THIS IS MY 159TH BLOG ON UNDERSTANDING MONEY
TOOLS
February, 2019
In this blog we are covering economics and finance
“101”. If you have read all my past
blogs some of this is redundant.
I am a competitive analytic so it bugs me when things don’t
turn out as expected. “Cause”
should result in an expected “effect”; two plus two should equal four. In today’s world you are seeing these
results being distorted by controls, regulations and variables by outside
sources. Let’s explore this. The first thing that comes to my mind
is the economy (what we hear from the government and media) and the stock
markets; perhaps we should put a bit of mistrust in these! Don’t I just love to pound the markets!
Let’s start out with a quiz. What is the difference between an economy, economics and
gross domestic product? An economy
is the relationship between production, services and trade and supply of money
in a country. Economics is used by
academics and governments to study economies resulting in models and
statistics. Gross domestic (or
national) product (GDP or GNP) of a country is the “economic” statistic
calculating in world trade (import and exports). This is why our economic value is so much higher than the
GDP value. Our current outflow of
money, imports minus exports, is about $700 billion, a good portion to China.
Economics is the “macro”, big picture mainly dealing with
world, national or local finances.
It doesn’t necessarily pertain to you or me, we have little control over
this unless we are in the political arena. However, if you have an understanding of economics you will
be more capable of handling your own finances. In the last blog we mentioned that Christine Lagarde, the
managing director of the International Monetary Fund, is very concerned about
the world heading toward recession mainly from the considerable debt we all
have, personal and country. Yes,
the USA, it’s citizens, take the top honors in that designation! Around 300% debt to GDP and getting
worse. We have caused this. We showed an indifference in lending to
third world nations, big corporations and people here who should not be
borrowing money. Third world
nations cannot pay back the debt and interest accrued. Corporations will be lucky to withstand
the payments if we fall into a rough recession.
In the last couple of days, I heard two comments from
people, and would like to approach both.
The first dealt with economics and “why can’t we start a program like
Franklin Roosevelt had in the 1930’s to get us out of the mess we are in”? FDR took office as president in 1933
and held the office until he died in 1945. FDR immediately started the “Works Progress Administration”
when he took office, a hopeful resolve to the “Depression”. It put mainly unskilled people to work
on government projects such as large dams/reservoirs, government buildings and
highways. Congress wanted a
slowdown in spending for the program in 1936, although the program lasted until
1942. Giving up the “works
programs” placed the US once again close to recession. On December 7, 1941, Japan bombed Pearl
Harbor. It saved our rear ends
financially, putting a war machine together, men went off to war with jobs such
as fighting; women in the factories making weapons and equipment. Prior to the attack we knew that Japan
had a fleet of aircraft carriers near Hawaii in the Pacific, but did nothing. These ships weren’t out there to catch
tuna!
Now looking at this, did we have something similar to a
works program since our “Great Recession” in 2008-9, of course. President Obama along with the Federal
Reserve approved of “Quantitative Easings”. This was the introduction of new printed money into the
money supply by the Federal Reserve and Department of Treasury. In this case, and a big mistake in my
eyes, was that the flow of money went first to the largest banks to keep them
afloat and meet capital requirements.
This money was then “essentially given” to large corporations at very
low interest rates. There was no
“trickle down” to middle America, job creation mainly at low income
levels. Large companies used this
money to their own benefit buying in their stock and expanding overseas,
resulting in a great diminishing of the middle class sector of our
economy. This was happening when
middle class Americans were having their loans called due on mortgages, lines
of credit and small business loans.
The greatest robbery of the rich from the middle class in history. This “Easing” made the wealthy
wealthier and large businesses bigger to the tune of trillions of dollars.
In every economic cycle there are four parts: expansion,
peak, contraction and trough. In
my eyes we have certainly hit the top of the expansion period and at the peak
or in the contraction period; we are well overdue for a significant downturn or
recession. Many times during a
contraction the stock markets will have some of their biggest “up” days, don’t
be fooled by a turn-around. A lot
of this has to do with Wall Street manipulation of the markets. I remember years ago when Wall Street
firms would issue a “buy” for a stock to the public, when they knew the company
was tanking. They wanted to unload
their stock in that company as a “market maker”. No one ever goes to prison, they are the “untouchables”!
Let’s continue with current economics:
- Employment
numbers solid, however no mention to the quality of jobs, full time or part
time nor income levels.
- Just
last week retail numbers out for December, 2018. Including on-line buying retail down 1.5% the worst in 9-10
years.
- Last
week on the news credit score numbers out. A total of 220 million people have ratings. Of these, 68
million people have poor ratings under 600.
- Debt
sky high with three categories, student loans, credit cards and auto
loans. All categories over $1
trillion and defaulting on payments significantly increasing.
- 2018
tax refund checks will be smaller than for 2017. Less money for people to spend in the economy; 30-40% lower!
- GDP
for 2018 projected to be 2.5% down from a high of 4%.
Now, let’s look at finances and see if we can help. Per the comment way above, the second
comment people had was, “the stock market is going down today”! It was stated as “this is unbelievable”. Come on, the stock market should be
correcting, but has solidly gone up since the beginning of this year with the
aid of our government. Regarding
stocks, be prepared for a “normal” downturn, and this one is worldwide. Revamp your portfolio. Get rid of your risky stocks, and lean
toward “staple” stocks with a high dividend and good history. Staple means needed items…like food and
toilet paper that you use daily!
The stock market has been inching up over the years because
companies are buying their stock back with cheap borrowed money. This drives the market up. Also, the human resource departments in
big companies persuade employees to buy the company’s stock in an ERISA
retirement plan (perhaps a 401) and deferring taxes. If it is a large company e.g. with over 50,000 employees
this automatically moves the stock price higher than perhaps it should be every
pay period. Up until 2006, there
was an energy company called Enron whose Chairman and CEO was Ken Lay. He was notorious for this. Even when he knew the company was going
down and into insolvency he was in front of his employees saying “buy”. He lucked out having a major heart
attack and dying in Aspen before he had to go to prison! Spread your stock investment portfolio
out as a hedge.
If you don’t owe the IRS money, but figure close to
break-even, perhaps a tax extension should be considered; I always do. This doesn’t pertain to short-form
filers, 1040EZ. On the other hand,
if you expect a large refund, don’t let the government use your money. Tax extensions buy time so you can
better prepare if you itemize.
Your accountant will appreciate it as your returns aren’t due until
October 15th of that year, and he has plenty of time to prepare
them, versus rushing the “job”.
As we covered above, if your tax refund is smaller than
thought, or you owe the government money, or you had too much withholding
deducted from your W-2, get advice from your company or human resource
department and adjust your withholding.
Regarding credit scores. If you are one of the people with a poor credit score, try
to get it improved. Either seek
free assistance from your bank, or an advisor. Banks actually thrive off people who need credit cards, have
low credit scores, but a track record for making payments. A low credit score can push your
interest rates to 29% or more. At this rate you most likely can never pay off
the credit card. There are debt
consolidation companies. Seek out
good advice, and do the smart thing to get out of debt. Make a payment toward your balance
early in the monthly billing period versus waiting, and pay slightly above the
minimum amount due; this will raise your credit score.
Also, if you don’t use credit and always pay off your credit
card in full and on time, your credit score will go down as you do not have
proven credit. Best to
periodically leave a small amount owing for a month or two and then pay it off.
I hope you learned something from this blog.
No comments:
Post a Comment