Credit is the ability to buy now and pay later. It takes credit to get an auto loan, a mortgage and other types of financing. Your credit score says a lot about your credit habits. This is a three-digit number ranging from 300 to 850, and it tells creditors how likely you are to pay your bills. The higher your credit score, the better your chances of getting approved for financing and the lower your interest rate will be.
Credit has many benefits. Most people can’t pay cash for homes, college education or new cars. Without loans, buying a house or car would be impossible for many. And since it takes credit to build credit, many people apply for their first credit card in college to establish a credit history. A credit card also provides emergency funds when we’re short on cash.
Although we use credit regularly as consumers, there are dangers associated with credit. We can avoid some of these problems with responsible use. But unfortunately, credit management education isn’t taught in high school, and many adults don’t learn about credit management until after they’ve made mistakes.
Potential Dangers of Credit
Credit puts a lot of things within our financial reach, so it’s easy to get in over our heads. We might not have enough in savings to purchase an electronic device or take a vacation, but with one quick application, we can get approved for financing and take advantage of life’s pleasures. There’s nothing wrong with getting a loan. But some people can’t stop using credit and they get into serious debt.
Too much debt has a significant negative impact on your personal finances. Paying off that debt will reduce your available disposable income to build an emergency fund (if you haven’t done so already) or save for retirement a house or other large purchases.
Of course, debt isn’t the only thing to be concerned with. Getting credit also means you’re vulnerable to identity theft. This is one of the fastest growing crimes in the U.S. And while some people think it can’t happen to them, no one is invincible.
Keeping Your Credit Report Accurate
Identity theft involves someone stealing your personal information and purchasing items in your name or opening new accounts in your name. It can drive down your credit score and take several months or years to fix. Identity theft often goes unnoticed because some people never monitor their personal credit reports or file credit disputes
You might wonder, what is a credit dispute? As a consumer, you have the right to check your credit history and receive one free credit report from each of the bureaus annually. Also, according to CreditRepair.com, you’re entitled to ask questions about anything included within your credit reports.
The 10 publicly traded companies with the largest market capitalizations. Since October of last year the top 20 list has seen quite a bit of profit for stockholders (mainly in Apple and Chinese companies).
|4||Exxon Mobil||USA||$352 billion|
|5||Berkshire Hathaway||USA||$346 billion|
|6||China Mobile||China||$340 billion*|
|7||Industrial & Commercial Bank of China||China||$306 billion**|
|8||Wells Fargo||USA||$292 billion|
|10||Johnson & Johnson||USA||$273 billion|
Apple’s market cap is up $115 billion since the last list was created in October of 2014. That increase is more than 50% of the value of the 14th most valuable company in the world (in October 2014).
China Mobile increased $100 billion and moved into 6th place. Industrial and Commercial Bank of China (ICBC) increased $78 billion to move into 7th place.
Exxon Mobil lost over $50 billion (oil prices collapsed as OPEC decided to stop attempting to hold back supply in order to maximize the price of oil). Alibaba (the only non-USA company in the last list) and Walmart dropped out of the top 10.
The total value of the top 20 increased from $5.722 trillion to $6.046 trillion, an increase of $324 billion. Several companies have been replaced in the new top 20 list.
The next ten most valuable companies:
|11||JPMorgan Chase||USA||$250 billion|
|12||China Construction Bank||China||$250 billion**|
|13||Novartis (NVS)||Switzerland||$246 billion|
|14||Petro China||China||$237 billion|
|19||Hoffmann-La Roche (ROG.VX)||Switzerland||$231 billion|
Market capitalization shown are of the close of business last Friday, as shown on Yahoo Finance.
The current top 10 includes 8 USA companies and 2 Chinese companies. The 11th to 20th most valuable companies includes 4 Chinese companies, 3 Swiss companies and 3 USA companies. Facebook (after increasing $21 billion), China Construction Bank (increasing $68 billion – it is hard for me to be sure what the value is, I am not sure I am reading the statements correctly but this is my best guess) and Tencent moved into the top 20; which dropped Procter & Gamble, Royal Dutch Shell and Chevron from the top 20.
A few other companies of interest (based on their market capitalization):
A new study, Secure Retirement, New Expectations, New Rewards: Work in Retirement for Middle Income Boomers, explores how Boomers are blurring the lines between working for pay and retirement (as I have discussed in posts previously, phased retirement).
From their report:
The define middle income as income between $25,000 and $100,000 with less than $1 million in investable assets and boomers as those born between 1946 and 1964.
