Tag Archives: economy

Let’s Talk about Greece

Why not, right?  Everyone else is.

First things first.  Is this a problem?  The problem is not so much that Greece has debt that is “spiraling out of control”, so much is that there are political issues preventing Greece from moving forward.  Both Greece and Portugal were downgraded by Standard & Poors debt rating service (we all know how well that turned out when they were rating junk CDOs).  This has sent both the markets in Europe and Europe’s political leaders into hyperventilation.

The markets have fallen because the spreads (the difference between what the bonds are selling for and what people are buying them for) have widened.  Yields (the rate at which the debtor pays back interest) have spiked.  The thought is that any restructuring of Greece’s debt will mean that payment is going to be difficult and even if Greece pulls out of this, then they will have a more difficult time borrowing.

The problem, as with most markets, is one of perception.  Greece has been in negotiations for quite some time in trying to find a way out of their current situation.  Germany, which seems to be Europe’s Mommy and Daddy, are trying to find a way to help Greece without enabling them.  For example, Greece was adamant about not raising their retirement age.  In February, they changed their tune, raising the retirement age from 61 to 63 and refusing early retirement (once again this is social retirement, so this is state money).  Can you imagine any place where you are likelier to live a long and healthy life pulling money from the state?  Germany’s current retirement age is 67.

Why should the good citizens of Germany help Greece, when still the retirement age for a Greek citizen is four years earlier than their German counterparts?

But this is just one issue among many.  The political posturing is absurd, and will only end when all sides finally realize that they are going to have to do what needs to be done.  Say what you want about our political leaders (and I do!), but when we were facing crisis after crisis, both parties pulled together to do something about it (whether you agree with their methods or not).  Our economy is recovering, minus minor setbacks.

In Europe, the sense of entitlement has been ingrained too long, which makes it very difficult to move forward.

Now, how does this affect us?  Well, we trade with Europe’s banks, who hold investments in Greek (and Portuguese) debt.  This can affect us in several ways.  But the smart money is on us doing something that would work for us financially.  This will affect the Euro, likely causing it to drop and strengthening the dollar.  A stronger dollar limits foreign investment, but also allows us to make foreign investment (and smartly).

However, I don’t suspect that Europe will let this get too out of control.  Since the creation of the European Union, they have tied their fates together, and none of them want a weaker Euro.

What are you going to do with your tax return?

Hopefully, most of you are getting money back this year from your tax return. If so, what are you going to do with the money? I know several of us (myself included) look forward to getting our money back every year, but are we spending it wisely?

I notice some of my friends put the money towards a large purchase, such as a TV or clothes, but is that really a good idea? Of course, I cannot tell you what to do with your money, I’m just giving you some food for thought. I’ve come up with a list of alternatives to spending your tax return money on disposable goods such as TVs and electronics.

My first question will always be, do you have any debt you need to pay off, such as a loan or a credit card? Think of how much your tax return can help you with that.

Do you have an emergency fund? It’s always a good idea to have at least 3 to 6 months of living expenses in a bank account, short-term CD or a high-quality money-market fund. It may be a good idea to start an emergency fund if you do not already have one in place… and if you do, why not add to it?

Or have you thought about investing the money or putting it in savings?

How about a step towards retirement? You may think your tax return is only a drop in the bucket, but think of how you may be restoring your 401(k).

How about buying a government bond? The current interest rate through April 30, 2010 is 3.36%. If there are any interest on I Bonds, it is added to the bond monthly and is paid, to you, when you cash the bond. It may earn interest for up to 30 years… and after having it 5 years, there is no penalty if you cash it. If you pay $50 for a bond, you’ll get AT LEAST $50 back. The disadvantage is, of course, if you need the money immediately.

Education? Maybe put the money towards something like your education or an education for our children. It could make you more marketable and make you more money, or it may give your child the chance at a quality education.

As much as that new LED-LCD screen may seem like an instant reward, think of how rewarding it is to pay off your debt sooner or to finance your child’s education. I challenge you to think about what’s best for you in the long-term, not what is going to give you instant satisfaction.

College is going to cost what?!

Much has been reported from various news sources, investment firms and college foundations about “college inflation” or the costs that are associated with attending a four-year institution.  News reports of students protesting and being generally unhappy with tuition increases have flooded the Internet news and print media with different claims.

Several studies put the increase in college costs between 5% and 8%, with 8% being the number most focused on.  College costs in this cast take into account only tuition and fees.  In the case of on-campus housing and meal plans, those costs are not included in the traditional inflation calculation for university costs.

There have been multiple studies done on why college is so expensive, but those reasons don’t really matter that much to the student (or parent) who is footing the tuition bill.  According to the Bureau of Labor Statistics, over the last 30 years, college costs have increased on average each year at 7.25%, which is slightly less than the return on the S&P 500, what is termed “the stock market”.

