Author: Roger Staiger

27 July 2018

 

Question: According to MSN:Money, what things should you do to boost your net worth?

 

Facebook sheds $120bn in value as ‘bombshells’ spark record sell-off – Pg. 1

–          The share price plunge of more than 19% marked the biggest one-day value destruction of a listed company in US history, almost equal to the entire value of McDonald’s and Nike, and larger than the likes of General Electric, Goldman Sachs, BlackRock and the entire Argentine stock market

–          …came less than two weeks after investors inflicted similar punishment on Netflix….

 

The next crisis is brewing in pension funds, not banks – Pg. 9

–          Risk has been gently and painlessly excised from the US banking system over the past 10 years.  On any sensible measure, US banks are far safer now

–          It grows ever clearer that risk has been moved, primarily to the pension system.  This means that the long-term dangers in the financial system have become more insidious: easier to ignore but ultimately even more dangerous

–          Pension funds have been the principal losers from quantitative easing, the main tool used to bail out the banks.  QE bond purchases pushed down bond yields.  This created pain for pension funds, which buy bonds to offer their members a guaranteed income.  The lower the yield on bonds, the more expensive it becomes for them to fund any given guarantee.  This problem has created a true crisis among US public sector pensions.  Many are looking for ways out of the guarantees made to their members, only to find that courts – rightly – defend the members

–          In the US, pension deficits – the gap between assets and the notional cots of funding the guarantees – widened sharply after the financial crisis

–          …comp[anise in the S&P 1500 index currently face a pension deficit of $229bn, or 11% of their assets

–          With bonds barely offering an income, many funds have resorted in taking greater risks.  That has meant buying into funds and strategies that go under the umbrella term of “alternative assets”, may of which rely on leverage for their returns

–          Unlike a banking crisis, a pensions crisis has no one month of critical danger.  Its ill effects settle in over time, and there is opportunity to fix them

 

Answer: (1) Start with cutting out unnecessary expenses (Prof Note: Stop with the Starbucks!); (2) Take Risks (Prof Note: Calculated and quantifiable risks); (3) Know what you want in life (Prof Note: This is absolutely critical.  I still ponder this thought.  Great people is a consistent answer.); (4) Believe that you can be rich (Prof Note: I cannot stand this word “rich”!  What does it mean?!  What one really wants is Passive Income exceeding active expenses!); (5) Now to build net worth (Prof Note: this is SOOOO WRONG!!!  Net worth is nothing!  A high net worth can be created by an asset requiring significant feeding!  What is really desired is Low-risk passive income); (6) Diversify your assets (Prof Note: This single employer system is dangerous….diversify one’s income); (7) Have specific financial goals (Prof Note: Know the passive income required to live the life that you desire!); (8) Do something you love (Prof Note: Absolutely!  I love development as I love creating.  Also, see the value is creating something from nothing.  Creating jobs, raising standards of living, etc.); (9) Learn how to invest smartly; (10) Build your net worth over time (Prof Note: I am going to flip OUT!  NOOOO…build your passive income streams over time.); (11) Increase your contributions each year; (12) Raise your bottom line; (13) Consistently invest your income; (14) Invest in yourself (Prof Note: While this is absolutely true, be cognizant of the return.  If you go to No-name business school, is the return really going to be there for the money spent?  Of course the return could be personal satisfaction, which is priceless.  However, enter with eyes wide open!)

26 July 2018

 

Question: According to Nerdwallet, what are three (3) money tasks you shouldn’t tackle on your own?

