talkecon.com

As the United States economy continues on its downward spiral, it is natural to be frightened, frustrated, and depressed as we watch the value of our assets dwindle. With so many changes taking place now and in the near future with the new presidential administration, newly enacted monetary policy, and ever-changing economic situation, our lives are filled with uncertainty. One thing that we can be certain of is that in light of all of the turmoil and worsening economic conditions, there are opportunities out there to be taken advantage of.

Now I’m not saying that all the economists and media are lying to you when they say that we are heading straight into a recession or even a depression, but what I have noticed is that things may not be 100% doom and gloom everywhere in the US. For example, I am in a position where I underwrite loans for my bank, mostly commercial, but some retail scattered in here and there. What I’ve seen recently is people taking advantage of the abundance of distressed real estate on the market. There are so many homes for sale that are put on the market at very low prices. Often this is because the bank has foreclosed on the owner and wants to recover any amount of money from the defaulted loan, or maybe the owner has had the house on the market for a long time and just wants to get rid of it. One particular group of guys who each know a little bit about something in real estate, joined together to form an entity for the sole purpose of buying undervalued properties, fixing them up, renting them out, and eventually selling them when the market goes back up….that’s right, WHEN the market goes back up. There is a natural business cycle to our economy that causes periods of expansion and contraction. We are obviously in an economic down turn right now, as can be seen by several of the leading economic indicators, but we can be comforted by the cyclical nature of the free market system that will lead to an eventual up-swing. Which brings me to my next bright spot in all this gloom, invest in the stock market.

Obviously not everyone is in a financial position, nor real estate savvy enough to invest in such an endeavor, so if that isn’t an option for you, why not take advantage of the low stock prices right now? I understand it’s painful to buy into the stock market at a time like this, especially when the value drops about 5% just about every other day. If you can spare at least $3,000 (usually the minimum amount required to invest in a fund) that you don’t need access to in the near future, throw it into an index fund! Broad-based index funds are a way to automatically diversify your investment. You can choose a fund that divided into a percentage of stocks and bonds, based on your risk tolerance level, age, and other various factors. To elaborate, a person with a higher risk tolerance would opt for an asset allocation that is more heavily weighted with stocks, versus someone with a lower risk tolerance would opt for a larger portion of bonds. Just as I mentioned with investing in real estate, not everyone has the opportunity to invest in the market right now. If you don’t have an excess of liquid assets lying around, now is not the time to jump in. However, given that the market will one day bounce back and return to its natural state of 8% average annual growth, this is the perfect time to buy in if you have excess cash sitting in your savings account.

Don’t get me wrong, I’m not trying to belittle the struggle that many Americans face right now. I am aware of the high levels of unemployment, not to mention underemployment as people aren’t getting the hours they need to support a family. I am aware of the families being foreclosed upon, left with nowhere to go, but my point is that as individuals there is nothing any one person can do to change the state of the economy. For that reason, I believe it is important to seek out the opportunities for growth in these financially trying times, rather than worry about what will happen over the course of the year.

The are opportunities to make money in growing or shrinking economies and markets. The loss of jobs and strain on budgets spurs creativity which wouldn’t have came about without such poor economic times. One of the most interesting articles I’ve found about someone finding an area as a result of the poor economy is a story about a guy who started spraying dead lawns of foreclosed homes. Since the banks can’t afford to pay the upkeep on many of the homes, they pay the lawn sprayer to come by and turn the dead grass green for a few more months. Check out the whole article here.

Have any stories of your own of people finding opportunity in the recession? Please share in the comments!

It now seems that another, once powerhouse industry that “drove” the U.S. to new heights in the past decades is now in need of some assistance.  The automobile industry, following in the wake of the financial industry’s downfall is at the center of another financial bailout possibility.  Although not quite to the extent that some experts were anticipating needing to assist the financial industry, one must question just how far the government will be able to reach.  Priding itself on its pure form of democracy and capitalism, the United States government has found itself needing to assist some of the most profitable and prominent industries in recent memory.  With over 780,000 retirees now receiving corporate retirement pensions and health-care payments, the country’s automakers and auto unions are finding themselves in tight positions.  And, as more Ford and GM “lifers” are nearing retirement age, this number is expected to climb much higher.  The pensions and retirement benefits alone, that the likes of Ford and GM are paying out leaves smaller companies in awe.  In efforts to cut costs, on top of depleted cash revenues, Ford is looking to cut over 2,000 white collar jobs (wsj.com).  It has only come recently that President Elect Barack Obama and congressmen alike are looking deeper into the struggles that the auto industry is facing and the possible actions that government and business could take.  There continues to be many issues that are playing vital roles in whether or not aid to the auto industry should be extended. 

