MONEY 54 - BANKING

THIS IS MY 54^TH BLOG ON UNDERSTANDING MONEY TOOLS

Let’s talk banking and a bit on the economy.  Banking involves a lot of things including money and the effect on the economy. 

First let’s go over employment again. Numbers came out that our unemployment has dropped considerably over the past few years, to below 6%. What good is this number? The importance is the number of people who have given up looking for employment, then under-employed, part time and full time jobs. Part time employment and under-underemployed make up a big percentage. Overall true unemployment most likely continues at about 20% of our workforce. A recent report showed that of the people working 34% are outsourced/contract workers.  This reflects that companies are trying to get around paying for benefits like health insurance and contributions to retirement plans. Employment and jobs are key to a good economy. The largest and most vital group to keep employed and pay a respectable wage is the middle class. A measure of unemployment “is important”, however wages are an equally important measure, and we are significantly lacking.

Secondly, important to the economy is money. Let us recap on this topic. Money has an all encompassing affect on the economy; the quantity of money in the market, the availability of this money, the supply and demand in relationship to interest rates of this money, and lastly the circulation of  money or as it expressed these days “V” or velocity of the money turning per year in the economy. As a baseline to a good economy we are far below the line of health.

Banking consists of three basic types, commercial, trust and investment banking. Credit unions, unique to certain groups, fall under this category.  We’ve described each in previous blogs so we will talk about commercial banking, especially how it has changed and employment for you inside the industry.

Commercial banking is what most people associate with a “bank”, savings accounts, loans, mortgages, money management and more.  Years ago bankers had a certain look and respect in communities. Many bankers dressed the part, men having three-piece suits, ties or bow ties, women with dresses. It was a people business as well as a relatively respected money business. The industry has changed as most businesses. The big banks have bought up or forced many small banks to close, consolidation.  Federal regulations after the industry collapse of 2007-8 forced major changes mostly with loans and mortgages. This has contracted the industry to about 6 major banks and holding companies.

If you are thinking of working in the banking industry it is not a bad place to learn the industry, and how it relates to business.  My mother worked for a small bank, and when the economy for oil/gas and real estate collapsed in the mid-1980s I spent 4 years with a trust company; trust companies being under state banking charters and regulations.

Employment has gone the same way as most industries paying low wages and hiring contract people on an hourly basis thus avoiding employee benefits.  Upward mobility in the industry is very difficult. Most banks hire younger people and train within to their standards. The large banks have investment departments, and normally will pay for your education and licensing. Licenses are issued to you, the bank as principal. If you leave their employment the license can be transferred to another brokerage firm.  Normally, you build a personal investment relationship with the bank’s customers. If you leave the bank to go with another firm many of the clients will want to move their money and stay with you rather than the bank, however note that the bank most likely will sue you for taking any clients. Such lawsuits typically can be settled or with considerable time go away.

There are many lower level jobs in the industry from tellers to backrooms for people with computer skills. Use the time employed to learn and advance your knowledge and skills.  Always keep your eyes open for another job. Companies many times like to hire people away from banks as they perceive honesty.

Some banks are offering only on-line services cutting costs. Year’s past you had a personal banker, and if needing a loan you sat down with a banker analyzing your needs. Those days are history. If you need a loan you are asked certain questions, your answers placed into their computers and an answer comes back quickly from their home base computer, not a human being with any of your concerns or special situations taken into account.

How else has banking significantly changed? Up until 2007 bankers were lending on asset based balance sheets. Now, banks do not care about assets but lend on earned income.  As there is earned and unearned income, this typically means you need a consistent paycheck every two weeks proving earned income.  Banks will want a three year history of income for a loan. Going from asset based to mainly income based lending to me makes little sense as a person can lose their job at any point these days. It does tell me that banks don’t trust asset values and liquidity in these tumultuous times.

Banks are making a lot of money off fees like credit cards. We have discussed that banks are not giving loans to middle class people starting small companies or retail stores. Not long ago a person could get an “operating line of credit” to help buy inventory and start a store, not today. This is a real problem for the US economy.

