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Investing and Economics Blog

Families Shouldn’t Finance Everyday Purchases on Credit

Why the Germans just hate to spend, spend, spend

“Millions of Americans,” croaked the US Treasury secretary, were being denied credit or facing rising credit card rates, “making it more expensive for families to finance everyday purchases”. The notion that families should finance everyday purchases on credit, the anchor commented, “suggests Washington has still to understand what brought us there in the first place”.
…
US, French and British officials puzzle over Germany’s refusal to tackle the recession head-on. German leaders, meanwhile, cannot see why their taxpayers’ money should go into encouraging precisely the kind of behaviour – reckless lending, careless borrowing and overconsumption – that precipitated the financial crisis.

I am with the Germans on this one. The people that want to find some more credit cards to run up don’t understand the problem. Until they come up with strong policies that admit we have been living beyond our means for decades and have to pay for this at some point and fashion a policy based on that understanding we are in danger. Yes another credit card can allow you to continue to live beyond your means, but it also puts you into even worse financial shape than you have already gotten yourself into. It is not a solution, it is an emergency to deal with the complete failure of yourself previously and without a plan to change it is just setting yourself up for a worse situation soon.

Related: How to Use Your Credit Card Responsibly – Have you Saved Your Emergency Fund Yet? – Can I Afford That? – Too Much Stuff

December 9th, 2008 by John Hunter | Leave a Comment | Tags: Credit Cards, Economics, Personal finance

Companies Beg Congress to Allow Them to Avoid Paying Into Pension Funds

Pension Funds Beg Congress to Suspend Billions in Contributions

Pension funds at Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies have joined the parade of businesses seeking relief from Congress amid this year’s economic meltdown.

Instead of money, they want legislation to suspend a federal law that would make them pump billions of dollars into retirement plans to offset stock-market losses as many struggle to find enough cash just to stay in business.

So lets see, you minimally fund the pension plan for your workers and make optimistic projections about investing returns. The market goes down, and you are now so far underfunding your pension that the law requires you to add funds to the pension. Your solution, go cry to the politicians. How sad. If Pfizer or IBM are having cash flow problems that is amazing. They really should be able to manage their cash better than that. Their most recent quarterly reports do not indicate cash flow problems. Yes I understand we have a credit crisis so if GM were having problems I wouldn’t be surprised (but you know what – they aren’t, in this area).

“Without relief, plan sponsors must shoulder the immediate burden of sudden, unexpected, large increases in plan contributions at a time when cash may be difficult to generate internally or to obtain in the credit markets,” Mercer’s Hartshorn says.
…
GM was notably absent from the five-page list of companies and organizations asking Congress for relief from the asset thresholds. GM said its pension plans had a $1.8 billion deficit as of Oct. 31, down from a $20 billion surplus 10 months earlier. At that level, GM’s plans would top the pension law’s 2008 asset threshold.

I think companies need to meet their obligations. If they choose to minimally fund their pensions without understanding that financial market are volatile, then they will have to pay up as required by law. When times are good you see all these CEOs taking advantage of pension fund “excesses” to reward themselves. They need to learn that you don’t raid your pension funds (either by taking cash out or not funding current investments – because you claim the assets are already sufficient). Pension funds are long term investments and you cannot manage as though the target value is the minimum amount allowed by law (unless you are willing to pay up cash every time your investments don’t meet your predicted returns). This is very simple stuff.

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December 8th, 2008 by John Hunter | 1 Comment | Tags: Economics, Financial Literacy, Investing, Retirement

Many Experts Say Health-Care System Inefficient, Wasteful

Many Experts Say Health-Care System Inefficient, Wasteful

Talk to the chief executives of America’s preeminent health-care institutions, and you might be surprised by what you hear: When it comes to medical care, the United States isn’t getting its money’s worth. Not even close.

“We’re not getting what we pay for,” says Denis Cortese, president and chief executive of the Mayo Clinic. “It’s just that simple.”

“Our health-care system is fraught with waste,” says Gary Kaplan, chairman of Seattle’s cutting-edge Virginia Mason Medical Center. As much as half of the $2.3 trillion spent today does nothing to improve health, he says.

