Posted in Behavioral Finance, Global Investing, Markets, tagged earthquake, economy, exchange rate, GDP, Japan, Japanes stock market, Nikkei, Nikkei 225 index, tsunami, Yen, Yen exchange rate on May 30, 2013 | Leave a Comment »
One of the most interesting market stories in the last week is the big drop in the Japanese stock market. Japan is the third-largest economy in the world, ranked by GDP. The values of the Japanese stock market, as measured by the Nikkei 225 index, dropped by 7.3% on May 23rd, and then suffered another fairly dramatic one-day decline of 3.2% on May 27th.
Over the last five sessions, the iShares MSCI Index ETF, EWJ, has dropped by almost 10% (see chart below). (more…)
Posted in Commodities, Real Estate, Wealth, tagged economic growth, economy, energy independence, entitlement programs, falling incomes, Michael Porter, middle class, natural gas, public education, skill development, stagnant incomes, technology on February 27, 2013 | 2 Comments »
Harvard Business School professor Michael Porter is a familiar name to almost anyone who has graduated from business school in the last twenty years or so. He recently gave an interview on CNBC in which he shares his analysis of the U.S. economy. Porter is best known for his work in competitive strategy, a field in which he is considered the preeminent expert, so his views of what ails the U.S. economy and how we can get back on track are of considerable interest. He has analyzed the forces that provide one country or region with relative competitive advantages vs. others and he applies this perspective in his commentary. (more…)
Posted in College Savings, debt, financial planning, tagged college affordability, cost of college, economy, higher education, recent graduates, unemployment on February 14, 2013 | 2 Comments »
I am now at an age at which many of my friends have kids preparing for, or going to, college. I have a few more years to figure out the details, but this is an issue that I have followed for a long time. My local in-state university, the University of Colorado at Boulder (CU), estimates the all-in cost of attendance at $26,000 per year. This varies a bit, based on which program you choose. Tuition, fees, and books cost about $14,000 per year (though this varies by program) and the estimated cost of room and board is about $12,000 per year. (more…)
Posted in financial planning, Market Outlook, tagged american consumers, Bob Huebscher, China, economic recovery, economy, minimum wage, Mohamed El-Erian, outsourcing jobs, persistent unemployment, unemployment, unemployment levels, unemployment rates on October 8, 2012 | 1 Comment »
Bob Huebscher just published an outstanding article on the sustained high level of unemployment in the United States. The question that he seeks to address is whether we are in the recovery phase of a major recession or we are actually in the midst of a long-term shift in the economy. The article calls these two possible explanations ‘cyclical’ and ‘structural.’ It is worth understanding the key factors that have resulted in the current persistent unemployment levels in order to put the recent modest reduction in unemployment into context. Are we seeing signs of the long-awaited recovery that will bring us back to full employment or is the recent growth in employment simply variability around a long-term shift in the U.S. economy in which unemployment will remain well-above historical levels? (more…)
Posted in Asset Allocation, Bonds, Diversification, ETFs, financial planning, Investors, Long-term investing, Low Cost Investing, Mutual Funds, Portfolio Investing 101, Retirement, retirement income, retirement planning, Risk, Stock Investing, Volatility, Wealth, tagged Defined Contribution, economy, household income, income replacement, Lawrence Kotlikoff, pensions, retirement security, Rob Arnott, saving, Scott Burns, unemployment on October 2, 2012 | 2 Comments »
There are a number of factors that we need to predict in order to come up with saving and investing strategies for retirement. The values that we assign to these factors will have a huge impact on whether or not we will be able to meet our goals. First, there is the expected return that investors will make on their retirement savings. Second, there is the common estimate that people will need about 85% of their pre-retirement income to support them once they stop working. Finally, there is the potential impact of behavior on savings rates, investing, and spending. (more…)
Posted in 401(k), Active Investing, Asset Allocation, Behavioral Finance, financial planning, Income Investing, Long-term investing, Portfolio Investing 101, Retirement, retirement income, retirement planning, tagged economy, Fidelity, Ibbotson, retirement savings, S&P 500, salary growth, stocks and bonds, Target Date Funds on September 24, 2012 | 5 Comments »
Fidelity just came out with a study that estimates that people will need about eight times their final salary level, assuming they work until age sixty seven, to be able to retire and subsequently to have 85% of their pre-retirement income provided from retirement savings plus social security. Fidelity also helpfully provides estimates of what they believe people need to have acquired at different ages. (more…)
Posted in 401(k), Asset Allocation, financial planning, Long-term investing, pension plans, pensions, Portfolio Investing 101, Retirement, retirement planning, tagged 457(b), baby boomers, economy, household income, IRA, presidential election season, retirees, retirement research, Savings, traditional pensions, underemployment, unemployment on September 21, 2012 | 10 Comments »
As the presidential election season of 2012 has gotten underway, there is a massive issue that has gotten very little attention: how Americans will sustain themselves in retirement. In 2010, there were 40 million Americans over the age of 65. By 2030, that number is expected to rise to 70 million, which represents 20% of the total population. At the same time, we have moved from a workforce with traditional pensions to one in which each person chooses how much to save and how to invest that money.
