Vedran Vuk here, filling in for David Galland. I'm prefacing today's issue with a slight warning. Since the fiscal cliff is center stage, it's hard to keep discussions of this issue completely nonpolitical. With Washington politics driving the economy downward at the moment, politics are unfortunately an inescapable topic. However, I just want you to know that I'm not a fan of either party. In this last election, I wrote in "Ron Paul," refusing to vote for the other "options."
If someone held a gun to my head, would I have voted Obama or Romney? Well, I'd likely karate chop the assailant's arm to disarm him and then would have thrown him over my shoulder. However, if his grip was pretty strong, I'd likely go for Obama, but it would be a tough choice. And with 20/20 hindsight knowing what happened to the market after Obama's election, I'd probably go with Romney. So, don't take any of today's comments too personally – I'm just calling it like I see it.
First I'll discuss some of the illogical and incoherent arguments for tax hikes. Apparently, according to some in Washington, DC, when it's a tax cut for the middle class it's great for the economy, but when it's a tax cut for the rich, it doesn't matter. Weird, huh? Then, Dennis Miller ponders reasons for the lack of savings in the US and offers some sound advice on how to improve your situation. One of the key things that he points out is the difference between saving to grow your wealth and saving to spend more – a mistake that many make. Last, I'll discuss the silver lining in Obama's re-election – unfortunately, it's not all that great.
Come on Guys, a Little Cyanide Never Hurts
By Vedran Vuk, Senior Research Analyst
Sometimes I ask myself, "Are our leaders just confused on economic policy, or is it something worse?" Take for example the president's recent comments after the election:
"Well, obviously, we can all imagine a scenario where we go off the fiscal cliff. If despite the election, if despite the dangers of going over the fiscal cliff and what that means for our economy, that there's too much stubbornness in Congress that we can't even agree on giving middle-class families a tax cut, then middle-class families are all going to end up having a big tax hike. And that's going to be a pretty rude shock for them, and I suspect will have a big impact on the holiday shopping season, which, in turn, will have an impact on business planning and hiring, and we can go back into a recession.
"It would be a bad thing. It is not necessary. So I want to repeat, step number one that we can take in the next couple of weeks: provide certainty to middle-class families ..."
At first, this got me really excited – he seems to get it here. Tax increases are a bad thing. Well, actually, he's even a bit more pessimistic than me here. A tax hike would hurt the economy, but I don't think it would send us spiraling into a major recession. Look back at the history of recessions over the past 100 years. You know what they pretty much all have in common? They weren't caused by tax hikes. I'm not trying to blow off the tax increase as unimportant, but it's just not as huge of a problem as something like the housing bubble. Regardless of your opinion of Obama, we should at least applaud him for recognizing in this case that taxes are not good things for the economy. Before I could get too happy though, his statements were followed by this:
"As we've already heard from some Republican commentators, a modest tax increase on the wealthy is not going to break their backs; they'll still be wealthy. And it will not impinge on business investment.
"So we know how to do this. This is just a matter of whether or not we come together and go ahead and say, Democrats and Republicans, we're both going to hold hands and do what's right for the American people."
OK, so I'm trying to follow the train of thought here. Tax hikes on the middle class are bad for the economy. But tax hikes on the rich don't matter? I'm just trying to figure this out. It doesn't really make sense to me.
Furthermore, Obama said that tax hikes on the middle class would "have a big impact on the holiday shopping season, which, in turn, will have an impact on business planning and hiring, and we can go back into a recession." But for the rich he says, "it will not impinge on business investment." So wait… if I'm a business and I make less money because middle-class consumers are facing higher taxes, then that's bad for my business planning. However, if I have less money because I'm being taxed more, then my business planning won't be affected?
On a side note, it's always disturbing to hear this line repeatedly by both parties – keep people spending and endlessly in debt, and the economy will be fine.
Maybe I'm a little slow or something, but it seems to me that in both cases I have less money and that will affect my business planning to some degree. Also, what about businesses catering to the upper class? Won't rich consumers do some holiday shopping as well? What about the effect on high-end business such as Louis Vuitton, Ritz Carlton, etc.? Just because they're high end doesn't mean that the bartender at the hotel or the salesperson at the mall is a high roller. Even if you are rich, higher taxes will slightly curb your spending.
Economics is based on a very simple premise: there's no such thing as a free lunch. The administration is suggesting that one could get money from the rich without any adverse effects, essentially a free lunch. Of course, a tax hike on the rich isn't going to make them start clipping coupons, but there will be an effect – that's just basic economics.
I've seen a couple of pundits defending the plan by saying that the tax cuts on the rich will barely affect the economy. However, even if that's right, it's no excuse. That position is like saying, "Just take a little of this cyanide pill. Don't worry; it won't kill you." It doesn't matter if the tax hikes would negatively impact the economy a little or a lot. We shouldn't be doing anything that could hurt an economy still crawling away from a crash.
