Whatever Happened To Saving Up And Paying Cash?

Whatever happened to saving up and paying cash?    

                                                        

This is an interesting concept that seems to have been lost over the last couple of generations.  I remember when my parents did this.  You may too.  Maybe it’s worth stepping back in time and taking a look at just how different it is today compared to our grandparents/parents time.

The following data comes from the U.S. Department of Commerce Bureau, www.mises.org.  We’re going to take a look at the percentage of American household income that gets spent, saved, and/or invested in four key areas: debt service, taxes, lifestyle, and savings.  We are comparing 1940 and 2011.

Taxes, including federal, state, local, and property taxes, totaled 15% of household income in 1940.  In 2011 it was 18%.  Not a big difference.

Lifestyle expenditures were 47% in 1940, and only 40.6% in 2011.  You could say we’re living a less “lavish” lifestyle now.  It might not seem that way, but the real question is “why” is it that way?

In 1940 we put 27% of our income into savings compared to only 3.4% in 2011.  And in 1940 we only had debt service totaling 11% vs. 38% today.  We are not saving and we are massively in debt!  Our lifestyle is being financed by debt, and that’s why the previous paragraph might seem odd.  We absolutely have more “stuff” today, but we “owe” on it.

This is something that requires serious discussions and thought, and decisions that are thoughtful and reflective of what our real goals and visions we have for our lives.  Holiday food for thought.

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Economic Headlines for the Week Ending November 4, 2011…and What it Really Means.

Economic Headlines for the Week Ending November 4, 2011… and What it Really Means.

All Europe, All Week, Again!… The Greek tragedy continues! There was a surprise announcement that the Greek population would vote on austerity measures, but then it was rescinded. The prime minister resigned, but then didn’t, but did again. It is still about the banks.

What it means… There is no doubt – no matter what the talking heads say – that the Greeks would vote against further austerity. This would throw out the grand but fuzzy plans of the ECB from last week and cause the bailout to fall apart, leading to banks once again being the point of pain with their Greek debt being worth a whole lot less than the price on their books. It is getting very interesting once again!

Productivity Up, Income Down… Companies increased their output by over 3% using the same amount of labor, while unit labor costs were down 2.4%.

What it means… This reflects the cautious nature of businesses. If you can deliver more product with the same personnel, why wouldn’t you? At the same time, there are so many people seeking jobs that the overall cost of labor continues to fall. This is the same scenario we have talked about for years. With inflation up almost 4% and wages down, the thing that gives up ground is our standard of living.

1 in 15 Among the Poorest… 20 million Americans are living at or below ½ of the rate of poverty, meaning an income of $5,570 or less for a single person and $11,157 or less for a family of four.

What it means… With gas over $3/gallon and food prices rising, the implications are obvious, and daunting.

US Unemployment Down to 9%… Non-farm Payrolls came out with an increase of 80,000 jobs, which included 104,000 new private sector jobs and a loss of 24,000 government jobs. The sneaky statistic of birth/death adjustment, meaning guessed at jobs at small businesses, added 102,000. If this is removed, then the number of jobs created goes negative. Unemployment fell to 9% through very minor rounding.

What it means… TheUS is not creating enough jobs to put to work the roughly 125,000 – 150,000 new members of the workforce each month. Instead, we are barely getting any of the long-term unemployed back to work. This measure, viewed in conjunction with the statistics on the poor and the slide in wages above, continue to outline a slack economy. We are slogging through it, and it is no fun.

 (source: HSDent Publishing)

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Economic Headlines for the Week Ending October 28, 2011, and What it Really Means.

Economic Headlines for the Week Ending October 28, 2011, and What it Really Means.

All Europe, All Week (Almost)… Equity markets around the world staged massive rallies on the announcement of a preliminary deal to address the European debt crisis.

 What it means… The deal included a 50% reduction in value on Greek debt held by banks, and a call for a recapitalization of banks of about 106 billion euros, as well as the raising of almost 1 trillion in funds that will be backed by the euro zone bailout program (EFSF). Who will invest in European banks? Who will invest in the euro zone bailout fund? These unanswered questions are left for another day. The deal shows a mindset to address the problem, but the details show that a real solution is nowhere to be found.

Greek Pensioners in the Crosshairs… Following on the Greek Tragedy, the national pension system holds 35 billion worth of Greek government debt. This is about to be cut in half, courtesy of the aforementioned agreement.