Unlike AIG, which supports about 100,000 jobs in the world, companies like Ford, GM and Crystler support twice as many workers in the United States, alone (businessweek.com).  A quick side note…while enjoying brunch with my grandfather this past weekend, who mind you is 91 years old and refuses to buy anything non-american, he mentioned that a single job in the autmobile industry creates roughly 7.5 additonal jobs for supplying industries and relating sectors.  This got me thinking about just how big this problem could get before it is all over, so I did a little research.  Unfortunately (or fortunately), my grandfather was wrong, however according to Auto Alliance the number is more like 1 to 5.  That means for every 1 auto plant job in the industry, 5 additional jobs are created in other industries.  Although some might think this is not a big deal, I tend to disagree.  It would be a stretch to say that if Ford cuts 2,000 jobs, 10,000 jobs across other industries would be immediately lost too, but the impact to these suppliers and complementary industries would be quite large.  For instance the amount of jobs lost in the first 3 quarters of 2008, reached 100,000 in the auto industry while ranking only second to the financial sector.   Even more, in small towns like Janesville, WI that is home to a GM plant that employs 2,400 people, there are plans to shut the plant down in 2010 (wisn.com).  This is due not only to the tight financial situation that GM is finding itself in, but also to the decreased demand to buy automobiles with poor gas milage (the Janesville plant makes mostly SUVs for GM). 

One must also consider the economic impacts on towns like Janesville, WI.  More often times than not, it is plants like this that keeps a town like Janesville afloat.  If not for a large plant that employs nearly 4% of the total population of Janesville, many think that the loss of this stronghold will take with it the economic stability of the small midwestern town.  Moreover, the situation that these workers will find themselves in is frieghtening.  Some who have worked at automobile plants for 20, 30 and 40 years, will be left searching for a way to make a living.  And with the small amount of plant workers that have earned anything but a high school diploma, many will have to start from scratch.

 So, the question remains: Can we as a nation afford a failing automobile industry, on top of the massive amounts of fallen financial institutions.  At the same time that people ask themselves why, we must also ask ourselves how much further we are willing to fall.  The problems we are facing stem from the evolution of a capitalistic society…over time, some companies thrive, while others perish.  But if industries such as these fulfill the latter, the nation is in store for even tougher times than we have already found ourselves in.

- David Courtis, talkecon.com

People often get caught up trying to find the fastest way to accumulate wealth in the least amount of time.  Often, people are willing to take on a significant amount of risk for this potential to make a lot of money, and more often than not, people fail and are worse off than where they started.  The investment articles found on this site are meant for those who care too much about their money to throw it into a get rich quick scheme, and who understand that building investment wealth takes time.  Needless to say, this site will also focus on long-term investment approaches.  We will explain all of the different concepts, but will only encourage those which have stood the test of time as sound investment strategies.

So we know time is a key element, but surely it is not the only important factor in building investment wealth.  The other two main factors are the rate of return, and the amount of money invested.  Both of these have an enormous impact on future returns.  This is best illustrated by looking at a graph like the one below.  This graph shows what would happen to a $10,000 investment over time at various interests rates (6%, 9% and 12%).

As seen here, the difference between earning 6%, 9%, and 12%is hundreds of thousands of dollars in the long run.  By investing $10,000 at 6% for 40 years, you would earn a return of 1029%.  If you invest $10,000 at 12% for 40 years, you would earn over 9300%!   This illustrates perfectly the two factors of time and rate of return on invested funds.  Now lets look at the third factor, amount of money invested.

Say instead of investing just $10,000 at the beginning of the investment period, we are able to scrounge together another $10,000 to invest a total of $20,000.

