Livin’ on a Prayer

“Whooah, were half way there
Livin on a prayer
Take my hand and well make it - I swear
Livin on a prayer.”

-Jon Bon Jovi

I kept humming this song as I thought about US consumers. Earlier this week, I discussed the urgent need to save more for retirement (“Payback Approaches”, June 17, 2008) but I should have started with a simple statement: WAKE UP AND STOP SPENDING! This is obviously not directed towards everyone reading, but there are indeed a few who might take this to heart—the ones who have spent their tax rebate checks not on gas, but on stuff or even worse, the folks that continue to use home equity lines of credit to postpone their day of reckoning.

These people seem to be living on a prayer—and not just one. The prayer here is multi-fold and it includes lower prices at the pumps; a rebound in real estate; a rise in wages; and lower interest rates on everything from school loans to mortgages. Let’s examine the possibility of each of these prayers and determine whether they will be answered.

Price at the pumps: This one may actually turn into reality. Although crude oil has gone parabolic and has caused great pain at the nation’s pumps just as the summer driving season arrives, there is evidence that demand is weakening among developed nations. Some suggest that oil prices will finally crack after the Olympics. The reason is that in advance of the games, China has idled most of their coal plants to clear the skies. With coal offline, China’s demand for oil has increased. Once the Olympics passes and coal plants re-start, we may see a dip in Chinese demand, which would help prices globally.

A rebound in real estate: Data has thus far not been too rosy, but there will eventually be a bottoming in housing. The problem is that the amount of housing inventory suggests that even if prices stop falling, they are unlikely to rise any time soon.

A rise in wages: As corporations feel the pinch of the slowdown, there is very little hope for this one. For most, not losing the low-paying job you have may be a victory in and of itself.


Lower interest rates: When inflation is the headline across the nation’s papers, you can pretty much count of interest rates rising. Despite inflation concerns, I do not think that the Fed will raise short-term rates any time soon, nor do I think that despite persistent economic weakness, that they will lower rates. That said, longer term rates have already started to climb. Because mortgages and student loans tend to be tied to longer term rates, the outlook for consumers on the rate front is that we may have already passed the cheapest rates of the cycle.

If any one of those prayers turned into reality, it would be great, but the way people are spending indicates that all would need to turn simultaneously to justify the rate of spending that is still occurring.

Mom is usually right

Women of a certain age might relate to the following: at some point in your life, you realize that your mother is right about a number of issues. From the obvious—“I don’t like your hair”, to the more practical, “Take a sweater to the movies because it’s always cold in the theater”, our mothers tend to consult the same manual when guiding us through life. There is one other area where my mother was particularly dead-on with her analysis: “Don’t count other people’s money…you never really know how much someone has and you certainly can’t judge your neighbor’s net worth based on the house in which he lives or the car she drives.”

I thought about this after hearing the story of an acquaintance—I will call him “Ned”. Ned lost his “big” job at a major Wall Street investment bank and called me to help him develop a game plan for moving forward. I will admit that I had fallen prey to the old trap of assuming that Ned had a lot of money. After all, he lived in a big house in a fancy suburb; drove an expensive sports car; and his wife was dripping in beautiful jewelry.

What I subsequently learned is that while Ned had previously amassed a tidy sum, he is nowhere nearly as wealthy as I would have thought he was, especially given the appearance he had so diligently created for the world. Compounding the problem was the fact that Ned made an amateur mistake: he held far too much of his net worth in his employer’s stock-when the company’s shares tumbled by over 60 percent over the past year, so too did Ned’s nest egg. And now, he had also lost his mid-six figure job with few prospects of becoming re-employed any time soon.

We talked about how he allowed himself get ensnared in this situation-he sheepishly said, “I was just greedy and have nobody to blame but myself. I got caught up in the toys, the image and the belief that I was impervious to the problems that plagued others. I am coming to you for a reality check – for perspective, and to put together a plan for getting to a better place…at age 45, it’s time for me to grow up and act more responsibly.” I am consistently surprised by how many smart people allow themselves to get into bad situations that are avoidable with just a tiny bit of discipline. Learning that lesson in your twenties or thirties is tough, but doing so in your forties and fifties can be life-altering.

So the next time you drive by your neighbor’s house and see his Porsche parked in the driveway, you may think of Ned and remember what your mother told you, “Don’t count other people’s money…for all you know, he could be broke!”

Scapegoats

I overheard the following snippets of conversation over the past few days:

“Hillary Clinton’s campaign is using sexism as a scapegoat for a poorly run campaign.”

“Lehman Brothers used Erin Callan and Joseph Gregory as scapegoats—of course Fuld knew the deal, but he let those two take the fall to save his own hide!”

