Thursday, July 29, 2010
San Franciso Moneyshow
The annual San Francisco Moneyshow is back again and is being held at the San Francisco Marriott Hotel from August 19-21. The free expo showcases financial experts and vendors displaying the latest in investment thinking. While most of the time they are trying to sell their services and products to you, you will learn something about what it means to be an independent individual investor. If you not satisfied with your portfolio performance or want to take the next step in learning about investing, then you should attend. No need to attend all three days and registration is free. You can find out more information and register at www.sanfranciscomoneyshow.com. For those of you not living in the San Francisco Bay Area, the expo does move from city to city throughout the year. You can check for other locations at www.moneyshow.com.
Tuesday, July 27, 2010
Dow / Gold Ratio Update
Back in our previous series of posts entitled Currency, Money and the Economy, we used a ratio to provide a measure of the value of paper assets versus real assets (refer to the post Identifying the Trend, 10/13/2009). We simply divided the value of the Dow (paper) by the price of gold (real). The ratio represents the public’s belief in holding paper assets. The higher the number, the more the public will want to own paper assets. The lower the number, the more the public will want to own real assets. The number also peaks and valleys at critical junctures in the history of the American economy (the Great Depression, the 1970’s, and the dot com boom and bust).
Below is a 3-year chart showing the Dow / gold ratio (click to enlarge). As you can see, the ratio was at 20 when it began its fall when the housing market went bust. As people fled paper for real assets, the ratio dropped all the way down to 7 before the market bottomed out in March 2009. Since then, the ratio has stabilized between 8 and 10, the most recent drop corresponding to the European debt crisis. The ratio is now moving back up towards 9 as the markets stabilize once again on earnings reports. Two horizontal lines, drawn at 7 and 10, show how the ratio has stabilized between this range. Governments around the world have taken enough action during this time to stabilize the ratio and keep the public’s faith in paper assets.
However, as the Greek economic crisis demonstrated, governments piling up too much debt can send people to sell paper assets in a heartbeat, as we saw that ratio drop from 10 to 8 (20%) in a matter of only three months. And as the United States continues to print more and more currency to get itself out of this current economic funk, they continue to sow seeds for the next economic crisis. History has shown us that once the Dow / gold ratio peaks (42 in 2000), it will continue to fall until the ratio drops to 2 or less. So while the ratio appears to have stabilized for now, the amount of debt the United States has racked up will only serve to push the ratio lower down the road.
Below is a 3-year chart showing the Dow / gold ratio (click to enlarge). As you can see, the ratio was at 20 when it began its fall when the housing market went bust. As people fled paper for real assets, the ratio dropped all the way down to 7 before the market bottomed out in March 2009. Since then, the ratio has stabilized between 8 and 10, the most recent drop corresponding to the European debt crisis. The ratio is now moving back up towards 9 as the markets stabilize once again on earnings reports. Two horizontal lines, drawn at 7 and 10, show how the ratio has stabilized between this range. Governments around the world have taken enough action during this time to stabilize the ratio and keep the public’s faith in paper assets.
However, as the Greek economic crisis demonstrated, governments piling up too much debt can send people to sell paper assets in a heartbeat, as we saw that ratio drop from 10 to 8 (20%) in a matter of only three months. And as the United States continues to print more and more currency to get itself out of this current economic funk, they continue to sow seeds for the next economic crisis. History has shown us that once the Dow / gold ratio peaks (42 in 2000), it will continue to fall until the ratio drops to 2 or less. So while the ratio appears to have stabilized for now, the amount of debt the United States has racked up will only serve to push the ratio lower down the road.
Thursday, July 22, 2010
Why The Great Recession Has Baby Boomers Fighting Uphill Battle
Since the financial meltdown of 2008, we had a nice rebound in 2009 but then suffered a setback with the European crisis in the spring of 2010. The markets have stabilized once again, but are still at levels that are approximately 30-35% from their peak levels of 2008.
