Sunday, April 30, 2017

Extreme Weather or Extreme Views?

Global warming is making hot days hotter, rainfall and flooding heavier, hurricanes stronger and droughts more severe. This intensification of weather and climate extremes will be the most visible impact of global warming in our everyday lives. It is also causing dangerous changes to the landscape of our world, adding stress to wildlife species and their habitat.
This statement by the National Wildlife Federation is typical of those who have bought in to the religion of climate change and man-made global warming.

Of course, the high priest of climate change is Al Gore. This is what Gore said about extreme weather at the 2016 Climate Action Conference in Washington, D.C.

The climate-related extreme weather events – and I won’t go through all of them – but every night on the television news now is like a nature hike through the Book of Revelation.

Many of you may also remember last year when many liberals who worship at the climate change altar were also saying that California's five-year drought was permanent due to global warming.

That was a year ago. This is now. Water levels at almost all of California's major reservoirs are at or above historic levels.

Talk about an inconvenient truth.

Or consider this recent report by the U.S Drought Monitor that indicates that drought levels have fallen to records lows in the lower 48 states (since the monitor started 17 years ago) with just 6.1% of the nation experiencing such dry conditions.

What was that about droughts being more severe?

It is just not droughts either. This data all relates to the United States as recently summarized by Marc Morano of The Climate Depot.

"It is not just droughts that are at or near record levels. On almost every measure of extreme weather, the data is not cooperating with the claims of the climate change campaigners. Tornadoes, floods, droughts, and hurricanes are failing to fit in with the global warming narrative."

Tornado activity has been declining. In fact, 2016 was one of the quietest years since formal records began in 1954 and was actually the fifth year in a row that tornado activity has been below historical averages.

Hurricane activity has been declining. In fact, despite category 1 hurricane Matthew that heavily damaged Hilton Head Island last Fall, there still has not been a category 3 hurricane to make landfall in the United States since 2005. 

Flood disasters are also sharply down in the United States compared to what we have been accustomed to seeing over the years.

Al Gore and others have argued for years that global warming will bring us more extreme weather. The facts have been the exact opposite almost from the day he started saying it.

Where is the extreme weather?

Perhaps it is outside the United States? After all, weather and climate know no borders.

However. global weather-related disaster losses as reported by the global insurance industry also show a downward slope.

This could be due to better loss prevention controls. However, any improvement in this regard is probably cancelled out by much more costly development along coast lines throughout the world.

Despite the evidence, why is Al Gore able to keep saying what he does and why do so many people readily believe it?

The easiest answer is due to the recency bias that is present in our brains. We remember and put the highest value on those things we experience most recently. This has become an even bigger issue in our modern age as we are deluged with images, videos and news from around the world. However, no one is providing any context with this news.

We see the egg frying on the sidewalk in Dallas. We see the half-filled reservoir in California. We have 24 hour coverage of every hurricane that might threaten the United States. We have iPhone video of the tornado that struck Canton, Texas on Saturday night.

Looking at other extremes, we even see pictures via Twitter of the Pac12 golf championship in Boulder, Colorado that was disrupted by snow this weekend.

It has been said that if you are a hammer everything looks like a nail.

I guess it could also be said that if you have fallen for the climate change mantra, every weather event looks extreme.

The only extreme thing I can see in all of this are the views of the Climate Change lobby.

They have no room for debate, discussion or dissent irrespective of any inconvenient truths that get in the way of their "settled science".  It is beyond me how they can continue making the claims they have made about increasing levels of extreme weather when the facts totally contradict their claims and predictions.

They call the people that don't agree with them "deniers". Looking at what they have said and what has actually occurred regarding extreme weather, you have to ask what are they?

Thursday, April 27, 2017

Caveat Emptor

Traditional retail stores are under siege. The numbers of store closings indicates the dimensions of the problem for bricks and mortar stores.

This chart from The Wall Street Journal shows the effects. A projected 8,000 store closings this year. U.S. retail employment is stagnant. Three major retailers, The Limited, BeBe and WetSeal, are getting out of retail stores completely. The Limited will still have an online presence. WetSeal is finished for good and it is not clear yet if BeBe will continue as a internet retailer only.

If you look at this evidence you might come to the conclusion that the consumer has won. They have voted with their pocketbooks and they prefer the ability to comparison shop and the convenience of shopping online. It would appear that consumer power is winning the day.

However, will that be the end of the story?