I understand that some people want bigger government. I get it. But what really frightens me is when our leaders can't even piece together an internally logical argument. Hey, the Republicans don't get a break here either. Somehow spending cuts work great when it's on food stamps, but not when it's on bombs.
The problem is that the two parties must reach some sort of compromise. But it's hard to reach a reasonable solution when both groups are coming to the table with incoherent economic ideas. When two idiots sit down and compromise, the end result isn't a problem solved, but more often than not, another one created.
Now that the election is over, you'd think members of Congress would put their differences aside and tackle the formidable problems facing the country. Unfortunately, both parties are digging in for an ideological battle that seems more and more likely to end in a stalemate.
So what happens if they don't stop us from careening off the fiscal cliff? Is another recession around the corner? What about quantitative easing? What happens to the purchasing power of our savings if the Fed keeps its easy-money policies?
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Why Can't Americans Save Money?
By Dennis Miller, Editor of Miller's Money Forever
For the past several decades, the United States has been the most prosperous nation on earth. Our standard of living has increased substantially, and even those considered poor in this country would be the envy of many throughout the world.
During my lifetime I have seen society go from Dad being the primary breadwinner with Mom staying home raising the children to today, where a majority of marriages find both husband and wife working and the American family has record debt levels. What about savings? No time to think about it; got too many bills to pay. How can that be in the most prosperous nation on earth?
A friend recently sent me an article which quoted some statistics from the Employee Benefit Research Institute indicating that only 58% of us are currently saving for retirement. Sixty percent of those have less than $25,000 and 30% have less than $1,000 saved.
We are seeing lots of articles with similar themes, all pointing out that Americans have not saved for the future and it is going to be a real problem, not only for the non-savers, but for those who have saved as well, because they will be asked to subsidize their less-thrifty peers through higher taxes.
Many will go on to speculate why. The particular article I read discussed the number of folks who have plans like a 401(k) and how few participate to any major degree. The essence is that there are some obstacles to being able to save. While I will not argue with those issues, my personal belief is they are tangential issues at best. If a person is a spender, he will find a way to spend. If a person is a saver, despite the normal obstacles he will find a way to save.
There is more than one type of savings
For many of us, one of our early childhood lessons involves the idea of "saving up" for something. The theory is that we accumulate money in order to buy something we really want. I have seen cases where those lessons translate directly to adult life. I had friend who told me he really wanted a boat. Every Friday he and his wife would get paid, drop the children off at Grandma's house, and go out with their friends partying at their favorite watering hole. He was proud to tell me that he figured out just how much that partying on Friday night cost, and that he and his wife decided they did not need to spend that money. He quickly added that the money they saved is equal to the monthly boat payment. What really happened? Now on Friday night, they drop their kids at Grandma's house, go buy a case of beer at the discount liquor store, and go party on the boat with their friends.
I have finally come to the conclusion that saving up for something is truly no more than an illusion of saving. It is really nothing more than a reallocation of expenses. It is like our government wanting to save money by not subsidizing Big Bird, so it will have money to buy more bombs. As a taxpayer, I don't see my taxes coming down.
Let's start at the beginning
How should we define savings? "A system where a person, family, entity, or government deliberately spends less money than they take in, putting the remainder away for the sole purpose of accumulating wealth." There is no immediate, specific purpose for spending that money. It is there for emergencies. In the case of a family, the goal is to accumulate enough wealth for retirement. How much is enough? It would be having enough wealth to maintain your standard of living off the earnings from the accumulated savings.
Don't do as I do, do as I say
My youngest son will turn 50 next year. He recently asked me how those in my generation were able to save money for retirement. Honestly, most of us were done with childbearing in our 20s. The children left the nest in our 50s. Our wives worked, and I called it "the race to the finish line." We were in our peak earning years, had more money than ever before in our life, and somehow we managed to save some for retirement. As I look at my definition, we really did not do a good job. If we had, most of us would have accumulated a lot more than we have today.
My son's response was an eye-opener for me. Most of his peers put off having children until their late 20s or even into their 30s. When they are in their 50s, their children will be heading off to college – and they will be in their highest-expense years. Their race to the finish line is just a few years long. They have quite a different challenge than we did.
If you don't fix the cause, you don't solve the problem
I really struggled with trying to determine the real cause behind Americans' inability to save. I went back and reread many of the articles I had on the subject and kept coming back to the same point. There are certain people who are just true savers. What makes them different than most who just cannot seem to save? My first clue took place in a very odd fashion.