Now most financial experts will tell you that the markets will eventually recover fully and that you should continue to invest for the long haul. However, for baby boomers (those born between 1946 and 1960), this bit of advice is hard to swallow because time is not on their side. To illustrate this point, I have provided the following example.
Let’s take a typical baby boomer couple that both turned 53 in 1999. This was just at the height of the dot com boom. At this point in time, they had $750,000 in retirement savings, and a $250,000 house that was fully paid off. Their annual cost of living as a couple was $50,000. Thus, if they were to retire right now and use their savings, it would last about 20 years, or until they are 73 years old. By all accounts, this appears to be adequate and life is good.
Let’s now fast forward to the year 2006. The dot com boom and bust has come and gone and now we are at the crest of the housing boom. Our couple is now 60 years old. Their retirement savings portfolio has now grown to $1,012,500. In addition, their house value has shot up and is now worth $400,000. With everybody cashing in on their homes like an ATM machine, our couple is no different and decides to refinance their home. With their good credit, they take out a $240,000 loan on their house, leaving $160,000 in equity. They decide to spend half of it on their children’s college education, a house addition, some extravagant vacations, and other stuff they just wanted to buy (perhaps a boat). The other half they added to their investment portfolio. Add the end of this financial shuffling, they now have $1,132,500 in their investment portfolio, and $160,000 equity in their home for a grand total of $1,300,000. Sounds pretty good, given the pain of the dot com bust. Unfortunately, costs have risen as well. The children’s tuition has skyrocketed, energy prices have climbed, and medical costs have begun to climb at alarming rates. Using more true measures of inflation (not the one the government misleads the public with), the same $50,000 in expenses back in 1999 has now risen to $93,000 a year. Even so, the $1,300,000 would last 14 years, meaning that they could continue their lifestyle until 74 years of age. This is one year more than projected in 1999. So it appears that life is still good.
Now comes the painful portion. It is now 2010 and we are in the aftermath of the housing bust and the Great Recession. Our couple is now 64 years old. Even with the rebound of the stock market, our couple’s retirement portfolio now stands at $725,000. In addition, their house value has dropped to $320,000 (note that it is still worth more than it was back in 1999). They have paid down their loan to $200,000, but that still means the equity in their house has dropped to $120,000. All the while, costs have not dropped one bit and the same $50,000 in expenses back in 1999 now costs a staggering $128,000. Their total net worth has been reduced to $875,000 and would only last 7 years at the current rate. This means their money would last until they are 71 years old. All of a sudden, our couple has now fallen 2 years short of the original 1999 projection, but more importantly now has only 7 years left on the clock to get it back again.
Recent reports have indicated that with the economy stagnating, a full economic recovery could take a decade or longer (see the 1970’s). However, our couple has only 7 years of savings left. So while the same financial advice of buy and hold is still being tossed out there, it no longer has any relevance to our couple. They simply cannot afford to wait out the storm. If both are still working, that would help push the limit out. However, what if they were laid off during this time period, took an early retirement a couple of years ago, or were no longer able to work? What if they need to pay for nursing care, senior assisted living facilities and/or increasing medical bills due to failing health in old age? What if they are perfectly healthly and will live until they are 90?Their children are probably unlikely to be able to help, given that fact they have racked huge amounts of debt and are digging themselves out while trying to figure out how to put their own children through college.
The only way out of this mess is a quick economic recovery, which every politician is campaigning on this fall. However, the last two economic booms were built on greed. With the passing of the financial regulation bill signed into law by President Obama, approximately 350 new rules (specifics still to be determined) were put into place to prevent such greediness from occurring again (or so they say). As such, politicians may have killed their own cow because if greed is curbed, then a quick economic recovery with the power of the last two economic booms is highly unlikely. And without a quick economic recovery, a lot of baby boomers will be faced with a financial quandary.