“As usual, Congress seeks to scapegoat speculators for any problem that arises in financial markets.”

That’s a lot of scapegoat-ing for one weekend, so I thought it was time to dive into the idea of it and the roots of the word. According to Merriam Webster, the word scapegoat is intended as translation of Hebrew and the modern interpretation is “one that bears the blame for others” or “one that is the object of irrational hostility.” You get the idea. Since I do not get paid to articulate my political views, I will leave the Hilary conversation aside. I am interested in the other two instances of “scapegoat-ing.”

The idea that the junior professional gets the ax instead of the boss is not a new one, but it seems more dramatic when everyone involved is at a high level. Lehman Brothers announced that Erin Callan has been shuffled aside from her role as CFO for some amorphous position "in a senior capacity." After John Mack’s firing of his star pupil Zoe Cruz at Morgan Stanley for more proof, it is a little strange to see another woman fall, considering there don’t seem to be many left in the executive suite at major Wall Street firms. First there was a dust-up at Fidelity where the boss’ daughter was passed over, then Sally Krawchek at Citi was demoted, then Zoe Cruz and now Erin Callan. My takeaway is that as soon as the New York Times or Wall Street Journal start writing about you, look out below! All of these women had major puff-pieces published within moments of their demotions/firings. I don’t actually think that sexism was the issue here, but few CEOs are willing to fall on their swords when the pressure cranks up.

When it comes to speculators, well, they are the easiest targets. Who likes the people who make money by inserting themselves between buyers and sellers? I DO! I was a speculator once—a young trader on the floor of the Commodities Exchange, skimming dimes and nickels out of the marketplace in a perfectly legal manner. The common wisdom holds that speculators are responsible for high gas prices, food increases and volatility -- lawmakers must have gotten tired of blaming the Chinese.

Here is my two cents: speculation may play a role, but so too does supply and demand. Without the liquidity provided by speculators, day traders and yes, hedge funds, these markets may not work as smoothly. Maybe some of the margin requirements should change, but I get nervous when one group or person becomes the target of such a large problem.

The issues surrounding dramatic events that occur in companies, financial markets and the economy are far too complex to blame on any single individual or group. Take the scapegoat-ing with a grain of salt, knowing that there are likely a variety of explanations for the situation at hand.

Payback Approaches

Even when markets are in turmoil and gas prices are soaring, it’s important to return to a basic theme: Americans need to do a better job of preparing for retirement. After reviewing fresh statistics on the topic, I can’t help but think that we are paying for the sins of the past two buoyant economic decades in spades right now.

Think about it: first the stock market roared higher, then the housing market exploded, both of which masked a fundamental problem—Americans got out of the habit of living within their means and saving. Compounding matters, a large swath of folks piled on loads of debt, making an already problematic situation dire. As the credit crisis and housing collapse continue to unfold, the long term effect is gripping the national retirement picture and payback is approaching.

Consider these facts that were recently released:

-28% of workers age 55 and over have less than $100,000 in total savings and investments (Employee Benefit Research Institute)
-Only 47% of workers have tried to calculate how much they will need in retirement (EBRI)
-43% of surveyed workers GUESS at how big a nest egg they will need, while 19% seek the assistance of a financial adviser and another 19% calculate their own estimate (EBRI)
-7% of workers are saving the maximum amount allowed in their 401 (k) plans (Financial Engines)
-18% of workers borrowed from their 401 (k) plan in 2007, versus 9% in 2005 (Boston College Center for Retirement Research)

Considering that the average Social Security benefit for retired workers is $1200 for men and $900 for women, many are facing an uphill battle when it comes to retirement --- and the problem is likely to escalate until Americans change their behavior. Wally from Cranston, RI, my favorite radio listener (and frequent contributor of excellent ideas) offered a simple formula that I have tweaked a bit to help people quantify the retirement challenge: WPK+BA+P/A=DR.

To spell it out: work place 401(k)/403(b) 457 plans + brokerage accounts + defined benefit pensions/annuities = delightful retirement. Work towards maxing out your retirement plan first, then add to brokerage accounts if cash flow allows, although for the majority, step #1 will be hard enough. If you are lucky enough to have a defined benefit plan, then there is a bit of icing on the cake. Payback is never easy-let’s get going!

Paraskavedekatriaphobia

With the markets gyrating and the economy struggling, it is a bit of bad timing to have an unlucky day upon us. But the calendar rules and today is Friday the 13th. A few years ago, I actually conducted research about this day because I wanted to convince my client that investing on the 13th would not pose a serious threat.

I know that some people are watching themselves today, but I have always loved Friday the thirteenth--not the horror movies, which I never understood, but the notion that any random date can create investor anxiety. The fear of Friday the 13th is called paraskavedekatriaphobia, paraskevidekatriaphobia or friggatriskaidekaphobia, a specialized form of triskaidekaphobia, a fear of the number thirteen.

