Free Stuff

January 21, 2018

by Steve Stofka

I like the 21st century. I get a lot of free stuff. Opinions, news and information, and directions to anywhere on the planet. Free apps and games for my phone. Free porno and free sermons.

I get so much free stuff that I can afford to pay for fancy coffee and smart phones, television and internet access. I can now afford a personal guru to align my chakras. My personal assistant, Alexa, listens to me and answers my questions.

Goodbye and good riddance to the 20th century with its clunky records, cassettes and DVDs. I say “Alexa, play me blankety-blank song,” and millions of tiny electrons do my bidding, and out comes my song!

My real personal income has doubled since 1973 (Average per capita income ) so I got all this extra free money. I’m getting paid more at work than 45 years ago. My total compensation has gone up 44% (Total real compensation per employee ). My employer provided benefits have doubled (Real employee benefits ). My employer kicks in more free money into my retirement program, and into my health care insurance. That’s real dollars, after inflation.

I got so much extra free money coming in that I’m living like royalty. My income has gone up 100% in 45 years, but my spending has increased 137% because I’m a first class 21st century person that banks want to loan money to.

Outlays1973-2017

Since 2000, I eat out a lot more – like 75% more (Real restaurant sales ). I deserve it cause I’m making all this extra money and I’m too busy to cook. In 2000, I was spending $11.50 a day for shelter but I needed more personal room and modern conveniences. Now I got more room but I’m spending $16 a day.

HousingCostRealPerCap2000-2017

Living first class means that I’m saving a lot less of my free extra money.  45 years ago, I was saving 12% of my income.  Now it’s 3%. But there’s an easy fix to that. More free stuff!
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Farming Communities

This past summer, my wife and I joined the many thousands of solar eclipse watchers who visited western Nebraska, where the totality and length of the eclipse was near its peak.  At hotels, shops and restaurants we were greeted with a cordiality that is typical of Nebraskans.  They worked extra hours to accommodate the influx of visitors. At one restaurant, our waitress remarked that the extra business would make up for the slack earlier in the year.  The reason?  Not the food and service, which were both excellent. The locals weren’t eating out as much. And why was that?

Last week, I wrote about the seven-year downturn in commodity prices that has affected many rural communities.  Although agriculture contributes about 6% to GDP (USDA) the changing fortunes of the people who produce our food gets little attention in urban areas.

A few hundred miles away, Denver is booming.  Gentrification and rising housing costs have stressed the pocketbooks of some families.  In Nebraska, it is declining prices that have caused stress fractures in the community (Denver Post ). Land values declined 4% in 2015, and another 9% in 2016 (U. of Nebraska-Lincoln report).

Despite a strong export market for corn, soybeans and other agricultural products, Iowa has had falling land prices for three years. In a recent survey, 40% of responding Iowa farmers reported lower sales in 2017.  However, there was a slight uptick in land values this past year and the hope is that the Iowa agricultural community may be turning a corner.

As land values decline, banks lower lending limits, refinancing terms become more strict.  Families sit at the kitchen table and try to pay higher bills with less money.  Property taxes decline so that there is less money for schools and other public infrastructure.  Seeing the stress that their parents face, younger folks are attracted to urban areas where there is more economic opportunity.  Farms that have been in the family for several generations get sold to large farm management companies.

The governors of western states must understand that they serve all the people of their state.  As people concentrate in the urban centers, they demand more resources from the state.  Those in rural areas feel as though they are being left out.  They will form elective coalitions within state legislatures to offset the growing urban power.

To those in the dense population centers of the coastal states, the shifting political and economic alliances in the fly-over states might earn a shrug.  Our federalist system of voting was a grand bargain to offset the dominance of high population states.  The 2016 election was a good lesson in the power of electoral federalism.  State and federal politicians must build a bridge that crosses the divide between the fortunes of those in urban and rural areas.

Expectations

by Steve Stofka

December 3, 2017

What can I expect from my portfolio mix? Portfolio Visualizer has a free tool  to analyze an asset mix. We can also get a quick approximation by looking at a fund with that mix.
An investor with a 40/60 stock/bond mix might go to the performance page of Vanguard’s Wellesley Income fund VWINX. It’s 50-year return is close to 10% but that includes the heady days of the 1970s and early 1980s when both interest rates and inflation were high. The ten-year performance of this fund includes the financial crisis and is close to 7%.