There is a saying, “As the baby boomers go, so goes the rest of the nation.” If that statement is true and a majority of baby boomers are scratching their heads over their financial situation as demonstrated in this post, then this country might be in a lot of trouble in the not-too-distant future.
Now most financial experts will tell you that the markets will eventually recover fully and that you should continue to invest for the long haul. However, for baby boomers (those born between 1946 and 1960), this bit of advice is hard to swallow because time is not on their side. To illustrate this point, I have provided the following example.
Let’s take a typical baby boomer couple that both turned 53 in 1999. This was just at the height of the dot com boom. At this point in time, they had $750,000 in retirement savings, and a $250,000 house that was fully paid off. Their annual cost of living as a couple was $50,000. Thus, if they were to retire right now and use their savings, it would last about 20 years, or until they are 73 years old. By all accounts, this appears to be adequate and life is good.
Let’s now fast forward to the year 2006. The dot com boom and bust has come and gone and now we are at the crest of the housing boom. Our couple is now 60 years old. Their retirement savings portfolio has now grown to $1,012,500. In addition, their house value has shot up and is now worth $400,000. With everybody cashing in on their homes like an ATM machine, our couple is no different and decides to refinance their home. With their good credit, they take out a $240,000 loan on their house, leaving $160,000 in equity. They decide to spend half of it on their children’s college education, a house addition, some extravagant vacations, and other stuff they just wanted to buy (perhaps a boat). The other half they added to their investment portfolio. Add the end of this financial shuffling, they now have $1,132,500 in their investment portfolio, and $160,000 equity in their home for a grand total of $1,300,000. Sounds pretty good, given the pain of the dot com bust. Unfortunately, costs have risen as well. The children’s tuition has skyrocketed, energy prices have climbed, and medical costs have begun to climb at alarming rates. Using more true measures of inflation (not the one the government misleads the public with), the same $50,000 in expenses back in 1999 has now risen to $93,000 a year. Even so, the $1,300,000 would last 14 years, meaning that they could continue their lifestyle until 74 years of age. This is one year more than projected in 1999. So it appears that life is still good.
Now comes the painful portion. It is now 2010 and we are in the aftermath of the housing bust and the Great Recession. Our couple is now 64 years old. Even with the rebound of the stock market, our couple’s retirement portfolio now stands at $725,000. In addition, their house value has dropped to $320,000 (note that it is still worth more than it was back in 1999). They have paid down their loan to $200,000, but that still means the equity in their house has dropped to $120,000. All the while, costs have not dropped one bit and the same $50,000 in expenses back in 1999 now costs a staggering $128,000. Their total net worth has been reduced to $875,000 and would only last 7 years at the current rate. This means their money would last until they are 71 years old. All of a sudden, our couple has now fallen 2 years short of the original 1999 projection, but more importantly now has only 7 years left on the clock to get it back again.
Recent reports have indicated that with the economy stagnating, a full economic recovery could take a decade or longer (see the 1970’s). However, our couple has only 7 years of savings left. So while the same financial advice of buy and hold is still being tossed out there, it no longer has any relevance to our couple. They simply cannot afford to wait out the storm. If both are still working, that would help push the limit out. However, what if they were laid off during this time period, took an early retirement a couple of years ago, or were no longer able to work? What if they need to pay for nursing care, senior assisted living facilities and/or increasing medical bills due to failing health in old age? What if they are perfectly healthly and will live until they are 90?Their children are probably unlikely to be able to help, given that fact they have racked huge amounts of debt and are digging themselves out while trying to figure out how to put their own children through college.
The only way out of this mess is a quick economic recovery, which every politician is campaigning on this fall. However, the last two economic booms were built on greed. With the passing of the financial regulation bill signed into law by President Obama, approximately 350 new rules (specifics still to be determined) were put into place to prevent such greediness from occurring again (or so they say). As such, politicians may have killed their own cow because if greed is curbed, then a quick economic recovery with the power of the last two economic booms is highly unlikely. And without a quick economic recovery, a lot of baby boomers will be faced with a financial quandary.