Instead of a low interest rate, logical line of credit for a store starting up, a bank may issue a credit card, non-secured line. Here is what all to often happens. Let’s assume that the bank gives “you” a credit limit of $40,000 at 10% interest, and you probably need much more than that to purchase inventory. This would be based on your personal very high credit score. Your store normally structured as a corporation cannot get a loan.  After a period of time the bank may drop the credit limit on your card, not what you are expecting assuming you are doing well and have paid the monthly statements. When the bank cuts your card limit, you have less available credit and rating companies lower your credit score. When your credit score is lowered, the bank will raise the amount of interest on your credit let’s say to 14% from 10%. Then, with the higher interest rate you can’t pay off as much of the principal carried month to month. Once this cycle starts people are seeing their credit card interest go up to 29% or more. It is very difficult to get out of debt, and banks know this and love it as a big profit center.

Try to stay away from carrying credit card balances over, even though it is difficult and sometimes impossible not to.

Commercial banks’ spread or gross profit lending margin. Years ago banks operated on approximately a 2% spread between what they took in from people’s savings accountants and what they lent money out for loans; not any more. (For instance, people would get a savings account at a bank and the rate was, let’s say, 2%. Then, people went to the bank for a real estate mortgage, car loan or business loan and the collateralized loan was at a rate of 4%.) Now, banks are borrowing at a discount rate and inter-bank loan rate of 25 to 50 basis points (this being 1/4 to 1/2 percent) and lending it out at 7 to 30%. I believe the old expression of “rape and pillage” is appropriate for this!

In past blogs we discussed two very important Act of Laws that would have prevented some of this, if they continued to exist, those being the Sherman Anti-trust Act/Law of 1890 and the Glass Steagall Act of 1933 which ended in 1999.

I recently heard, and believe it true, that the investment banks of Goldman Sachs owned coal mining interests in Columbia, and Morgan Stanley which today through mergers is J.P. Morgan/Chase Bank owned 100 oil tankers and millions of barrels of oil, both these situations of investment outside their normal regulated banking purview. With these large interests they could perhaps have an affect on commodity markets.

The current banking and financial/economic situation is a two edged sword. On the positive side there is such a massive spread between what banks pay on savings accounts (1% or less is normal), and the rate of interest banks are lending. This forces the American public to de-leverage by using discretionary income to pay off debt.  On the negative side, it takes discretionary income from the economy and Americans making purchases, thus inflation remains low as well as GDP.

Bottom line, no risk lending, no money for the middle class to start companies equates to no growth economy. If you are employed with a bank use the knowledge and experience to move ahead. Try not to get stuck in a slot with no future potential. Think outside the box!

I hope this is a good quick overview with some insight.

MONEY 53 - COMMENTS

THIS IS MY 53^RD POST ON UNDERSTANDING MONEY TOOLS

In this blog I thought I would comment on three areas that I feel are important these days; they are social interactions, the economy and today’s politics. (This primarily written before the November elections.)

I am going to let my subjective opinions flow. Although I read and study a lot I don’t have the academic qualifications or titles to stand behind my opinions.

First to social interactions.  It disheartens me every time we have an incidence where a troubled young person shoots and takes the lives of other students. This is not just a reflection on an individual but our society as a whole. We are all responsible individually and collectively, and need to be held accountable for a future resolve. Granted media coverage is so much faster these days with the internet, radio and television news brining us immediate details. This was not available 60 years ago or even 25 years ago. We know in a flash what has happened in any state or around the world.

I will date myself with some comments here. I think the USA had its best years after World War II. Men came back from war, but there was the unification in our country and a national spirit to get things moving again.  There was a need for goods, services and manufacturing was going strong, although we had built a lot of national debt just like with any war.

 In the 1950s the norm was that the father went to work, mother stayed at home and took care of household duties and raising the children. The father normally returned home from the workday around 5:30 and the family was united for dinner.  Then the kids did their school homework and played outside, they got exercise and were in better physical condition.