Recently my wife and I went into Walmart, and something caught my attention. A mother had her son in the cart; he was probably not yet four years old. He was carrying on about how he wanted a toy he grabbed off the shelf. His mother said, "No," and predictably he just screamed louder. His mother then said, "Maybe for Christmas." At that point, the child raised his voice and screamed, "No, I want it now!" Much to my chagrin, the mother finally gave in. The lady and her son ended up in front of us in the checkout line. She took the toy away from her son so the clerk could scan it and ring up the sale. Then she took out her credit card and paid the bill. Bingo! It hit me.
In 1975 our world changed forever. Up to that point in time, if you had a credit card, it would have been from an oil company, a department store, or something like American Express or Diner's Club. The cards could only be used at the specific stores that issued them. A very limited number of establishments would accept Diner's Club or American Express. You paid for your purchases with cash. If you didn't have the cash, you didn't buy it – just that simple.
Along came Visa, soon to be followed with MasterCard offering credit cards that would be accepted most anywhere. If you had any type of credit card, there was a good chance you would get – unsolicited – a Visa or MasterCard card in the mail with a $200 credit limit. Thus the concept of "instant gratification" was enabled. The expansion of instant credit has fueled economic booms and changed family values significantly.
When you really look at saving money, isn't it really a trade-off? It is sacrificing something providing instant gratification for something of greater value in the future. How does an entire generation brought up in the age of instant gratification all of a sudden change and learn how to save? The last of the baby boomer generation turns 50 in 2014. They were taught to buy the biggest house they could because real estate was always going to appreciate. Homes owned by couples in their 20s and 30s are beyond anything their parents could have dreamed of when they were the same age. Want a new car? No problem: you can get a seven-year loan. Most have never been taught to save; they never felt nor saw a real need to do so.
The idea of instant gratification has become so ingrained in the US that it is easily defined as part of our culture as a nation. Noel Tichy wrote a book called Control Your Own Destiny or Someone Else Will. He defined corporate culture as "The unwritten norms, beliefs and values that define appropriate behavior." It is not what is written in the personnel manuals, but rather just the accepted way things are being done. The definition struck home; it applies to families just as much as corporations. For many Americans, the culture is instant gratification – charge it, and worry about saving sometime later in life.
For those who have not saved nearly enough money for retirement, are they not putting themselves at the mercy of others who will control their destiny? Kinda scary when it's put that way... particularly when you know that the government is so broke it is printing trillions of dollars on a printing press to try to create the illusion that it is real money. The idea of putting our destiny in the hands of any government is frightening.
So where do we start?
When a corporation or entity sets out to accomplish a change in culture, it is a major financial and emotional event for everyone. It is an attitude and priority change, coupled with a major commitment and behavior change on the part of all people involved. It is the same process within a family.
Within our family, we have some folks who are married who have either always lived within their means and been true savers or they had a "revelation event" that caused them to reassess things and radically change their spending and savings habits.
In those cases, both husband and wife have to come to an understanding of priorities. That is followed by a total assessment of their current debt, spending habits, and lifestyle. The next step is to figure out where they want to be. Then they asked themselves the real question: "Are we willing to learn to defer gratification and give up a lot of stuff that is cool and fun to truly accumulate wealth?" We might want to start by giving a clearer definition of the goal.
In May, 2012, the Transamerica Center for Retirement Studies released its 13th annual Retirement Survey. In a survey of over 3,600 workers, 56% plan to work after age 65, and 54% indicated they would continue working after they retire. The lead paragraph of the press release says, "American workers, shaken by the realities of the Great Recession, have adjusted their visions of retirement …"
The detailed research report offers a new definition of "retirement readiness":
"A state in which an individual is well‐prepared for retirement, should it happen as planned or unexpectedly, and can continue generating adequate income to cover living expenses throughout his/her lifetime through retirement savings and investments, employer pension benefits, government benefits, and/or continuing to work in some manner while allowing for leisure time to enjoy life."
The real question is this: Are the perceived benefits in the above paragraph enough to motivate people to change their behavior? Almost all people want to be set for retirement, so they can sleep easy and enjoy the rest of their lives. While the articles tend to point to the majority of folks who are ill-prepared financially for retirement, there still are many who have taken the necessary steps to look after, and be in control of, their own future destiny (one of those steps is to not depend on interest income from CDs).
As a person who is retired, I can say we have many good friends who are still struggling. Most all have confided in my wife and me something to the effect, "If I had a do-over," followed by examples where they would have managed their finances and priorities differently. It all adds up to the same point – they wish they had taken retirement seriously at a much younger age.
On the positive side, there is something about turning 50 that causes many to stop and reassess their station in life and their priorities. My son initiated the discussion about retirement; he realized that it was an issue that should no longer be ignored.
I confessed to him that I had come to the same conclusion when I was his age; however, I also learned a bit about myself. The best way for me to save money was to put it where it was invested and I could not have ready access to it. I was self- employed, and my CPA put me in touch with a pension consultant. We set up a retirement plan where the contributions to the plan were tax deductible, which gave me a great incentive to save as much as I could. After a couple of years of seeing it grow, our first budget item was the maximum contribution to the plan; we had made the transition and were truly saving.