The origin of the Friday the 13th superstition has been linked to the belief that there were 13 people at The Last Supper of Jesus, but it has also been linked to the fact that a lunisolar calendar must have 13 months in some years, while the solar Gregorian calendar and lunar Islamic calendar always have 12 months in a year. Another suggestion is that the belief originated in a Norse myth about twelve gods having a feast in Valhalla. The mischievous Loki gate-crashed the party as an uninvited 13th guest and arranged for Hod, the blind god of darkness, to throw a branch of mistletoe at Balder, the god of joy and gladness. Balder was killed instantly and the Earth was plunged into darkness and mourning as a result. Taken together, the number 13 has had a tough time.

To some extent, the fear of the 13th has become a bit self-fulfilling. Because people are tense and anxious, they tend to have more accidents or fall ill on the day. According to the Stress Management Center and Phobia Institute in Asheville, North Carolina, it estimated that in the US alone, $800-900 million is lost in business each Friday the 13th because some people will not travel or go to work, not to mention that maybe some are not investing on this day!

According to Rabo Securities, when comparing the Dow Jones Industrial performance on a typical Friday from 1955 to 2005 to those times when the 13th day of the month fell on a Friday, the index actually performed better on the unlucky 13th! Before you get too excited, the difference was only fractional, so I am back to my original concept…thirteen is only a number and it’s only a day, so go ahead --- overcome your Paraskavedekatriaphobia and feel free to invest!

Guaranteed Loss

Sometimes when fear is at the extreme, investors can react emotionally and bail out when the pain is just too difficult to bear. I hear it all the time “I just can’t stand it—at least in my bank account or in a CD, I can’t lose money!” Au contraire…with inflation surging higher and interest rates at paltry levels, it may not occur to you that this simple rescue operation is actually the equivalent of a guaranteed loss.

Here is the simple math that is hard to see when you are confronted with a deluge of red arrows in your portfolio: by reallocating your portfolio away from the stock and bond markets and directing it into cash or CD’s earning about 2%, you are effectively locking in a loss of 2%. That’s because the rate of inflation is currently running at approximately 4%. And if you are unlucky enough to make this move in a taxable account, the news is worse because you have to pay taxes on what little interest you are earning.

But the alternative may not seem appealing. Perhaps you have heard that inflation is not too good for stocks or bonds either, which has historically been the case. It makes sense that inflation reduces the appeal of most financial assets, but only in extreme cases. According to Ibbotson Associates, in the 23 calendar years between 1926 and 2007 when inflation measured more than 4%, stocks returned 6.9% on average, versus 2.8% for long-term government bonds. The bad news is that when inflation goes well-beyond 4%, the numbers turn nasty. But very few analysts or economists think that is where we are heading, so perhaps we can put that particular worry to rest for now.

So what’s a freaked out investor to do when the markets are gyrating and the emotional surge of fear takes over? The first step is to revisit the game plan that you established before you started to invest. Even if you are a balanced investor, I am sorry to say that you signed up for some bad years—that’s the trade-off for the good years. Over time, things should even out and you will likely reach your goals.

If your emotions take over, then you may upend the whole plan. And remember, just because you don’t actually see the down arrows that inflation creates, does not mean that losses do not occur—they do! Over time, inflation will erode what little interest you earn and whether you see it or not, you will end up with less money—that’s a guarantee.

Guilt Trip

“Are you like the Suze Orman of New England?” queried a producer at Fox News Chanel. Absolutely not…I don’t want to be one of those types who only lectures about the evils of credit card debt or is defined as a finger-pointing debt cop. I want to talk about a variety of issues in the financial world—investments, estate and tax issues. After reading David Brooks Op-Ed in yesterday’s New York Times, I felt guilty for that sentiment.

If you did not happen to catch it, I urge you to do so (“The Great Seduction” at http://www.nytimes.com/2008/06/10/opinion.) It is a cogent argument for eradicating the culture of debt that has developed over the past thirty years. Brooks notes that “The social norms and institutions that encouraged frugality and spending what you earn have been undermined.” After reading the column, I felt guilty for not doing more to help fight the battle.

Yes, I emphasize the evils of credit card companies, the modern-day equivalent of legalized drug pushers. But like my friend who is a doctor gets tired of telling people to stop smoking, I grow weary of delivering what I think is so obvious: consumer debt is the equivalent of termites in your house: no matter what time of day it is, those little critters eat away at the foundation of your financial life. But more work is necessary.