By comparing the two charts, it’s easy to see that the initial amount of money invested at the beginning makes a huge impact on the future returns.  Now most people are not able to put in a large amount of money to begin investing, but most are able to invest a fair amount consistently over time.  This can be every pay period, month, year, etc.  This is how most people build up their investment wealth over time.  Regular payments together with some compound interest and a fair amount of time means a large amount of investment wealth for retirement, college, down payment on a house, or any investment goal you might have.  This can still generate a huge amount investment wealth as seen in the graph below.

This graph shows what would happen if you were only able to invest $1000 a year at various interest rates for different periods of time.   Again, you can see the power of our three main factors of building investment wealth: rate of return, time, and amount of money invested.

So how do people earn these rates of return on their money?  Investors must have diversified portfolios with various financial assets.  The most common financial assets of investors are stocks, bonds, and cash reserves.  Where investors put their money within these asset types determines the level of risk that they bear, which usually determines the rate of return provided on these assets over the long-run.

Investor Behavior

Everyone has this sound piece of advice for making money in the stock market, but how many people have actually do it?  In looking at historical trends it’s easy to see that the majority of investors have done the exact opposite.  This graph illustrates this point and shows how people tend to move less money, or even remove their money from the S&P 500 in bear (down) markets, and increase their investing during bull (up) markets.  The blue line is the level of the S&P 500 index, and the red lines show the amount of money flowing into, or out of the market.

As you can see, the majority of investors were putting more money into the market when it was going up, and most people sold when the market was going down.  This clearly contradicts the key to any successful investment program which would see more stock purchases at low prices and more sales and high prices. So where did people put their money when they took it out of the stock market?  In 2002 and 2003, the lowest trough in the graph above for stock prices, investors put more than $89 billion into bonds from the sales of their stock portfolios.  At this time, bonds were at a peak in prices and once again, investors failed to do the opposite of buy low, sell high.  This behavior occurred because of people’s inability to invest for the long term and remember that acquiring large amounts of capital requires time and money.  There usually are not any shortcuts, which is why the wealthy tend to be smart, lucky, and old.

Throughout our commentary on investing, we will attempt to illustrate all of the psychological biases and emotions which caused these poor investment decisions and how smart investors can stay away from making these mistakes.  We will also attempt to illustrate common strategies and investment concepts that are used in the implementation of a successful investment program.

This post will be the first of many in a series on the topic of personal finance and investing.  I encourage readers to check back regularly in order to keep up with the posts and participate with comments and questions.  As always, we will be happy to answer these questions.

As a recent college graduate, just shy of 6 months removed from school, one of the most important, and might I add stressful, tasks following commencement is finding a job.  On a personal level, it took me nearly 7 months to solidify a single job offer, and this was even before all the doom and gloom that we currently see taking a toll on the Nation’s economy.  Businesses such as Lehman Brothers and AIG, who once were nationally known for their receptive nature of employing new college graduates see themselves struggling to survive.  Even the graduate-friendly corporations like Target and Walgreens are tightening their proverbial “hiring belts” due to a reduction in new store construction.  The National Association of Colleges and Employers, just two months ago anticipated a 6.1% increase in hiring for 2009 graduates.  This week, that number has dropped to 1.3% (wsj.com).  Even more daunting is the increase in college graduates from 2008 to 2009.  An additional 41,000 students, according to the National Center of Education Statistics, will be receiving their degrees than those in 2008.  This causes much concern for nearly 1.59 million twenty-somethings that will be entering the already struggling job market in less than 8 months.

At the same time that companies are hiring fewer and fewer people, much less those with limited to no experience, industries are laying off employees at its highest rate since 2001.  In September alone, there were nearly 2,270 mass layoff actions in the United States, resulting in 235,681 new filings for unemployment benefits (Bureau of Labor Statistics).  Although this can be attributed to a number of factors, i.e. jobs transferred overseas, reduced demand, increased prices of supplies, etc., its leaves many watching and waiting anxiously to see the direction of the job market in the next 6 months.   With the demise of mortgage giants like Fannie May and Freddie Mac, and the financial struggles that numerous commercial banks are showing, we will start to see many jobs opportunities for those in finance, economics, business administration, and accounting decline sharply.  In addition, the once thought strong financial sector future in jobs is now struggling to hold true.  Because of this, soon-to-be graduates are beginning to broaden their job search to include companies and industries they might never have thought or wanted to.  More importantly, the lack of experience that graduates enter the workforce with will play an even bigger part in obtaining a job than previously thought.

