Thursday, May 26, 2011

The U.S. debt ceiling is no place for politicians to be playing chicken!

If you want a less-than-serious look at how our banking system works, try this short video on for size:

But if you want to know how Washington works, you need an insider to guide you.

Chances are, you've been a little dismayed about what you're seeing in Washington these days. Not only are the two parties constantly bickering at each other, but they seem to be blocking each other from getting anything done. That may be a great thing under normal circumstances, but at a time when there are so many major problems to be solved, gridlock doesn't seem to be the ideal solution.

That's why so many financial advisors were interested to hear what David Gergen said when he spoke at NAPFA’s conference in Salt Lake City. Gergen has worked for both Democratic and Republican presidents, and has managed to keep an insider's view of Washington. In his view, are things really as bad as they seem?

Gergen told the audience that, despite all the bickering, both sides of the aisle see the current debt crisis through the same basic filter. "People in Washington basically agree on the nature of the problem and its consequences," he said. "which are outlined in the theories proposed by economists Ken Rogoff and Carmen Reinhart."

Rogoff and Reinhart's influential book, entitled "This Time It's Different," looks at various debt, fiscal and economic crises in different countries around the world over a period of several hundred years. Their conclusion is that the most crippling economic scenarios play out over a familiar pattern. First, you have a financial crisis, and the government throws a ton of money to end it. "But then," said Gergen, "you have thrown so many resources at the problem that it moves from a financial to a fiscal crisis, because the government had to borrow so much to stop the financial crisis. And it is how they handle the fiscal crisis that determines their long-term well-being as a country."

The book also outlines some danger zones. If public debt grows larger than 60% of the size of the country's economy, you start to enter a danger zone. "At that point, you really need to deal with the problem or you are moving into deeper water," said Gergen.

If the debt level reaches 100% of GDP, the country moves into the danger zone. Its economic growth rate goes down at least a percentage point, and creditors (think: China) begin to get nervous and demand higher rates on their government bond investments. Borrowing costs go up, adding to the problem, and the lower economic growth rate lowers tax revenues, making it harder to pay down the debt, which and sends the whole situation into another round of still higher borrowing costs and lower economic growth.

Gergen noted that since World War II, U.S. government debt has generally run about 38% of America's Gross Domestic Product--what Rogoff and Reinhardt would call a healthy range. This last year, we reached the 60% level. Under the government's current trajectory, we might hit that 100% level in less than a decade.

Both Republicans and Democrats want to avoid that scenario, which is the good news. The bad news is that they disagree on how to do it. "There are two ways to address the problem," Gergen told the audience. "You can cut spending, or you can raise revenues. Spending is 25% of GDP right now. The Republicans want to get that down to 21%, the Democrats want to cut but not that far, and they both want to cut different things." To make up the difference, the Democratic leadership wants to raise taxes on upper-income Americans; the Republicans want to maintain the current tax rates.

Is there any hope? Gergen noted that a bipartisan committee headed by Republican ex-Senator Alan Simpson and Democratic former White House chief of staff Erskine Bowles has mapped out a way to reduce total government debt by $4 trillion, cutting spending by two dollars for every dollar of tax increases. A so-called Gang of 6 in Congress that included both liberal Democrats and Conservative Republicans was working on an alternative proposal, but that fell apart a week before Gergen spoke. A third group, chaired by Vice President Joe Biden, is still holding meetings.

Overhanging any negotiations, and making them more complicated, is the debt ceiling limit, which will be breached on August 2, throwing the U.S. in technical default on all of its bond obligations. "[U.S. Treasury Secretary Tim] Geithner would like to get this resolved well before August 2, so as not to rattle the markets," Gergen told the audience. "The Wall Street folks are warning the people in Washington not to play with the debt ceiling, that any loss of confidence in the U.S. could be a big deal. Meanwhile, the Republican leadership thinks they'll get a better deal as they approach August 2, and some Republicans think there may not be a problem if the negotiations go past August 2."

The silent party to these negotiations, the general public, seems not to understand the severity of the issue, Gergen said. "In recent polls, 60% of them think we should not raise the debt limit," he told the audience.

In the long run, Gergen said, if Congress manages to address the debt issue responsibly, it could make America stronger. "Otherwise," he said, "it will be very bad news." Because the political risks of taking action that might alienate the public, both Congress and the White House seem to prefer kicking the government debt issue down the road for 18 months, deferring any serious action until after the 2012 elections, which Gergen finds dismaying.

"We're playing right close to the edge on this," he told the group. "This is dangerous stuff for our politicians to be playing with." He described it as one of the most serious issues he has seen in Washington in the last 30-40 years.

Wednesday, May 04, 2011

Are the gasoline prices going to slow the current economic recovery?

Yesterday, when I filled up my, Lincoln MKZ Hybrid, gasoline tank I hit my all time record for the cost of a tank of gas, $64. So I started asking everyone I talked to, “How are the current gasoline prices affecting your activities?” They have all said gasoline prices are having an effect on how often they drive and the plans they are making for the summer.

Since crude oil is one of my three main indicators for stock market problems I decided to go back and see how crude and gasoline prices today relate to those in the past.

First, when crude oil prices go up near 80% on the first day of the month over the same price 12 months before, it signals a stock market problem coming. It has correctly signaled this January 1, 1974, September 1, 1979, July 1, 1987, September 1, 1990, November 1, 1999, July 1, 2000, October 1, 2004, November 1, 2007 and January 1, 2010. This was the only signal that called the October 1987 crash. So let’s take a look at what it is telling us today:

• Crude oil prices were up 54.02% over the same price 12 months ago on May 1, 2011, current Midwest regular gasoline price were $4.19 per gallon.
• The last time crude oil was this high was April 1, 2008, crude oil prices were $100.98 per barrel and gasoline prices were $3.71 per gallon.
• By July 1, 2008 crude oil prices were $140.97 per barrel and Midwest regular gasoline prices were $4.21 per gallon.
• Crude oil prices at or near $130.64 per barrel on June 1, 2011 would be a very red flag.