Not only is American health care inefficient and wasteful, says Kaiser Permanente chief executive George Halvorson, much of it is dangerous.
…
The United States today devotes 16 percent of its gross domestic product to medical care, more per capita than any other nation in the world. Yet numerous measures indicate the country lags in overall health: It ranks 29th in infant mortality, 48th in life expectancy and 19th out of 19 industrialized nations in preventable deaths.

One way to reconfigure health spending is to shift large sums into prevention and wellness, said Reed Tuckson, a physician and executive vice president at UnitedHealth Group in Minneapolis. The idea is to tackle the handful of preventable, chronic illnesses such as heart disease and diabetes that account for 75 percent of health-care costs.
…
the Dartmouth team concluded that as much as 30 percent of medical spending — or $700 billion — does nothing to improve care.

I continue to write about this serious problem for the USA. The credit crisis is an immediate crisis (with roots in many bad decisions over the last decade). But the health care crisis is just as deadly. The health care crisis is like a person smoking. It might not kill the economy immediately, but the huge harm down to the economy by the broken healthcare system is like a cancer on the economy.

Previous posts on problems and suggestions for improvement: PBS Documentary on Improving Hospitals – site and books on improving the health care system – International Health Care System Performance – USA Health Care Improvement – Broken Health Care System: Self-Employed Insurance – Excessive Health Care Costs – USA Spent $2.1 Trillion on Health Care in 2006

December 8th, 2008 by John Hunter | 4 Comments | Tags: Economics, quote

Over 500,000 Jobs Disappeared in November

Jobless Rate Rises to 6.7% in November

With the economy deteriorating rapidly, the nation’s employers shed 533,000 jobs in November, the 11th consecutive monthly decline, the government reported Friday morning, and the unemployment rate rose to 6.7 percent.
…
The decline, the largest one-month loss since December 1974, was fresh evidence that the economic contraction accelerated in November, promising to make the current recession, already 12 months old, the longest since the Great Depression. The previous record was 16 months, in the severe recessions of the mid-1970s and early 1980s.
…
The manufacturing sector has been particularly hard hit, losing more than half a million jobs this year. That is nearly half the 1.2 million jobs lost since employment peaked in December and, in January, began its uninterrupted decline. The cutbacks seem likely to accelerate as the three Detroit automakers close more factories and shrink payrolls even more
…
With all this in mind, and particularly the shrinking employment rolls, economists are estimating that the gross domestic product is contracting at an annual rate of 4 percent or more in the fourth quarter, after a decline of 0.3 percent in the third quarter.

The news was even worse than the anticipated 350,000 losses. And Previous months figures were adjusted from 240,000 losses in October to 320,00 and from 284,000 in September to 403,000. And these numbers are on an already extremely poor job picture the previous 7 years. One of the great strengths of the US economy over the last 50 years has been job creation. We know we are in for serious problems, the question is how serious and how long. One of the most important gages of that will be how many jobs are lost.

When job losses stop and job gains start (in the aggregate, for the entire economy) it will be a very positive sign. Normally jobs are a lagging indicator, meaning job data lags the actual economy. Job losses will not increases until after the economy starts to grow. Of course, economic data doesn’t always fit the conventional wisdom.

This is one more piece of evidence that the economy is not looking good. And 2009 is likely to be a bad year for the economy overall.

Related: Bad News on Jobs (Sep 2008) – What Do Unemployment Stats Mean? – The Economy is in Serious Trouble – Financial Market Meltdown

December 5th, 2008 by John Hunter | 2 Comments | Tags: Economics, Financial Literacy

Let the Good Times Roll (using Credit)

Continuation of: USA Manufacturing is Healthy

The real problem with the USA economy is that a country cannot live beyond its means forever. Those living in USA have consumed far more than they have produced for decades. That is not sustainable. The living beyond our means is mainly due to massively increased consumption, not shrinking output (in manufacturing or service). One, of many examples, of the increased consumption is average square footage of single-family homes in the USA: 1950 – 983; 1970 – 1,500; 1990 – 2,080; 2004 – 2,349.

