Archive for the 'finance' Category

Traditional IRA’s looking better and better.

When you look at whether you would like a traditional IRA or a Roth there are basically three considerations.

  1. Do you expect to be in a higher or lower bracket when you retire (making more or less money)
  2. Do you expect overall taxes to be higher or lower when you retire
  3. Do you have extra money to put in (putting in dollars after tax effectively lets you put in more)

Lets look as these issues one at a time, based on the current financial disaster

Will you be making more

In this instance, I am looking at what the feds are doing as far as monetary policy. By injecting huge amounts of dollars, they are going to cause massive inflation. It is economics 101. According to this story, we are already into it about $1.8 Trillion. Assuming a population of 300 Million, we end up with about $6,000 for every man, woman, and child. Um, Mr. President, could you exclude me from the plan and just send me the $30k for my family? Especially seeing the spectacular results so far, I wonder how much more money we will send in with questionable results. All of these dollars are going to inflate our currency. Result? Inflation and earnings (not real earnings) go up.

Will Overall taxes be Higher or Lower

I will give you a hint. We were already looking at a mess when we had social security and medicare with a healthy economy. With the coming economic crisis, taxes will have to go even higher just to keep the leviathon from tumbling. The other part is that next year they will try to lower taxes on middle and lower income people. This might be your chance to put in money at very favorable rates before the spike.

Do you have extra money to put in

This is all up to you. I would just recommend having a nice nest egg in case things get even worse. We thought things wouldn’t get worse a couple weeks ago. Good old Cramer called the bottom of the market at 11,500. Looks live we have slipped a bit since then. It can always get worse, but if you are prepared, it isn’t all that bad.

Good luck, and take another serious look at the traditional IRA. Due to shifts, it could be right for you.

Pelosi hosed it up

Let’s be clear right away.  I am not saying that the bill would have passed if Pelosi hadn’t spoken, but the chances would have been better and the excuses even flimsier.  First of all, let’s get some facts straight.

The bailout reeks of big government, and the republicans are supposed to be against that, and some of them truly are deep down inside.  Another problem is that it removes the moral hazard (idea that poor consequences follow poor decisions).  The last of all, a lot of people don’t even think it will work.  I know I think we are in huge trouble, and a big painful cleanse might be what we need.

On the other side, how much can we risk.  If the banks go downhill, Detroit, the home market, and utilities will follow, along with many businesses that need credit to operate smoothly (almost every decent sized business).  That is a lot of layoffs and a lot of problems.

I am willing to bet that there were some representatives that were weighing the two sides in their minds, and had trouble deciding.  They got a call from the minority leader and were told, “This is a bipartisan thing.  Let’s join hands and do it.  It is a good chance for us to rise above the fray.”  They weren’t really sure what to do (constituents were calling at and emailing against it), but they decided that it would help things run smoother in DC, and there is a lot of work to do and they might be able to call a favor in.

Then Pelosi gets up and ends any idea of bipartisanship.  Meanwhile the representative is getting more pressure from his constituents.  Those two things do not push anyone to vote for a bill if they are on the fence, especially when both factors are pushing one way.

If Pelosi could have kept here partisan mouth shut there would have been two possible outcomes.

1.  Bill passes.

2.  Bill fails and Republicans look more like obstructionists and very politically motivated.  (although they do a lot already)

She spent some political capital with her venting that she did not have to spend.

By the way, Barney Frank’s comments were brilliant.  They framed the problem just as the Democrats wanted.  After hearing that republicans were offended, he said, “I’ll make an offer. Give me those 12 people’s names and I will go talk uncharacteristically nicely to them and tell them what wonderful people they are and maybe they’ll now think about the country.”  When you mumble so badly it is hard for me to understand you, you have to be endowed with incredibly quick wits to get as far as Frank is.

Weathering a recession- Input from CEO of CAT

I saw an article published on October 31st on what is coming in the economy.  The CEO of Caterpillar thinks that recession is nearly certain for the beginning of next year.  The basic idea is that people buy heavy equipment from companies like CAT before engaging in large projects.  The orders for the big equipment has been petering out in the USA.