College students have always been stressed by parents, faculty members, and future employers to make sure their resume’s include one or two internships to gain the ever important job experience now practically needed in order to get a face-to-face interview.  What many people don’t consider, however, is that a slowing economy not only effects permanant, full-time positions, but largely terminates seasonal and intern positions first.  Even though employers may say that they use this technique as a last resort, it is commonplace that a company will forgo bringing in, training, and and using its valuable resources to pay a group of students and instead load that work onto the shoulders of its already overworked employees.  In turn, this puts graduates at an even bigger disadvantage when entering the pool of workers with only arm floaties.

-David Courtis, talkecon.com

I hear a lot of people asking about what the bailout actually is.  This questions comes in various shapes and form, but it seems that many Americans do not understand what’s actually going with it.  We’re going to attempt to shed some light on the subject by explaining it in terms that hopefully everyone can understand.

What is the Bailout?

Essentially, it is the government’s plan to buy up the bad loans that many banks are likely not to collect on.  These loans are often referred to as “toxic assets” and are not worth nearly their face value so the government is determining how much they are willing to pay, probably between 30 to 40 cents on the dollar, and buying these toxic assets from the banks to help relieve some of the pressure from loan delinquencies on their balance sheets.

Why is it necessary?

With all of the bad loans out on the market, most banks have no idea how much money they are going to be getting back on these loans, which means they can’t lend out any more money because they don’t know how badly they will need it in the near future. Without banks lending money, people can’t get access to the capital they need to invest and expand their companies, buy a new home (which suppresses housing prices even furthe), or finance big-ticket items.  This causes consumer expenditures to go down which hurts all large companies and leads to decreased production, and eventually recession.  The government’s plan to bail out these banks is a last ditch effort to put some money back into the banks so that they can continue to lend to individuals, businesses, and each other.

What if we just don’t do anything?

If nothing was done to relieve the pressure on banks, things would certainly someday become stable again, but the problem is that it would probably take a very long time.  The banks and the government screwed up in pushing subprime lending practices in an attempt to make bigger profits, and now everyone is paying for it and making an effort to pay upfront instead of letting things get out of hand will most likely keep things from getting much worse than they could if nothing was done.

If the bailout didn’t go through, it would not just be individuals suffereing from not being able to get a loan, or the banks suffering and going bankrupt, it goes much further.  You see, large companies and banks engage in short-term lending, often on just a daily or weekly basis, which allows these firms to pay of their bills consistently with their cyclical income streams.  Say I’m Wal-Mart and it’s time for me to pay my employees, but many times I don’t have the cash on hand to pay everyone so I take out a short-term loan to pay the difference that I can’t handle, and pay it back with money that I know will be coming in within the next few days, then I pay off the loan.  Banks often do the same thing amongst themselves and lend money between each other all the time.

The problem that got us to where we are today, is that the money that banks were counting on to be coming in within the next few days, much of this income coming from mortgage payments, stopped coming in.  This meant that banks were taking out short-term loans, and then not being able to pay them back to the bank where they got the money from which means another bank isn’t going to be able to get the money that they need for a short-term loan.  This tightening up of the credit markets has caused banks and businesses to be unable to get the money they need for their daily or weekly expenses which they were previously paying off with short-term debt, and hopefully, this injection of capital into these markets will loosen up some money for these firms to be able to borrow again.

What’s going to happen?

As of right now, no one is sure, but it seems as if the government’s plan has made an impact already.  A good indicator of how tight credit markets are is  something called the Ted Spread.  Here is a link to this indicator.