I first studied the theory and practice of dynamic pricing over 20 years ago. Simply stated, dynamic pricing suggests that no two consumer are alike. They have different motivations for buying based on their current situation and environment and will pay different prices for the same product or service.

In order to best maximize profit, a seller needs to understand these differences. The airline industry was one of the first to recognize the power of dynamic pricing and it has long priced its seats accordingly. The business traveler in seat 6C may have paid $799 for her seat but the vacation traveler in 6B was only enticed to fly by the $199 fare.

Coca-Cola understood these differences many years ago in how they priced their product in supermarkets versus the fountain market. Consider your willingness to pay for a Coca-Cola. In a grocery store, you may decide you don't need Coke in your house if it costs more than $1.49 for a 64-ounce container (2.3 cents/oz) but you willingly pay that for a 16-ounce cup at a fast food restaurant (9.3 cents/oz) and you might pay $3.49 for the amount of Coke (21.8 cents/oz) at a bar with your friends in order to be sociable.

There is a 10-fold factor on what you will pay for a Coca-Cola based on your circumstances at the time.

Vintage Coca-Cola Ad (1960)

The Atlantic is out with the downside of the demise of traditional retail and it points in the direction of dynamic pricing as something we all need to be aware of as we shop, compare, click and have our products shipped to us. As Jerry Useem, the author of the article puts it, "How Online Shopping Makes Suckers Of Us All".

Credit: The Atlantic, May, 2017 issue

Our ability to know the price of anything, anytime, anywhere, has given us, the consumers, so much power that retailers—in a desperate effort to regain the upper hand, or at least avoid extinction—are now staring back through the screen. They are comparison shopping us.
They have ample means to do so: the immense data trail you leave behind whenever you place something in your online shopping cart or swipe your rewards card at a store register, top economists and data scientists capable of turning this information into useful price strategies, and what one tech economist calls “the ability to experiment on a scale that’s unparalleled in the history of economics.” In mid-March, Amazon alone had 59 listings for economists on its job site, and a website dedicated to recruiting them.

The prices that you see in a traditional store are all the same for everyone. That may not be the case when you shop online.

“I don’t think anyone could have predicted how sophisticated these algorithms have become,” says Robert Dolan, a marketing professor at Harvard. “I certainly didn’t.” The price of a can of soda in a vending machine can now vary with the temperature outside. The price of the headphones Google recommends may depend on how budget-conscious your web history shows you to be, one study found. For shoppers, that means price—not the one offered to you right now, but the one offered to you 20 minutes from now, or the one offered to me, or to your neighbor—may become an increasingly unknowable thing.

We all came to love the internet for the freedom, convenience and power it has given us. It broke down walls (literally in traditional retail) and gave us a whole new world of transparency.

However, transparency works both ways and internet retailers know more about you than you know. They increasingly know what is important to you and what is not. Are you a bargain shopper or an impulse buyer? When you are more likely to shop? (Tip from the article-most people shop weekday so retailers often raise prices in the morning and lower prices in the evening when there is less traffic).

I have only two words of advice, and despite all the changes in technology and the evolution of man and society, it still holds as much weight today as it did 2,000 years ago.

Caveat emptor.

Tuesday, April 25, 2017

Money and Marriage

Four years ago I wrote a blog post that is still among the five most viewed on BeeLine. It was titled "Degree Dearth=Date Dearth" and it detailed what I predicted would be an increasing problem for young women seeking a husband---the significant imbalance between female and male college graduates.

Why is that a problem?

Women have historically tended to date and marry men of at least equal educational attainment. However, that is becoming an increasingly difficult goal today. Almost 60% of college graduates are now women. Only 40% are men. This is true for almost all college degree programs.

What difference does it make whether you both went to college? It becomes important because those who have college degrees tend to make more money. Does a women want to marry someone who makes less money than she does?

You would think that it shouldn't matter but it seems that it is pretty important. recently wrote about the problem in a story titled "Millennial women are 'worried', 'ashamed' of out-earning boyfriends and husbands".

There is also data that supports the fact that when the woman earns more than the man in the marriage, the odds of the marriage ending in divorce increases.

You can see the dimensions of the problem even better in the results from the recent U.S. Census Bureau study that I cited last week on "The Changing Economics and Demographics of Young Adulthood: 1976-2016" which showed that more 18-34 year olds are living with their parents than with a spouse.