 

Draghi expects grilling over mixed ECB messages on rates – Pg. 2

–          …vital issue on when interest rates will rise from their record lows

–          …bank said it expected to keep interest rates on hold until “at least through the summer of 2019”.  The markets interpreted this phrase as meaning interest rates would stay at their current levels until September next year – longer than previously expected

 

Chinese economy – Pg. 7

–          …how it started [debt boom]…the trigger was the global financial crisis.  Between early 2004 and the late 2008, Chinese gross debt was stable at between 170 and 180% of GDP.  This was higher than in other emerging countries, but was not much higher

–          Then, in 2008, came the meltdown of the western financial system and subsequent deep recession in high-income countries.  China responded with a huge investment programme, amounting to some 12.5% of GDP, probably the biggest ever peacetime stimulus

–          The challenge confronting Beijing was to offset the impact on demand of a fall in China’s net exports of 6% of GDP between 2007 and 2011.  In 2007, net exports had been close to 9% of GDP.  Since this was neither economically nor politically sustainable, the fall was permanent

–          Such a decline in net external demand needed a permanent offset

–          …the share of gross investment in GDP soared from an already extremely high 41% of GDP in 2007 to 48% in 2010

–          ….between the fourth quarter of 2008 and the first quarter of 2018 China’s gross debt exploded from 171 to 299% of GDP

–          A simple measure of the efficiency of the investment is the incremental capital output ratio, which measures the ratio of the investment rate to the growth rate.  Until the crisis, the ICOR had not exceeded four for any sustained period.  Ever since 2011, it has been close to six

–          It was as though the high-income countries has passed the credit baton to china.  For Beijing, this response to the financial crisis has an additional drawback – distracting it away from a necessary rebalancing of its economy

–          By 2017, next exports were back down to 2% of GDP: that did represent a rebalancing.  But investment was still higher than in 2007, at 44% of GDP, private and public consumption was still only 54% of GDP and debt had soared to three times GDP.  In sum, the rebalancing of China’s external accounts came at the cost of still greater domestic imbalances

–          So what happens now?  There are four conceivable possibilities: a crisis, followed by lower growth; a crisis, not followed by lower growth; no crisis, but reduced growth; and no crisis and no reduction of growth

–          The salient characteristics of a system liable to a crisis are high leverage, maturity mismatches, credit risk and opacity

 

Answer: (1) Deciding when to retire (Prof Note: The question is best asked, “When do you want the option to retire?”  Remember retirement is NOT an age but an question, i.e. Passive Income >= Active Expense.); (2) Handling an IRS audit (Prof Note: Everyone runs to hire a CPA…I recommend hiring an attorney that has a CPA); (3) Filing for bankruptcy if you have anything to lose  (Prof Note: This is a complicated process and not one to be taken lightly)

25 July 2018

 

Question: According to US News & World Report, what are 9 habits that can get you out of a deep debt hole?

 

Venezuela heading for 1,000,000% inflation warns IMF – Pg. 4

–          The figure would compare with levels seen in the Weimar Republic in Germany in the 1920s and Zimbabwe a decade ago, and was the likely outcome if Venezuela continued to pring bank notes in response to its economic crisis,…

–          …expected the economy to contract 18% this year – the third consecutive year of double-digit contractions – and that the worsening social crisis “will lead to intensifying spillover effects on neighbouring countries”, which have already taken in thousands of poor Venezulean immigrants

–          Prices have consistently risen at more than 50% per month – usually considered the threshold for hyperinflation

–          If the IMF’s prediction proves correct, it will put Venezuela on par with the Weimar Republic, where people carried virtually worthless bank notes around in wheelbarrows.  Thankfully for Venezuelans, they can generally use debt cards to make purchases, even for small items

–          Most cases of hyperinflation do not last long, although in Greece during the second world war and in Nicaragua during the late 1980s, prices rose by more than 50% per month for several years

–          At the heart of Venezuela’s economic collapse lies a dramatic fall in oil production, which accounts for virtually all the country’s export revenue

–          Output has more than halved since the start of the century and is at its lowest level for decades

 

Its time for millennials to fight for our rights – Pg. 9

–          …people born between 1981 and 1996 make up the generation that shrugs “yolo” as they hop in an Uber instead of the bus, sip their artisanal gin and plan their next mini-break

