I heard an interview with author Jared Bernstein about his new book, Crunch: Why Do I Feel So Squeezed? (And Other Unsolved Economic Mysteries). Mr. Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C. and his book attempts to offer an explanation for why so many Americans feel insecure and uncertain about their standing in the economy.
This topic often engenders knee-jerk explanations -- Bernstein notes that “economics has been hijacked by the rich and powerful, and it has been forged into a tool that is being used against the rest of us.” Talk about class warfare—en garde! He also cites plenty of statistics supporting the fact that only a small percentage of American workers have participated in the post-dot-com recovery of 2002-2007. The chasm between the very rich and the middle has been widening during this time period and as a result, politicians have picked up on the theme of regular people in economic distress.
But there is something else at work here. Bernstein’s ability to accurately describe what so many are feeling is important, but in my experience, he is not inclusive enough. I speak to people all the time, who may actually be defined as “rich” in Bernstein’s eyes, but who also feel the weight of an economic crunch. These households often earn up to $300,000 per year, but complain that there is not much left over after the bills are paid. I know that those who earn $50,000-$60,000 may roll their eyes at this lament, but take a walk with me in the shoes of these “semi-affluent” to understand how the crunch can impact many more than those considered “the middle class”.
“John” and “Jane” have a household income of $200,000. They live in an affordable house in a nice neighborhood, but the schools have been in decline since they moved in. As a result, they decided to send their three kids to private school. The annual after-tax cost of tuition has been approximately $60,000 for the past couple of years and with this added expense, the only savings they can manage is the contribution to employer-sponsored retirement plans. Jane exclaimed, “It’s crazy to think that we earn $200,000 and can barely meet our day-to-day expenses!”
But is it really crazy? Here is the math: they earn $200,000 and after accounting for their retirement contributions, benefits and taxes, they take home approximately $120,000 per year. Now remove the tuition and they are living on $60,000 per year. For some, this might seem like a lot, but I’m telling you that it is not easy for these people. They are anxious about money all the time and are feeling the “crunch” that Bernstein describes in his book. You might say, “Just send the kids to public school and that would solve the problem.” I took a slightly different approach. When they raised the issue of sending the kids to private school, I responded that the kids would likely have to pay their own way in college so that the parents could fund their own retirement.
Everyone agreed to that game plan but there is still is a pretty healthy dose of stress that lingers. That’s why when I hear the details of real-life stories like these, I caution all of us not to assume that we know who the “rich and powerful” are that Bernstein talks about, and instead try to remember that a lot of folks are experiencing crunch time in their own significant ways.
Friday, May 23, 2008
Thursday, May 22, 2008
Crude + Credit = Cringe
Just when you thought that the worst was behind us, we get a day like yesterday to remind us that all is not perfect in the merry ol’ land of Oz. The wicked witch came in the form of soaring crude-oil prices, accompanied by a couple of flying monkeys – that is, renewed concerns about the length and depth of the credit issues and hawkish comments from the Fed.
Before yesterday’s opening, crude oil prices had risen 35%, above $130. Wednesday’s additional $4.19 to $133.17 seemed surreal, as traders monitored data from the Energy Information Administration that showed U.S. oil reserves fell last week, contrary to expectations for modest growth in stockpiles. The timing was pretty rotten, especially if you were one of the oil executives grilled by the Senate Judiciary Committee about windfall profits and bloated executive pay yesterday.
As if oil itself were not enough to rattle investors, there was Ms. Meredith Whitney, the Oppenheimer financial sector gur-ess, who accurately nailed the credit crisis last year. She predicted that the credit crisis will continue into 2009 and that large financial institutions will likely incur credit-related losses of another $170 billion by the end of next year.
But what really seemed to spook investors yesterday was the release of the minutes of last month’s Federal Open Market Committee meeting. If you recall, the Fed cut rates by a quarter-point to 2% in April. What we learned from the minutes is that the cut was a "close call," and that future reductions are unlikely even if the economy gets worse. “Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting,” unless there was a “significant” weakening in the outlook. The minutes also revealed that Fed officials believe that the US economy will only increase by 0.3%-1.2% this year, as measured by GDP. The April estimate is lower than the previous forecast of 1.3% - 2%.
It seems to me that the economy and the markets have been fairly resilient, after taking an amazing number of blows over the past year. Yesterday’s action was a good reminder, though – while the economy and markets are healing, we are not yet done with the process. The dual bubbles that have burst in housing and credit have yet to be fully absorbed and the “crude realities” of skyrocketing oil are the biggest unknown facing investors in the short-term. Indeed, there are likely to be more trading sessions like yesterday’s, where you find yourself cringing.
