Sometimes Being Rich Is No Accident


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Jocelyn Black Hodes of Marketwatch.com lists 10 ways where the behavior of wealthy individuals differ from most.  When looking at these methods, they are something that we can all do.  It just takes discipline, focus, and perseverance.

Step 1:  Start early.  While it is ideal to start early in life, you can start at any time.  The quicker you begin the process, the better off you will be at retirement.

Step 2:  Automate.  Go to your financial institution and ensure that a specific portion of your check (ideally 10 percent or more) goes to savings.  First, build up your emergency savings where you have a minimum of one monthly paycheck, if not two or three months.  Then, it is recommended that you align yourself with a certified financial planner and direct a portion of your future savings toward prudent investment products based on your financial goals.

Step 3:  Maximize your contributions.  Seek your benefits specialist at your job to determine whether your employer makes any contributions.  If so, you will want to deduct from your check whatever they are willing to match, which could be up to 5 percent.

Step 4:  Never carry credit card balances.  This means an end to impulse buying.  When going to the mall or an electronics store, never buy an item that you initially like.  Instead, make a mental note of it, then go back and plan within your budget whether it can be reasonably purchased at a later date.  If you carry a credit card debt and you have established an emergency savings fund, then redirect your savings to draw down your credit card debt.  Make sure to focus on eliminating balances with the highest interest rate, rather than the lowest balance.

Step 5:  Live like you’re poor.  Rather than ‘live within your means’, make sure to live BENEATH your means. Keep your eyes on the prize and keep a visual image of your financial goals where you are constantly reminded of what you are hoping to accomplish.

Step 6:  Avoid temptation.  The worst thing to do is try and emulate your neighbors.  Resist trying to match their car, high-definition TV, or immaculate wardrobe.  Recognize that it is where you end up and not where you start.  You do not want to reach retirement age with the realization that you must continue working.  Instead, think about how thankful you will be about the sacrifices you made early in life, so that you can live comfortably in your twilight years.

Step 7:  Be goal-oriented.  Rather than think paycheck to paycheck, think year to year and even decade to decade.  If you are single and just started working, then you should be thinking about saving for a home.  If you have young kids, realize that college tuition continues to rise, so set up goals for establishing a college savings fund.  Otherwise, your financial goals should center on retirement and not worrying about the daily necessities of life.

Step 8:  Get educated.  We need to stop making excuses about not understanding money.  Check out MyMoney.gov which was created by Congress and the Federal Financial Literacy and Education Commission.  Learn the basics and then regularly read news from the web, such as Marketwatch, CNNMoney, and Yahoo Finance.

Step 9:  Diversify your portfolio.  When developing your investment portfolio, emphasize time horizon and risk allocation.  Regardless of your age, you need to choose investment products based on the timing of your investment goals.  If your goal must be met within five years, then choose more bonds and money market accounts where they will have a lower return, but less risk.  If your goal reaches beyond ten years, then choose more stocks where the return is higher, but also the risk.  With stocks, make sure that you also diversify within industry because some do well even when the economy is tanking, such as consumer staples, such as Family Dollar, Walmart, and Proctor and Gamble.

Step 10:  Spend money to make money.  As you accumulate more wealth, it is wise to start hiring professionals with expertise in investment and tax planning.  They will provide you an edge in getting the most bang from your buck.

Rather than allow circumstances dictate your ability to generate wealth, take control of your finances by being disciplined in money matters.

 

Why Deficits No Longer Matter


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William Gale of Brookings Institute provides six takeaways from the Congressional Budget Office (CBO) 2014 Long-Term Budget Outlook.  Its findings suggest that not much has changed.  First, the size of the federal budget deficit is not a problem now or even the rest of the decade.  However if Congressional action is not taken soon, then the pain of deficit reduction will only worsen.  Unfortunately, that means more of the same with deficit spending continuing to spiral into the future.

Here are three reasons why proactively addressing deficit reduction is politically a poor one:

  1. Attacking the deficit by either restraining spending or raising taxes will be vigorously attacked by special interests.
  2. Politicians recognize that voters have short-term memories, so while significant deficit reduction will yield long-term benefits, it will likely cause short-term economic pain.
  3. They have been emboldened by Federal Open Market Committee (Fed) policies, whose expansionary monetary policies, have made deficit spending attractive.

The last point is most poignant.  While theory suggests that high deficits will lead to “crowding out” private sector borrowing, that has not happened.  Even though the debt to gross domestic product is historically high at 74 percent, current interest rates remain very low.  We can see this through a graph of the average U.S. prime interest rate, which is the interest rate charged to borrowers with good credit.