An investor with a slightly aggressive 65/35 stock bond mix could look to Vanguard’s Wellington Fund VWELX, which has a similar weighting. It’s 90-year return is 8.3% but that includes the Great Depression and WW2. It’s 10-year return is – wait for it – close to 7%.

Two funds – a conservative 40/60 and a slightly aggressive 65/35 – both had the same ten-year returns. All it took was one bad year in the stock market – 2008 – to even up the returns between these two very different allocations. On a year-by-year comparison of the two funds we see a trend. During the two negative years of this fifteen period, I charted the absolute value to better show that trend. Also, compare the absolute values of the returns in 2008 and 2009. The collapse and bounce back was about the same level.

VWELX-VWINXComp

During this fifteen year period, the cautious mix earned 88 cents to the $1 earned by the slightly aggressive mix. Looking back thirty years, cautious made only 75 cents. In the past fifteen years, the difference between positive and negative years was important. In good years, cautious earned 20 cents less. But in negative years, like 2002 and 2008, cautious made 73 cents more by losing that much less.

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Personal Saving Rate

The savings rate is near all-time lows. We’ve seen a similar lack of caution in 2000 and 2006. As housing and equities rise, families may count those gains in their mental piggy bank. Asset gains are not savings. Asset prices, particularly equities, will decline during a recession. Jobs are lost. Without an adequate financial cushion, families struggle to weather the downturn. The rise in bankruptcies and foreclosures further exacerbates the downturn.
SavingsRate1998-2017

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Annuity

A good explanation of the various types of annuities.  The graphics that the author presents might help some readers understand the role of annuities, and the advantages of deferred vs. immediate annuitues.  I have also posted this on the Tools page for future reference.

http://www.theretirementcafe.com/2017/11/income-annuities-immediate-and-deferred.html

Saving Trends

May 1, 2016

Macroeconomists define saving as Income Less Consumption and Taxes.  There are two distinctions – public, or government savings, and private, or household, savings.

From 1986 to 2000 inclusive, a 15 year period, gross private savings grew 78%.  In the same length of time, from 2001 to 2015, it grew 112%.  So why the higher savings rate?

Lower interest and inflation rates have persisted during this later period.  One would think that consumers would be more likely to save when interest rates were higher in the earlier period.  However, the reverse is true.  Households respond to lower interest rates by saving even more.  Why?  Because their savings will grow more slowly at lower interest rates, they must save more, which only keeps interest rates low.  Like so much of human activity, the process is self-reinforcing.

What else contributes to higher savings rates?  80 million Baby Boomers is more than a third of the population.  As they neared retirement age, they saved more of their income.  In 2012, the first boomers turned 66, a high point in the chart of savings below.

Richard Koo is the chief economist at Nomura, a gigantic Japanese financial holding company similar to Goldman Sachs.  He introduced the idea of a balance sheet recession instigated by a large number of people and businesses paying down their debts to repair their balance sheets.  Here is a recent paper.

Because trends in savings are affected by the decisions of mutiple generations, the primary causes can be difficult to establish.  As the Boomers begin to spend down their savings in retirement, the equally large Millennial generation will start saving but it is unlikely that they will completely offset the spending rate of the Boomers.  The glut of savings will be slowly draw down until new investment puts enough demand for savings, which will spur interest rates higher.

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Cadillac Purchasing Power

Last week, I looked at the relative purchasing power to buy a Ford F-150 pickup.  In a trip to a car museum lately, I learned that a new 4 door Cadillac model cost $2000 in 1913.  The average hourly wage was $2 per hour per the NBER, so it took the average person 1000 work hours, about half a year, to buy that Cadillac.  A 2016 Cadillac 4 door ATS Sedan costs about $40,000, an amount that would take 1573 hours, about nine months, at an average $25.43 per hour (BLS).

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College Bound

A recent BLS study found that 70% of 2015 HS grads enrolled in college.  Recent NAEP results show that only 37% of test takers are prepared for college reading and math.