Interestingly enough, all reports show that we have a surplus of gasoline today. This is being explained because of all of the hybrid and high mileage cars that have been bought in the past few years.

If this is the case then why are prices so high? Well part of the reason is the political problems around the world in oil producing countries. The other part might be because of speculators within the investment markets. Our current gasoline prices are as high as when crude oil was at $140 per barrel not $111 per barrel. Why might that be?

Finally, why is this important to you: Crude oil has to do with everything you do and have; it does not just affect your gasoline prices? Crude oil is used for:

• Farmer’s fertilizer when they are planting your food.
• Medical chemicals.
• Clothing chemicals.
• Furniture finishing products.
• Cleaning chemicals.
• Transportation of products to factories and then to retailers and much more.

Only time will tell how big of a problem this is

Monday, May 02, 2011

Slow Buring Crisis

Through a combination of procrastination and bad timing baby boomers are facing a personal finance disaster just as they're hoping to retire. In January this year, more than 10,000 baby boomers a day began turning 65, a pattern that will continue for the next 19 years.

The boomers, who in their youth revolutionized everything from music to race relations, are set to redefine retirement. But a generation that made its mark in the tumultuous 1960s now faces a crisis as it hits its own mid-60s.

"The situation is extremely serious because baby boomers have not saved very effectively for retirement and are still retiring too early," says Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania.

Today, I sees a lot of new empty-nesters who spent all their years and money raising kids, putting them through school and clothing them in the right brands.

"Now their kids are gone, and they realize they've done nothing to prepare for retirement. Many prospects come in to see us today and think they have all this money and they ask how they're doing, and they're shocked when I tell them they are in trouble. When they were kids, they thought that if they had $100,000, they were rich. Today, that doesn't go very far."

There are several reasons to be concerned:

• The traditional pension plan has disappearing. In 1980, 39% of private-sector workers had a pension that guaranteed a steady payout during retirement. Today that number stands closer to 15% and getting smaller, according to the Employee Benefit Research Institute.

• Reliance on stocks in retirement plans is greater than ever; 42% of those workers now have 401(k) accounts. But the past decade has been a lost one for stocks.

• Many retirees banked on their homes as their retirement fund. But the crash in housing prices has slashed a third of a typical home's value. Now 22% of homeowners, or nearly 11 million people, owe more on their mortgage than their home is worth. Many are boomers.

Failure to save

Too many boomers have ignored or underestimated the worsening outlook for their finances, says Jean Setzfand, director of financial security for AARP, the group that represents Americans over age 50. By far the greatest shortcoming has been a failure to save. The personal savings rate - the amount of disposable income unspent - averaged close to 10% in the 1970s and '80s. By late 2007, the rate had sunk to -1%.

The recession has helped improve the savings rate - it's now back above 5%. Yet typical boomers are still woefully short on retirement savings. Boomers in their 50s and 60s with a 401(k)account for at least six years had an average balance of less than $150,000 at the end of 2009.

Signs of coming trouble are visible on several other fronts, too:

Mortgage debt: Nearly two in three people age 55 to 64 had a mortgage in 2007, with a median debt of $85,000.

Social Security: Nearly 3 out of 4 people file to claim Social Security benefits as soon as they're eligible at age 62. That locks them in at a much lower amount than they would get if they waited.

The monthly checks are about 25 percent less if you retire at 62 instead of full retirement age, which is 66 for those born from 1943 to 1954. If you wait until 70, your check can be 75 percent to 80 percent more than at 62. So, a boomer who claimed a $1,200 monthly benefit in 2008 at age 62 could have received about $2,000 by holding off until 70.

Medical costs: Health care expenses are soaring, and the availability of retiree benefits is declining.
"People cannot fathom how much money will be needed to simply cover out-of-pocket medical care costs," says Mitchell of the University of Pennsylvania.

A 55-year-old man with typical drug expenses needs to have about $187,000 just to cover future medical costs. That's if he wants to be 90 percent certain to have enough money to supplement Medicare coverage in retirement, according to the Employee Benefit Research Institute. Because of greater longevity, a 65-year-old woman would need even more to cover her health insurance premiums and out-of-pocket health expenses: an estimated $213,000.

Employment: Boomers both need and want to work longer than previous generations. But unemployment is near 10 percent, and many have lost their jobs.

The average unemployment period for those 55 and older was 45 weeks in November. That's 12 weeks longer than for younger job-seekers. It's also more than double the 20-week period this group faced at the beginning of the recession in December 2007.

If financial neglect turns out to be many boomers' undoing, challenging circumstances are stymieing others.

'Slow-burning' crisis

Add this all up, and there's a "slow-burning" retirement crisis for boomers, says Anthony Webb, a research economist at the Center for Retirement Research.

"If you have a crisis where the adverse consequences are immediately clear, then people understand that they have to do something," Webb said. "When the consequences will be felt 20 or 30 years in the future, the temptation is that we kick the can down the road."

As a result, he believes many won't change their behavior.

For less affluent boomers, it won't take that long to feel the pain of poor planning. Concerns about financial trouble will hang over many of those 65th birthday celebrations in 2011.

Many seem to view their plight through rose-colored granny glasses. An AARP survey last month of boomers turning 65 next year found that they worry no more about money than they did at age 60 - before the recession or the collapse of home prices. But in an acknowledgement of reality, 40% of boomers said they plan to work "until they drop."