In the late 1960s things started changing with both men and women in the work place, more people immigrating to this country, and a definite divide on thoughts with the non-popular Viet Nam War.  Still people worked and socialized more closely. There was time in the day for quality of life, but life was changing.

In the mid-1990s came the individual computer with internet capabilities. Then came cell phones. Technology was really advancing; Microsoft, Dell, Apple….then, Google, Facebook Twitter and more.

Advance to today. There is little time for anything. The US workers have tons of work stress upon them.  It takes both husband and wife working hoping they can pay bills.  With this stress comes divorce, two households and more stress. You don’t see children playing outside after dinner.  America’s corporate workers have fewer vacation days than any of the top world countries. No one is really taking good care of the children, spending adequate time. What is adequate time? An old expression, however true, is that it takes the community to raise good children, meaning a unification of family (grandparents and relatives included), educators and schools, church, neighbors/mentors and more.

Go to a Starbucks or places where younger people migrate socially. They aren’t talking intimately to one another. They are sitting at tables on their cell phones or computers texting friends. We’ve lost human connection with one another.  Once we lose our human/natural connection to one another including verbal and non-verbal communication, emotions,  empathies, sympathies, laughter, etc. we have become robots, computers ourselves. With this comes intolerance, subjectivity, lack of objectivity, and some people go crazy. They can’t cope; shootings in the workplace, on the highways, and shootings in the schools.  The stresses to compete and place only number one. Number two is no good. Crazy. There can only be one number one. The rest aren’t losers, they are all participants and just as important. Combined participation is the important thing, you do your best.

I hope America and the world sees where we are heading with all of this, but I am afraid nothing will turn around. The desire to change does not exist with the masses. Many don’t care and many have given up.  The connection to the human race has been lost. Now, on to other topics, but they all tie in together.

What I talked about above regarding the 1950s was my baseline, or standard to work from. It is important for me to realize that each new generation has a new and different baseline to work from. An example of change can even be related to cars.  The Barrett Jackson Car Auction will again be coming to the Phoenix area. My father’s generation “hot car” collectables were the Model A and Model T Fords. They could relate to them. Now, the hot cars are the muscle cars of the 1960s and early 1970s, the Cobras, the Corvettes and the big engine Dodge’s like the Charger. People of my generation can relate to them. Is the next hot car for the younger generation to collect the Toyota Prius?

Second, let’s go to economics. We have discussed this topic in many previous blogs from different angles. Economics from a very basic standpoint is really quite fundamental that most people can grasp. GDP (Gross Domestic Product) and growth, or lack thereof, can only come from two places, the private sector or the public sector. Public sector being some sort of government job.

We have macro economics, the large picture, and micro economics, the closer range economics or the smaller picture.  We have supply side economics (supply and demand), and manipulated economics with interventions. A true market does not exist.

Let’s go back about 25 years when the first President George Bush wanted to vote NAFTA through as a trade agreement mainly between the US, Canada and Mexico. The Bill passed with President Clinton working well with both the Senate and Congress. Since then, more and more jobs have been lost with companies seeking lower wages and bigger markets abroad. This is not new to anyone. What it has done is make people more competitive individually and less a team player because there is so much competition for few jobs.

The sad lesson to be learned here is money buys. Big corporations don’t have your interests at heart as they have moved jobs overseas, and wages in this country are low and haven’t moved upward in 18 years. Companies are all about bottom line and “upping” the price of their stock. Behind the scenes few Americans know what is going on. A for instance, many doctors and veterinarians receive a dollar percentage of the drugs they prescribe. A person needs to look at special or unique situations to find good paying work.

Don’t forget Board members answer to stockholders. They also select top management. In “Understanding Money Tools” a great reminder is not your actual knowledge or ability to perform, it is your perceived value by others. Without mention of a name, I remember years ago a top airline CEO who managed to bankrupt 4 airlines. I always wondered how this good-looking man could get away with such a feat. He was perceived to be good. One thing he did accomplish, good or bad, was breaking apart union strength, and with that wages and benefits were lowered.