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Sales, Savings and Volatility

August 17, 2014

This week I’ll take a look at the latest retail sales figures, a less publicized volatility indicator, a comparison of BLS projections of the Labor Force Participation Rate, and the adding up of personal savings.

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Retail Sales

Two economic reports which have a major influence on the market’s mood are the monthly employment and retail sales reports.  After a disappointing but healthy employment report this month, July’s retail sales numbers were disappointing, showing no growth for the second month in a row.  The year-over-year growth is 3.7%, which, after inflation, is about 1.5% real growth.  Excluding auto sales (blue line in the graph below), sales growth is 3.1, or about 1% real growth, the same as population growth.

As we can see in the graph below, the growth in auto sales has kicked in an additional 1/2% in growth during this recovery period. Total growth has been weakening for the past two years despite strong growth in auto sales, a sign of an underlying lack of consumer power.

Real disposable income rebounded in the first six months of this year after negative growth in the last half of 2013 but there does not seem to be a corresponding surge in sales.

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Labor Force Projections

While we are on the subject of telling the future…

All we need are 8 million more workers in the next two years to meet Labor Force projections made in 2007 by the Bureau of Labor Statistics (BLS).   8 million / 24 months = 300,000 a month net jobs gained. Hmmm…probably not.  In 2007, the BLS forecast slowing growth in the labor force in the decade 2006 – 2016.  Turned out it was a lot slower. Estimates then for 2016 projected a total of 164 million employed and unemployed.  In July 2014, the BLS put the current figure at 156 million employed.  The Great, or at least Big, Recession caused the BLS to revise their forecast a number of times.  The current estimate has a target date of 2022 to hit the magic 164 million.  In other words, we are 6 years behind schedule.

The Participation Rate is the ratio of the Civilian Labor Force to the Civilian Non-Institutional Population aged 16 and above.  The equation might be written:  (E + UI) / A = PR, where E = Employed, UI = Unemployed and Actively Looking for Work, and A = people older than 16 who are not in the military or in prison or in some institution that would prevent them from making a choice whether to work or not.  As people – the A divisor in the equation – live longer, the participation rate gets lower.  It ain’t rocket science, it’s math, as baseball legend Yogi Berra might have said.

The Participation Rate started rising in the 1970s as more women entered the work force, then peaked in the years 1997 – 2000.  Prior to the recession of 2001, the pattern of the participation rate was predictable, declining during an economic downturn, then rising again as the economy recovered.  The recovery after the recession of 2001 was different.  The rate continued to decline even as the economy strengthened.

In 2007, the BLS expected further declines in the rate from a historically high 67% in 2000 to 65.5% in 2016.  In 2012, the rate stood at 63.7%.  Current projections from the BLS estimate that the rate will drop to 61.6% by 2022.

Much of the decline in the participation rate was attributed to demographic causes in the 2007 BLS projections:

“Age, sex, race, and ethnicity are among the main factors responsible for the changes in the labor force participation rate.” (Pg. 38)

Comparing estimates by some smart and well trained people over a number of years should remind us that it is extremely difficult to predict the future.  We may mislead ourselves into thinking that we are better than average predictors.  Our jobs may seem fairly secure until they are not; a 5 year CD will get about 5 – 6% until it doesn’t; the stock market will sell for about 15x earnings until it doesn’t; bonds are safe until they’re not.

The richest people got rich and stay rich because they know how unpredictable the world really is.  They hire managers to shield them – hopefully – from that unpredictability.  They fund political campaigns to provide additional insurance against the willy-nilly of public policy.  They fight for government subsidies to provide a safety cushion, to offset portfolio losses and mitigate risk.  What do many of us who are not so rich do to insure ourselves against volatility?  Put our money in a safe place like a savings account or CD.  In real purchasing power, that costs us 1 – 2%, the difference between inflation and the paltry interest rate paid on those insured accounts.  In addition, we can pay a hidden “insurance” fee of 4% in foregone returns by being out of the stock and bond markets.  We stay safe – and not-rich.  Rich people manage to stay safe – and rich – by not doing what the not-rich people do to stay safe.  Yogi Berra couldn’t have said it better.

