Friday, April 29, 2016

Debt and Its Many Impacts on Our Individual and Family Well Being, Including the Future Growth and Prosperity of our Nation and World

Managing Debt in an Overleveraged World sums up the debilitating and often long lasting negative impacts of debt not undertaken for long term investment purposes. Here's a sample of its straightforward alarming message and wake-up call:

"What ever happened to deleveraging? . . . more than ever, debt is fueling concern about growth prospects worldwide.

The McKinsey Global Institute, in a study of post-crisis debt trends, notes that gross debt has increased about $60 trillion – or 75% of global GDP – since 2008. China’s debt, for example, has increased fourfold since 2007, and its debt-to-GDP ratio is some 282% – higher than in many other major economies, including the United States.

A global economy that is levering up, while unable to generate enough aggregate demand to achieve potential growth, is on a risky path. But to assess how risky, several factors must be considered.

First, one must consider the composition of the debt across sectors (household, government, non-financial corporate, and the financial sector). After all, distress in these sectors has very different effects on the broader economy.

As it turns out, economies with similar and relatively high levels of gross debt relative to GDP exhibit sharp differences when it comes to the composition of the debt. Excessive household debt is particularly risky, because a shock in the price of assets (especially real estate) translates quickly into reduced consumption, as it weakens growth, employment, and investment. Recovery from such a shock is a long process.

The second factor to consider is nominal growth – that is, real growth plus inflation. Today, real growth is subdued and may even be slowing, while inflation is below target in most places, with some economies even facing the risk of deflation. Because debt is a liability for borrowers and an asset for creditors, these trends have divergent effects, increasing value for the asset holder, while increasing the liability of the debtor. The problem is that, in a low-growth environment, the probability of some form of default rises considerably. In that case, nobody wins.

The third key factor for assessing the risk of growing debt is monetary policy and interest rates. Though no one knows exactly what a “normal” interest-rate environment might look like in the post-crisis world, it is reasonable to assume that it will not look like it does today, when many economies are keeping rates near zero and some have even moved into negative territory.

Sovereigns with high and/or rising debt levels may find them sustainable now, given aggressively accommodative monetary policy. Unfortunately, though such accommodation cannot be sustained forever, today’s conditions are often viewed as semi-permanent, creating the illusion of stability and reducing the incentive to undertake difficult reforms that promote future growth.

The final, and arguably most important, factor shaping debt risk relates to investment. Increasing debt to sustain current consumption, whether in the household or government sector, is rightly viewed as an unsustainable element of a growth pattern. . . .

Many governments nowadays are accumulating debt in order to buttress public or private consumption. This approach, if overused, can amount to borrowing future demand; in that case, it is clearly unsustainable. But, if used as a transitional measure to help jump-start an economy or to provide a buffer from negative demand shocks, such efforts can be highly beneficial.

Moreover, in a relatively high-growth economy, ostensibly high debt levels are not necessarily a problem, as long as that debt is being used to fund investments that either yield high returns or create assets worth more than the debt."

Summing Up

Too many individuals and nations borrow for today's spending without a clue or plan for how that debt will be repaid from a growing economy and future earnings.

If today's borrowing doesn't go along with or, better yet, cause or create more income growth tomorrow, the debt burden grows uninterrupted, exponentially, and inevitably becomes more difficult to repay in full and on time.

And as that debt burden grows, it will become impossible to repay without inflationary 'cheaper money' and accompanying unsustainable asset appreciation, such as happened in the U.S. in the 1970's with double digit inflation, followed by a severe recession, and then again early this century in the U.S. before the housing bubble burst.

Then a long period of slow growth and debt repayment inevitably results.

That's where we are today as a world, nation, individual cities and states, other government agencies, including K-12 school districts and colleges, as well as far too many overleveraged and under-earning individual spenders and borrowers in a slow and barely growing economy.

Meanwhile, the vote seeking politicians continue to ignore that simple and unsustainable reality.

At least that's my take.

Thanks. Bob.

Thursday, April 28, 2016

Economy Struggles and Homeownership Rate Falls While Rental Costs Rise

The lingering debt issues facing America and Americans continue to take their toll on how We the People are able and willing to live our financial lives.

Home prices and rental rates are rising rapidly. That said, homeownership rates remain at historic lows despite historically low interest rates. It's an affordability problem, for sure, and it's not going to be solved anytime soon.

The impact of the government misdirected, debt burdened economy coupled with the sluggish jobs situation and minimal income gains, when combined with an existing global capacity glut, highly indebted and slow growing worldwide economy, will continue to make things tough for most Americans.

And this ugly situation isn't likely to change much for the better for many years to come. See U.S. Growth Falters Amid Consumer, Business Caution which is subtitled 'First-quarter GDP notches worst performance in two years.'
But now let's look at the U.S. housing story specifically. Home ownership rate falls to third lowest on record tells it like it is:

"The rate that Americans own their homes fell in the first quarter to the third lowest on record, another indication that worsening finances as well as changing preferences since the Great Recession are altering behavior.

The Commerce Department reported that the ownership rate fell a 10th to a seasonally adjusted 63.6% in the first quarter, marking the third lowest figure since the 63.5% low in the second quarter of 2015. The ownership rate was 67.8% in the quarter when the U.S. entered recession.

The diminished interest, or ability, to own a home comes at a time when mortgages rates are low but house prices are climbing.

Freddie Mac reported the benchmark 30-year fixed-rate mortgage rose to 3.66% in the week ending
April 28. The 30-year mortgage has been below 4% throughout 2016, according to Freddie Mac data.

However, home prices are on the move, particularly out west. According to Case-Shiller data, prices nationally rose at a 5.4% clip in the 12 months ending February. Some cities including Denver and Portland are seeing double-digit percentage increases.

Rents also are picking up, however. The median asking price for rent was $870 in the first quarter, the Commerce Department reported, representing year-over-year growth of 8.9%."

Summing Up 

We're in heavy debt in a slow growth economy.

Working our way out of the hole we've dug for ourselves, with the 'huuuuge' helping hand from our politicians, of course, will take a very long time.

But the more we dig and the longer we delay the working out phase, the greater our burdens will become.

No amount of political spinning or self denial will change that simple fact of life.

So let's put down our shovels and start telling each other the truth.

That's my take.

Thanks. Bob.

Truth Telling Time ... America's Trade Deficit Is Due to Americans Not Saving, Despite What the Vote Seeking Politicians Say

We don't save enough of what we earn, both as individuals and as a nation.

That's why we have to borrow so much in the form of goods and services from producers in other nations. We are living beyond our means and borrowing from abroad to do so.

And that's also precisely why we're burdening future Americans with the future debt service obligations and a slow growing economy that will struggle to provide them with good jobs and financial security.

Sadly, however, that real story is not the one being spun by the political class of presidential contenders. So let's consider the facts before it's too late to do anything about them.

America's Trade Deficit Begins at Home should be required reading for all Americans:

"Thanks to fear mongering on the US presidential campaign trail, the trade debate and its impact on American workers is being distorted at both ends of the political spectrum. From China-bashing on the right to the backlash against the Trans-Pacific Partnership (TPP) on the left, politicians of both parties have mischaracterized foreign trade as America’s greatest economic threat.