What it means… There is no way to overstate the size of the problem inGreece and the growing issue in Italy. These economies are shrinking, not growing, and the turnaround plans of the region rely on the fantastical notion of budget surpluses in these countries through dramatic spending cuts with no resulting loss of tax revenue. How likely is it? Ask the nations that have already tried it –Greece, theUK,Italy,Portugal,Spain, andIreland. Close on the heels of this group is France, which is not in a death spiral, but is teetering on the edge of recession and just announced another round of austerity measures.

US GDP Up 2.5%… The 3rd quarter GDP of the US grew at a 2.5% annualized rate, which is better than many had hoped for over the course of the summer.

What it means… Many breathed a sigh of relief that the US moved away from recession instead of toward it, as 3rd quarter GDP doubled the rate of the 2nd quarter. In fact, GDP is now above its pre-recession levels. The problem is that in the 3+ years since the last GDP high we have added millions of new people to the economy, so on a per person or per capita basis, we are still about 3% down. Either way, our current growth rate will not add jobs, and wages have fallen, which is why personal confidence remains low.

No Population Movement… The Census Bureau and the IRS released data showing that the population movement of the US is at its lowest point since the measurement began in the 1940s. The sun states are not gaining, in fact NV and FL lost people, and the large cities of the Northeast staunched their losses.

What it means… If you cannot sell your house, and you are not gaining new employment, then moving is hard. In addition, the previously attractive states were in a feedback loop where more people meant more development which meant more jobs, which attracted more people, and so on. Now the feedback loop is negative, where fewer people mean less development, which means fewer jobs, which requires less people, and so on. Young people are hanging around major population centers hoping the size of the cities will lead to employment opportunities.

Home Prices Continue to Slide…The Case Shiller 20-city Home Price Index fell 3.8% year-over-year, and the median price of a new home fell 10.4% year-over-year.

 What it means… This is no surprise, of course. Housing is still in the dumps, and the main drivers – access to credit, earnings, and savings – are still suffering. Don’t look for a turnaround soon, especially with foreclosed inventory about to hit the markets.

 (source: HSDent Publishing)

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Economic Headlines for the Week Ending October 14, 2011… and What it Really Means.

Economic Headlines for the Week Ending October 14, 2011 …and What it Really Means.

 Jobless Claims Hover Over 400k…Jobless Claims were reported at 404,000 for the previous week, remaining at an elevated level since April.

 What it means…Over the past four weeks we’ve seen a number of surprises in Jobless Claims. There were weeks above 420,000, and then the surprise drop down below 400,000.  Now we are back in the middle of the range. When the average is taken, the reality is clear – not much has changed. Unemployment is high, there are no clear “job engines” in the economy.

S&P Downgraded Just About Everybody…At least in European terms. From countries likeSpain to 10 different banks, S&P slashed ratings, citing sluggish GDP growth across the euro zone and the continued sovereign debt crisis.

What it means…Lower ratings mean higher borrowing costs, which cuts into the profits of banks and can even cause their spread to go negative, where their cost of borrowing exceeds what they can earn on lending. This becomes very important in an environment where central banks are doing their best to force down long term interest rates. With short term borrowing already difficult in Europe because of a lack of trust of bank balance sheets, these downgrades will not help.

 Germany and France Announce a Plan to Make a Plan, and the Markets Fly…Angela Merkel, the leader of Germany, and Nicolas Sarkozy, the leader of France, announced that they would announce a “big” plan for fixing the European debt and banking crisis. The announcement will be near the end of October because the plan isn’t finished. European andU.S. equity markets soared on the news.

What it means…The two leaders, now known as the combined name Merkozy (like Brad Pitt and Angelina Jolie who became Brangelina), are in both a tough spot and a good spot.  It is tough because the European debt crisis is not going to be eliminated through miracle growth in GDP or a simple return of confidence that over-spending countries will right their ships. It is a good spot because the longer it goes on, the more flexible the participants become.  Remember Summer ’11 when European banks had to agree to a 21% haircut to get the new round of bailout for Greece? Well, now the number for a haircut (or write down) for Greek debt is between 50% and 60%. This is much closer to reality, but it takes time to get people to agree. Now what happens to banks that take such a loss? They look to taxpayers to make up the difference, of course. It’s a bad time to be French or German, unless you really wanted to pay taxes to support banks that bought Greek bonds.

Earnings Season Kicked Off…Alcoa started the season, missing earnings and disappointing. JP Morgan followed suit, but then Google blew the doors off.