“Despite weakness in U.S. markets, our sales and revenues increased 9 percent. We continue to see remarkable growth outside of the United States with particular strength in key industries like mining, oil and gas, electric power and marine engines. The industries we serve are becoming increasingly global, and the investments we are making to achieve our 2010 goals have us well positioned to meet their needs.”

Hey-  This is sounding very familiar.  The US has to accept the fact that we can’t be the cool rich kid on the playground.  We gave all of our money away, and everyone else wants a turn.  To take their turn at living the good life, they need resources.  3rd world nations require resources to become 1st world nations.  The price of copper will remain high as people start putting that delightful electricity in their houses.  The cost of oil will remain high as they continue to buy cars, use plastics, and run factories.  We can expect to see uranium and coal move up as electricity demands increase.  If you are invested in the companies that are serving this growth market (read, international market), you will reap the benefits.

One market that I see suffering a little is the P & G type market.  The prices of raw materials has been skyrocketing all across the board.  The economy is starting to suffer a little, and consumer confidence is poor.  These companies that make consumer goods and food are going to have trouble increasing their prices at rates that will offset their increased costs.  I just Googled for evidence and found this story about Kraft’s weakening profits.  They can’t raise their prices too suddenly, or they will rapidly lose market share, but the cost of commodities trickles down.  Employees will want raises to help offset the higher cost of homes, food, gas, and soon, energy.  The electric power generation will see the higher costs of commodities start to trickle through the system.  Inflation of 2-3% a year can’t be maintained when the cost of many basic commodities is going up.  Many basic commodities have gone up in the last five years, like oil($25 to $96), copper ($.70 to $3.50), wheat and corn nearly doubling.  We are going to see these effects soon.

I am guessing right now we will see a little stagflation.  The US is cash poor due to the debt situation, despite having printed dollars left and right.  Time to pay the piper.

Tough Business Decisionss: Inflation or Recesion

It seems like the news is the same as it was a month ago, only closer.  The dollar is still in horrible shape, the price of a barrel of oil can’t seem to stop going up, and people are still defaulting on their mortgages.

The big problem is that all of these factors seem to be worse now.  First of all, the dollar continues to descend against the Euro.  What that tells me is that people who have large sums of money to move think that the US economy is in for some rough times. When your currency goes from under one dollar per euro to over 1.40 per euro in five years, you are in a bit of trouble.  If the euro is already suffering from inflation in the 2% range, the loss of value in the dollar must be much larger.

The price of oil continues to move up.  The simplest  solution is to nuke China to reduce their demand for foreign resources.  The problem is the side effects-  Billions of humans dead.  The economic growth in China continues to be staggering.  The Chinese tend to have an interesting business strategy.  Work your butt of and save.  Even in a country that uses a poor primary business model (communism), the work hard and save strategy seems to work.  They are getting sick of saving and want to buy a piece of the good life.  That includes things that require oil either as a fuel or a feedstock.  Oil hit $92.22 during trading last weak.  The extra production capabilities of OPEC and other such countries seem to have nearly run out.

Last of all, more and more people are defaulting on their mortgages.  The companies involved in real estate are getting clobbered, according to a recent story.  These companies represented a huge part of the boom that helped us recover from 9/11.   Their support in the economy will be missed.

It’s time to tighten our belts.  In a world of ups and downs, the economy is due for a down.  People that have planned a little will do just fine, just like they have always done.  You just have to ask yourself where you are.  If there is a coming depression, how will that work out for you?  If there is high inflation?  I feel like stocks offer some nice benefits.  They go up with inflation over the long term.  If you buy boring high quality stocks, they will weather a recession.  Real estate can have the same benefits.  It holds its value, and you get a good deal on a rentable property, it can also provide some benefits.  Cash does well in one and gets slaughtered in the other, and debt does the opposite.  There is also a chance we could have both.  I hope that things go along well for the next while at least.  Hopefully till I and all my descendants are  dead.  But I am not counting on it.