In 2015, the United States had trade deficits with 101 countries – a multilateral trade deficit in the jargon of economics. But this cannot be pinned on one or two “bad actors,” as politicians invariably put it. Yes, China – everyone’s favorite scapegoat – accounts for the biggest portion of this imbalance. But the combined deficits of the other 100 countries are even larger.

What the candidates won’t tell the American people is that the trade deficit and the pressures it places on hard-pressed middle-class workers stem from problems made at home. In fact, the real reason the US has such a massive multilateral trade deficit is that Americans don’t save.

Total US saving – the sum total of the saving of families, businesses, and the government sector – amounted to just 2.6% of national income in the fourth quarter of 2015. That is a 0.6-percentage-point drop from a year earlier and less than half the 6.3% average that prevailed during the final three decades of the twentieth century.

Any basic economics course stresses the ironclad accounting identity that saving must equal investment at each and every point in time. Without saving, investing in the future is all but impossible.

And yet that’s the position in which the US currently finds itself. Indeed, the saving numbers ... measure the saving available to fund new capacity rather than the replacement of worn-out facilities. Unfortunately, that is precisely what America is lacking.

So why is this relevant for the trade debate? In order to keep growing, the US must import surplus saving from abroad. As the world’s greatest economic power and issuer of what is essentially the global reserve currency, America has had no trouble – at least not yet – attracting the foreign capital it needs to compensate for a shortfall of domestic saving.

But there is a critical twist: To import foreign saving, the US must run a massive international balance-of-payments deficit. The mirror image of America’s saving shortfall is its current-account deficit, which has averaged 2.6% of GDP since 1980.

It is this chronic current-account gap that drives the multilateral trade deficit with 101 countries. To borrow from abroad, America must give its trading partners something in return for their capital: US demand for products made overseas.

Therein lies the catch to the politicization of America’s trade problems. Closing down trade with China, as Donald Trump would effectively do with his proposed 45% tariff on Chinese products sold in the US, would backfire. Without fixing the saving problem, the Chinese share of America’s multilateral trade imbalance would simply be redistributed to other countries – most likely to higher-cost producers.

I have estimated that Chinese labor compensation rates remain far less than half of those prevailing in America’s other top-ten foreign suppliers. If those countries were to fill the void left by a penalty on China, like the one that Trump has proposed, higher-cost producers would undoubtedly charge more than China for products sold in the US. The resulting increase in import prices would be an effective tax hike on the American middle class. That underscores the futility of attempting to find a bilateral solution for a multilateral problem.

The same perverse outcome could be expected from the reckless fiscal policies proposed by other politicians. Take, for example, the ten-year $14.5 trillion federal government spending binge proposed by Democratic presidential candidate Bernie Sanders – a program judged to be without any semblance of fiscal integrity by leading economic advisers within the very party whose nomination he seeks.

Government budget deficits have long accounted for the largest share of America’s seemingly chronic saving shortfall. The added deficits of Sandersnomics, or for that matter those of any other politician, would further depress America’s national saving – thereby exacerbating the multilateral trade imbalance that puts such acute pressure on middle-class families. . . .

In short, trade bashing is a foil for the vacuous promises that politicians of both parties have long made to American voters. Saving is the seed corn of economic growth – the means to boost American competitiveness by investing in people, infrastructure, technology, and new manufacturing capacity. The US government, through decades of deficit spending and advocacy of policies that encourage households to consume rather than save, has forced America to rely on foreign saving for far too long. This has undermined US competitiveness, punishing workers with the job losses and wage compression that trade deficits invariably spawn.

America’s 101 trade deficits don’t exist in a vacuum. They are a symptom of a deeper problem: a US economy that has lived beyond its means for decades. Saving is but a means to an end – in this case the sustenance of a thriving and secure middle class. Without saving, the American Dream is in danger of becoming a nightmare. The trade debate of the current presidential campaign heightens that risk."

Summing Up

The more we know, individually and collectively, the better off we'll be.

And the better off future generations, including our kids and grandkids, will be as well.

But the more we listen to today's politicians and presidential contenders, the less we'll know.

And that shortfall of knowledge will harm all Americans, today's and tomorrow's.

Except for the self serving politicians, that is.

Saving begins at 'home' and results from the remainder of earnings minus spending.

Investment is all about the future. We need more investment in the future.

That's my take.

Thanks. Bob.

Wednesday, April 27, 2016

Women's Rights and Obligations Concerning Financial Matters ... It's 'Sharing' Time

Should Moms Manage the Money? will provide many people with good reason to rethink how their individual family finances have been, are and will be handled and shared.

And this is especially true with respect to the appropriate sharing role of the sexes, especially considering that women are better investors and that they also live longer than men. Sorry, guys, it's a fact.

"In many households, men tend to manage family investments and taxes, and women, if they get involved in money issues, tend to focus only on everyday expenses and charitable donations....

A 2014 UBS Wealth Management Americas report noted that when it comes to investing, it’s men making the decisions alone half the time. Another 37 percent of couples shared the decisions, while just 13 percent of women made them alone. Among younger women, just 15 percent of millennials and 18 percent of Generation Xers were flying solo. . . .

One reason men may handle investing more often is that they tend to come into a marriage with more assets. A 2014 Wells Fargo study of millennials reported that the males had both a higher median household income ($83,000 vs. $63,000 for women) and higher median assets that were available for investing ($59,000 vs. $31,000).

Or perhaps men simply like handling this task more. Does it really make sense to take it away from them?...

First, women tend to be better investors. Studies have shown that men have a bit too much confidence and take a bit too much risk. One seminal piece of research in this area showed how badly men’s investment returns suffered because they traded their stocks too often. A 2015 book called “Women of the Street: Why Female Money Managers Generate Superior Returns (and How You Can Too)” sums up the case for those who want to know more — or slip a treatise under their husband’s pillow.

Second, when mothers are the money leaders in the household, children take notice. For years, surveys of families have found that parents talk to girls less often about money than they talk to boys and that teenage boys end up believing they will earn more. . . . Moms who manage the money serve as role models who can counteract some of these problems.

Finally, many women will have to be in charge of the money sooner or later, so having some experience as the primary household money manager is essential. Women outlive men, and there are about four times as many widows as widowers in the United States . . . . All of us who toil in the personal finance salt mines hear stories of widows who had to start reassembling their financial lives from scratch when their husbands died suddenly. When you are sad and older, you do not want to find yourself locked out of the household accounts, literally.

Divorce happens, too, so it’s good for both spouses to know where the money is (and if it’s been moved around recently) in the event of a surprise separation. . . .

A couple’s financial discussions should be collaborative, whether the person executing the decisions is male or female. So you sit down at least once a year and remind yourselves of the answers to the following questions: Where is our money now? How do we get to it? Has our willingness to take risks with our investments changed? What are the most important goals for the next year? And what do we want to change?"

Summing Up

The ways things are and always have been is not a good reason not to change how things will be done in the future.

The plain fact is that women live longer than men.

And another plain fact is that many single parent households exist today.