What it means…The divergence should continue. The industries (finance and commodities, for starters) that have to do with the basic functioning of the economy will show weakness, while gadget-oriented consumer fluff should soar. It makes us feel better, and might even extend the rally in stocks for a while, but it’s no way to either put people back to work or grow our underlying economy. One final note on JP Morgan, they used a nifty accounting trick to record $1.9 billion in earnings. This accounting trick says that if your own debt outstanding, meaning bonds or other things you have issued, go down in value, that you as a company can record a “profit” because if you bought back the bonds at a discount then there would be a gain. So, no money changes hands, and the debt of the company is worth less because the company is seen in less favorable light, but the company gets to record a gain. Amazing! This little accounting move was worth $0.29/share of earnings, when the company’s total earnings were $1.02. So this move was almost 30% of the quarter’s earnings, even thought it was nothing but air.

 Retail Sales Up in September… Retail sales were reported up 1.1% when they were expected up 0.8%, and excluding car sales the number was up 0.6% on expectations of 0.4%.

What it means…The US is not falling off a cliff. While these numbers are not huge increases, they are positive and they are more than expected. This gives credence to the notion that the US is not falling into another recession, at least not right now.

 (source: HS Dent Publishing)

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BITS & PIECES

 DIDN’T SOLVE THE PROBLEM – 48.4% of home mortgages modified by lenders in the 1st quarter 2009 were 90 days or more delinquent just 1-year later (source: Office of the Comptroller of the Currency). 

 

 It would appear that there were bigger issues at play.  And as far as foreclosures go, in 2009 55% of the national total were in just 5 states; California, Arizona, Nevada, Florida, and Illinois.

VERY HOMEY – Of the 51 million households that own a home and have a mortgage, the average outstanding debt is $200,000.  There are another 24 million households that own their home free-and-clear (source: Census Bureau). 

 

See, it’s not all bad news on the home front.

MORE THAN ONE-THIRD – 37% of the 6.8 billion people in the world live either in China or India (source: World Health Organization). 

 

A couple of weeks ago I attended the 15^th annual Super Bowl of Indexing and the concluding presentation was about global aging.  India’s workforce is projected to be 40% larger than China’s by the year 2040.  By far the most interesting fact was the population decline in Japan.  Their birthrate is so far below replacement that unless things change, statistically it is projected that no one will be living in Japan by the year 2900.  Their young population is declining so fast that they are closing 300 schools each year because there are no children to attend.

NOTHING TO PAY – Americans filed 140 million tax returns for calendar year 2008 income.  Through the use of deductions, exemptions and credits, 52 million tax returns of the 140 million total returns (or 37% of all returns filed) paid zero federal income tax (source: Internal Revenue Service). 

 

So, when making tax policy, over one third of us are never impacted.  Perhaps we all need to have some skin in the game?

DEJA VU – An article in Fortune magazine written by reporter Shawn Tully began with the statement: “Growing deficits.  Out-of-control federal spending.  Rising debt.  With the budget suddenly an election issue, it’s time for some straight talk.”  The date of the article was 3/8/2004 or nearly 7 years ago (source: Fortune). 

 

I guess some things just never get better.  And maybe the next item is part of the problem.

WORKING FOR THE GOVERNMENT – 1 out of every 6 American workers is employed by the government, either at the federal, state or local level (source: Department of Labor). 

And governments at all levels only provide services.  They “produce” nothing much.  It’s always been my thought that the tension between capitalism built on the premise of profits is in conflict with government, which has no profit incentive.   This makes for an interesting dialog, and an issue that merits further understanding across the board, especially within the governments at all levels, as they now struggle with the costs of keeping the doors open for the services they provide.

HALF A MILLION – A child born in 2010 that begins kindergarten in the fall of 2015 would attend college between the years of 2028 and 2032.  If that child attended an average private 4-year college and if the annual price increases for private colleges experienced over the last 30 years continued into the future, the aggregate 4-year cost of the child’s college education (including tuition, fees, room & board) will total $506,423 or nearly $127,000 per year (source: College Board). 

 

Yikes!!  It’s inconceivable that the costs will inflate as much as they have, but even so, it’s a lot of money.

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Financial Headlines that are Full of Crap….What a Surprise!!!

 Financial Headlines that are Full of Crap….What a Surprise!!!

Here is the headline from Yahoo Finance Tuesday morning as I copied it.  It’s an Associated Press feed.