–          On the other, they are the generation that came of age in the middle of the global financial crisis: they drink less, smoke less and study harder.  They cling to job security and worry that they will never own homes

–          Millennials say: we are paying a price for a global crash we did not cause

–          Boomers say: it’s hard to take you seriously when you’re frittering away your salary on smashed avocado on toast (Prof Note: I was in a Silver Diner this week and they had Avocado on toast on the menu)

–          …young people are on average more austere, not less

–          In 2001, 25- to 34-year-olds spent roughly the same amount of money as 55- to 64-year-olds on goods and services other than housing.  Now, the younger group spends 15% less

–          …the vital building blocks of a life – housing and education – have become vastly more expensive

–          …millennials in the UK are half as likely to own a home at age 30 as baby boomers were

–          Home ownership rates for young people have been declining for decades as house prices have detached from incomes

–          …in an effort to make the financial system safer, regulators limited how much banks could lend to housebuyers.  Suddenly, many young people needed far bigger deposits to buy their first home, effectively locking them out of the market

–          It would be better to build more houses in areas of high demand, including more social housing; take measures to boost productivity so incomes rise; and rebalance the rights of tenants versus landlords to make the UK more like Germany.  There, the alternative to home ownership is not poor quality housing with no security

 

Answer: (1) Learn how to shift your spending habits (Prof Note: Rarely do I get a drink anymore at restaurants.  $3 for a coke when a 1 litre is 99 cents…no thank you!); (2) Set up an automatic savings account (Prof Note: Forget the auto “anything”…do it manually.  Pay yourself first!); (3) Have an emergency fund (Prof Note: ONLY for familial health issues.  You should have a standard side hustle!); (4) Don’t automatically use an unexpected windfall to pay off your debt (Prof Note: Absolutely true BUT if you have no discipline you may want to reconsider); (5) Pay off smaller debts first (Prof Note: NOOOOO!!!  Pay off the high-interest debts first!); (6) Pay your debts on time (Prof Note: Absolutely!!!); (7) Use cash as much as possible (Prof Note: NOOOOO…then you loose points on credit cards!  Learn credit card discipline and be responsible!  ORRRRRR…as soon as you make a credit card purchase go to the smart phone and transfer from checking to the credit card); (8) Measure your debt (Prof Note: One cannot eliminate what one cannot quantify!); (9) Dine in (Prof Note: There is always room at my table for anyone on the list-serve.  On Nevis, the main is served at 1:00pm promptly!  Olive always makes too much as she never wants me to go hungry! J); (10) Continually monitor your budget (Prof Note: Yes, this is 10 but the question had “9”…I noticed this as well and double checked.  As for budget, stay true to your budget.)

24 July 2018

 

Question: According to MSN:Money, Cutting what 10 costs can make you rich?

 

Beijing’s $74bn banking boost increases risk of currency war – Pg. 1

–          China’s central bank injected $74bn into its financial system yesterday to help fortify a weakening domestic economy against the impact of an escalating trade war with the US and growing friction with Washington over its falling currency

–          It follows a renewed threat by Donald Trump, the US president, late last week to impose tariffs on all of China’s $500bn in exports to the US

–          Raising the risk that the US-China trade war could turn into a currency war, Mr Trump has accused Beijing of manipulating the renminbi, which on Friday reached its lowest point for a year against the US dollar and has fallen 5% since the start of last month

–          The injection was the People’s Bank of China’s biggest ever using its Medium-term Lending Facility, a policy tool crated in 2014 to provide loans to commercial banks for three to 12 months

–          The loans come on top of other recent PBoC easing moves, including a cash injection of about Rmb700bn in late June, when it cut the share of deposits that banks must hold on reserve at the central bank, where they are unavailable for lending and investment

–          The extra liquidity shows that Beijing is moving to support growth as a slowdown in housing and infrastructure adds to pressure from the US trade war.  China’s economy grew at 6.7% in the second quarter, ….