Nearly 70% of retirees retired earlier than they planned to. Many did so due to health issues. Only 3% retired so they could travel more.
48% of middle income boomer retirees wish they could work. For those wishing to, but unable to work: 73% cannot due to health, 17% can’t find a job and 10% must care for a loved one.
Nearly all (94%) nonretirees who plan to work in retirement would like some kind of special work arrangement, such as flex-time or telecommuting, but only about one third (37%) of currently employed retirees have such an arrangement.
It seems to me, both employees and employers need to be more willing to adapt. Workers seem to be more willing, even though they claim they are not: this is mainly a revealed versus stated preference, they claim they won’t accept lower pay but as all those that do show, they really are willing to do so, they just prefer not to. This report is based on survey data which always has issue; nevertheless there are interesting results to consider.
61% of middle income boomers who ware working say they do so because they want to work, not because they have to work.
Only 12% of working middle income boomer retirees work full time all year. 60% work part-time. 7% are seasonal while 16% are freelance and 4% are other. Of those identifying as non-retired 75% work full time while 17% are part-time.
49% plan to work into their 70’s or until their health fails.
51% are more satisfied with their post-retirement work than their pre-retirement work. 27% are equally satisfied with their jobs.
As I have stated in previous posts I think a phased approach to retirement is the most sensible thing for society and for us as individuals. Employers need to provide workable options with part time work. The continued health care mess in the USA makes this more of a challenge than it should be. With USA health care being closely tied to employment and it costing twice as much as other rich countries (for no better results) it complicates finding workable solutions to employment. The tiny steps taken in the Affordable Care Act are not even 10% of magnitude of changes needed for the USA health care system.
Related: Providing ways for those in their 60’s and 70’s (part time schedules etc.) – Companies Keeping Older Workers as Economy Slows (2009) – Keeping Older Workers Employed (2007) – Retirement, Working Longer to Make Ends Meet
I believe a huge amount of money will be made due to self driving cars. Figuring out who will make that money is not easy.
The value of being able to use the time you are moving to your destination instead of concentrating on driving is huge. And the reduction in deaths, serious injuries, injuries, damages, frustration and waste of time caused by accidents will be a huge benefit to society. Many people attempting to focus on phone calls or whatever else instead of driving create lots of that damage due to accidents.
There will also be big restructuring in how the economy works. Car sharing (such as Zipcar) will greatly increase I think and Uber and Lyft will likely be big players in a move to driverless cars. It sure seems like fewer cars will be needed. Space wasted on parking cars should be greatly reduced. Deliveries will likely see big changes. The impact on the economy will be huge. Even the health care system may see billions in savings.
Toyota is an amazingly well managed company. They should capitalize on any important shifts in the auto industry. But will they do so for driverless cars? Will there be a decrease in demand for cars so large that Toyota losses more than it wins? My guess is the decrease in demand globally will not be huge for the next 10 years (of course I could be wrong). My guess is Toyota will do well, but may be caught a bit behind, but then will come back strongly.
For those that don’t think Toyota can innovate, remember the Prius. Also they have been big investors in robots. That they haven’t turned robots into a big business yet though may be a sign of weakness (related to turning innovation into business profits).
I think Toyota will do the best of the large traditional car companies at taking advantage of this opportunity. Honda would be my second pick.
Google has been at the forefront of the driverless car efforts; I first wrote about self driving cars in 2010 about Google’s efforts (on my Curious Cat Engineering Blog). They are willing to take big gambles. They have a very good engineering culture. They are very profitable. They haven’t done much at creating profitable businesses outside of search and ads though. Still I think they may be huge winners in this area. I would guess by licensing technology to others, but things are involving quickly we will see how it plays out.
Tesla has a great engineering culture with a priority given on innovation and customer focus. They are in the car industry though I don’t lump them with the “traditional car companies.” I give weight to the value Elon Musk will bring them. They have big potential to be one of the big winners in a self driving car future. But they have yet to create much profit. Will they be able to turn promising engineering and leadership into a huge business? I think the odds are good but that is still a difficult challenge. Others have much more money than Tesla. Apple has so much money they could even buy Tesla easily.
Elon Musk recently spoke about the current state and near term future:
Musk also stressed that the new Tesla autopilot system, which uses radar, ultrasonic sensing and cameras to create a sort of super-smart cruise control, obstacle avoidance and lane-keeping system, is not the same as a self-driving car.