Stocks Slump but Off Lows Amid Weak Revenues From Goldman, IBM– AP

Stocks are falling after revenues from Goldman Sachs and IBM came in lower than investors expected.

I’m sorry, but I’m an investor and I had NO expectations of what the revenues would be.  These kinds of headlines make me nuts because when you read them, it paints a picture that’s not accurate.

The “expectations” are from the analysts, not the investors.  The analysts are always trying to predict sales revenues, earnings, growth, etc.  Their ability to predict the future is like everyone else’s…..YOU CAN’T PREDICT THE FUTURE!!!

When do we stop listening to the analyst’s predictions?  It’s nonsense.  Why do we then punish the stock price when it’s the analysts that are wrong?  When do we get to punish the analysts? 

The companies are going to report whatever they report.  We don’t know what that is until it comes out.  We have to learn to live with the unknowable.  It’s OK not to know what the future will bring.  Too bad the analysts of the world don’t get it.  But then what would they do?  Come to think of it, would anyone miss them?

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The Do-It-Yourself Stimulus Package

The Do-It-Yourself Stimulus Package

That’s the headline from the Dorsey Wright blog, stating that “one of the great strengths of a capitalist, entrepreneurial economy is its ability to adapt. Although the politicos in Washington may have no idea how to restart the economy, it might not matter. As long as things are not completely in flux, businesses and consumers will figure out a way to move forward.” 

 From Newsweek comes evidence that conditions for a recovery are being put in place without any help from the government:

 This do-it-yourself stimulus has already started. Corporate America’s balance sheet has never looked better, and consumers are paying down debt and bolstering savings. The challenge is a reluctance to spend. To try to jump-start consumption, companies are enacting mini stimulus programs of their own. In years past, teen-oriented retailer American Eagle has given away free T shirts and movie tickets to potential shoppers as part of a back-to-school promotion. This year it’s offering a free smart phone to shoppers who try on a pair of jeans (and sign up for a plan). Chrysler just kicked off a round of promotions that includes zero-interest financing and an offer to cover the first two installment payments. With banks reluctant to lend to small businesses, warehouse giant Sam’s Club has started a program with an approved Small Business Administration lender, Superior Financial Group. Sam’s Club will essentially subsidize a chunk of the loan process to enable its members to borrow up to $25,000—with the hopes they’ll spend the proceeds in the retailer’s wide aisles.

Innovative retailers like American Eagle, Chrysler, and Wal-Mart will figure out ways to improve their sales. Other companies will too. There are always trends because there are always corporate winners and losers and often a recession strengthens the winners and makes them stand out relative to their competition. Not sure if these three will be winners, but they’re certainly being creative.

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Dow Stagnation as Well as Volatility

 Dow Stagnation as Well as Volatility

Thanks to our friends at Dorsey Wright for again coming up with an interesting way to look at the history of investing.  I keep coming back to ideas like this in order to keep things in their proper perspective.  I think it’s pretty self-explanatory, so enjoy.

 “The WSJ’s Jason Zweig points out that last week, the Dow Jones Industrial Average rose above 10,000-again. Since March 16, 1999, when it first touched 10,000 in intraday trading, the Dow has bounced over that threshold and back 63 times. Friday, the index closed 219.6 points below where it stood exactly 11 years ago.

This isn’t the first time stocks have been stuck on a seemingly endless pogo-stick ride. On Jan. 18, 1966, the Dow hit an intraday high of 1,000.50. It broke through the four-digit barrier three more times that January and February, then faded. The Dow cracked 1,000 again in 1972 and 1976, then fell back both times. Not until December 1982 did the Dow finally hurdle above 1,000 and stay there.

History is under no obligation to repeat itself exactly, but this comparison does beg the question of how long before the Dow Jones Industrial Average will meaningfully rise from the 10,000 level. The fluctuations around Dow 1,000 persisted for 17 years. We have been fluctuating around Dow 10,000 for 11 years. Periods of extended Dow stagnation can test the patience of even the most forbearing equity-only investor.

One way to deal with this U.S. equity stagnation is to employ an investment strategy that has the flexibility to shift into many different asset classes in order to find those asset classes that are currently in secular bull markets. This is exactly the objective of our Global Macro strategy which tactically overweights those asset classes with the best relative strength. Click here to see a table which shows the average Global Macro allocation to each of the major asset classes since mid 1999.