Before yesterday’s opening, crude oil prices had risen 35%, above $130. Wednesday’s additional $4.19 to $133.17 seemed surreal, as traders monitored data from the Energy Information Administration that showed U.S. oil reserves fell last week, contrary to expectations for modest growth in stockpiles. The timing was pretty rotten, especially if you were one of the oil executives grilled by the Senate Judiciary Committee about windfall profits and bloated executive pay yesterday.
As if oil itself were not enough to rattle investors, there was Ms. Meredith Whitney, the Oppenheimer financial sector gur-ess, who accurately nailed the credit crisis last year. She predicted that the credit crisis will continue into 2009 and that large financial institutions will likely incur credit-related losses of another $170 billion by the end of next year.
But what really seemed to spook investors yesterday was the release of the minutes of last month’s Federal Open Market Committee meeting. If you recall, the Fed cut rates by a quarter-point to 2% in April. What we learned from the minutes is that the cut was a "close call," and that future reductions are unlikely even if the economy gets worse. “Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting,” unless there was a “significant” weakening in the outlook. The minutes also revealed that Fed officials believe that the US economy will only increase by 0.3%-1.2% this year, as measured by GDP. The April estimate is lower than the previous forecast of 1.3% - 2%.
It seems to me that the economy and the markets have been fairly resilient, after taking an amazing number of blows over the past year. Yesterday’s action was a good reminder, though – while the economy and markets are healing, we are not yet done with the process. The dual bubbles that have burst in housing and credit have yet to be fully absorbed and the “crude realities” of skyrocketing oil are the biggest unknown facing investors in the short-term. Indeed, there are likely to be more trading sessions like yesterday’s, where you find yourself cringing.
Wednesday, May 21, 2008
The Edge of Death
Two of my favorite pastimes are watching a market confound the pundits and a sports come-back story. It strikes me that in this pre-Memorial Day week, we are seeing both and there are important lessons that investors can take away in the process.
Let’s start with the amazing odyssey of Red Sox’ pitcher Jon Lester. Lester’s young career was stopped short in 2006, when he was diagnosed with a rare form of non-Hodgkin's lymphoma. Although he did not speak extensively about this period, we can only surmise that pitching statistics and wins and losses take a back seat to life and death. Lester, like so many cancer survivors, endured months of treatment, including aggressive chemotherapy, with the hope of life first, everything else next.
He returned to the Red Sox and on Monday night, and Lester took the mound against the Kansas City Royals. He had never even completed an entire game in his career, but on a fateful night at Fenway, Lester threw the first no-hitter of the Major League Baseball season and the 18th no-hitter in Red Sox history. One of my friends who is a doctor likes to describe the process of chemotherapy as “walking to the edge of death.” Imagine coming back from the edge to deliver this kind of performance?
On a much smaller and less important scale, I could not help think about another beast that went to the edge, only to come back. I am talking about the US stock market. It was only two months ago when the financial system was melting down and the near-collapse of Bear Sterns signifying the “edge of death.” Well, maybe not death, but certainly significant pain and suffering. You may recall that in mid-March, concerns were mounting that the market could suffer a massive pullback from an already-low level.
Since then, the market has gone through its own treatment of sorts: the drug of choice came in the form of a variety of Federal Reserve actions; benign economic numbers (US economic data have been lukewarm, but not as weak as some have originally feared); and better-than-expected first quarter earnings from non-financial sector companies. As a result, the financial system is healing. While we are not out of the woods yet (stubbornly-high oil and food prices make that impossible right now), things are improving. I wouldn’t expect any no-hitters from this market just yet, but in the past 6-8 weeks, the market has tilted towards an upside bias in the absence of specific bad news. That’s good enough for me after experiencing the metaphoric edge of death.
Let’s start with the amazing odyssey of Red Sox’ pitcher Jon Lester. Lester’s young career was stopped short in 2006, when he was diagnosed with a rare form of non-Hodgkin's lymphoma. Although he did not speak extensively about this period, we can only surmise that pitching statistics and wins and losses take a back seat to life and death. Lester, like so many cancer survivors, endured months of treatment, including aggressive chemotherapy, with the hope of life first, everything else next.