Apple seems like a long shot to me. It doesn’t seem like the type of business Apple has gone into in the past. The argument for doing so is the huge pile of cash they have (over $170 billion which is an absolutely huge number – it is also a bit fake in that they have started borrowing tens of billions instead of spending that cash). The moves with the cash are based on 2 circumstances. First they would have to pay large amounts of taxes to use that cash in the USA (taxes are delayed as long as they hold it overseas). And second interest rates are so low, borrowing money hardly costs them anything.
Solar energy capacity has been growing amazingly quickly the last few years. Part of the reason for this is the starting point was so low, making it easy to have large gains.
As with so many macro economic measures China has made enormous investments in solar energy the last few years. China’s increase in 2013 was larger than the USA’s total capacity at the end of 2013. Since solar energy use on a large scale is still small investments are quickly ramping up. Europe was a few years ahead of others putting countries like Germany, Spain and Italy far in the lead. China, the USA and Japan have been investing huge amounts the last few years and will likely leave those other than Germany (which already has such a large capacity) far behind very shortly.
In the USA, even after growing 60% in 2008, 53% in 2009, 71% in 2010, 86% in 2011, 83% in 2012 and 64% in 2013 solar energy capacity only totaled 1% of USA total electrical capacity. In 2013 hydropower was 6.8%, wind was 5.3% and biomass was 1.3%. The increase in solar capacity should continue to grow rapidly and is starting to make significant contributions to the macroeconomic energy picture.
When you look at total electricity generation solar only represented .5% (compared to 6.6% for hydropower 4.1% for wind and 1.5% for biomass).
USA data based on only solar capacity that is connected to the grid (and my guess would be that is the measure used in other countries too). Data is largely from that Department of energy report, with historical data for other countries pulled from previous editions.
The US Energy Information Agency (USEIA) expects the USA to add (net) 9,841 MW of wind capacity; 4,318 MW of natural gas capacity and 2,235 MW of solar in 2015. In 2015 they also predict a net decline of 12,922 MW of coal capacity. They also share that nuclear plants and natural gas combined-cycle generators having utilization factors 3 to 5 times those of wind and solar generators, which means capacity measures are significantly different from actually produced electricity measures.
The USEIA has predicted “global solar PV capacity seen rising from 98 GW in 2012 to 308 GW in 2018.” They predicted in 2018 China would have the most solar PV capacity followed by Germany, Japan and the USA.
The Solar Energy Industries Association (USA) states that 5,000 MW of solar capacity was added in the USA in 2013 and 7,000 MW in 2014. They forecast 8,000 MW to be added in 2015 and 12,000 MW in 2016.
Related: Solar Direct Investing Bonds – Chart of Global Wind Energy Capacity by Country 2005 to 2013 – Leasing or Purchasing a Solar Energy System For Your House – Nuclear Power Generation by Country from 1985-2010 – Google Invests $168 million in Largest Solar Tower Power Project (2011) – Molten Salt Solar Reactor Approved by California (2010) – 15 Photovoltaics Solar Power Innovations (2008)
USA health care spending increased at a faster rate than inflation in 2013, yet again; increasing 3.5%. Total health expenditures reached $2.9 trillion, 17.4% of the nation’s Gross Domestic Product (GDP) or $9,255 per person.
While this remains bad news the rate at which heath care is increasingly costing those in the USA has been slower the last 5 years than it has been in past years. Basically the system is getting worse at a slower rate than we used to be, so while that isn’t great, it beats getting worse as quickly as we used to be. For the last 5 years the rate of increase has been between 3.6% and 4.1%.
GDP has increased more than inflation. As the GDP grows the economy has more production for society to split. The split between the extremely wealthy and the rest of society has become much more weighted to the extremely wealthy (they have taken most of the gains to the overall economy in the last 20 years). Health care has a similar track record of devouring the gains made by the economy. This has resulted in health care spending soaring over the decades in an absolute basis and as a percentage of GDP.
The slow down in how badly the health care system has performed in the USA has resulted in the share of GDP taken by the health care system finally stabilizing. Health care spending has remained near 17.4% since 2009. While hardly great news, this is much better news than we have had in the last 30 years from the USA health care system. The percentage of GDP taken by the USA health care system is double what other rich countries spend with no better health results.
It is similar to if a team started as a championship team and then got worse every year and now they have finally stopped getting even worse. Granted they have become the worst team in the league but if, say, their record has now been 5-55 for 3 years in a row, they at least are not winning fewer game in each subsequent year anymore. But you can hardly think you are doing a great job when you are clearly the worst team each and every year.