Women should become familiar with and actively participate, if not comletely manage, the financial affairs of their families.

And men should welcome the change.

That's my take.

Thanks. Bob.

Making College 'Free' May Not Make a Difference, Except for Adding Debt, Adding Taxes and Adding Salaries for Added College Employees

Hillary and Bernie want to make college 'free.'

How about first making college a solid investment of both time and money for all of We the People, our kids and grandkids, and not just the politicians and school administrators?

That will happen only if, as and when students have been properly prepared, academically and otherwise, to do the work required for success in college prior to their entering college.

And not allowing parents to have things like vouchers, charter schools and school choice will only enhance the power of status quo administrators and the stranglehold that teachers unions have, especially on urban schools.

That will result in continually graduating a great many students unprepared for college work and who will then waste valuable time and money attending college. Their future will be made difficult by the people proclaiming to want to 'serve' them.

Of course, Hillary and Bernie, like all good Democrats, are opposed to school choice for kids and their parents. Politics sucks and people continue to vote for free stuff that isn't free.

Meanwhile, public sector unions grow and prosper while and our economy continues to struggle. It's not a pretty picture that We the People are painting, but it's one of our own making.

Just 37% of U.S. High School Seniors Prepared for College Math and Reading, Test Shows has the gruesome story about our politically popular but misplaced priorities:

"Only 37% of American 12th-graders were academically prepared for college math and reading in 2015, a slight dip from two years earlier, according to test scores released Wednesday.

The National Assessment of Educational Progress, also known as the “Nation’s Report Card,” said that share was down from an estimated 39% in math and 38% in reading in 2013.

Educators and policy makers have long lamented that many seniors get diplomas even though they aren’t ready for college, careers or the military. Those who go to college often burn through financial aid or build debt while taking remedial classes that don’t earn credits toward a degree. . . . 

The biggest problems came at the bottom, with growth in the share of students deemed “below basic” in their abilities. In math, 38% of students were in that group in 2015, compared with 35% two years earlier. In reading, 28% of students were “below basic,” compared with 25%....

In reading, the average score of 287 out of 500 points was about flat from two years earlier, but down significantly from 292 in 1992, when the test was first given. Students who reported reading for fun every day or nearly that often tended to score higher.

In reading, “The students at the top of the distribution are going up and the students at the bottom of the distribution are going down,” said Ms. Carr.  “There is a widening of the gap between higher and lower-ability students.”

In reading, 49% of Asian students performed at or above proficiency last year. So did 46% of white students, 25% of Hispanic students and 17% of black students. . . .

In math, 47% of Asian students performed at or above proficiency. So did 32% of white students, 12% of Hispanic students and 7% of black students."

Summing Up

One popular definition of insanity is doing the same thing over and over and expecting a different result.

The income inequality that Hillary and Bernie rail against is largely a result of educational inequality. And that educational inequality results in large part from not putting parents and their kids in charge of where and how they are educated.

So public sector spending grows, public sector employment grows, individual and government debts grow, global competition negatively impacts U.S. manufacturing and energy related jobs, and people suffer with high debts, substandard education and poor job opportunities.

Yet politics continues as is, while many kids and their families struggle needlessly and senselessly --- yet continue to vote for more of the same.

That's my take.

Thanks. Bob.

Tuesday, April 26, 2016

For Individuals, Investing In Actively Managed Mutual Funds Should Be Avoided .... Invest Instead in a Passive Fund or a Basket of Individual Stocks ... Cost in Relation to Performance Matters Most

Individual investors in stocks have three basic choices: they can invest in (1) a diversified portfolio of individual stocks, (2) passive index funds such as the S&P 500 index from Fidelity or Vanguard, or (3) an actively managed mutual fund, which just happens to be what is most often sold to them by an insurance agent, bank trust fund or individual stock broker.

In my view, choice #1 is by far the best, choice #2 is definitely second best and #3 is the worst of all and should be avoided.

That's because over a several decade period of individual saving and investing, choices #1 and #2 are going to deliver several times more money at retirement time than will choosing #3. It's the effect of compounding and the 'rule of 72' at work, pure and simple.

But getting individuals to choose #3 is how the typical stock broker salesman, insurance company, banker and actively managed mutual fund make lots of money at the expense of trusting and unknowing individual savers and investors.

And that's also why long term oriented individual savers and investors are likely to end up at retirement time with a shortfall of 80% to 90% of what they could have had by following the #1 or #2 path to income security.

The High Fees You Don't See Can Hurt You offers this useful overview of the dangers of investing in actively managed mutual funds:

"High fees, often hidden from view, are still enriching many advisers and financial services companies at the expense of ordinary people who are struggling to salt away savings. The problem has persisted year after year. A new analysis of mutual fund data confirms its severity.

That’s why the Labor Department announcement early this month is so important. For the first time, all financial advisers dealing with retirement accounts will be required to act in their clients’ best interests. The announcement is long overdue and a big step forward.

But don’t rejoice just yet: It is only a step.

First, the Labor Department’s new rules are not yet in place. They are scheduled to take effect in 2017 and 2018 but are opposed by much of the financial services industry. They could easily be changed, weakened or blocked.

For now, even for retirement accounts that are to be covered by the rules, many advisers are not required to act in their clients’ best interests. This means that they are legally entitled to look out for themselves first and recommend investments with higher fees, to the detriment of those who have asked for help.

Second, if all goes according to plan, after the new rules take effect they will deal only with saving and investing for retirement — and not for goals like a new home, a child’s education, a wedding, a car or a vacation. . . .

Third, while the new rules are both lengthy and clear on fundamental principles, they are short on crucial details. . . .

The rules say that, with some exceptions, advisers will be required to make reasonable recommendations based on an examination of industry norms and practices. But the rules don’t detail which specific investments or fee levels are acceptable. . . .

Data provided last week by S&P Dow Jones Indices confirms that commissions and fees in actively managed mutual funds are depressing fund performance and hurting investors — while enriching fund managers and advisers. These costs are an important factor in the failure of most actively managed funds to outperform the market consistently over long periods .... even when fund managers succeed in outperforming their peers in one year, they cannot easily repeat the feat in successive years, as many studies have shown. That’s why low-cost index funds, which merely mirror the performance of the market and don’t try to beat it, make a great deal of sense as a core investment.

But whether you choose an index fund or one that is actively managed, commissions and fees provide important clues about future performance.

Low fees won’t turn intrinsically bad investments into profitable ones, of course, but they make a big difference. . . .

Mutual fund commissions, also known as sales loads, are a big drag on performance. They are often difficult to justify if an adviser is truly working in an investor’s best interest. . . .

With fees included, the average actively managed fund in each of 29 asset categories — from those that invest in various sizes and styles of stocks to those that hold fixed-income instruments like government or municipal bonds — underperformed its benchmark over the decade through December. In other words, index funds outperformed the average actively managed fund in every single category. . . .

What was striking, though, was that in some categories, fees were responsible for the actively managed funds’ mediocrity. This was true for large-cap value stock funds and international small-cap stock funds, as well as for global, general municipal, California municipal and New York municipal fixed-income funds. The average fund in these categories actually beat its benchmark when the impact of fees was removed from fund returns.