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China

For you China watchers out there, Bloomberg economists have compiled a monetary index from several key factors of monetary policy.  After hovering near decade lows, China’s central bank has considerably loosened lending in the past two months.  The chart shows the huge influx of monetary stimulus that China provided in 2009 and 2010 as the developed world tried to climb up out of the pit of the world wide financial crisis.

The tug of war in China is the same as in many countries.  Politicians want growth.  Central banks worry about inflation.  The rise in this index indicates that the central bank is either 1) bowing to political pressure, or 2) feels that inflationary pressures are low enough that they can afford to loosen the monetary reins.  As is often the case with monetary policy, it is probably some combination of the two.

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Personal Savings Rate

Over the past two decades, economists have noted the low level of savings by American workers.  While economists debate methodologies and implications, politicians crank up their spin machines. More conservative politicians cite the low savings rate as an indication of a lack of personal responsibilty.  As workers become ever more dependent on government programs, they do not feel the need to save.  Over on the left side of the political aisle, liberals cite the low savings rate as a sign of the growing divide between the middle class and the rich.  Many families can not afford to save for a house, or their retirement, or put aside money for their children’s education.  We need more programs to correct the economic inequalities, they say.

While there might be some truth in both viewpoints, the plain fact is that the Personal Savings Rate doesn’t measure savings as most of us understand the term.  A more accurate title for what the government calls a savings rate would be “Delayed Consumption Rate.”  The methodology used by the Dept. of Commerce counts whatever is not spent by consumers as savings.  “To consume now or consume later, that is the question.”

If a worker puts money into a 401K each month, the employer’s matching contribution is not counted.  If a consumer saves up for a down payment for a house, that is included in savings.  When she takes money out of savings to buy the house, that is a negative savings.  The house has no value in the “savings” calculation.  Many investors have a large part of their savings in mutual funds through personal accounts and 401K plans at work.  Capital gains in those funds are not counted as savings.  (Federal Reserve paper) In short, it is a poor metric of the aggregate behavior of consumers.  Some economists will point out that the savings rate indicates a level of demand that consumers have in reserve but because a significant portion of saved income is not counted, it fails to properly account for that either.

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Volatility – A section for mid-term traders

No one can accurately predict the future but we can examine the guesses that people make about the future.  In his 2004 book The Wisdom of Crowds (excerpt here) James Surowiecki relates a number of studies in which people are asked to guess answers to intractable problems, like how many jelly beans are in a jar.  As would be expected, respondents rarely get it right.  The surprising find was that the average of guesses was remarkably close to the correct answer.

Through the use of option contracts, millions of traders try to guess the market’s direction or insure themselves against a change in price trend.  A popular and often quoted gauge of the fear in the market is the VIX, a statistical measure of the implied volatility of option contracts that expire in the next thirty days.  When this fear index is below 20, it indicates that traders do not anticipate abrupt changes in stock prices.

Less mentioned is the 3 month fear index, VXV (comparison from CBOE). Because of its longer time horizon, it might more properly be called a worry index.  Many casual investors have neither the time, inclination or resources to digest and analyze the many economic and financial conditions that impact the market.  So what could be easier than taking a cue from traders preoccupied with the market?  Below is a historical chart of the 3 month volatility index.

Historically, when this gauge has crossed above the 20 mark for a couple of weeks, it indicates an elevated state of worry among traders.  The 48 month or 4 year average of the index is 19.76.  Currently, we are at a particularly tranquil level of 14.42.

When traders get really spooked, the 10 day average of this anxiety index will climb to nosebleed heights as it did during the financial crisis.  As the market calms down, the average will drift back into the 20s range, an opportunity for a mid-term trader to get cautiously back into the water, alert for any reversal of sentiment.

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Takeaways

Retail sales have flat-lined this summer but y-o-y gains are respectable.  So-so income growth constrains many consumers.  The 3 month volatility index is a quick and dirty summary of the mid-term anxiety level of traders.  A comparison of BLS labor force projections shows the difficulty of making accurate predictions.  The personal savings rate under-counts savings.