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A look at the graph above shows that the current prime interest rate of 3.25 percent is the lowest rate experienced since 1970.  If not for the Fed’s actions, the prime rate would undoubtedly be much higher.  On the surface, this appears to be attractive.  A lower interest rate will encourage more purchases of homes and boost employment rates.  That is true during the short run, but it is not without cost.

First, by artificially keeping interest rates low, we have discouraged saving and encouraged reckless borrowing.  A cursory look at saving rates show that the rate for a savings account is meager at 0.49 percent as of July 17th, 2014.  On the other hand, consumer debt has been higher at almost $3.195 trillion.  While that points to a bright present, it portends a dim future.  Lastly, this policy has exacerbated inequality where U.S. aggregate household wealth increased from $81.8 trillion from $59 trillion in 2009.

On the other hand, if Federal Reserve Chairman Janet Yellen were to adopt John Taylor’s prescription of stable pricing through use of the “Taylor Rule”, then markets will eventually correct themselves and the economy will be poised for more dynamic growth.  If implemented, then that would raise the fed funds rate from 0 percent to approximately 2 percent.

A higher fed funds rate would raise borrowing costs, thus spooking equity markets that could result in huge declines in wealth.  However, the upside is that it might strengthen the dollar and ease pressure on developing countries who have been forced to devalue their currencies to maintain their exports.  That would be a positive to global economic growth.  The other positive is that it will likely boost saving incentives with banks probably offering higher rates on saving.  Lastly with higher interest rates, consumers and businesses will be less likely to take on more debt, thus improving their long-term economic outlook.

John Taylor’s prescription is a risky one with much downside risk, but Congress will only respond to our deficit situation when they have incentive to do so.  Right now, interest rates are low, so much of the benefits of deficit reduction will not be enjoyed.  That will change if the Fed allows interest rates to move according to market conditions.

Unless the Fed changes course, it appears that the U.S. fiscal situation will likely remain the same.  While that might be comforting to those advancing in age, it is a dire signal for our youth.

Don’t Worry, Be Cautiously Happy About U.S. Economic Growth


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The U.S. Bureau of Economic Analysis provided yet another revision to their first quarter numbers.  In a third revision, we now learned that the economy declined by 2.9 percent, as measured by real gross domestic product (real GDP).  That would rate as the second sharpest decline during the Obama administration and that worse decline was when we were in the midst of a steep financial crisis in the first quarter of 2009 when the economy contracted by 5.4 percent.  Even though that is a depressing rate, many analysts still believe that it will be a temporary bump.

Here are the three reasons why we should not worry:

  1. Weather was particularly bad across the U.S., so we should see a healthy rebound during second quarter.
  2. Job growth remains healthy with June private sector job growth estimated at 281,000, which would be the highest since November 2012.
  3. U.S. manufacturing continues its healthy trend in 2014 with its latest reading at 55.3.  (Note:  Any number above 50 represents expansion)

Take a deep breath and take comfort that the U.S. economy should rebound strong in the 2nd quarter.  Having said that, our economic recovery remains relatively soft with  the International Monetary Fund downgrading U.S. economic growth prospects for 2014 from 2.8 percent to 2 percent.

Use The Robot Before It Uses You


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Andrew Beaujon of Poyntor Institute wrote an interesting report describing how the Associated Press (AP) is planning to use robots to write certain business stories.  My first inclination was thinking about how this would negatively impact the journalism industry by reducing the number of media reporters.  While that still might occur even though AP has said this would not impact any current jobs, it hints at what skills and value a potential journalist or any worker for that matter will need to prosper in this new environment.

First, Automated Insights will be providing the automation technology through the use of Zacks Investment Research.  Its content will consist of writing various earnings reports of companies.  Through this form of innovation, the capacity of company data reports will rise exponentially.  Whereas currently 300 stories are generated manually each quarter, that figure will jump to 4,400 stories.  This mundane tasks of writing earnings reports will free media journalists to focus more stories on business strategies and personal relationships with key industry leaders, along with adeptly identifying future industry trends.

Therefore, journalists with strong critical thinking and investigative skills will be in greater demand with the labor-intensive grunt work diminishing.  With amazing technology and innovation, there is so much data available out there.  To the undiscerning eye, that might mean that it will be easier to generate stories and research, but actually it will be more difficult.  With so much information, both good and bad, the value will be found in those individuals that can sift through pertinent, accurate information and communicate it in clear and concise ways to their audience.

For instance, check out this quote attributed from Automated Insights CEO Robbie Allen from Beaujon’s story:

“We flipped the standard content creation model on its head.  The standard way of creating content is, ‘I hope a million people read this.’ Our model is the inverse of that. We want to create a million pieces of content with one individual reading each copy.”