In other words, over the long run, the odds that a talented manager will beat an index fund improve when fees are low — though those odds are still quite low, and a low-cost index fund remains a safer bet. . . .

What is a reasonable benchmark for fees? Note that according to Morningstar, the median expense ratio for actively managed mutual funds is 1.2 percent. For index funds it is about 0.5 percent. The data suggests that, for the most part, the less you pay the better off you will be....

Investors who believe they have found honest and skillful advisers may still want to understand all of this. Not everyone truly has your best interest at heart."

Summing Up

Front end commissions are often as much as an immediate 7% when purchasing an actively managed mutual fund.

And funds advertised as 'no load' and 'no commission' funds usually charge .25% annually in the form of a hidden '12B-1' advertising fee as well as another ~.5% to ~1% annually for managing the fund. And to top it all off, the 'fund' also pays brokerage commissions to make trades, and which fees are embedded and undisclosed as part of the cost of the individual securities purchased in the fund from time to time.

Add all these fees together and the difference at retirement time is likely to be a huge shortfall from what easily could and should have been the far more profitable outcome.

So here's the deal: get a good low cost and fiduciary acting adviser and keep the earnings and growth of the assets over time for yourself instead of giving them to those selling and managing active mutual funds.

That's my take.

Thanks. Bob.

Narcissistic Personality Disorder ... Guess Which Politician This Best Describes

Many of today's politicians are special characters.

And these self described great leaders obviously think very highly of themselves, if not the same way about We the People.

In fact, one of our fearless political leaders-to-be immediately came to mind when reading the following characteristics describing individuals who are suffering from narcissistic personality disorder.

Narcissistic Personality Disorder is subtitled 'You may insist on having "the best" of everything:'

"From the Mayo Clinic’s online entry on narcissistic personality disorder:

If you have narcissistic personality disorder, you may come across as conceited, boastful or pretentious. You often monopolize conversations. You may belittle or look down on people you perceive as inferior. You may feel a sense of entitlement—and when you don’t receive special treatment, you may become impatient or angry. You may insist on having “the best” of everything—for instance, the best car, athletic club or medical care.

At the same time, you have trouble handling anything that may be perceived as criticism. You may have secret feelings of insecurity, shame, vulnerability and humiliation. To feel better, you may react with rage or contempt and try to belittle the other person to make yourself appear superior. Or you may feel depressed and moody because you fall short of perfection. . . .

[The Diagnostic and Statistical Manual of Mental Disorders-5] . . . criteria for narcissistic personality disorder include these features:

Having an exaggerated sense of self-importance

Expecting to be recognized as superior even without achievements that warrant it

Exaggerating your achievements and talents

Being preoccupied with fantasies about success, power, brilliance, beauty or the perfect mate ...

Behaving in an arrogant or haughty manner"

Summing Up

Sound like anyone you've seen lately?

Of course it does.

Thanks. Bob.

Sunday, April 24, 2016

NOTE TO HIGH SCHOOL STUDENTS AND GRADUATES .... The Choice of Whether and/or Where to Attend College, Including Advance Preparation and Realistic Plans for a Timely Graduation ... Pick Your Path Wisely and Proceed Accordingly

Going to college is a good idea for those who are (1) adequately prepared to do the academic work and (2) seriously intending to graduate in a timely manner.

Otherwise it may prove to be both (1) a costly misadventure and (2) a big waste of valuable time.

The scary stat most high school seniors overlook as they pick a college says this:

"One of the biggest issues for college students — and their bill-footing parents — is whether they will really graduate in four years. . . .

The average for U.S. college students is 40%. Add in those who need five or six years, and that only gets the average up to 60%.

What do those additional years of college cost? Tuition may not be that much, as most students who stay beyond four years don’t need many more credits to graduate. But the College Board calculates that living expenses for college students on average are about $17,000 for nine months. . . .

Then add in student loans. Some 60% of all college students borrow to help cover the cost of education. . . .

Read: 47% of high school grads aren’t prepared for college

It might be surprising, but a lot of undergraduates, maybe the majority, way overestimate their abilities and take courses that are too hard for them. . . .

This is the place you want to spend your time and money to boost the odds of a good return on your education. Remember, the worst outcome is dropping out of school laden with debt.

The second-worst outcome is taking a very long time to graduate. Even if students don’t get derailed by college life and tough courses, they can be delayed by not being able to get into courses to complete requirements for their majors.

This is a risk that can be assessed pretty easily just by looking at those requirements. The more there are and the more of them that involve prerequisites (this has to be taken before that), the more difficult it is to complete the major.

The final effect of expensive college years is how they can affect career and life choices after. That is especially so when there is more debt. One of the things we know from empirical evidence is that people in debt choose different career paths — and they’re not necessarily the career paths that they would have chosen otherwise. . . .

College debt also affects life choices. The most obvious of these is the possibility of going to graduate school, which can be next to impossible for individuals who already have a lot of debt. Student debt also delays marriage and home purchases.

Student loans are expensive: The cheapest, federal “subsidized” loans charge 3.4%, but the borrowing limit is $3,500 in the first year (it then rises, reaching $5,500 a year for juniors and seniors). “Unsubsidized” federal loans charge 6.8%, and the new federal loans that parents can take out for their undergraduate children charge a whopping 7.9% along with an initial fee of 4.2% of the total value of the loan. That more than doubles the total cost of the loan over a 10-year period.

Read: Parents borrowing to send kids to college skyrocketed over the last two decades

A college education these days is a big investment, one that can cripple a student and family financially if they aren’t careful. The biggest risk factor in that investment is also one that can be managed if we are careful, and that is making sure the student graduates and does so on time."

Summing Up

For those adequately prepared and wanting to go to college, by all means they should do just that. 

A college education can be both a financially rewarding and life enriching experience.

But for those not prepared to do the work, they should think long and hard before proceeding.

Piling on onerous debt and dropping out are also life changing events, albeit generally of a most negative nature.

Thus, graduating in a timely manner with a marketable degree and graduating debt free is the absolute best way.

So here's my take and advice to high school attendees and graduates alike --- choose wisely and proceed accordingly.

You'll be glad you did, and you'll be better off for having done so.

Thanks. Bob.

More on the Troubles of the 'Middle Class,' Including the Required Income for Membership (as Defined by Government), 'Free' College and Debt ... Why Politics Sucks

In my most recent post concerning an article titled "The Secret Shame of Middle-Class Americans," the following paragraph was included from the referenced publication:

"In a 2010 report titled “Middle Class in America,” the U.S. Commerce Department defined that class less by its position on the economic scale than by its aspirations: homeownership, a car for each adult, health security, a college education for each child, retirement security, and a family vacation each year. By that standard, my wife and I do not live anywhere near a middle-class life, even though I earn what would generally be considered a middle-class income or better. A 2014 analysis by USA Today concluded that the American dream, defined by factors that generally corresponded to the Commerce Department’s middle-class benchmarks, would require an income of just more than $130,000 a year for an average family of four. Median family income in 2014 was roughly half that."

Here's the deal. Only one out of eight American households earns $130,000 annually. Thus, according to the government, only 12.5% of American households have incomes high enough to include them in the middle class.