Only 42% of American private-sector workers between ages 25 and 64 have any type of retirement plan in their current job. The majority of Americans (67%) who have access to a pension plan have only self-directed accounts such as 401(k)’s and similar accounts (such as 457(b) plans which cover those who work at non-profits or who are employed by the state or local government organizations). A large number of Americans also have IRAs. We refer to these types of retirement plans as Defined Contribution (DC) plans as opposed to Defined Benefit (DB) plans, the traditional pensions that used to be the norm. (more…)
Posted in Investors, Long-term investing, mortgages, Real Estate, Uncategorized, Wealth, tagged case shiller, economy, Housing, housing prices, income, recession, Wealth, wealth effect on April 2, 2012 | 1 Comment »
New data shows that housing prices are not improving.
Nationally, prices have now dropped 34.4% from their peak in 2006. Prices are now the lowest they have been since the end of 2002, according to the Case/Shiller index. Robert Shiller, co-creator of the index and long-term researcher on housing prices, warns that risks remain and that we may be seeing a broad shift in consumers’ beliefs with regard to the desirability and risks of owning a house. In fact, Shiller speculates that it may take decades for suburban single-family housing prices to recover.
A chart of the 20-city composite of U.S. house prices tells the story (below):
(Case/Shiller 20-City U.S. Home Price Index, Seasonally Adjusted. Source: Standard and Poors.)
Nationally, home prices more than doubled from 2000-2006. From mid-2006 to mid-2009, prices dropped as dramatically as they rose during the boom. We experienced a slight bounce from mid-2009 to mid-2010, but prices started to decline again in 2010 and are now at their lowest point in a decade.
Beyond the obvious impacts on homeowners’ net worth, what are the implications of weak housing values for the economy?
First, for many Americans, their houses represent most of their net worth. What’s more, less wealthy households tend to have a higher percentage of their net worth in home equity. A continued decline in house prices tends to increase wealth inequality, as well as reducing household net worth as a whole. Given that fewer and fewer Americans have traditional employer-sponsored pension plans, reductions in household net worth translate directly into fewer financial resources available to fund retirement and other long-term liabilities.
Second, we have the wealth effect. People tend to feel wealthier when the paper value of their assets is higher, and they tend to spend more. This may be an especially powerful driver of consumption when homeowners can easily use home equity loans to fund purchases of consumer goods. A number of studies have found that wealth in the form of home equity is a larger driver of consumer spending than other forms of wealth.
Third, we have the manifestation of de-leveraging among individual investors. People who lose their homes to foreclosure are not likely to purchase new homes. In addition, baby boomers who are saddled with mortgages they cannot really afford are likely to sell their homes to get out from under the risks that such leverage (e.g. mortgaged) creates. Gary Shilling recently outlined this scenario. With a smaller pool of ready buyers, this de-leveraging across the residential real estate market is a deflationary force.
Yes, some. Buying a house is looking more and more attractive relative to renting. With low interest rates and lower prices, the cost of purchasing a house is lower than it has been over most of the last ten years. Ken Johnson, a professor who studies real estate, and the buy-vs.-rent problem in particular, concludes that buying looks like a better bet than renting. On the other hand, it is hardly surprising that potential home buyers, and especially first-time buyers, will be very wary of borrowing large sums of money to purchase an asset that may be hard to sell (liquidity risk) and that has the potential to drop as much as we have seen housing prices fall in recent years.
On the other hand, the implications of the most recent Case/Shiller numbers are not very positive. The best that can be said is that housing prices have shifted from a dramatic free fall to a slower downward drift. It is hard to tell whether this persistent declined in housing prices is a symptom or a cause of an ongoing economic malaise. For wealthier Americans, the massive upswing in the stock market has offset declines in housing values. For less-well-off Americans, the continued erosion of net worth suggests it will be a very slow recovery in terms of personal wealth and in terms of a sustained recovery in consumer spending, which has historically depended on the “wealth effect.”
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Posted in Bonds, debt, Dividends, Global Investing, Income Investing, Investors, Uncategorized, Volatility, tagged AA, AAA, bonds, downgrade, economy, France, income, S&P, yield on January 18, 2012 | 1 Comment »
Standard and Poor’s downgraded France’s credit rating last week from AAA to AA+. While this downgrade has gotten a lot of press coverage, there are a number of topics surrounding the downgrade that are worth noting.
First, France now has the same credit rating from S&P as the United States. As you’ll remember, S&P downgraded U.S. sovereign debt from AAA to AA+ back in August 2011. Second, the yield on France’s 10-year bonds is at 3.08%. While this yield is well above the U.S. 10-year Treasury yield of 1.9%, it is certainly not a sign that the bond market sees substantial credit or interest rate risk associated with France. The media response to the downgrade is reminiscent of the situation in July last year when there was a media frenzy surrounding the possibility that the U.S. would fail to raise the debt ceiling and technically default on its debts.
Third, we can better understand the markets for debt (bonds) if we also look at the markets for equity (stocks). They are related. The appetite of investors for risk (and that of the market as a whole) varies through time. When investors are broadly risk averse, they are less willing to (more…)
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