What the Ted Spread tells us is the difference between treasury security rates, and the LIBOR, which stand for the London Interbank Offered Rate.  This is the rate of interest that banks are willing to lend to each other, and the treasury security rate is the interest rate that the U.S. government is willing to pay on their scurities.  These indicators are used because the lower the rate on treasury securities, the more people are putting their money into these securities rather than investing or loaning their money out, and the higher the LIBOR rate, the less willing banks are to lend to each other.   During strong economic times the Ted Spread is typically below 1%, but recently has been at unprecedented levels to around 4%.

Of course there are other measures to look at, but this is one that we follow as a good indicator of what’s happening in the short run.

Stay tuned for more information on what’s going on with the bailout and the credit crisis and please feel free to ask questions in the comments area and we’ll answer them as quickly as possible.

Chris Schmitz - talkecon.com

In an article that was written last week, I discussed how it seems impossible to say for sure why the stock market as a whole, or an individual stock goes up or down.  Obviously there are some events and news that can cause massive waves of buying or selling in the market, but how big do they have to be before we can attribute any fluctuations to anything more than random and typical stock market movements?

In examining this, I  took a statistical approach to see how much the market has to change in a single day to be more than 2 standard deviations away from the mean.  I used numbers from the Dow Jones Industrial Average for the years from 2000 to present.  This is what I found:

For the years from January 1, 2000 to Sepetember 12, 2008, the standard deviation was 113.1.  This means that this is the average market change on any given day from 1985 to 2008, and 99% of the time, the market changed by 113.1 points or less.  If we go one step further to two standard deviations we see that 95% of the time, the market changed by about 226.6 points.

This means that unless the market is changing, up or down, by more than 226.6 points, people probably shouldn’t be concerned or attempting to explain these movements in the market which are not out of the ordinary.

How Did We Get Here?

The housing driven recessionary cycle that the U.S. is currently in is not alleviated by the government’s attempts to help out delinquents and the Freddies.  “Helping” individuals and corporations alike will not change much, and why should the government be responsible for digging people out of the holes that they dug themselves into.

Something had to give, and now everything gave at once which has wreaked havoc across the nation.  The downturn of the economy comes back to core human principles.  Banks were knowingly giving away mortgages like Lance Armstrong gives out Livestrong bracelets.  MBS’s (Mortgage Backed Securities) became more popular with fund managers than Ugg boots with female college students.  Housing prices were skyrocketing and it was very clear that the growth couldn’t be sustained, but everyone pretended not to notice.  People were living beyond their means and got a short-lived taste of the high-life, only to get slapped upside the head for throwing caution to the wind and jumping on the bandwagon to create the housing market crisis we’re in today.

Economic Affects

People are finally getting punished for doing things that they know were potentially dangerous.  Now lending standards for new loans will be that much higher which will mean less spending on high-ticket items and another big hit to the economy and potentially lowering housing prices even further as less people are able to afford them.  This will also cause many to not pay their taxes because their loans will be for amounts far greater than their home’s value.  When these homes are foreclosed upon these backtaxes will mean even bigger losses for lenders.

There will also be a large group of homeowners who will be unable to borrow against the value of their home and will be unable to sell them anywhere near what they have put into them.  Many homeowners aren’t losing much by simply walking away from their homes and some people are probably saving money over renting because of the low interest teaser rates they were paying.

If all this wasn’t bad enough, delinquencies on car loans are at an all time high as well.  Without the ability to borrow against the value of their home, many people are feeling the squeeze and are now unable to make the two main assets of almost any family in the country.  The combination of the housing crisis along with the pressure of rising energy, gas, and food prices, higher credit card payments, and high unemployment make for a bleak future for the economy.

But now with the new mortgage bailout plan help is on the way!  False, this will NOT help…  The government is merely trying to curb the drop in housing prices thinking that this will help stabalize the economy.  What everyone really needs to do is accept the fact that current housing prices are still too high and they are going to continue to drop.  Banks will need to implement their old standards of lending, but this will result in prices also returning to their actual values which nobody wants to suffer as a consequence.  It would be wise to cut our losses now and just get back to where we know we need to be.  Suck it up and suffer the short-term consequences in order to stablize the economy.