In case it isn’t totally obvious to you. You don’t fix this problem by encouraging more spending and borrowing: either by the government or by consumers. The long term problem for the USA economy is that people have consuming more than they have been producing. Personally, as this continues you reach a point where getting another credit card does not work. The same holds true for the collective health of a country. A country cannot solve the problem of having bills come due from decades of living beyond its means by charging more so that they can continue to live beyond their means.

Where the USA is in the continuum, is hard for me to judge. For the sack of illustration, lets say a consumer can get to 10 cards before they finally fail. If the consumer reaches the limit on 2 credit cards they have the choice to continue to the party by getting another credit card. Or they have the choice of addressing the situation they have gotten themselves into. If they decide to become responsible they have a challenge but one they can endure with some hardships.

If they press on to 5 credit cards and then max them out they come to the same decision. Dig themselves deeper in debt to avoid the problem today or live up their past behavior and become responsible. The work they have ahead of themselves is much more challenging than if they had started working on the problem when they only had 2 cards.

If they press on to 9 cards and now have the decision again. The effort to find a solution may be almost impossible. Borrow more to pay for past mistakes while maintaining some expenditures may be possible (but they will have to live on less than they earn). By the time you are this far down the failed path you have so much going to pay for your past bills you can’t spend even close to what you currently earn on current expenses. Letting yourself get to this point is very bad. And most likely as a person you will go bankrupt.
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December 4th, 2008 by John Hunter | 6 Comments | Tags: Economics, Financial Literacy, quote

USA Manufacturing Output Continues to Increase (over the long term)

When looking at the long term data, USA manufacturing output continues to increase. For decades people have been repeating the claim that the manufacturing base is eroding. It has not been true. I realize the economy is on weak ground today, I am not talking about that, I am looking at the long term trends.

The USA manufactures more than anyone else – by far. The percentage of total global manufacturing is the same today it was two decades ago (and further back as well). For decades people have been saying the USA has lost the manufacturing base – it just is not true. No matter how many times they say it does not make it true. It is true since 2000 the USA increase in manufacturing output (note not a decrease) has not kept pace with global grown in manufacturing output (global output in that period is up 47% and the USA is up 19% – Japan is down 10% for that period).

I would guess 20 years from today the USA will have a lower percentage of worldwide manufacturing. But I don’t see any reason believe the USA will see a decline in total manufacturing output. I just think the rest of the world is likely to grow manufacturing output more rapidly.

Looking at a year or even 2 or 3 years of manufacturing output data leaves a great deal of room to see trends where really just random variation exists. Even for longer periods trends are hard to project into the future.

Conventional wisdom is correct about China growing manufacturing output tremendously. China has grown from 4% of the output of the largest manufacturing companies in 1990 to manufacturing 16% of the total output in China today. That 12% had to come from other’s shares. And given all you hear from the general press, financial press, politicians, commentators… you would think the USA must have much less than China today, so may 10% and maybe they had 20% in 1990. When actually in 1990 the USA had 28% and in 2007 they had 27%.

Manufacturing jobs are not moving oversees. Manufacturing jobs are decreasing everywhere.
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December 2nd, 2008 by John Hunter | 3 Comments | Tags: Economics, Financial Literacy, Investing, Popular, Saving, quote

More on Failed Executives

Citigroup Saw No Red Flags Even as It Made Bolder Bets

But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings – and executives’ multimillion-dollar bonuses – failed to rein them in, these insiders say.
…
Citigroup’s stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.
…
“They pushed to get earnings, but in doing so, they took on more risk than they probably should have if they are going to be, in the end, a bank subject to regulatory controls,” said Roy Smith, a professor at the Stern School of Business at New York University. “Safe and soundness has to be no less important than growth and profits but that was subordinated by these guys.”

It is sad to see the same story repeated over and over. Give people the change for obscene bonuses. They make up claims that they are making lots of money to get bonuses but actually set the company to go bankrupt. They take huge bonuses because of course they are so smart and successful. The company fails and they say the market is to blame (it isn’t that they are really not that smart and of course they deserve the obscene bonuses they took before the collapse – or even after the collapse). They feel no shame for the horrible mess they leave in their wake that they would paid more than a king’s ransom to manage. They will be on to similar schemes in a few years.