The question is will the Fed choosing inflation over recession.  One kind of sucks and reduces what the true government debt is, the other one sucks worse and reduces the governments ability to pay off debt.  Tricky.

National Sales Tax is Double Taxation For Some

First of all, I like the idea of a national sales tax.  It will be fantastic for people to go to the stores and realize how much the government consumes.  When money is taken out of the paycheck in chunks, it isn’t to bad.  Lets see, a few percent for social security (that’s a nice program), a few for medicare (on great financial footing), some comes out as income tax.  When all is said and done, the average tax rate for your average  American is about 25% from the paycheck.  This doesn’t include 5 kazillion other little taxes that build up before you can spend your money.  That’s just for the feds.

Fair tax proposals suggest we generate all the revenue from a sales tax to avoid evasion and to avoid having to file our taxes.  The system really sounds pretty slick.  The fact is, to duplicate a 25% tax on a paycheck, you could have to charge closer to 30% sales tax, assuming all of the paycheck was spent.    This is based on 25% of a slightly larger number (total paycheck, which includes taxes) is the same as 30% of a smaller ( cost of an item, which doesn’t include taxes).

Now here is where I really like the plan.  People are going to be paying 30% federal taxes and 10-15% local taxes (state income tax will most probably be rolled into sales tax also.  That will suck.  People will be ticked.  They will be reminded every day that they are paying for inefficient ethanol production, illegal immigrant education, a DMV that treats us like crap.  All the sudden, people will be demanding the government watch where they spend dollars.  We will only need enough nukes to kill everyone in the world 2 times instead of  10.  Maybe we don’t need fifty overlapping bureaucracies.   Maybe the CIA, FBI, and military intel can all work together to streamline information distribution.  Maybe the military can suck it up and make the marines an special type of army unit.  There are two reasons we don’t do that.  The marines interface with the Navy for transport (hey-  Just like the army.  Hmm) and they have so much “We are so much tougher and um Stuff” mentality.  When the taxpayer realizes that maybe we could drop sales tax a percent, they won’t care.    People will look at social security as a menace to financial freedom, and will demand that we reform the system.  Poeple will look at their neighbor on welfare, thinking, “That guy is why I have to pay 40-45% overall sales tax.”  There will be significant peer pressure for people to get their hands out of other’s pockets.  People think these tax rates look high, but they are reality.  The government consumes a huge amount of resources-  An amount they would like to keep hidden.  I’d like everyone to know

So much for why I like it.

When the government comes out with a new program  to help you save money, you always have to look on it warily.  The Roth IRA is great, in my humble opinion.  But I have a question.  What will be the status of the money in a Roth account if the Fair Tax gets passed?   I have been taxed on the money that I put into my Roth account once.  If the fair tax law is passed, I will be taxed on that money again.  The overall rate will be around 90%, if you look at it like a sales tax, or about 48% if you look at it like an income tax.  Either way, it sucks.  Does anyone know of any alternatives?  Anyway, just throwing in my 2% about making the savers pay 90% tax

Bush Pushing for Bank Bail Out

I can still remember a very true garfield comic, in which garfield said, “If I am telling a lie, may lightning strike. . . the dog next door.” (thunder and yipping). This is what the savings and loan industry wants now. They know that if they show themselves as irresponsible enough, they can get the government to bail them out once again, taking money from the taxpayer and funneling it into hands of bank owners and people who couldn’t afford a house.  This is very similar to the bailout that they did of those who lost substantial sums in Vegas.

The government is now doing its patriotic duty in making sure that profits remain high in the banking industry. Banks made fortunes in the last five years off of the rush to pull cash out of houses. Now, when there poor risk management is about to kick them in the teeth, Bush is prepared to guarantee the loans. Now we will end up on the hook for failed loans. We had a savings and loan crisis in the eightees and we bailed out the banks. We are about to do the same things again. In addition, injecting this new money will serve to inflate the currency and steal value from the savers in this country at an ever increasing rate.

We all know who pays. The taxpayer ends up putting up the cash. But we don’t have any money, so we will finance the banks with our deficit. The government continually acts like it has the ability and the kindness to provide money all around. They steal the money from our children, putting an increasing burden on those of the future.