Some things bear repeating ---- in simple language, it takes that amount to be able to afford 'homeownership, a car for each adult, health security, a college education for each child, retirement security, and a family vacation each year' --- the guidelines used by the government for middle class membership.

So how does one out of eight equate to middle class membership? It doesn't, of course.

Just like free college isn't free. Room and board, transportation, spending money and the lost income associated with not working instead of going to college aren't free, even if the politicians say otherwise. The simple fact is that 'free' tuition represents a relatively small part of the total cost of going to college, especially for a public sponsored institution.

And by the way, college employees, professors and administrators aren't going to work for free. Somebody always pays for the 'free' stuff given by government. That's where We the People enter the picture.

The conclusion is simple --- what is represented by politicians as 'free' is never free. 

And debt, no matter who ends up having to pay for it, is never 'free' either.

Politics sucks. So does unnecessary indebtedness.

That's my take.

Thanks. Bob.

Credit Card Debt and Middle Class America ... Income Stagnation and the Shame of It All ... IT'S TIME TO WAKE UP AND CHANGE OUR HABITS, MY FELLOW AMERICANS

The Secret Shame of Middle-Class Americans is subtitled 'Nearly half of Americans would have trouble finding $400 to pay for an emergency. I'm one of them.'

It's a long but riveting article which should be required reading for one and all, young and old, rich and poor, political and apolitical. It's all about debt and the current sad state of affairs in far too many American households.  While you won't 'enjoy' reading it, reading it will be very much worth your time.

Here's what it says in part:

"Since 2013, the Federal Reserve Board has conducted a survey to “monitor the financial and economic status of American consumers.” Most of the data in the latest survey, frankly, are less than earth-shattering: 49 percent of part-time workers would prefer to work more hours at their current wage; 29 percent of Americans expect to earn a higher income in the coming year; 43 percent of homeowners who have owned their home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?

Well, I knew. I knew because I am in that 47 percent. . . .

You wouldn’t know any of that to look at me. I like to think I appear reasonably prosperous. Nor would you know it to look at my résumé. I have had a passably good career as a writer—five books, hundreds of articles published, a number of awards and fellowships, and a small (very small) but respectable reputation. You wouldn’t even know it to look at my tax return. I am nowhere near rich, but I have typically made a solid middle- or even, at times, upper-middle-class income . . . .

Financial impotence goes by other names: financial fragility, financial insecurity, financial distress. But whatever you call it, the evidence strongly indicates that either a sizable minority or a slim majority of Americans are on thin ice financially. How thin? A 2014 Bankrate survey, echoing the Fed’s data, found that only 38 percent of Americans would cover a $1,000 emergency-room visit or $500 car repair with money they’d saved. Two reports published last year by the Pew Charitable Trusts found, respectively, that 55 percent of households didn’t have enough liquid savings to replace a month’s worth of lost income, and that of the 56 percent of people who said they’d worried about their finances in the previous year, 71 percent were concerned about having enough money to cover everyday expenses. . . .

You could think of this as a liquidity problem: Maybe people just don’t have enough ready cash in their checking or savings accounts to meet an unexpected expense. In that case, you might reckon you’d find greater stability by looking at net worth—the sum of people’s assets, including their retirement accounts and their home equity. That is precisely what Edward Wolff, an economist at New York University and the author of a forthcoming book on the history of wealth in America, did. Here’s what he found: There isn’t much net worth to draw on. Median net worth has declined steeply in the past generation—down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile. According to research funded by the Russell Sage Foundation, the inflation-adjusted net worth of the typical household, one at the median point of wealth distribution, was $87,992 in 2003. By 2013, it had declined to $54,500, a 38 percent drop. And though the bursting of the housing bubble in 2008 certainly contributed to the drop, the decline for the lower quintiles began long before the recession—as early as the mid-1980s, Wolff says.

Wolff also examined the number of months that a family headed by someone of “prime working age,” between 24 and 55 years old, could continue to self-fund its current consumption, presuming the liquidation of all financial assets except home equity, if the family were to lose its income—a different way of looking at the emergency question. He found that in 2013, prime-working-age families in the bottom two income quintiles had no net worth at all and thus nothing to spend. A family in the middle quintile, with an average income of roughly $50,000, could continue its spending for … six days. Even in the second-highest quintile, a family could maintain its normal consumption for only 5.3 months. Granted, those numbers do not include home equity. But, as Wolff says, “it’s much harder now to get a second mortgage or a home-equity loan or to refinance.” So remove that home equity, which in any case plummeted during the Great Recession, and a lot of people are basically wiped out. “Families have been using their savings to finance their consumption,” Wolff notes. In his assessment, the typical American family is in “desperate straits."

Certain groups—African Americans, Hispanics, lower-income people—have fewer financial resources than others. But just so the point isn’t lost: Financial impotence is an equal-opportunity malady, striking across every demographic divide. The Bankrate survey reported that nearly half of college graduates would not cover that car repair or emergency-room visit through savings, and the study by Lusardi, Tufano, and Schneider found that nearly one-quarter of households making $100,000 to $150,000 a year claim not to be able to raise $2,000 in a month. . . .

In the 1950s and ’60s, American economic growth democratized prosperity. In the 2010s, we have managed to democratize financial insecurity.

If you ask economists to explain this state of affairs, they are likely to finger credit-card debt as a main culprit. Long before the Great Recession, many say, Americans got themselves into credit trouble. . . .

With the rise of credit, in particular, many Americans didn’t feel as much need to save. And put simply, when debt goes up, savings go down. . . . nearly 30 percent of American adults don’t save any of their income for retirement. When you combine high debt with low savings, what you get is a large swath of the population that can’t afford a financial emergency. . . .

So who is at fault? Some economists say that although banks may have been pushing credit, people nonetheless chose to run up debt; to save too little; to leave no cushion for emergencies, much less retirement. “If you want to have financial security,” says Brad Klontz, “it is 100 percent on you.” One thing economists adduce to lessen this responsibility is that credit represents a sea change from the old economic system, when financial decisions were much more constrained, limiting the sort of trouble that people could get themselves into—a sea change for which most people were ill-prepared....

It is ironic that as financial products have become increasingly sophisticated, theoretically giving individuals more options to smooth out the bumps in their lives, something like the opposite seems to have happened, at least for many. Indeed, Annamaria Lusardi and her colleagues found that, in general, the more sophisticated a country’s credit and financial markets, the worse the problem of financial insecurity for its citizens. Why? Lusardi argues that as the financial world has grown more complex, our knowledge of finances has not kept pace. Basically, a good many Americans are “financially illiterate,” and this illiteracy correlates highly with financial distress. A 2011 study she and a colleague conducted measuring knowledge of fundamental financial principles (compound interest, risk diversification, and the effects of inflation) found that 65 percent of Americans ages 25 to 65 were financial illiterates.

Choice, often in the face of ignorance, is certainly part of the story. Take me. I plead guilty. I am a financial illiterate, or worse—an ignoramus.

And so the hole was dug. And it was deep. And we may never claw our way out of it.