The sad thing about today’s economics is that we receive so much bogus information from the government and private reports that no one knows exactly where we stand. The government learned long ago how to measure things differently, manipulation of facts. To move the country ahead the government needs to ease up on regulations. The next step is to make money available to the private sector, middle class and small companies. Many politicians and corporations look at only cutting expenses. Yes, this is important, but more importantly is how to increase revenues and GDP. Right now we could use growth of 4-6% for a couple of years to make up for the past 7 years of essentially no growth.  I want to equate this to the corporate sector. Too many times companies are run by accountants or engineers who cut marketing budgets that include advertising and sales departments. Sales deliver revenues.

I have predicted a stock market correction for some time, but now it doesn’t look like we will have a major one. Historically, we have never gone over 1000 days without a strong correction of the market, but now we are well past 1000 days and the market continues upward or level. We have “engineered” a very artificial manipulated market. The investment community in general has only one outlet right now and it is the stock market. The Central Banks and our government including politicians will protect this market.  If the economy staggers too much, or if the stock market falls significantly “Quantitative Easing 4” will start and the Federal Reserve will authorize the printing of more US dollars. This money goes to the big banks and wealthy in the form of very low interest loans, and that money goes back into the stock market propping it up.

The dollar has reached new highs in recent months compared to the past few years. This has pushed the price of commodities including oil and gold down. This will help the American public with lower gas and fuel prices, however the high dollar will have an effect on large companies and exports. As many international companies are leveraged 2:1 or more on debt, for every one percent the dollar goes up, large corporate earnings should drop 2 or more percent, thus corporate earnings will be off.

OPEC nations could continue with strong oil production until we have a very significant over-supply and drop prices further. Most Middle Eastern oil producing countries have a very low cost per barrel for production, much lower than the US.  The dramatic price cuts of oil will hurt small US oil companies most as they normally carry more debt.  Russia just signed a 30 year agreement to supply oil to China. Russia intends to be a super power in the energy arena. A new book coming out mid-November is “Colder War” about Russia and energy, and will be an interesting read. (The author is Marin Katusa.)

While we are on economics, let’s talk briefly about international markets.  A current measure of countries strength these days has been debt to GDP (Gross Domestic Product). Some of the emerging countries have been getting a lot of free or low interest rate money the past few years from Central Banks and the International Monetary Fund. If the world economies continue to weaken this is going to be a problem.  In South America three countries stand out that could have big financial problems, these being Brazil, Argentina and Chile. Japan has had economic issues since the late 1980s. Even China may not be able to keep up with unprecedented growth and growing debt that has enabled its exports to be number one in the world. The Chinese may be forced to sell off more government owned assets including real estate to foreign or private parties to pay debt obligations.  Included in the list of debt-burdened countries are India, France and Italy.  I am a suspect person, so I will make this statement that perhaps the reason Central Banks have lent money so liberally to poor emerging countries is that if these countries cannot pay back debt big business and the wealthy can move in, take over assets and gain control.

A point I am making is that we are building tremendous stress personally, corporately and nationally. The world “kicks the can” of debt down the road, but at some point it cannot be maintained; a worldwide bubble will/should occur. Few care about people collectively or individually.

I will mention again that one of the sad things happening to the middle class is jobs and incomes not rising. We haven’t had an increase in middle class income since about 1996, yet there has been inflation. Even though inflation has remained low, if you compound it over this period of time it becomes significant, over 40%. (Inflation/deflation manipulation. Is it asset based or price based for a number? Calculations over what period of time? Does it include oil and gas or agricultural product?)