Brooks cites a think-tank report by the Institute for American Values called, “For a New Thrift: Confronting the Debt Culture,” to help underscore the problem. “Between 1989 and 2001, credit-card debt nearly tripled, soaring from $238 billion to $692 billion…By last year, it was up to $937 billion…the transformation has led to a stark financial polarization. On the one hand, there is what the report calls the investor class. It has tax-deferred savings plans, as well as an army of financial advisers. On the other hand, there is the lottery class, people with little access to 401(k)’s or financial planning but plenty of access to payday lenders, credit cards and lottery agents. The loosening of financial inhibition has meant more options for the well-educated but more temptation and chaos for the most vulnerable.”

It’s time for me and all of the people in my industry to recommit to sound the alarms of the debt crisis and to remind the lottery class of all that they can do to improve their lives. Like pounding the anti-smoking message day in and day out, we can create a social movement that helps people see all that can be gained by changing hard-to-break habits.

Driving Lessons

I took my 16-year old niece out to practice her driving over the weekend. She noted that it was much easier to drive my Mini Cooper then her mother’s big SUV. I said, “Don’t get too used to Mommy’s car---it’s about to go the way of the dinosaur and become extinct!” To demonstrate the difference between the two, we headed to the gas station for an experiment. When we were through filling up the Mini and the SUV, Emily was clear: “Why would anyone buy the big car?”

Ah, youth…if only it were so easy. I explained that most of the people who purchased the big guzzlers did so when gas prices were lower—she could not believe how quickly the price at the pump went from $1 per gallon to this week’s average of $4 per gallon and she is not alone. As prices reached a national average of $4 a gallon for the first time over the weekend, many families are forced to make some difficult choices. But the spike is not felt uniformly across the nation.

Gasoline prices have increased by 26% over the past year, but the spike is not equal in its pain quotient. According to the Oil Price Information Service, certain parts of the country are harder hit than others. The percentage of income that is being spent on gasoline is highest in rural areas of the south, New Mexico, Montana, Wyoming and North and South Dakota. It is pretty simple to understand why the disparity exists: those areas where drivers earn more money and drive shorter distances or have access to more robust public transportation – basically most of the northeast -- are not feeling the pain as much as those in the other areas of the country.

Tell that to the woman whose conversation I overheard last week. She commutes 45 minutes to her workplace in Massachusetts and there is no reliable public transportation that she can take. She drives an old Ford Explorer, which costs over $80 to fill up. “I can’t afford to buy a new car, so I am stuck with this darned thing!” To offset her increased costs at the pump, she no longer takes the family out for dinner on Friday nights.

And that is just one story of pain at the pumps. There are so many others, which you have probably read about. Until we develop a true energy policy in this country, you are likely to hear many more tough stories that highlight difficult choices that people are forced to make. And of course my niece is absolutely right about anyone looking to buy a car today: why in the world would you buy a big car/truck knowing what we know now?

Russert Gets an “A”

I had another article written for today, but decided to replace after the sudden death of journalist Tim Russert. I have been a long and faithful fan of “Meet the Press” and the news that someone who had become my Sunday morning buddy was gone, filled me with sadness. I have been thinking about what made Russert so different than those around him and I have come to the conclusion that it was a unique combination of A-List qualities: authenticity and accessibility.

When I started to appear on television more frequently, a producer gave me a very good piece of advice: watch how the pros do it and adapt what strikes you to your own style. Because I have been a long-time fan of Sunday morning talk shows, I started there. I remember watching “Meet the Press” with a pad of paper in front of me and writing down just a few words: feels like my friend, courteous, respectful, listens, cares, has fun, passionate, well-prepared.

There were a lot of other popular network and cable hosts who were tougher, even meaner, but their style did not resonate with me. In fact, after studying the craft, I incorporated the research not only into my television appearances, but to use it on the radio as well. I was determined to change the tone of my radio presence in a subtle way—a little less combative and negative when it came to talking about my competition and instead replacing it with more grace. It felt more comfortable and in fact, seemed to resonate more with the audience.

The A-traits that Russert possessed were important because they allowed him to build a bridge between his topics/guests and those of us watching. He was comfortable being who he was: a guy from a humble beginning in Buffalo who was indeed a powerful Washington DC insider. The ability to straddle those worlds made him easy to access for anyone watching, whether it was a life-long political animal or a regular viewer who wanted to understand the issues of the day. We trusted Russert because he was authentic—he did not need to be anyone else and his personal style invited a variety of people to participate in the discussion every Sunday. In a business that often seems to shut out the masses, Russert’s accessibility was our ticket in to the world of politics.
There are plenty of people who will speak to Russert’s personal life, but for one fan, I choose to honor the passing of great professional by highlighting what defined him to me. Like his work, Tim Russert’s personality traits earned him an “A”.