–          Financial stress is rising among cash-strapped borrowers: 150 peer-to-peer lending platforms have collapsed since the start of June amid a wave of defaults

 

ECB decision to end easing faces first statistical verdict – Pg. 2

–          After a surprisingly strong 2017, the eurozone’s economy has begun to stagger

–          The question hanging over the ECB is whether the eurozone’s rocky first quarter was a blip or a harbinger of a more serious downturn

–          If growth remains lackluster the ECB will face questions on whether it was wise to declare an end to a policy widely credited with reviving the region’s economic fortunes, before being able to make a proper call on how sever the slowdown will be

 

Sales of US homes fall again as ‘severe’ shortage lifts prices – Pg. 4

–          Sales of previously owned US homes fell for the third consecutive month in June and prices struck a record high amid a “severe housing shortage”…

–          Existing home sales fell 0.6% last month to an annualized rate of 5.38m units…the key gauge of the US housing market was down 2.2% form the same month in 2017

–          The lack of supply and robust demand sent the median price of an existing home to $276,900 in June, up 5.2% year-on-year, setting a new high

–          It forecast a 2.5% rise this year in total home sales, which includes existing homes and newly built ones, with prices rising 6.7%

–          Demand in the sector has been lifted by a labour market and broader economy tha tare firing on all cylinders.  The jobless rate was 4% in June, close to an 18-year low…

 

Technology and society – Pg. 7

–          Digital distraction has been blamed for a range of ills, from ruining dinnertable conversation and disrupting sleep patterns, to interfering with children’s education and contributing to an increase in anxiety and depression – even putting young people at higher risk of suicide

–          In June the WHO created a new classification of “gaming disorder”, to describe people whose personal or professional lives have seen “significant impairment” due to excessive video gaming (Prof Note: This has been around since the late 90s.  I still remember a very good friend of mine in trouble at college as he played too much Nintendo.)

–          Serious legal threats or class action lawsuits have not yet emerged around smartphone addiction

–          (Prof Note: The way I lecture has changed. I use to ride the students to pay attention.  Now, I simply say, “It is in your best interest to pay attention.  Please note I get paid the same regardless of if you pay attention.”  I found that if I tried to reach the students by engaging them in class my evaluations were harmed.  “No good deed goes unpunished.”)

–          Faced with this onslaught of new technology, parents are struggling even to answer questions about how much time on technology is “too much” and at what age it should be limited (Prof Note: I am finding I am putting technology down around 8pm at night.  On Nevis I see the families chowing down on a $300 lunch with all four people on smart devices not talking to each other.  When families come to play the course, the children all have their smart devices and their heads are down.  It makes my heart heavy for what they are missing.  The message(s) will still be there in the evening.)

 

Trump’s Fed broadside puts investors on notice – Pg. 17

–          Two more quarter-point increases this year are still largely expected, bringing the interest rate corridor to 2.25-2.5%

–          Whle the bond market expects the Fed will stop tightening later next year, the US current stands out among leading economies regarding growth and interest rate expectations.  That has helped boost the dollar and short-term borrowing rates

 

Answer: (1) Checking account Fees (Prof Note: Literally, my bank FEARS giving me a fee.  I will absolutely pay interest, when appropriate, but fees send me into orbit, i.e. I start letter writing campaigns); (2) Landline phone service (Prof Note: What is a landline?): (3) Cable TV (Prof Note: Cut the cord over a year ago); (4) Restaurant meals (Prof Note: I had local crab cakes and local first-of-season corn last night for dinner…spectacular!); (5) Soda (Prof Note: Guilty!  There are three 2-litre bottles in my fridge currently BUT purchased at Dollar General for $1.50/2-litre); (6) Bottled Water; (7) Subscription Boxes (Prof Note: Had to learn what these are when I read the article); (8) Alcohol (Prof Note: I did purchase hard ice tea to have with my lemon vodka at dinner last night.  Very refreshing!); (9) Tobacco; (10) Daily Latte (Prof Note: Stop making Starbucks wealthy!)