Perhaps none of this would have happened if my income had steadily grown the way incomes used to grow in America. It didn’t, and they don’t. . . . Real hourly wages—that is, wage rates adjusted for inflation—peaked in 1972; since then, the average hourly wage has essentially been flat. (These figures do not include the value of benefits, which has increased.). . .

In a 2010 report titled “Middle Class in America,” the U.S. Commerce Department defined that class less by its position on the economic scale than by its aspirations: homeownership, a car for each adult, health security, a college education for each child, retirement security, and a family vacation each year. By that standard, my wife and I do not live anywhere near a middle-class life, even though I earn what would generally be considered a middle-class income or better. A 2014 analysis by USA Today concluded that the American dream, defined by factors that generally corresponded to the Commerce Department’s middle-class benchmarks, would require an income of just more than $130,000 a year for an average family of four. Median family income in 2014 was roughly half that....

I don’t ask for or expect any sympathy. I am responsible for my quagmire—no one else. I didn’t get gulled into overextending myself by unscrupulous credit merchants. Basically, I screwed up, royally. I lived beyond my means, primarily because my means kept dwindling. I didn’t take the actions I should have taken, like selling my house and downsizing, though selling might not have covered what I owed on my mortgage. And let me be clear that I am not crying over my plight. I have it a lot better than many, probably most, Americans—which is my point. Maybe we all screwed up. Maybe the 47 percent of American adults who would have trouble with a $400 emergency should have done things differently and more rationally. Maybe we all lived more grandly than we should have. But I doubt that brushstroke should be applied so broadly. Many middle-class wage earners are victims of the economy, and, perhaps, of that great, glowing, irresistible American promise that has been drummed into our heads since birth: Just work hard and you can have it all. . . .

And while the affliction is primarily individual and largely hidden from public view, it has perhaps begun to diminish our national spirit. People want to feel, need to feel, that they are advancing in this world. It is what sustains them. They need to feel that their lives will improve, and, even more, that the lives of their children will be better than theirs, just as they believed that their own lives would be better than their parents’. But people increasingly do not feel that way. A 2014 New York Times poll found that only 64 percent of Americans said they believed in the American dream—the lowest figure in nearly two decades. I suspect our sense of impotence in the face of financial difficulty is not only a source of disillusionment, but also a source of the anger that now infects our national politics, an anger that gets displaced onto undocumented immigrants or Chinese trade or President Obama precisely because we are unable or unwilling to articulate its true source. As the Harvard economist Benjamin M. Friedman wrote in his 2005 book, The Moral Consequences of Economic Growth, “Merely being rich is no bar to a society’s retreat into rigidity and intolerance once enough of its citizens lose the sense that they are getting ahead.” We seem to be at the beginning of just such a retreat today—at the point where simmering financial impotence explodes into political rage.

Many Americans still remain optimistic—at least publicly. In a 2014 Pew survey revealing that 55 percent of Americans spend as much as they make each month, or more, nearly the exact same percentage say they have favorable financial circumstances, which may just mean some of them are too frightened to admit they don’t. Or perhaps they are just too financially illiterate to understand the severity of their predicament. Many of the scholars I have talked with are optimistic too. “People have this ingenuity to solve so many problems,” Annamaria Lusardi told me. “I think we are finally getting it that the brain does not work around money naturally,” Brad Klontz said, believing that Americans are realizing they have to take more control of their financial lives.

But optimism won’t negate the fact that wages continue to stagnate; that the personal savings rate remains low; and that a middle-class life seems increasingly hard to maintain. (A pre-recession survey by the Consumer Federation of America and the Financial Planning Association found that 21 percent of Americans felt the “most practical” way for them to get several hundred thousand dollars was to win the lottery.) I try to hang on to hope myself while still being a realist. Yet hope doesn’t come easily anymore, even in a nation of dreamers and strivers and idealists. What so many of us have been suffering for so many years may just seem like a rough patch. But it is far more likely to be our lives."

Summing Up

The more we know about how things really are, the better off we are.

Getting to a better reality is always a good thing.

That's because while we can't change what has happened and what is, we can change what will happen and what will be.

Hole digging is out.

Financial literacy is in.

So is personal financial responsibility.

So let's do all these things ourselves and help others do them as well.

That's my take.

Thanks. Bob.

Friday, April 22, 2016

An Essay on Passover and Its Meaning for All Freedom Loving Americans

The Optimistic Conservatism of Passover is subtitled 'Rehearse the story of liberty gained and be humble---honor what has gone before.' 

It has much to say to us about freedom:

"I associate conservatism with optimism and its synonyms—hopefulness, sanguinity, positivity and confidence. American Jews are often associated with a gutted liberalism, but that is a caricature. A more intimate understanding of the Jewish experience connects it to an optimistic conservatism that could help secure America’s future.

I’m particularly reminded of that connection as Jews celebrate the eight days of Passover beginning Friday at sundown. Passover is the festival of freedom when Jews commemorate and re-experience the biblical story of their passage from slavery under Pharaoh in Egypt to freedom, first in the desert, then in the Land of Israel.

Emphasizing the importance of decentralized authority and individual responsibility, the escape from Egypt is celebrated not in the synagogue but in the home, among family and invited guests who join for the ceremony of the Seder, which means order. Following a ritual text called the Haggada, families retell the story as recounted in the Book of Exodus, and eat the unleavened bread that the Children of Israel took with them when they fled in the middle of the night.

When I took over from my mother the organization of Passover for our family what I felt most keenly was the paradox—the incongruity of it all. The cleaning and cooking preparations for Passover are so demanding that in the weeks leading up to it, obsessive-compulsive personalities come into their own. I could not get beyond these questions: If we were breaking for freedom, why these weeks of preparation? If we were recalling harsh conditions, which was it—the dry matzo and bitter herbs, or the chicken soup with matzo balls and the best meal of the year?

And that is how the association of conservatism with hopefulness began for me, and how it is further reinforced every year. Freedom was not decamping to Hawaii to become a surfer, not experimenting with drugs or with sexual conquests—not getting away from, but readying oneself for, the enjoyment of freedom. The Passover ritual of re-experiencing the Exodus helped me figure out the constituent elements of freedom that were crafted over many centuries:

First, a people is not defined by its experience of slavery, but neither does self-liberation happen once and for all. The temptation of slavery is always there, the part of us that wants to return to a stage of dependency, to the relative security of having the overseers regulating life. Those who do not reinforce the responsibilities of freedom will be returned to the house of bondage.

Second, the Passover ritual calls for humility—not to reduce our self-confidence, but rather to harness our capacities to the larger civic purpose of a free society. Friedrich Nietzsche was concerned that the Judeo-Christian tradition squelched the greatness of the emergent individual. The constitutional civilization that Passover celebrates is wary of the hubris of individuals who think themselves too good to “merely” reinforce what others have achieved before us.

One other item of Passover consolidated my conservative hope for change—the section about the relation of optimism to evil. It’s one that makes liberals queasy. “Pour Out Thy Wrath!” is a collection of verses from Psalms and Lamentations that calls on God to punish not the Jews who obey his laws but—for a change!—the evildoers who want to destroy them.