Contemplate that for a moment.  What one individual will have time to sift through a million pieces of content?  It will be the motivated individual that is seeking an edge over their competition.  While that is obvious hyperbole, the greater meaning is who can seek and acquire relevant information in an efficient way.  Individuals that are very proficient at that skill will see their market value rise.

As you enter the new marketplace, recognize that we are in Informational Revolution and adjust accordingly.

Argentina’s debt restructuring options limited


Aaron Johnson:

In my latest installment to Global Risk Insights, I comment on Argentina’s dispute with U.S. creditors. This is an under-the-radar issue to most Americans, but it should matter to investors. While on one hand, the U.S. Supreme Court ruling for a New York-based hedge fund over Argentina bodes well for U.S. creditors. This is problematic for Argentina’s prime minister Christina Fernandez de Kirchner for two reasons.

First, she can abide by the ruling and pay Eliot Associates, also known as NML Capital Ltd, the principal of their U.S. bonds, which they defaulted on in 2001. However, these repayment terms might conflict with contractual terms that limited their ability to offer better terms to late holdouts. There is disagreement on the interpretation. It is Argentina’s position agreeing to this would renege their previous agreements with 93 percent of other U.S. creditors that agreed to more favorable terms. If they have to offer similar terms to these other creditors, then that could raise their repayment obligations to up to $15 billion, which is more than half of their reserves.

If they refuse to abide by the ruling and withhold payment, then they risk a technical default. That would potentially be devastating to a country that is already suffering from a weak currency, rising inflation, and sluggish growth prospects.

As of right now, the impact on emerging countries is limited. However, countries with significant debt exposure might have less flexibility in attaining more favorable repayment terms as a result.

Originally posted on Global Risk Insights:

On June 16th, 2014, the U.S. Supreme Court ruled in favor of NML Capital Ltd (NML) over the Republic of Argentina in a major debt settlement case. The ruling has implications not only for Argentina but also other debt-ridden countries throughout the world. Regardless of how Argentina responds, Prime Minister Christina Fernandez de Kirchner’s options are unattractive.

Argentina reached agreement with a majority of its creditors with only a limited number of holdouts. However, there was a small subset of U.S. creditors led by Elliot Associates, a New York-based hedge fund described as NML Capital Ltd, that were holding out for better repayment terms. They sought and received relief from the Southern District of New York, which can result in a high payoff from their purchase of cheap bonds that occurred from the 2001 default of Argentina.

With the U.S. Supreme Court siding with the creditors, Argentina’s agreement with the other bondholders…

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Why 3.8 Percent Unemployment Rate Could Be Bad?


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Lauren Weber of the Wall Street Journal cites a research paper showing that the unemployment rate will soon get down to 3.8% within the next fifteen years, which sounds good. Given that the unemployment rate is However, this is deceptive because they’re saying that will be due to labor shortages.  I address this concept in a previous blog entitled “Why A Lower Unemployment Rate Is Not Always Good”.

The main problem is that we will be having a large segment of our workforce retiring, but there will be challenges in replacing this skilled workforce.  By retiring, they will leave the labor force and that will lower the unemployment rate.  In addition, you have younger workers, who have been slow to adapt to a changing labor force.  While they are attaining college degrees at a faster rate, it is not necessarily in disciplines in high demand, such as STEM (science, technology, engineering, and mathematics).  If they become discouraged and drop out of the labor force in large numbers, then that could lead to a misleading drop in the unemployment rate.

Therefore, a declining unemployment rate does not necessarily mean a healthier labor market.

Good News In Manufacturing Activity


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When economists try to predict future economic growth, they look to manufacturing output.  According to the Wall Street Journal’s Real Time Economics, the Federal Reserve reported a surprising rebound in output with a growth rate of 0.8 percent.  That almost erased the loss of 0.9 percent decline from the last month.  Overall, industrial activity rose by 0.6 percent.

Economic growth is highly correlated with the production of goods.  Over the last couple of months, we saw a decline in manufacturing, which caused concern that our economic recovery could be weakening.  However, February’s data gives credence that the decline could have been due to poor weather.

When industrial output rises, that indicates that businesses are ramping up production in anticipation of consumers buying more goods.  If more sales activity occurs, then that will lead to more hiring and incomes will rise.  That is why we should be encouraged by this data.

Not all of the news was good, though.  Home-related durable goods production fell for the second month.  Even though this could also be weather-related, it is also possible that this could be a precursor to a slowdown in home sales.  If that happens, then that will be a drag on economic activity.

When home sales fall, then that will lead to less spending on household goods and home furnishings.  Both are necessary to drive economic growth.  Therefore, let us hope that these last two months of decline do not become a pattern.

Only the future will tell us whether the trend in manufacturing will offset the slowdown in home-related goods.