Everyone knows those annoying people at the store or restaraunt who’s kids are obnoxious. The parents threaten and cajole, but the misbehavior continues as there are no real consequences. There kids later turn into juvenile delinquents, and from there they become more dysfunctional than your usual adult. We have been doing this with industry and communities (see New Orleans and Hurricane Katrina). There need to be some consequences for the irresponsible, and starting all over with renting, and slowly saving up another down payment (if there was one at all) is fair. They have paid the price for their lack of vision. (But at least they won’t be killed by the emperor)

I will put it bluntly. People should lose their houses if they can’t afford them. Banks should suffer massive losses if they made bad loans for a large scale. Don’t punish the honest taxpayer and their children because banks and homeowners are irresponsible.

You, Too, Can Live Off Just $480,000 a Year

It is amazing, but it can be done. I know because someone just down the road does the same. You might have to give up a few necessities, but you will survive.

No matter what your expenditures, you can spend less. The proof is the person down the road spending a mere $450,000. This carries all the way down to a family of seven living off of $35,000 a year. I guarantee that there is a family of 8 living off of less, they just don’t manage publicity as well.

When I was going through college(2001-2004), my wife was my sugar mama, bringing home a slick $1050 a month. From this money we paid all our bills, including tithing and saving $100 a month for a rainy day. We thought we were living fairly decently. We had insurance through the school and scholarships to pay for books and tuition. Our apartment wasn’t exactly a palace, but it was warm, dry, and plenty big. Before I had married my wife, I worked 12-14 hours a day 5 days a week and 8 hours on Saturdays all summer to save up money to buy a car, so I wouldn’t have that debt over my head. Our biggest advantage over others is that we knew the difference between a need and a want.

Cell phones are one of my favorite current needs. “What if your car breaks down by the side of the road?” some people ask.  As I recall, 20 years ago, when people’s cars broke down, there was no spontaneous combustion of the stranded. You simply made do. Nowadays you can either use a phone by the side of the road or wave down a driver and ask him if he can call a towing company. A basic cell phone plan runs about $600 a year. Is that really a necessity?

Cable is laughable. I don’t see how people even attempt to justify it as a need, but all over America there are people who get welfare checks every week that can’t live without their boob tube fix.  It costs around $500 a year, depending on your package. There is no way cable is a necessity.

I always am amazed by how much people spend on food.  We now have a family of 4 and we spend $45-$50 a week, and we eat great.  You  just have to base what you eat off of what is on sale , and learn how to cook.

The idea that it takes  $50,000 to support a family of 4 of four is ridiculous.  You can live off much less, you simply have to question your assumptions.  I have no problem with anything that people want to buy.  They should just make sure they buy it because it truly is a necessity (food, shelter, thrift clothing) or because it will provide enough enjoyment to justify the life they used up earning it.

Immigration and your job

Everyone always talks about whether the current immigration is good or bad for society. If you are wealthy, it seems to come out great. If you are poor and uneducated, once again, you are screwed.

When immigrants come to town they bring cheaper labor (as a whole- I know some are very educated). This reduces the cost to produce labor intensive goods, like fruits and vegetables. The first farmer that started using immigrants had the benefit of cheaper labor, and made more money. Within short order the other farmers adopt the same techniques, and, in efforts to sell more goods, reduce their prices. Competition allows the lowest cost highest quality goods to move through the chain. Eventually these reach us. The good news is products are much cheaper in stores. Who benefits from this effect? Those who buy the most. While you can only eat so many fruits and vegetables, other labor intensive services can be consumed extensively. Everyone benefits from the low cost labor, but the more wealthy benefit more because they can buy more.

Economically, lower classes bear a large portion of the difficulties. Generally, there is small mobility in a job slot you are already in. If you are the weed whacker operator doing the landscaping at Intel, you could get moved up to driving the riding lawn mower, but good luck on CEO. Engineers can become project managers, but you won’t find a lot of janitors becoming engineers. You don’t have to take massive steps from day laborer to drywall installer to owner of a drywall company. The costs involved are relatively small, the training necessary to start is very small (although improvement can be done constantly).