If you are a bank you make money by borrowing for less than you lend. If you are a speculator then you try to out bet the other speculators. Nothing wrong with either choice to me. When you want to say you are a bank but you want to make most of your money from speculating their is a problem. Investment banks used to also make huge amounts from fees they would charge (they still do but not enough to offset the huge speculative losses).
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November 26th, 2008 by John Hunter | 5 Comments | Tags: Economics

S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958

S&P 500 Payout Tops Bond Yield, a First Since 1958 (site broke the link, so I removed it):

U.S. stocks’ dividend yields were lower than the yield on 10-year Treasury notes for half a century. Not any more. Dividends paid by Standard & Poor’s 500 Index companies in the past 12 months amounted to 3.51 percent of the benchmark’s closing value yesterday. In early trading today, the 10-year yield fell as low as 3.42 percent.
…
Treasuries routinely had higher yields than stocks before 1958, according to Bernstein. When this relationship came to an end, yields were near their current levels. The S&P 500 dividend yield fell 0.58 percentage point, to 3.24 percent, in the third quarter of 1958. The 10-year yield rose about the same amount, 0.6 point, to 3.80 percent.

Two explanations later emerged for the reversal, he wrote. One held that the economy’s recovery from the 1957-58 recession showed “investors could finally put to rest the widely held expectation of an imminent return to the Great Depression.” The second was the increasing popularity of investing in growth stocks, or shares of companies whose sales and earnings rose at a relatively fast pace. Because of their expansion, the companies often paid below-average dividends.

Reversal of Fortunes Between Stocks and Bonds

Even more telling was the relative movements in stock and bond yields over the years. Bernstein calculates that from 1954 to 1969 — while inflation was relatively low and stable — bond and stock yields moved mostly in tandem. But from 1970 to 1999 — the Great Inflation — bond and stock yields moved inversely. From 2000 on, bond and stock yields have been back in sync.

Arnott takes it a step further. “In a world of deleveraging, both for the financial services arena and for the economy at large, growth is less certain,” he says. “And with the economy eroding sharply, so is inflation. If stocks don’t deliver nominal growth in dividends and earnings, then their yield ‘must’ exceed the Treasury yield, in order to give us any sort of risk premium.”

Related: Corporate and Government Bond Rates Graph – Highest Possible Returns – posts on interest rates – investing strategy

November 21st, 2008 by John Hunter | 4 Comments | Tags: Economics, Financial Literacy, Investing, Stocks, quote

Redesigning the Global Finance System

Redesigning global finance

International finance cannot just be “fixed”, because the system is a tug-of-war between the global capital markets and national sovereignty. As cross-border financial flows have expanded and big financial institutions have far outgrown their domestic markets, finance has become one of the most globalised parts of the world economy. At the same time, finance is inherently unstable, so the state has to play a big role in making it safer by lending in a crisis in return for regulation and oversight.

The challenges are difficult. I am not confident the current leadership (if their is leadership globally) is capable of making the difficult decisions. There are not easy answers though their are some pretty basic principles people should agree on (excessive leverage is dangerous, massive positions that endanger entire economies are dangerous…). But how to deal with those issues is not easy.

Related: Leverage, Complex Deals and Mania – Treasury Now (1987) Favors Creation of Huge Banks – Monopolies and Oligopolies do not a Free Market Make – Negligent Watchmen

November 20th, 2008 by John Hunter | Leave a Comment | Tags: Economics

Financial Markets with Robert Shiller

Financial Markets with Professor Robert Shiller (spring 2008) is a fantastic resource from Open Yale courses: 26 webcast (also available as mp3) lectures on topics including: The Universal Principle of Risk Management, Stocks, Real Estate Finance and Its Vulnerability to Crisis, Stock Index, Oil and Other Futures Markets and Learning from and Responding to Financial Crisis (Guest Lecture by Lawrence Summers).

Robert Shiller created the repeat-sales home price index with Karl Case that is known as the Case-Shiller home price index.

Related: Berkeley and MIT courses online – Open Access Education Materials – Curious Cat Science and Engineering Blog open access posts – Paul Krugman Speaks at Google

November 19th, 2008 by John Hunter | Leave a Comment | Tags: Economics, Financial Literacy, Investing, Real Estate, Stocks, quote

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