Needless to say, this section about confronting the enemy was the first part of the Passover Haggada that was eliminated by self-styled Jewish progressives, by the Bernie Sanders constituency of the Jewish people. That constituency gets very angry—but it pours out its wrath on its own people instead of on its destroyers. And let’s acknowledge that when you have no incentive for aggression, it is hard even to voice aggression.

Free people tend to focus inward on their self-improvement and have no need for an enemy, no need to imagine a malevolent Other. But a free, energetic, self-reliant people that creates and builds and innovates and does not want war is precisely the people that gets targeted by others. This is what Jews learned at tremendous cost over the centuries, and it is the most important lesson that they have to share with America.

The history of America is not the history of slavery but of slavery overcome, of having escaped from slavery into freedom. The descendants of slaves and slave-owners alike should not be trying to erase the shameful aspects of the past but to take the measure of all that has been achieved and to celebrate it with humble pride.

Culture, behavior, values and the story of America are not biologically transmitted. America’s freedoms cannot be maintained free of charge, and keeping America great means rehearsing how we got that way, repeating it formally, in the family as well in the schools and in public ceremony. There are so many occasions for a Passover experience in America—Thanksgiving, the Fourth of July, Presidents Day, Martin Luther King Day. All that has been earned and won cannot be maintained unless it is conserved and reinforced and transmitted and celebrated.

Ms. Wisse is a former professor of Yiddish and comparative literature at Harvard. This op-ed was adapted from her speech on April 16 at a student-sponsored conference at the university, “Prospectus: Emerging Ideas for New Conservative Generation.” "

Summing Up

I hope you enjoyed and learned from the essay as much as I did.

We're all in this together, so let's celebrate the freedoms we enjoy as free and humble Americans.

And let's try hard not to pay too much attention to what the vote seeking politicians say while trying to pit us against one another in an effort to get themselves elected.

Thanks. Bob.

Thursday, April 21, 2016

Sleeping Well at Night ... Knowing What's What Financially

The real reason you're not sleeping says this about how to get a good night's rest each and every night:

"Roughly 70 million Americans suffer from sleep problems — and new research uncovers a surprising reason for some of those sleepless nights.

Fully 68% of women and 56% of men say they lose sleep at least occasionally because they’re worried about money issues, according to a survey of 1,000 adults released Thursday by, a credit-card comparison website.

Retirement worries are the most common concern, with nearly four in 10 people saying they’ve at least occasionally lost sleep over their lack of retirement savings. That may be thanks to the fact that just 22% of workers say they are very confident that they will have enough money for a comfortable retirement, according to the Employee Benefit Research Institute, which focuses on policy research and benefits education.

5 financial issues Americans lose sleep over
Percent of Americans who say they at least occasionally lose sleep over these issues

2007 2009 2016
Retirement savings 34% 40% 39%
Health care/insurance bills 28% 35% 29%
Mortgage/rent  20% 28% 26%
Education expenses 31% 27% 30%
Credit card debt 17% 23% 22%

“They say money can’t buy you love or happiness, but according to our survey, money can buy you a pretty good night’s sleep,” says Matt Schulz, senior industry analyst for"

Summing Up 

Retirement savings and education expenses are the two biggies that we worry about the most.

Close behind the two biggies are health care/insurance bills, mortgage/rent and credit card debt.

That's in reality needless worrying in most cases, since knowing what's what financially isn't all that difficult for individuals to achieve.

It just requires some time and some confidence, as well as a helping hand along the way from someone who's been there, done that.

For those who want it, we're here to help.

Thanks. Bob.

Wednesday, April 20, 2016

Harriet Tubman ... A Letter From Her Friend Frederick Douglass

A Letter from Frederick Douglass to Harriet Tubman written in 1869 says this to and about the lady whose image will soon appear on the $20 bill:

"From Sarah Hopkins Bradford’s “Scenes in the Life of Harriet Tubman” (1869), a letter dated August 29, 1868, from Frederick Douglass to Tubman, the abolitionist whose image will replace Andrew Jackson’s on the $20 bill, the Treasury Department announced Wednesday:

Dear Harriet: I am glad to know that the story of your eventful life has been written by a kind lady, and that the same is soon to be published. You ask for what you do not need when you call upon me for a word of commendation. I need such words from you far more than you can need them from me, especially where your superior labors and devotion to the cause of the lately enslaved of our land are known as I know them. The difference between us is very marked. Most that I have done and suffered in the service of our cause has been in public, and I have received much encouragement at every step of the way. You on the other hand have labored in a private way. I have wrought in the day—you in the night. I have had the applause of the crowd and the satisfaction that comes of being approved by the multitude, while the most that you have done has been witnessed by a few trembling, scarred, and foot-sore bondmen and women, whom you have led out of the house of bondage, and whose heartfelt “God bless you” has been your only reward. The midnight sky and the silent stars have been the witnesses of your devotion to freedom and of your heroism. Excepting John Brown—of sacred memory—I know of no one who has willingly encountered more perils and hardships to serve our enslaved people than you have. Much that you have done would seem improbable to those who do not know you as I know you. It is to me a great pleasure and a great privilege to bear testimony to your character and your works, and to say to those to whom you may come, that I regard you in every way truthful and trustworthy.

Your friend,

Frederick Douglass"

See also Change for a $20: Tubman Ousts Jackson which reads in part as follows:

"Treasury Secretary Jacob J. Lew on Wednesday announced the most sweeping and historically symbolic makeover of American currency in a century, proposing to replace the slaveholding Andrew Jackson on the $20 bill with Harriet Tubman, the former slave and abolitionist, and to add women and civil rights leaders to the $5 and $10 notes.

Mr. Lew may have reneged on a commitment he made last year to make a woman the face of the $10 bill, opting instead to keep Alexander Hamilton, to the delight of a fan base swollen with enthusiasm over a Broadway rap musical named after and based on the life of the first Treasury secretary.

But the broader remaking of the nation’s paper currency, which President Obama welcomed on Wednesday, may well have captured a historical moment for a multicultural, multiethnic and multiracial nation moving contentiously through the early years of a new century.

From left, Sojourner Truth, Lucretia Mott, Susan B. Anthony, Alice Paul and Elizabeth Cady Stanton will be featured on the back of the new $10 bill. Credit From left: Hulton Archive, via Getty Images; via Library of Congress: via Library of Congress; Hulton Archive, via Getty Images; Associated Press

Tubman, an African-American and a Union spy during the Civil War, would bump Jackson — a white man known as much for his persecution of Native Americans as for his war heroics and advocacy for the common man — to the back of the $20, in some reduced image along with the White House. Tubman would be the first woman so honored on paper currency since Martha Washington’s portrait briefly graced the $1 silver certificate in the late 19th century.

While Hamilton would remain on the $10, and Abraham Lincoln on the $5s, images of women would be added to the back of both — in keeping with Mr. Lew’s intent “to bring to life” the national monuments depicted there.

The picture of the Treasury building on the back of the $10 bill would be replaced with a depiction of a 1913 march in support of women’s right to vote that ended at the building, along with portraits of five suffrage leaders: Lucretia Mott, Sojourner Truth, Elizabeth Cady Stanton, Alice Paul and Susan B. Anthony, who in more recent years was on an unpopular $1 coin until minting ceased.