What Has Caused This Rise In Value

Currencies are usually looked at as proxies for the performance of their given economy. Unfortunately, the reason for the recent rise of the dollar is not because of strong economic performance. It’s more that other economies are struggling more than us! Everything is relative, and even with the grim outlook for the U.S. economy, we’re looking relatively good compared to the rest of developed world. Europe and Japan are worse off than we are, and their future looks even worse.

What makes this change in value interesting is that it is the main currency for global trade and its fluctuations affect the price of oil unlike any other currency in the world. This makes these changes in the U.S. dollar of great significance to other economies. The rise in the value of the dollar helps decrease the price of oil, which has positive effects for the global economy. But since the dollar’s increase in value isn’t a result of a strong economy at home, but rather a result of the deterioration of Europe and Asia’s economies, this is not a good sign for the global economy.

Is This Good Or Bad For The U.S.?

Economists have reported a 2.7% annual growth rate for the second quarter even with the current poor economic conditions. Wall Street maintains that these numbers will not be sustainable. Paradoxically, the rise of the dollar is a main reason why.

The rise of the dollar makes U.S. exports less attractive as they appear more expensive to other countries. The dollar has risen 7% since July, which will no doubt have negative impacts on U.S. exports. As these exports go down, GDP figures will fall which could lead to a recession. How much will this change in exports hurt the economy? Well, foreign trade added 2.4% of the 2.7% annual growth percentage for the second quarter. If we lose a large portion these exports we are going to need to make up for it somewhere else.

Summary

As the dollar increases in value and U.S. exports become less appealing, we are going to need to find a way to make up for this loss in growth somewhere else or this could push us over the edge into the recession that we’ve been on the brink of for some time.

In examining the current economic recession, everyone is wondering, “How low will it go?”  Let me make on thing clear.  We have not yet entered into a recession!  In order for there to be a recession, there has to be two negative quarters of GDP in a row.  This hasn’t occurred yet, but needless to say, the economy is struggling and people want to know when it will bounce back.  Well nobody knows for sure, and if they say they do then they’re a liar, but here are the main factors that have caused us to enter this economic downturn, and some reasons why the future for the U.S. economy is looking dim.

How We Got Here

• Falling Housing Prices: Almost every American’s main form of asset is declining rapidly in price. With forecasts of this decline continuing for the new 12 months, consumer confidence is shattered and spending will likely continue to drop as more and more people feel the squeez. The continuing delinquencies on mortgages increase the amount of unsold houses on the market and make the future depressing for this sector of the economy.
• Credit Crisis: The impact of the defaults on subprime loans goes far beyond the banks that provided those loans. Now everyone is having a hard to time finding money to pay for big-ticket items like cars, boats, and houses. Construction companies are feeling the pressure from this as demand for new homes has plummeted, and the government isn’t going to be able to bail out all of the banks that are in trouble. With plans to help out individual mortgage delinquents I don’t know how this could be possible. The economics behind this issue is more complex than it seems, and will require further explanation which can be found in detail here sometime in the near future.
• Global Economic Struggles: The U.S. isn’t the only country in economic trouble. The EU and Japan are also on the downturn which will only result in less U.S. exports and even less money coming into the country as we continue to increase our debt.

What’s Going To Keep Us Here

• The Dollar Is On The Rise: With the dollar rising in value, our goods become more expensive relative to other countries’.  This translates into a decrease in exports of American goods and an even bigger trade deficit.  This coupled with increases in the national debt will continue to make these tough economic times even worse.
• No More Tax Cuts: Taxes can’t be cut any lower than they already are.  Given the current budget deficit and the effort to fuel the economy with the recent economic stimulus package, there’s no way there are any tax cuts in sight.  Although the economic stimulus package did have a positive affect on the short-term spending, this was only a quick fix to boost consumer confidence, and there is still no long-term remedy in sight.
• Interest Rates Are Already Rock Bottom: With the federal funds rate already down to 2%, it can’t go any lower.  The Fed has attempted to relieve economic stress of all the Adjustable Rate Mortgage (ARM) holders in America, but they’ve gone as low as they can go and there are still delinquencies all across the nation.

 Summary

Nobody can say for sure how long the economic downturn in the U.S. will last, but these signs make it pretty clear that there’s not much chance of relief in the near future.  My guess, completely personal, is that it will start to swing back in the middle of next year.