Obviously there is a need for much much more improvement in the USA health care system. Still stopping the growth in spending, as a percent of GDP, is a positive step toward drastically decreasing it to reach a level more in live with all other rich countries. Even this goal is only to have the USA reach a level of mediocrity. If you actually believe the USA can to better than mediocre that would imply a combination of drastic declines in spending (close to 50%) and drastic gains in outcomes. Decreasing spending by 50% would put the USA at essentially the definition of mediocre – middling result with average spending.
Health Spending by Type of Service or Product
- Hospital Care: Hospital spending increased 4.3% to $936.9 billion in 2013 compared to 5.7% growth in 2012. The lower growth in 2013 was influenced by growth in both prices and non-price factors (which include the use and intensity of services).
- Physician and Clinical Services: Spending on physician and clinical services increased 3.8% in 2013 to $586.7 billion, from 4.5% growth in 2012. Slower price growth in 2013 was the main cause of the slowdown, as prices grew less than 0.1%, due in part to the sequester and a zero-percent payment update.
Provide easy, new access to credit facilitates sales. For that reason businesses want such easy access maintained. They don’t want people unable to buy just because they don’t have the money.
Financial institutions make a great deal of money providing easy access to credit. They don’t want to slow it down. While they do want to reduce fraud, they are perfectly happy to allow a fair amount of fraud while they can still make a lot of money.
What this means is the financial system has less incentive to eliminate identity theft than the people that have to clean up after it happens to them. There should be better ways to make identity theft much more difficult.
At a lessor level it should also be more difficult to steal one credit card (which also creates a big hassle for us, in trying to clean things up after fraud occurs). I suggested a way to make credit cards more secure and useful. When Apple Pay was announced I learned they are doing basically what I suggested.
Apple Pay doesn’t share information that can be used to steal your credit card. Apple Pay gives the retailer a 1 time use code for that purchase. It can’t be used, even if someone steals it to use your credit card for more purchases. I also believe Apple Pay doesn’t share other details with the retailer, though maybe I am wrong – I think it is just like you giving them cash (they don’t have your name, address, phone number, etc.).
Much of the information businesses share in the USA is considered private in Europe and companies are not allowed to share that personal information. This makes identity theft and invasions of your privacy more difficult. I wish the USA would move more in that direction.
If you have details stolen (a wallet…) you can put a note with credit agencies that results in them be less free to make it easy for financial institutions to give credit without sensible protections against misuse. But you can’t do this just as a matter of course. I believe we should have the ability to protect ourselves from the massive headache caused by businesses providing credit in our name. But we don’t have such protection now, because of the big money in keeping credit super easy (and thus fraud fairly easy).
Having to clean up after identity you may well have to hire someone to help clean up your credit report. To do so, look for credit repair companies with good reviews and a good reputation.
I would imagine choosing to put in extra protections against identity theft would mean we would have less easy access to credit. For example, I wish I could say you cannot provide a new credit under my name that isn’t using my address on file and without confirmation from my email. Also you are required to send an email, send a text message and send a postal letter, and update my credit agency file (in a way I can view) one week before credit is allowed.
There should also be options such as you must get a positive reply from me. A citizen choosing to have better protection against identity theft would give up immediate access to credit. But I would happily do so. I believe millions of others would too. And given how many people are victims every years, millions or hundreds of thousand a new customers for such a service would likely result.
I continue to believe the choices for investors are much more challenging than they normally are, as I have written about several times. Though maybe soon, this will just be the new normal (in which case investors won’t have the fairly easy choices they have had for much of the last 100 years).
In previous posts I have discussed the value of real estate investments in this investing climate. Real estate is one way to cope with the challenges of extremely low yields today.
There are many advantages to city property, in the right city. When I was looking at my first house I looked for something that would be easy to rent out. The most important factor to minimize vacancy is high demand. If there is high demand, the worst you should face is the need to lower your asking price.
An additional consideration in buying condos (your only option in large urban centers like New York City, seen in my photo of the Empire State Building) are condo fees. Fees and taxes can make positive cash flow a challenge and they continue when the property is vacant thus creating more risk for the investor. Of course, in popular markets and good times rents are very attractive for owners and price increases can make them great investments.
During downturns rental property that is not in high demand can be vacant no matter the price. And those properties with some, but not overwhelming, demand will face the need for dramatic rent decreases to minimize vacancy (and large declines if you need to sell). My purchase was 3 blocks from a metro stop (close in to Washington DC). All housing near metro stops in DC have high demand and that close in to the city has even higher demand.