On the flip side of the $5 bill, the Lincoln Memorial would remain, but as the backdrop for the 1939 performance there of Marian Anderson, the African-American classical singer, after she was barred from singing at the segregated Constitution Hall nearby. Sharing space on the rear would be images of Eleanor Roosevelt, who arranged Anderson’s Lincoln Memorial performance, and the Rev. Dr. Martin Luther King Jr., who in 1963 delivered his “I have a dream” speech from its steps.

The Treasury Department announced new designs for several bills that will incorporate women, including Harriet Tubman, Susan B. Anthony and Eleanor Roosevelt.

The final redesigns will be unveiled in 2020, the centennial of the 19th Amendment establishing women’s suffrage, and will not go into wide circulation until later in the decade, starting with the new $10 note."

Summing Up

All's well that ends well.

Thanks. Bob.

The Global Debt Debacle ... What Can't Go On Forever Won't

Big Banks Aren't the Problem is subtitled 'The Richmond Fed says 61% of debts are guaranteed by government.'

The article presents those stubborn '61%' facts about our government's, aka We the People's, indebtedness.

Future generations of U.S. taxpayers are going to have a huge mountain of past promises to fulfill at the cost of not being able to live their own dreams.

Here's what the troubling but all too accurate article says in relevant part:

"The Richmond Fed’s “bailout barometer” shows that, since the 2008 crisis, 61% of all liabilities in the U.S. financial system are now implicitly or explicitly guaranteed by government, up from 45% in 1999.

Citigroup estimates that the top 20 advanced industrial economies, in addition to their enormous, recognized public debts, face unrecorded additional debts of $78 trillion for their unfunded pension systems.

Six years after a crisis caused by excessive borrowing, McKinsey estimates that even visible global debt has increased by $57 trillion, while in the U.S., Europe, Japan and China growth to pay back these liabilities has been slowing or absent.

In their desperation to avoid the real problem, central bankers lately have started bruiting “helicopter money”—the jokey term for printing money and giving it to consumers, businesses or governments to spend without incurring an offsetting debt.

How does this solve any problem when so many businesses and households are already sitting on cash hoards they are afraid to spend or invest? As former Israeli central banker Jacob Frenkel told a conference in Italy two weeks ago, “What they need is not money. What they need is confidence and productive opportunities in front of them.”

Exactly. They need to see their leaders taking actions to restore confidence in the ability of the world’s premier economies to grow and to afford their debts. . . .

The question that ought to keep central bankers up at night is whether their ministrations to buy time for the politicians are only buying politicians time to make matters worse."

Summing Up

Free stuff 'given' by government is never free.

And it's a certainty that the bill will come due down the road.

In the end, someone will pay.

And it won't be the politicians.

Here's the real deal --- without economic and income growth led by private sector investment and initiatives, the global debt burden will become both unpayable and unconscionable.

And eventually the bubble will burst.

That's my take.

Thanks. Bob.

Friday, April 15, 2016

Dangerous Investing in Bonds ... Today's 'Duration Risk' in Bond Investments Is Both Real and Huge

Bonds are incorrectly viewed by most individuals as safe investments. And here's something else that makes bond investing hazardous to one's financial health and well being --- the longer the bonds will be outstanding (the duration), the bigger will be the interest rate and credit risk undertaken by the lender.

And that duration element in order to get a marginally higher interest rate simply isn't a risk I'm prepared to take in the historic low rate environment of today. Nor should you, I would suggest.

For an example of how interest rate risk works, think of a chart with a slanted line going from the lower left to the upper right. The vertical axis represents the rate of interest and the horizontal axis represents time or duration of the bond. The longer the duration or the longer the bond is outstanding, generally the higher the interest rate that will be paid on the bond. So far, so good.

But now let's think of a Teeter Totter (see my recent post on this) with the future of interest rates going up over time and the principal value, aka price, of the bond going down. That's the situation facing bond investors for the foreseeable future. The farther investors go out on the yield curve, the more interest rate risk they are taking with respect to future interest rate levels. And the more interest rates rise, the farther the price or principal value of the outstanding bond will fall if not held until maturity. It's really just that simple.

{NOTE: Of course, there are other risks to consider as well, such as credit risk, for non-government entities and even some government borrowers as well. If a company or government agency enters bankruptcy, bondholders have a higher claim on the assets than do common stock investors, and if a company decides to stop paying dividends to its owners, it can do so, unlike its obligation of making principal and interest payments on its bonds. That said, individuals need not and should not invest their savings in a risky stock which may not be able to make its payments, whether they be on the company's outstanding bond obligations or to its shareholders in the form of cash dividends.}

So that's precisely why I've chosen to buy for the long haul shares in good blue chip companies, participate in growing dividends and enjoy a growing share price over time.

But if you're going to buy bonds in a low interest rate environment such as today, and in all probability tomorrow as well, please take the time to know what you're doing and don't 'reach' for yield by buying long dated bonds of companies which aren't blue chip investments.

Duration Risk: The Bomb Ticking Inside Today's Bond Market contains valuable information about the riskiness of bond investing for individuals:

"{There is} a quiet risk suffusing bond markets in the era of low and negative rates: duration.

The duration of a bond is a measure of when an investor gets his or her money back. Longer-term bonds have higher duration—as do bonds with lower coupon payments, because low coupons mean more waiting.

Today, with global interest rates extraordinarily low, and borrowers issuing ultralong debt, duration is shooting up.

Duration implies risk: A rule of thumb is that a one percentage-point change in interest rates implies a change in the bond’s price equal to the duration. A bond with a duration of 25 years will jump 25% if interest rates fall by one percentage point ​and fall 25% if rates rise by the same amount.​ . . .

As durations get longer, risks mount. . . .

That long waiting period is worrisome.

An educated investor can take a guess at where interest rates might be in two or three years and the situation that the economy might be in then. That is the sort of range that many central banks and other large institutions attempt to forecast across, and many end up being inaccurate. A forecast of the world in four decades is a fool’s errand.

Usually, to account for duration risk, the yield curve on bonds is relatively steep. That means bonds with long maturities have considerably higher yields, since an investor is facing considerable uncertainty. . . .

But institutions which have made government bonds the backbone of their business model, like insurance companies and pension funds, may struggle to find safe alternatives with a similar yield.

Those investors and fund managers are forced to take on more risk. When that is through credit risk, as in the case of Venezuelan government bonds, it seems obvious to everyone. When they are loading up on bonds that don’t mature for longer and longer periods, it is less easy to see. But the risk is still there and growing."

Summing Up

For my personal account, I don't own bonds and have no intention of doing so. Rates will be higher down the road as far as the eye can see, and that's not good for bond investors. It's the Teeter Totter effect at work.

Instead I own shares in blue chip dividend paying and growing companies, and I own them for the long haul.

In my view, that's both the safest and most profitable way to invest my savings.

You may wish to consider a similar approach. 

But whatever you do, take the time to know what you're doing with your money. It's very much worth the effort.

That's my take.

Thanks. Bob.