Disposable Personal Income

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Disposable personal income is a benchmark that is used to assess aspects of our financial condition, like debt and wealth. What is it? It is gross income, including any transfer payments like Social Security that we receive, less taxes.

Discretionary income is what we have left of disposable income after paying our rent or mortgage, utilities, food and clothing – the essentials. Discretionary implies that we have some choice about whether to spend the money or not. What is discretionary to one person may seem like a necessity to another person. For those of us who are having some financial difficulties, it can be both fruitful and painful to reassess our guidelines for what is a necessity. A cell phone, once regarded as a luxury item, is now considered by many to be a utility like electricity. Is the monthly $100 voice/data plan we are on a necessity or could we get by with a $30 monthly voice plan instead? As I said, these reassessments can be painful.

Some regard a new car every three years a necessity while others view it as a luxury. In any assessment of our personal expenses, it is frightingly easy to lie to ourselves, to convince ourselves that something really is an absolute necessity and to line up several reasons why a particular item is a necessity.

Of the two income benchmarks, disposable personal income (DPI) is easier to measure and to gauge our debt. Household debt, which includes both consumer and residential mortgage debt, was about 80% of disposable personal income during the 1980s and 1990s. Household debt is now 122% of DPI, down from 129%. Americans are saving more but they have quite a ways to go to decrease their debt levels.

Credit Guard has a good guide to personal budgeting.

Health Care Conundrum

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In an op-ed in WSJ 10/17/09, Vernon Smith, a Nobel Laureate in economics, explained the problem with health insurance in simple terms that any layperson can understand. Health care provider A recommends to patient B the services that B should buy from A. C, either the government or an insurance company, pays A. “This structure defines an incentive nightmare,” Mr. Smith writes and presents a seemingly unsolvable problem.

The Senate recently passed its version of health care reform. House and Senate committees will meet in January to start reconciling differences in House and Senate versions. During the health care debate this year, and for the past century – Theodore Roosevelt tried to institute a public health care system – the focus has been on solutions to a number of problems: the number of uninsured, ballooning costs, the alarming number of bankruptcies because of medical bills, insured patients who are cut off because their benefits exceeded a lifetime maximum, those people denied affordable coverage because of pre-existing conditions.

Various players in the medical care provider market have voiced objections to proposed solutions when the impact of a solution would be negative on them. Perhaps we should all admit that we will never fix this intractable problem. Like many cancer therapies, the “solution” may be to manage the problem, not solve it. Only when all parties give up the notion of finding a solution will we be able to sit down at the table and come up with a framework for managing this problem.

This idea was first conceived by James Madison, the chief architect of the U.S. Constitution. Unable to resolve the decade old dispute between advocates for a strong federal government and those who championed individual and states’ rights, Madison had the genius to incorporate the struggle between these two ideologies directly into the Constitution, thereby providing a structured debating platform for this continuing argument and struggle for power.

Buffalo Stampede

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From the stock market low in March through the end of September, retail investors, who own half of the U.S. equity market, had put only $2.5B into mutual funds and exchange traded funds for equities, largely missing out on the market’s 60% rise. Investors had pumped $254B into bonds during that time, a ratio of 100-1 of bond to equity investment.

Forget about the bulls and bears. Markets, both up and down, behave more like buffaloes.

Home Equity Loans

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Since the credit crisis in September 2008, home equity loans have declined – little surprise there. The steepness of the decline, however, is a bit astonishing. In a Dec. 25th article, AP details the 87% drop in loans in 2009 compared with loans in 2006, when the housing market was booming.

A lot of kitchens and baths are not getting remodeled, garages are not being built, college educations are not being funded. The reduction in remodeling projects has dealt a blow to the construction industry but the sharp reduction in home equity lending has a wider impact on many varieties of small businesses. Home Equity loans provide the start up funds for new businesses and can provide a more cost effective way for small businesses to build seasonal inventories. In a July article, CNN looked at this aspect of the credit crunch.

Small businesses, not the mega corporations or the financial bank giants, create the majority of new jobs in this country. Unemployed people sap the resources of local, state and federal government. Employed people contribute to those resources with payroll and income taxes, as well as sales taxes. It would be good public policy to implement an incentive program to encourage private banks to loan to small businesses.