When cheap labor comes into town, the supply glut depresses wages in jobs requiring the least skills first. As the wages drop, more and more people decide they won’t work for those wages and look for a better paying job. A secondary supply glut (generally smaller then the 1st) hits the jobs that are slightly more difficult, lowering the wages their also. This continues up until the moat is to difficult to cross due to education, capital requirements, or networking requirements. As a result, the earning power of the lower economic classes are hit hardest by the effects of immigration.

The net effect is that, as a trend, those who benefit the least from lower cost goods are the ones who suffer the most from wage depreciation.

If we want to insulate ourselves from the negative effects of immigration, we must get a moat between us and and competitors. Twenty years ago, the moat of education was sufficient. Now an influx of Indians trained in math and science has started to bridge that moat. We are importing doctors from other countries as well. Specialization has helped some create a sphere in which they do not have massive competition. We need to work on other economic moats if we wish to protect our earning power. Accumulated capital, used wisely, can provide a massive business advantage.

My father, a PE, did landscaping for a change of pace about 13 years ago, mainly sprinkler systems. As illegal immigrants showed up, they started to depress the profit margin in the business. My father jumped to more specialized projects that required greater capital investment and drew more heavily on his engineering knowledge. He is still doing very well, and he recommends that before we get into a business, make sure that illegal immigrants can’t be competing with us 1 week after they cross the border.
I am now thinking about how to widen the economic moat around myself.  I need more skills (bo staff skills, mustache growing skills), more capital (no negative savings rate for me, thank you very much), and more business connections (soon I will have 2).  There are a ton of dollar bills out there looking for a good home, and I want to provide that.

Peace out, hombres.

Casino Patrons to be Reimbursed for Losses

Reports are coming from Las Vegas of a massive government effort to help investors that have been betrayed by casinos. These investors have put massive amounts of money into investments, some their entire livelihood, only to end up broke. One investor says, “I was just doing what everyone else was. I knowed that I had to make money at this, cause my cousin, Willy, was here last week and he made 500 smackaroos. Now I’m broke, upside down on my mortgage, and my kids don’t have anything to eat. I just want what’s fair and decent.”

The betrayal by the casinos occurred on a grand scale. At one end of a casino, the lights flashed above the slot machine “Win Car Here”, but poor Harold Hickson walked home. “It just ain’t right,” he says. “It says I should win a car, but I put in my entire savings, and even pawned my mobile home, and I ain’t won crap. I don’t know what Betty Sue will do when she hears. We made this investment in good faith. I heard a bunch of people were here last week and made a bundle.”

Another patron, Graham Wellington said, “It is clear that the practices here have been unethical. As I walked in, the lady who gave me chips said, good luck, I hope you hit it big. The personnel in the industry spread this idea that investing at a blackjack table is a sure way to get a significant payout. There were no warnings that these investments could turn sour. This euphoria caught many up in it, and I cannot afford the losses I have incurred. As a working citizen, I have a right to have someone help me with the losses I face due to this deception.”

The deception is all over. Claims of million dollar payouts were spread far and wide. These losses aren’t flukes, but a scheme by those no good dealers to get fat off of their pay. Rick Henson, a college student majoring in economics, reports, “I was always good at investing back at college, and got my friends good and wasted before I cleaned them out. It’s gotta be a fraud, because I toasted my student loans in one day of investing in poker here. I saw a billboard that says people hit it big in Vegas, false advertising if I’ve ever seen it. This disaster is too big for individuals. The government needs to intervene and help the market out of this crisis.”

A spokesman from the heartless bastards at The Von Mises Institute said, “Their unwise speculations did not result in the outcome they expected. The risk management was skewed by years of being taken care of by the government, resulting in expectations of large payouts with little aversion to downside risk. If the government mitigates these consequences, it will perpetuate this poor judgment, and these types of incidents will occur with greater frequency.”