He returned to the Red Sox and on Monday night, and Lester took the mound against the Kansas City Royals. He had never even completed an entire game in his career, but on a fateful night at Fenway, Lester threw the first no-hitter of the Major League Baseball season and the 18th no-hitter in Red Sox history. One of my friends who is a doctor likes to describe the process of chemotherapy as “walking to the edge of death.” Imagine coming back from the edge to deliver this kind of performance?
On a much smaller and less important scale, I could not help think about another beast that went to the edge, only to come back. I am talking about the US stock market. It was only two months ago when the financial system was melting down and the near-collapse of Bear Sterns signifying the “edge of death.” Well, maybe not death, but certainly significant pain and suffering. You may recall that in mid-March, concerns were mounting that the market could suffer a massive pullback from an already-low level.
Since then, the market has gone through its own treatment of sorts: the drug of choice came in the form of a variety of Federal Reserve actions; benign economic numbers (US economic data have been lukewarm, but not as weak as some have originally feared); and better-than-expected first quarter earnings from non-financial sector companies. As a result, the financial system is healing. While we are not out of the woods yet (stubbornly-high oil and food prices make that impossible right now), things are improving. I wouldn’t expect any no-hitters from this market just yet, but in the past 6-8 weeks, the market has tilted towards an upside bias in the absence of specific bad news. That’s good enough for me after experiencing the metaphoric edge of death.
Tuesday, May 20, 2008
Hot Fun in the Summertime
End of the spring and here she comes back
Hi Hi Hi Hi there
Them summer days, those summer days
That's when I had most of my fun, back
high high high high there
Them summer days, those summer days
-Sly & The Family Stone
I love the summer and was disheartened to hear that due to the weak economy, some are scrapping their usual plans for a July-August break. According to a new survey commissioned by Access America, a travel insurance company, only 33 percent of Americans plan to take a summer trip this year, compared with 40 percent last year. The survey, conducted by Ipsos Public Affairs, also found that of those who do plan a trip, almost half are planning a lower cost trip by eating out less, spending fewer days away or staying closer to home.
Considering that US workers have the smallest number of vacation days of any industrialized nation in the world, we have to take what little time we have to re-charge our depleted batteries. That said, we all know that piling into the car and driving anywhere is going to cost a pretty penny this summer. According to AAA, the cost of gasoline is up to $3.80 per gallon for regular and $4.173 for premium. You don’t have to go far for those kinds of numbers to add up quickly.
So what’s a beleaguered consumer to do—forego hot fun in the summertime? Absolutely not! There are ways that we can all enjoy vacations that are more local in nature without breaking the bank. The first thing to do is head to your local bookstore and pick up a copy of a guide book about your city/state. You probably have not been to have of the tourist attractions that are within spitting distance of your home. I always marveled at the number of people that I knew in Providence, Rhode Island, who had not seen the basic “Top 10” sites in Boston, not to mention the vast number of New Yorkers who have never been to Ellis Island or the Statue of Liberty. If driving is a drag, consider the train or the bus and of feel free to touch base with your old college pal who lives in one of these places to see if a visit may be possible.
I know that there are cultural riches in your backyard that while are not Europe, are certainly memorable and wonderful in their own ways. I beg you to take your vacation time and sample the beauty and wonder of the wonderful place where you live this summer.
Hi Hi Hi Hi there
Them summer days, those summer days
That's when I had most of my fun, back
high high high high there
Them summer days, those summer days
-Sly & The Family Stone
I love the summer and was disheartened to hear that due to the weak economy, some are scrapping their usual plans for a July-August break. According to a new survey commissioned by Access America, a travel insurance company, only 33 percent of Americans plan to take a summer trip this year, compared with 40 percent last year. The survey, conducted by Ipsos Public Affairs, also found that of those who do plan a trip, almost half are planning a lower cost trip by eating out less, spending fewer days away or staying closer to home.
Considering that US workers have the smallest number of vacation days of any industrialized nation in the world, we have to take what little time we have to re-charge our depleted batteries. That said, we all know that piling into the car and driving anywhere is going to cost a pretty penny this summer. According to AAA, the cost of gasoline is up to $3.80 per gallon for regular and $4.173 for premium. You don’t have to go far for those kinds of numbers to add up quickly.