I work for new home-builders and they are now feeling a financial bind and lowering expectations. Nationally this is happening although some markets remain strong. (35% of new home sales are created by the big public home-builders almost doubling in the last year.) The small home-builder can’t get money. They have gone out of business or sold out to the big builders.) Here are recent facts: home ownership will slip to about 50% down from the highs of 68%, currently about 59%. The younger generation learned that home ownership may not be a good investment because of the devaluations from 2007 on. As of October, first time home buyers hit a low, the fewest first time buyers since 1987.  63% of baby boomers now intend to keep their homes versus sell and retire to warmer climates. People can’t sell and pull equity out of their homes they once thought was available.  Instead, baby boomers will renovate their homes to a significant degree,

The auto industry has done well the past few years but manufacturers are building financing into the sales of autos. Many people can’t qualify for bank loans to buy cars, but auto manufacturers will qualify these people for loans. This could result in a big problem down the road if people default on the loans because they lost their employment.

The US dollar itself is interesting. The Feds stopped Quantitative Easing (end of October 2014) and will wait to see the outcome on the economy. If necessary they will again start printing money. Here comes the interesting aspect in all of this. We have printed trillions of dollars of new money, yet the dollar has increased in relation to world currencies and we have very low inflation. Normally, if you dilute any currency the value should go down.  Also, inflation was predicted to sky-rocket and it has not.

In prior blogs we have discussed these reasons, but I will briefly hit upon them. We are in a state of total governmental manipulation, beyond Keynesian Economics. You can print all the money in the world, but if it only reaches a few sources, these being the wealthy who have the ability to borrow, and large corporations, you “ain’t” going to have inflation.  Measurements that are necessary here are the quantity of new money printed, availability to reach this money, “V” or velocity of the money to circulate through a given economy and Federal regulations.  Inflation is not a threat for now, but should be some time in the long term.

Regarding big business, what have they done with all these new dollars made available. For one, they have been buying back their own stock, assessing that it is relatively inexpensive compared to future projections. Corporations are borrowing money for next to nothing and issuing bonds at low rates. Then, with the money they buy their own stock and make the stock go higher. This is one reason you have had an incredibly strong stock market and many are expecting it to go higher and ignore fundamentals. Smells to me of a Ponzi scheme. (If you don’t know who Ponzi was, Google him.)

Elections and early voting are over. You saw political signs everywhere and advertisements on every TV channel. All the negative ads against the opponent rather than what someone could actually accomplish. Few details, positive or negative, are made public. Sad, but true, it has been found that negative ads are more influencing on the vote than positive ads. It’s foremost all about getting elected, there is no such thing as a righteous, honest approach to politics.

Locally and nationally what is wrong with public officials; they are voted in to serve the public.  Nothing has been accomplished in the past 6-7 years except to try to bail us out of a big financial jam. Politicians need to work together and attempt to guide the country for the betterment of all people, not just specializing on self interest groups. Term limits are constantly talked about, but nothing is done as no politician will vote for a limited term and put himself/herself out of business. This would help keep politics cleaner and get away from some of the long established conflicts of interest.

Another example of our growing lack of working together and intolerance comes along personal attitudes and party lines.

Tea Party members and right wing Republicans won’t debate topics, even over coffee and are very dogmatic. They are fixed on beliefs and non-flexible. As you get into more liberal thinking people they are willing to debate and seem to be less argumentative.

I don’t know if one is better than the other. I do know it takes working together to get things done whether in the corporate world or in politics. Perhaps a good oligarch, an autocrat would be good for this country. We’d have more change without a lot of debate. Could we actually find an honest one?

Are elections in this country more honest and above board than other countries?  My answer is no, we just approach elections and manipulate differently. Granted, we do not have armed guards at voting offices.  The people running for offices here spend more money than any other country on earth. Money buys votes. These are the special interest groups.  Special interest groups and lobbyists spend millions to push their candidates into office for special considerations. Once an individual is elected they are going to watch out for themselves, not you and me.

Bottom line, we have become a very individualized society, is that an oxymoron? Drawing the point of this blog together, we don’t socialize as we once did, we work individually, and our politics end up with our elected official serving themselves or small private sectors rather than for the long term betterment of America.

Periodically, it is good to remember that we are all made up of atoms and molecules, all the same, unique to ourselves, however no better or less than any other person on the planet.

Believe in yourself, don’t rely heavily on team effort, have faith, visualize your positive future and go for it!