The easiest way for my youngest son to save money, invest it, and not have it easily available was to increase his contribution to his 401(k). They are able to live on his income. His wife recently went back to work full-time. With the help of Vedran Vuk, we provided him with some charts showing an analysis of increasing his 401(k) contributions and what it would mean over a 15-year period. He discussed it with his wife, called his payroll department, and increased his annual contributions. In addition, they committed to themselves to continue to increase their contributions each year.
What struck me about the survey I mentioned at the beginning of the article was how few folks take advantage of their 401(k) plans. One of the many sayings of my grandfather that took me many years to understand was, "Pay yourself first and learn to live on the rest!"
Better the Devil You Know
By Vedran Vuk, Senior Research Analyst
Much has been said about the policy uncertainty holding the economy back. And with the fiscal cliff, we jumped straight from the uncertainty of the election to the uncertainty of our current predicament. However, it's not all bad. With the re-election of President Obama, some uncertainty will go away, and that will slightly help the economy. For example, take this recent news story, titled CEO of Papa John's Says Employees' Hours Will Likely Be Cut Due to Obamacare:
"The CEO of popular pizza chain Papa John's says his employees may face reduced hours and he expects his business costs to rise because President Obama's re-election most likely insures [sic] the president's health care reform law will be implemented in full. ....
"[CEO] Schnatter estimated that these rising costs could adversely affect his workers. Since only full-time employees working 30 hours or more must be covered under the new law, he said he expects franchise owners will be forced to cut employees' hours because they can't afford the costs of health insurance plans."
Have I gone completely crazy? How is this possibly good news? Well, it's not good news in the sense that the healthcare law is not good for the economy. However, it is good news in that now business owners can start to adapt to the new rules. What's dangerous about political uncertainty is that it paralyzes business owners from doing anything. If there's a 50/50 chance of negative legislation passing, it's hard to prepare for the outcome. A situation where things could go either way puts businesses in a state of limbo – and things don't get done.
In the case of Papa John's Pizza, they didn't know whether to seek full-time or part-time workers prior to the election. Furthermore, one couldn't be sure of next year's costs. With these sorts of uncertainties, expansion and future plans are more difficult to formulate. When the legislation is finally resolved, it's easier to plan even if the outcome wasn't necessarily favorable. With Obama re-elected, businesses no longer have to nervously wait to see what will happen with the healthcare law. Business owners can now roll up their sleeves and get back to what they do best – solving business problems.
Even if the new rules are bad, it's easier for everyone to play the game when the rules are clear rather than ambiguous. Papa John's no longer needs to question what's going to happen. Now it knows the environment, and it can get back to building its business under these conditions.
Looking back at the last four years, what's even worse than the policies that were passed is how they were passed. It's almost as if uncertainty has been maximized at every single step of the way. First, let's start with the fiscal cliff. Each side is digging its heels into the ground, refusing to budge. That only makes things worse. If at least everyone knew that each side was willing to compromise, the uncertainty would lessen. Then, remember the debt ceiling? Same sort of issue. Everyone was sweating bullets over it, down to the last minute.
Of course, there's Obamacare as well. By waiting years to implement it, the administration maximized the uncertainty. Let's not stop there. We still don't know how the Dodd-Frank Wall Street Reform and Consumer Protection Act is going to play out, as the implementation continues to drag on for years. How is the banking industry ever supposed to recover if it doesn't even know what rules to play by? And then there's the Federal Reserve. At first, everyone wondered how long rates would stay low, then whether there would be QEII... then whether there would be QEIII. Will interest rates stay low until 2014 or 2015? The monetary situation is in a constant state of flux.
The policies are bad; the uncertainty around them has made it even worse. Every single piece of legislation has become a drawn-out, tortuous process which only hampers business decisions more.
What you have to remember is that businesses will work around regulations when the regulations are fully understood. The energy industry is a good example. The sector faces so many regulations that it's ridiculous, but the industry has become an expert at dealing with them – whether it's domestic regulation or dealing with foreign governments. The rest of the economy is going to have to adapt in a similar way. Regulations make things tougher, but they're not necessarily the end of the world.
While Obama's re-election might not be great for the economy, it does give some certainty on a few issues. Existing in a state where no one knew the future of the healthcare law was not a good place to be. At least the business world can now tally the costs and move on.
Here's a funny meme playing off Papa John's slogan "Better Ingredients. Better Pizza," out in light of Papa John's CEO's comments that were discussed earlier:
And now for some funny cartoons…..
For those who love everything in the animal kingdom…
How germs feel about the five-second rule:
Well, that's it for today. Thank you for reading and subscribing to Casey Daily Dispatch. See you again next week.
Casey Senior Analyst