In over 10 years I have had maybe 2 months of vacancy – the first year I messed up; I was new to trying to rent places out and believed people were going to sign the lease because they said they would but then they backed out. I think I may have had 1 more month sometime, but maybe not, I can’t really remember.
I have considered tourist property but have decided against it so far. The rental yield are higher but you have higher vacancy rates, which is manageable, but also much more property management issues to deal with. In order to cope with that you need to hire a property manager, for example, Summit Vacations Property Management Company, very carefully. You need to carefully check their experience, reliability and competence.
And even for residential real estate the hassles of dealing with the property management yourself may lead investors to use property managers. This cuts into the advantages of direct real estate investments and so if you are going to use property managers then looking at REITs has to be considered. I believe if you are sensible direct real estate investments would normally return more but the risks are significantly higher and the hassle is somewhat to significantly higher. Likely the decision on whether to use direct real estate investing is more about personal preference than just a decision on which option would be a better investment.
I was recently interviewed on equities.com, read the full interview – Financial Blogger Profile: John Hunter. Some quotes from the interview:
John Hunter: I look for good individual investments, but I also weigh my guesses about long term macroeconomic conditions in making investment commitments. I think there is much more risk to the drastic measures central banks have been making for the past few years than the market is factoring in. I think the poor job regulating risk in the financial system is also very risky at the macroeconomic level.
I don’t have any real idea of what the chance of massive economic failure is, but I am much more worried today than I have been. Pretty much, my worry has remained the same over the last few years. We did avoid an immediate meltdown, though we still had plenty of economic pain. Yet, in my opinion, the risk has remained very high for the last few years, but people seem to think central banks can continue this extraordinary behavior without consequences; I see a great deal of risk in the economy.
Three macro-economic factors make healthcare an appealing investment. First, the aging population should provide a booming market. Second, the huge increase in rich people globally that can afford very expensive medicine again provides an ever-growing market. Third, the broken healthcare system in the USA results in exceedingly high-priced medical care in a very large and rich market.
I also close out the interview with some tips I have shared on this blog over the years
John Hunter: I can’t pick one, but I can pick a few short pieces of advice:
- Save 15%, or more, of your income and invest it wisely. If you want to buy more, then earn more, or save extra until you can pay for it with the extra savings.
- Minimize costs on investments, use Vanguard or similar low fee funds. Buying individual stocks reduces even the costs of Vanguard. There are tradeoffs to diversity of your portfolio when buying individual stocks.
- Pay attention to the overall risk of the portfolio, and even beyond that, your entire financial picture. For example, in the USA we have extra healthcare expense risk that is outside our portfolio risk, but is part of our entire financial picture. Building your portfolio with extra-portfolio risks in mind is wise. Don’t get fooled into thinking about the risks of investments taken individually, even though that is what you will continually be bombarded with.
I think those that find this blog worthwhile will also enjoy the interview so I hope you read the full interview.
One thing for investors consulting historical data to remember is we may have had fundamental changes in stock valuations over the decades (and I suspect they have). Just to over simplify the idea if lets say the market valued the average stock at a PE of 11 and everyone found stocks a wonderful investment. And so more and more people buy stocks and with everyone finding stocks wonderful they keep buying and after awhile the market is valuing the average stock at a PE of 14.
Within the market there is tons of variation those things of course are not nearly that simple, but the idea I think holds. Well if you look back at historical data the returns will include the adjustment of going from a PE of 11 to a PE of 14. Now maybe the new few decades would adjust from PE of 14 to PE of 17 but maybe not. At some point that fundamental re-adjustment will stop.
And therefore future returns would be expected to be lower than historically due to this one factor. Now maybe other factors will increase returns to compensate but if not the historical returns may well provide an overly optimistic view.
And if there is a short term bubble that lets say pushes the PR to 16 while the “fair” long term value is 14, then there will be a negative impact on the returns going forward bringing the PE from 16 to 14. That isn’t necessarily a drop (though it could be) in stock prices, it could just be very slow increases as earning growth slowly pushes PE back to 14.
Another thing to consider is another long term macro-economic factor may also be giving long term historical returns an extra boost. The type of economic growth from the end of World War I to 1973 (just to pick a specific time, there was a big economic slowdown after OPEC drastically increased the price of oil). While that period includes the great depression and World War II, which massively distorts figures, from the end of WW I through the 1960s Europe and the USA went through an amazing amount of economic growth.