There is a saying, “As the baby boomers go, so goes the rest of the nation.” If that statement is true and a majority of baby boomers are scratching their heads over their financial situation as demonstrated in this post, then this country might be in a lot of trouble in the not-too-distant future.
Wednesday, July 14, 2010
Austerity is the New Black; U.S and Europe Fiscal Policies Diverge
Given how close to the edge of the abyss Greece came and taking the European Union down with it a couple of months ago, fiscal policy in Europe has suddenly taken a left turn. Governments across Europe, including England and Germany, have embraced austerity measures to cut some debt out of their budgets. Some of this has come on the numerous losses by incumbent politicians who advocated spending in the past. But just the fear of “ending up like Greece” was enough to cause Europeans to re-evaluate their fiscal policies.
However, while austerity is being instituted in Europe, the United States now remains the only major country trying to spend their way out of economic trouble. At the recent G-20 summit, President Obama warned European leaders that cutting back at this juncture of the economic recovery could lead to a double-dip recession. In other words, the United States wants to continue spending money it doesn’t have and needs other partners to spend as well.
President Obama is correct in that restricting money flow will lead to slower or even negative growth in the short term. However, United States fiscal policy for the past two decades has also been short-sighted. The near economic collapse of Greece has demonstrated to other Europeans that spending is not the answer and that fiscal responsibility is required for the long term viability of a country.
The problem the United States has is with the speed of the economic recovery. 3% economic growth for decades was the norm and was an indicator of a strong and steady economy. However, we have been so used to 6-10% growth over the past two decades, that 3% economic growth today simply means a slow recovery. It is just not strong enough to recreate all the jobs that were lost in the past couple of years. Based on the current rate, it would take 8-10 years to replace all of the jobs lost. For a politician, who is up for re-election every 2-6 years, this is simply unacceptable. They need a speedy economic recovery to save their own seat in government and will spend any amount of taxpayer money to get it. We can spend the money now and worry about the consequences later, they say. The politicians and most Americans just want things to go back to the good ol’ days of the past two decades. However, those decades were built on unsustainable economic policies and after two boom and bust economic cycles, will not return.
Europe has recognized this and has taken steps to ensure their long term viability. Unfortunately, the United States is still in denial. Hopefully, United States politicians will wake up and smell the coffee soon, otherwise we might “end up like Greece.”
However, while austerity is being instituted in Europe, the United States now remains the only major country trying to spend their way out of economic trouble. At the recent G-20 summit, President Obama warned European leaders that cutting back at this juncture of the economic recovery could lead to a double-dip recession. In other words, the United States wants to continue spending money it doesn’t have and needs other partners to spend as well.
President Obama is correct in that restricting money flow will lead to slower or even negative growth in the short term. However, United States fiscal policy for the past two decades has also been short-sighted. The near economic collapse of Greece has demonstrated to other Europeans that spending is not the answer and that fiscal responsibility is required for the long term viability of a country.
The problem the United States has is with the speed of the economic recovery. 3% economic growth for decades was the norm and was an indicator of a strong and steady economy. However, we have been so used to 6-10% growth over the past two decades, that 3% economic growth today simply means a slow recovery. It is just not strong enough to recreate all the jobs that were lost in the past couple of years. Based on the current rate, it would take 8-10 years to replace all of the jobs lost. For a politician, who is up for re-election every 2-6 years, this is simply unacceptable. They need a speedy economic recovery to save their own seat in government and will spend any amount of taxpayer money to get it. We can spend the money now and worry about the consequences later, they say. The politicians and most Americans just want things to go back to the good ol’ days of the past two decades. However, those decades were built on unsustainable economic policies and after two boom and bust economic cycles, will not return.
Europe has recognized this and has taken steps to ensure their long term viability. Unfortunately, the United States is still in denial. Hopefully, United States politicians will wake up and smell the coffee soon, otherwise we might “end up like Greece.”
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