So what’s a beleaguered consumer to do—forego hot fun in the summertime? Absolutely not! There are ways that we can all enjoy vacations that are more local in nature without breaking the bank. The first thing to do is head to your local bookstore and pick up a copy of a guide book about your city/state. You probably have not been to have of the tourist attractions that are within spitting distance of your home. I always marveled at the number of people that I knew in Providence, Rhode Island, who had not seen the basic “Top 10” sites in Boston, not to mention the vast number of New Yorkers who have never been to Ellis Island or the Statue of Liberty. If driving is a drag, consider the train or the bus and of feel free to touch base with your old college pal who lives in one of these places to see if a visit may be possible.
I know that there are cultural riches in your backyard that while are not Europe, are certainly memorable and wonderful in their own ways. I beg you to take your vacation time and sample the beauty and wonder of the wonderful place where you live this summer.
Monday, May 19, 2008
Bubble Trouble
Last Friday, the Wall Street Journal ran a front-page story about the study of bubbles throughout history. (Bernanke’s Bubble Laboratory, by Justin Lahart, WSJ May 16, 2008). The article highlighted a group of intellectuals assembled at Princeton University to figure out how and why bubbles form and what should or should not be done to prevent or mitigate the bubbles from forming/popping.
Considering that we have seen two bubbles form (dot com and housing) and burst within ten years, the topic is quite timely. The Princeton group notes that bubbles often emerge when a significant innovation occurs—in the 1920’s, it was automobiles and electricity and in the nineties, it was the advent of the Internet. The interesting thing to consider is that most bubbles start with a great idea. Both automobiles/electricity and the widespread use of the Internet were truly transformative moments in time that would impact the economy in significant and lasting ways.
But what can occur is that the great idea morphs into a mania and then all bets are off. All of a sudden, everyone knows that what is going on is crazy, but nobody wants to be left out of the money-making. I remember talking to clients late in the Internet cycle and hearing “I know that it’s insane, but can’t we own more technology? My cousin has all of his money in the ABC Internet fund and has made a fortune!” Those animal instincts are so hard to fight, so maybe it’s up to a higher power to help us. The higher power in this case is the Federal Reserve.
Last week, Fed Governor Frederic Mishkin “suggested that while it was inappropriate to use the blunt instrument of interest-rate increases to prick bubbles, if too-easy credit appeared to be fueling a mania, policy makers might craft a regulatory response that could ‘help reduce the magnitude of the bubble.’” I am not sure what response Mishkin is thinking about, but there is a very easy solution that exists: change margin requirements.
One of the accelerants to a bubble is the use of borrowed money. As a result of leverage, bubbles become larger, faster, but once the tide turns, “the speed of their fall is intensified as investors sell urgently to pay down debt.” By requiring that investors use cash, not borrowed money, or in the case of housing, by ensuring that 20% down payments are used to secure mortgages, the Federal Reserve may not be able to prevent a bubble from forming, but it sure would make the eventual bursting of the bubble easier for the economy, markets and people to absorb.
Considering that we have seen two bubbles form (dot com and housing) and burst within ten years, the topic is quite timely. The Princeton group notes that bubbles often emerge when a significant innovation occurs—in the 1920’s, it was automobiles and electricity and in the nineties, it was the advent of the Internet. The interesting thing to consider is that most bubbles start with a great idea. Both automobiles/electricity and the widespread use of the Internet were truly transformative moments in time that would impact the economy in significant and lasting ways.
But what can occur is that the great idea morphs into a mania and then all bets are off. All of a sudden, everyone knows that what is going on is crazy, but nobody wants to be left out of the money-making. I remember talking to clients late in the Internet cycle and hearing “I know that it’s insane, but can’t we own more technology? My cousin has all of his money in the ABC Internet fund and has made a fortune!” Those animal instincts are so hard to fight, so maybe it’s up to a higher power to help us. The higher power in this case is the Federal Reserve.
Last week, Fed Governor Frederic Mishkin “suggested that while it was inappropriate to use the blunt instrument of interest-rate increases to prick bubbles, if too-easy credit appeared to be fueling a mania, policy makers might craft a regulatory response that could ‘help reduce the magnitude of the bubble.’” I am not sure what response Mishkin is thinking about, but there is a very easy solution that exists: change margin requirements.
One of the accelerants to a bubble is the use of borrowed money. As a result of leverage, bubbles become larger, faster, but once the tide turns, “the speed of their fall is intensified as investors sell urgently to pay down debt.” By requiring that investors use cash, not borrowed money, or in the case of housing, by ensuring that 20% down payments are used to secure mortgages, the Federal Reserve may not be able to prevent a bubble from forming, but it sure would make the eventual bursting of the bubble easier for the economy, markets and people to absorb.
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