Every major asset class goes through periods of extended stagnation–it is just part of the cyclical nature of the financial markets.

Yet another way to get the DJIA into some perspective is to take a look at how wide the range has been historically. To determine the range of the DJIA, we took the intra year high, subtracted the intra year low and then divided by the closing price of the previous year. Then, we took the range calculated for every year going back to 1896 and plotted it on a bell curve type chart. This gives us some perspective as to what is a pretty “normal” range for the DJIA and what is a narrow range and what is a large range. A range in the mid 20% area is “normal” for the DJIA. Looking at the blocks outlined in bold below, we can see that most of the years of the past decade have been at either end of the spectrum. Of course, 2008 and 2009 where two years which appear on the wide range side of things with a range of over 44%. The year 2007 was pretty normal in the middle of the range. But 2004 and 2005 were two of the handful of years when the range of the DJIA was extremely tight. So far this year the DJIA is running at a range of approximately of just over 14%. This range is still slightly on the low side of the median range of 25.6%. We still have another six months to go and see if this range stays pretty stable where it is or begins to widen. This can just be another way of depicting how volatile the market is in relation to its history and this viewpoint is especially helpful given our recent memories are filled with thoughts of 2008 and 2009 those years are outside norm just as much as 2004 and 2005 being tight ranges.

Historical Yearly Range of DJIA (1897-2010)

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The Balance Sheet Recession and its Consequences

The Balance Sheet Recession and its Consequence

The following blog comes from our friends at Dorsey Wright & Associates and talks about what might occur as we come out of the recent recession.  I’m just going to let them tell the story.  Remember, as always, no one can predict the future.

Kate Welling is a terrific financial journalist and has had a sterling reputation for years, on her own and at Barron’s. In my opinion, she has just burnished it with a tremendous interview with former Federal Reserve and current Nomura economist Richard Koo. Koo’s book, The Holy Grail of Macro Economics: Lessons from Japan’s Great Recession, discusses how a balance sheet recession is different from a typical cyclical recession. It’s a long article, but you’ve got to read the whole thing to really understand his thesis. This is a five-star article, in my opinion.

Koo’s argument is that in a balance sheet recession, businesses and consumers direct their free cash flow toward paying down debt and saving, rather than on maximizing profits. Koo’s thesis has visceral appeal: we’ve all seen this happening on a micro level within our own circles of acquaintances. During the deleveraging process, the typical rules of macroeconomics and monetary policy do not apply. For example, cutting interest rates should, in theory, stimulate loan demand and thus stimulate the economy. But even with U.S. interest rates near zero, there is no loan demand. Why? Koo’s contention is that, although it may be partly because of a lack of creditworthy borrowers, it’s largely because people are busy rebuilding their balance sheets–they are not interested in borrowing money at any price, even a low one. Koo’s interview is the first discussion I’ve seen by an economist that explains this phenomenon very well–because it also happened in Japan after their asset bubble burst in 1989.

Here’s where it gets interesting: there could be lots of unintended consequences in the market if policy levers do not operate as expected. Assuming that action x will lead to outcome y in the way we are used to expecting may not be applicable. Basing investment decisions on such assumptions could be very dicey. Using relative strength to power a trend-following process may be very useful, since trend following does not require any assumptions about policy outcomes. Global currency relationships may also become prominent as different countries respond to their situations in various ways. We’ve already seen this to some degree with the Euro/Dollar cross during the Greek situation. With policy responses in flux and with unpredictable outcomes potentially in store, a systematic global tactical asset allocation process may be the best defense for investors.

 Here’s the link to the interview: http://welling.weedenco.com/files/NLPP00001/803.pdf

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Taxes Are Going Up, So Just Pay Attention!

 Taxes Are Going Up, So Just Pay Attention!

I’m not making any kind of political statement with this blog, but from a practical point of view, let’s be reasonable.  Our government is spending it faster than we’re paying our taxes, so the only recourse is higher taxes.  Oh, sure, they could cut spending, but come on!

Here’s an interesting article from Fortune magazine – “Nickel and dimed by Obama’s microtaxes” – that gives some insight into what’s happening and what may lie ahead.

This is like slowly boiling a frog.  You may already know this, but if you put a frog in a pan of boiling water, he’ll just jump out.  But if you have the water at room temperature and gradually keep turning up the heat, the frog will not jump, and eventually gets boiled.

Hold on to your wallets, it’s getting hot in the kitchen!!

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