people with unexplained cash deposits of more than $4 million, including one from a man who doesn't even have a formal job.

Mexican customs is also trying—for the first time—to disrupt the flow of guns and money that return from the U.S. to Mexico in exchange for the drugs. Disrupting that flow is crucial to cartel finances: Mexican gangs send drugs north, and get cash and guns in return.

For decades, people crossing into the U.S. from Mexico have been subjected to rigorous checks, but Mexico never bothered to check people coming back from the other direction. Now, cars coming from the U.S. will be blocked by a mechanical arm. License-plate photographs will be run against a criminal database in Mexico City, while a scale and vehicle-scanning system will determine if the car may be overloaded with contraband. Dogs trained to locate weapons and money will roam the area.

"Cash is king. Every bit of money we seize hits the cartels directly on the bottom line," says Alfredo Gutierrez Ortiz, the head of Mexico's tax authority.

But Mr. Gutierrez has also been around long enough to know Mexico is not going to stamp out the drugs trade here entirely.

"We must raise the transaction cost, make it too expensive for them to use Mexico as an export platform relative to other countries," he said. "But the demand itself—well, that's not going to go away."

Rich Cling to Life to Beat Tax Man


Nothing's certain except death and taxes -- but a temporary lapse in the estate tax is causing a few wealthy Americans to try to bend those rules.

Starting Jan. 1, the estate tax -- which can erase nearly half of a wealthy person's estate -- goes away for a year. For families facing end-of-life decisions in the immediate future, the change is making one of life's most trying episodes only more complex.

"I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days," says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. "Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?"

Currently, the tax applies to about 5,500 taxpayers a year. So, on average, at least 15 people die every day whose estates would benefit from the the tax's lapse.

The macabre situation stems from 2001, when Congress raised estate-tax exemptions, culminating with the tax's disappearance next year. However, due to budget constraints, lawmakers didn't make the change permanent. So the estate tax is due to come back to life in 2011 -- at a higher rate and lower exemption.

To make it easier on their heirs, some clients are putting provisions into their health-care proxies allowing whoever makes end-of-life medical decisions to consider changes in estate-tax law. "We have done this at least a dozen times, and have gotten more calls recently," says Andrew Katzenstein, a lawyer with Proskauer Rose LLP in Los Angeles.

Of course, plenty of taxpayers themselves are eager to live to see the new year. One wealthy, terminally ill real-estate entrepreneur has told his doctors he is determined to live until the law changes.

"Whenever he wakes up," says his lawyer, "He says: 'What day is it? Is it Jan. 1 yet?'"

Estate-tax experts didn't expect Congress to allow the tax to lapse, and are flabbergasted that it is actually happening. "All fall when I gave speeches, I said I was willing to bet anyone in the room $10 that we would have an estate-tax extension by the end of the year," says Thomas Ochsenschlager, head of taxes for the American Institute of CPAs. "Thank goodness I didn't have any takers," he says.

Now, all bets are off. "If Congress couldn't do it this year, why will they be able to do it next year?" says Prof. Michael Graetz of Columbia University, who worked both at Treasury and for Congress. He calls the lapse "congressional malpractice."

Under current laws in effect until the end of this year, the size of the exemption is $3.5 million per individual or up to $7 million per couple. The tax is slated to disappear entirely on Jan 1.

But estate planning in 2010 will be complicated by a new twist: a complex tax on capital gains, levied at death, that will affect a broader swath of taxpayers. The estate tax is scheduled to return in 2011 at a 55% rate with an exemption of slightly more than $1 million.

The looming lapse of the estate tax is presenting some families with unprecedented ethical quandaries.

"I've been practicing for more than 30 years, and never has the timing of death made such a financial difference," says Dennis Belcher, president of the American College of Trust and Estate Counsel. "People have a hard enough time talking about death and addressing estate planning without this."

Congress could pass an estate tax next year and make it retroactive to Jan. 1. Whether that would withstand a court challenge is a subject of debate in the estate-planning world. In the past, when Congress has passed retroactive laws, congressional leaders often issued formal statements of intent in advance.

That hasn't happened this time. The main statement has been a verbal one by Senator Max Baucus (D., Mont.) on the floor of the Senate, not a joint declaration by leaders from both parties.

In addition, the composition of the Supreme Court has changed, and some financial advisers believe the court might not again bless a retroactive law. "People with the means to fight against a retroactive law will die, and someone will challenge it and we might not know the answer for years," Mr. Belcher says.

As part of the changes taking effect in January, Congress also dramatically lowered the taxes on gifts to grandchildren. But all the uncertainties -- Will the law be changed? Will it be retroactive? -- are forcing family legal advisers to craft various provisional financial-planning strategies that can be undone later if the rules do change.

The situation is causing at least one person to add the prospect of euthanasia to his estate-planning mix, according to Mr. Katzenstein of Proskauer Rose. An elderly, infirm client of his recently asked whether undergoing euthanasia next year in Holland, where it's legal, might allow his estate to dodge the tax.

His answer: Yes.

Feeling That Cold Wind? Here’s Why.


A bitter wind has been blowing over parts of North America, Europe and Asia. Some places have been colder than ever, like Melbourne, Fla., which dipped to 28 degrees last Thursday, a record low. Europe has been walloped by snowstorm after snowstorm.

What’s going on? Global cooling?

Nope. A mass of high pressure is sitting over Greenland like a rock in a river, deflecting the cold air of the jet stream farther to the south than usual.

This situation is caused by Arctic oscillation, in which opposing atmospheric pressure patterns at the top of the planet occasionally shift back and forth, affecting weather across much of the Northern Hemisphere.

What’s notable this year is that the pattern of high pressure over the Arctic is more pronounced than at any time since 1950.

In most years over the past few decades, the opposite has been true: there has been lower-than-average pressure over the Arctic, and higher-than-average pressure over the mid-latitudes — the middle of which cuts through Maine, across the Great Lakes and on to Oregon.

That pattern allows the jet stream to blow unimpeded from west to east and keeps the cold Arctic air largely north of the United States. The result tends to be warmer temperatures across much of the United States east of the Rocky Mountains.

No one is quite sure what drives these flip-flops in air pressure.

“I tend to think of it as a random thing,” said John M. Wallace, who is a professor of atmospheric sciences at the University of Washington. “I don’t think we understand any reasons why it goes one way one year and the other way another year.”

What does seem clear is that these oscillations have nothing to do with global warming, or, for that matter, global cooling. For one, they’re not new. And this winter’s cold has not been global. Santa, by North Pole standards, has been experiencing a balmy winter.

“Pretty much all of the Arctic is above normal,” said Dr. Walter Meier of the National Snow and Ice Data Center in Boulder, Colo. In some areas, the temperatures are as much as 15 degrees Fahrenheit above normal.

In terms of global average temperature, this winter’s arctic oscillation “probably roughly cancels out,” Dr. Meier said. (In fact, last year ranked as the fifth-warmest year on record since 1850, the United Kingdom’s Met Office says.)

And it is certainly not the coldest air that has descended on the United States. In a great blizzard that swept across the East Coast in 1899, even parts of Florida dropped to below zero.

“We’re not close to those types of things,” said Michael Vojtesak of the National Weather Service.

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