Someone from the back yelled, “What he’s saying is they gambled and lost their shirts because they were greedy. If we bail them out they won’t learn their lesson, and we will have to keep bailing people out.”

The Center for Compassionate Government rebutted these outrageous insults.  “These are people who trusted the advice of these casinos, and were provided an environment where they could simply get more chips. There was nothing that told them about the impending losses.  Serious sanctions must be taken against these corporate bosses. One investor told us that they thought they could simply get back all of their money after they were done gambling, assuming that the casino was just holding the money for safety purposes.  He never signed anything that said he would not get his money back.  He was duped.  The thought of losses had never entered his head.”

“Now he and his family don’t have the money to pay next month’s rent.  We need to help them.  After all, it’s for the children.  We are proposing that people be allowed to be reimbursed in a way that will be fair to all parties. We don’t think anyone should be locked out of the American Dream.  Now we recognize that the casino owners don’t have the means to deliver what they promised, but I am sure that no true American wants little Bobby to go hungry.  The government has the means to support this, and we demand they help the poorest,  who were tricked into precarious financial situations.”

The president of Evil Conservative Industries, Gren Bock, said, “What the heck did they expect? They were gambling at a freakin’ casino. It’s sad that the kids are in such trouble, but come on. Everyone knows that in speculations you have ebbs and flows. There is no free lunch. My father was a baker, and he worked his rear off for every cent he got. These guys think it will fall into their laps just because their friends got lucky, well, they are in for a surprise.”

It is clear that despite the heartlessness of the rich evil conservatives, something must be done to help those that invested in at these well known establishments in good faith. Americans are obligated to help those who have been tricked and swindled. Presidential candidates promise that relief is coming. We couldn’t suppport them more strongly. Everyone has a right to the American dream!

Lack of liquidity in the markets, and inflation

When I was at work today, an employee who likes to follow the markets talked about the the liquidity issues that a lot of the banks are facing.  They have loaned out a ton of money that people are having trouble repaying.  Here is a quote.

“Extraordinary optimism sustained an orgy of speculation.  Books were written to prove that economic crisis was a phase which expanding business organization and science had at last mastered.  ‘We are apparently finished and done with economic cycles as we have known them,’ said the President of the New York Stock Exchange.”

When was this from?  September 1929.  The whole passage was pulled from Churchill’s The Gathering storm (1948).  I believe that the modern day comparison is “irrational exuberance”.   We have spent money that we do not have, and the whole country is mortgaged up to the hilt.  The US still wants to be big and bad, but economics are what provide worldwide power. 

Karl von Clausewitz said, “To secure peace is to prepare for war.”  Instead of preparing for future wars that we could win decisively, we have slowly whittled away our strength in piecemeal wars.  Foreign governments are emboldened as they see us stretched to the breaking point.  The number of people employed by the government leviathon are people that can’t be employed in contructive industry or in the military.  Those killed and maimed in war represent permanent losses to the country economically (not to mention their families met someone in a hospital or in a body bag.)  Those people permanently injured in action also require permanent benefits, including medical care with its escalating costs. 

We could afford these type of expenses if we weren’t hemoraging money in every other sector.  If in San Francisco the cost of illegal immigrants is not high enough, some people can fix that.   They wish to raise taxes to pay for the green cards of the illegal aliens.  It’s natural that we want to be the benefactor of poor nations, but we do not have the resources to take care of the problems of the world.  After we get our own house in order, from the federal government level down to the individual household, we can and should individually use our resources to help others.  Until then, we are like people buying gifts for everyone with our credit card, while planning to go bankrupt.  The polititians are afraid to tell Americans that the way out might require a bit of hard work and sacrifice.  They’d rather cheat their way out, through the magic of inflation.

The central banks of the world pumped over $300 billion into the world markets during 48 hours on Thursday and Friday (cough cough inflation).  What happens to the global econonmy when fiat money is pumped into the system?  It steadies temporarily, but we are delusional if we think that this is a permament fix.  This is a bandaid over a wound that is festering.  It has been festering for years, and it will take a major surgery to clean it up.  I’m not looking forward to it.