Keep in mind a few factors though.  When looking at the additional expenses associated with college (room and board, transportation, etc.), those costs follow CPI, or the consumer price index, which tracks the overall inflation rate (the increase in costs over the years), or normal inflation.  Normal inflation over the last 30 years has averaged 4.35%, which is still very high.

However, averaged into the last 30 years has been the high inflation of the early 1980’s, where normal inflation was 10% and college costs were rising between 12% and 14% per year.  The last 10 years have actually oscillated between 5% and 6%.  In fact, the last twenty years have also averaged between 5% and 6%.  Both are higher than CPI (which has averaged about 2.5% over both periods).

What does this mean exactly?  A lot, actually.  An in-state school in North Carolina carries tuition and fees of approximately $6400/year.  This means that for a child born in 2010 and attending college for four years beginning in 2028, the cost for tuition and fees alone under the assumption of 7.25% will be $30,000 more than the actual college inflation rate of 5.5%.  Throw in regular costs and that difference jumps to $70,000.

As you can see, college inflation, while significantly more than normal inflation, is exaggerated in the news.  I’m not sure exactly why except that sensationalist claims usually make the news and it also helps sell investment products (529 plans, mutual funds, etc.) or even sells news.

So yes, college is going to be expensive for your baby.  But regard with some skepticism calculations you are shown about “the true cost of a college degree”.

Why You Shouldn’t Get Your Stock Picks From Your Fitness Trainer

This was supposed to be a presentation that I was going to give at Ignite Raleigh.  Unfortunately, stock picks didn’t seem to be the interest of most people.  Social media was the primary focus.  Everybody wanted to know how to use Twitter, Facebook, et al for marketing and advertising purposes.  Those are great, but I feel I would be doing you all a great disservice if I didn’t at least write about it.

The premise isn’t so much fitness trainers, just that fitness trainers gave me the idea.  I have known personal trainers who give out stock tips to their clients as if they are serving double duty.  Which I guess I shouldn’t complain, when people ask me about workout tips, I usually provide them.  With the caveat that I really don’t know what I’m talking about and anything I tell you is third hand.  Kinesiology and nutrition and some other terms that I’ve never studied are complex.  A lot like investments.  So I am the first to say I am no expert.  After all, I work out six times a week, figure I eat healthy, and can’t drop a pound to save my life.

My reason for writing this is not so much the lack of expertise among the fitness trainers (they could be well studied in capital markets and understand securities more than the average person and maybe even more than some investment advisors), so much as the lack of understanding about the particular investor.  Which is what gets me going about financial opinion writers/pundits/tv critics.

Unable to tear my eyes from the television, I watch these shows and marvel at the dearth (10 dollar word) of bad advice being given out.  Not because the advice is bad, just that those providing it have no idea whether or not they are giving the right advice.  A good example would be recommending to someone who is obese that they need some more fat in their diet.  We don’t know if the advice fits.

So it is fascinating to me to see these people on television.  Let’s start with Cramer.  Booyah, anybody?  Jim Cramer is a former hedge fund manager who used to work at Goldman Sachs.  Jim Cramer is a smart guy and he is also a very animated guy.  He is also wrong quite a bit.  Oh, not about the stocks that he picks (although Barron’s did an article a few years ago pointing out that the stocks he picked went down rather quickly), but the fact that he has no idea what else everybody has in their portfolios.  Do his picks make sense for everybody out there?  Unlikely.  In fact, they are probably a small minority of people that they do make sense for.

What about Suze Orman?  What about those teeth?  Those teeth are nice and bright, and can be a little scary… but what about her advice?  Suze makes an effort to gather some information.  However, that information gathering is cursory and there is no verification.  Plus, others who may be in similar situations may apply her advice to theirs, but may be off because of other circumstances.  Suze is also smart and has done quite well for herself.  But here she is wrong.  Not because she isn’t good at what she does, but because she is providing advice out of context.

And everybody’s favorite, Dave Ramsey.  Dave Ramsey has made quite a name for himself.  Poor guy has had to file bankruptcy before and advocates zero debt.  Forget credit scores and the like.  Pretty much the opposite of Suze Orman.  Well, Dave does what they all do.  Provide blanket advice for problems that the advice may not fix.  Or even address.  I know I am getting pretty close to blasphemy here, but really it is getting quite out of control.

But what about you Mike?  You write things on this blog all of the time and you don’t know about my situation.  That’s true, I don’t.  But the advice I provide generally talks about being careful about making those decisions and often involve asking you to consult a professional (me or someone I think you should talk to).  Also, I never give specific recommendations, as that would be irresponsible and really should be illegal.  Why?  Because I don’t know your situation.  In order to properly give advice, a professional needs to know the situation.  Physicians read your charts, attorneys use discovery and financial advisors ask you questions and look at your financial statements.

So why shouldn’t you get your stock picks from your fitness trainer?  Because he doesn’t know your specific situation.