Consumer Confidence

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The Conference Board recently released its November Consumer Confidence Survey. The index stood at 49.5, little changed from October. In 2000, the index was about 140. It declined to 60 in 2003, rose to over 100 in 2007 and plunged to under 30 in 2008. A component of the index, the Present Situation index, is at a low level last seen in 1983.

Business Outlook Survey

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Each month for the past forty years, the Federal Reserve conducts a survey of businesses, attempting to ascertain both current conditions and future anticipations of orders, costs, inventory levels, and employment. December’s survey shows continued improvement in current activity but there is a disturbing decrease of confidence in the future in those businesses surveyed.

In 2010, the businesses surveyed are expecting their costs to increase about 8% in two areas: energy and health care for employees. They project only moderate increases of about 2% in other costs. Only 12% anticipate lowering prices, while 12% project higher prices.
Welcome to the “New Normal”.

Health Care & Medicaid

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Dr. Miller, dean and CEO of Johns Hopkins, wrote an op-ed piece in the WSJ 12/4/09 citing a CMS actuary that the House bill will increase Medicaid rolls by 18 million. The Senate version will increase eligibility for Medicaid to 133% of Federal poverty level. Miller cites the Kaiser Family Foundation that an additional 308,000 people will meet that eligibility in Maryland alone so the Senate version appears to have a similar impact as the House bill.

Dr. Miller is concerned about the costs. JH has already struggled handling the Medicaid patients it has and has lost a good deal of money in unreimbursed costs from the state.

From 1990 to 2004, Federal and state Medicaid spending increased yearly by about 10%, more than triple the average 3% CPI rate of inflation. For the three year period 2004-7, annual increases slowed considerably to 3.6%. States are reporting 2009 Medicaid spending increases averaging 7.9% because of the recession.

Gold ETFs

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The rise in gold prices has prompted a growing popularity in the SPDR Gold Trust ETF (GLD), which buys and holds gold bullion. The IRS regards ownership in this trust as an ownership in a collectible and taxes profits in the trust accordingly.

An investor who holds GLD for a year or more and sells for a profit might expect to pay the 15% long terms capital gains rate. However, the profit is taxed at the 28% collectibles rate. For this reason, an investment in gold bullion is more appropriate in an IRA or other tax advantaged plan.

Another way to play the gold market is to buy Market Vectors Gold Miners (GDX), an ETF that owns shares in gold mining companies. The average cost to produce an ounce of gold is about $850 – $900, so that a gold price above that amount is profit to the mining companies. Because of this leverage, mining company stocks are more volatile than the bullion itself. Long term profits in an ETF like this one would be taxed at the usual 15% long term capital gains rate.

Employed Not

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The often quoted unemployment rate of 10.2%, dire though it is, is only half of the unemployment rate in the construction industry, which stands at 19.1%. The lack of jobs in a predominately male work force has lowered the percentage of men in the work force so that women now make up 50% of workers, a first in the American economy.

Neither of these unemployment rates accounts for the number of people working part time jobs because they could not find full time work or those discouraged people who have stopped looking for work in the past month. That U6 rate is over 17%. In the construction field, it may be over 25%.

Smaller road building projects which received stimulus funds earlier this year have about run their course. Although housing sales have shown improvement, there remains a glut of pending foreclosures that will continue to amply supply the demand for houses in 2010. This steady influx of supply will only dampen new housing construction and continue to put pressure on construction related jobs.

For those who built their working careers in construction during the last 15 years of steady job prospects, this will be a life crisis requiring many to rethink their career path and develop new job skills.

Trends

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A few trends that have caught my attention in the past month:

Credit card offers in the mail are down 77% in the past year.
Gold, bonds, commodities, and stocks are up. It is unusual for all of these asset classes to rise at the same time.
Women now account for 50% of workers, up from 35% thirty years ago.
Only 25% of workers aged 55+ have saved more than $250K for their retirement (excludes house equity and pensions)
On average, the Employee Benefit Research Institute reports that Americans aged 65+ get almost 40% of their income from Social Security. In 2007, the median income for those 65 and older was $18K.
If you had 60% of your portfolio invested in a mix of stocks and 40% in bonds before the banking crisis, you have lost nothing in the past year.
In the past ten years, the Federal Reserve reports (click on debt) that consumer debt has increased 63% and mortgage debt has shot up 135%. Debt in the public sector has almost doubled. Both federal and state debts have risen 95%. For perspective, the Consumer Price Index has gone up on 30% in the past ten years.