That study had another interesting statistic with regard to the income of 18-34 year old males.

41% of these young men made less than $30,000 annually in 2016.

In 1975, only 25% of men of a similar age failed to achieve that level of income (in constant dollars).

If you are a well-educated, young woman looking for marriage material, that statistic is not real comforting today. The pool of eligible bachelors could be looking pretty small depending on where you live.

You know it is bad when there are 10 women for every 8 men in a city and that is in the Top 10 list for best U.S. cities for dating.

Credit: Washington Post

As I stated above, all of this talk of education and income levels should not matter. After all, isn't it about love and companionship first and foremost? If you have that all should be well in the world.

The problem is that even though the world has changed our basic biology and the way the male and female brains are wired has not changed with it. There are primal emotions deep within us that dictate a lot about what we are looking for in a mate.

Many marriage experts will tell you that the most important factor that a woman is looking for in a husband is security. Women want to feel secure that they will be protected and cared for. Men, on the other hand, are looking most for respect. They want to have the respect of their wife.

Do you see a potential problem when the wife is out-earning the husband in the house considering these underlying factors in marriage involving men and women? How does the wife feel secure? How does the husband feel respected?

If you doubt how powerful these factors are in us, consider the survey research I cited previous blog involving the dating preferences of millionaires . When asked what they were looking for in a potential spouse insofar as money is concerned, there was a massive difference between men and women.

It seems that the vast majority of the millionaire men, 79.6% according to the survey, are seeking non-millionaire women.  However, 84.5% of the female millionaires want to date another millionaire.
The female millionaires made it clear that they are not looking to use their money to take care of someone else.  However, the men seem to want to find someone they can take care of.

In short, the men are looking for respect. The women are looking for security. Even when they are making a lot of money themselves.

Many marriages survive and thrive despite the woman bringing home more money. However, like everything else in a marriage, it requires work to make it work.

What is particularly interesting in all of this is, despite the fact that many Millennial women are earning more than Millennial men today, the youngest Millennials (ages 18-25) of both genders are increasingly in favor of a traditional home in which the man is the breadwinner and the woman stays at home. This is particularly true of young males.

This is from a Daily Caller article on the survey which has tracked young people's opinions on the roles of men and women since 1977.

42 percent of high school seniors in 1994 believed that the best family arrangement was one in which the husband was the financial-earner and the wife stayed at home — this figure increased to 58 percent in 2014. When looking specifically at men ages 18-25, support for this arrangement increased from less than 20 percent in 1994 to nearly 50 percent in 2014.

I assume these young men have not seen the Census Bureau study above in which they are more likely to be living in their parent's basement than supporting a young bride at home in a few years!

The other thing that young women have not likely seen is this blog post by Penelope Trunk on "How To Pick a Husband If You Want To Have Kids".  I referenced Ms. Trunk's advice to women on this subject in my previous post on this subject. I don't know if the choices are as stark as she lays them out but I think there is food for thought here.  For me, this would turn daunting into depressing if I were a single woman.

This is how Penelope sees it.
You cannot pick a husband to have kids with until you know if you want to work full-time while you are raising them. Some women will say they know for sure that they do want to work full-time. Most women will say that they don’t know for sure. But there are actually only two choices: be a breadwinner or marry a breadwinner. Then, within those two choices, there are a few strategies you could use.
Most people just will not like these choices. Nothing here is good. It’s reality, and of course it’s not as good as fantasy. The only good, real thing is that you have choices, and you can figure out who you are and what you need and you can get what you need. 
There will be people who say you can’t choose who you fall in love with. This is a lie, of course. There are a million people you could fall in love with. If one is impractical, just go find another.

However, as I point out in the statistics above, it may be just as impractical to "go find another" in light of the dating pool of eligible bachelors in various cities across the country.

It is worth the full read.

Should you think that I don't understand the husband/wife dynamic on incomes and think that I am a chauvinistic pig, this is what Ms. Trunk says on the subject. This is a married woman speaking, not me.

Statistically your marriage is high risk if you and your husband are both in the workforce and you earn more than him because surveys show that you will resent him. This is not logical, or social, it is primal. Statistically, you will marry a guy who does not make as much as you and then you will have kids and get a divorce. Because women hate the feeling of out-earning their husbands.

What does it all mean? We will find out in time. However, we are in uncharted territory with regard to the changing roles of men and women in the workforce and in society. Those changes have come faster than our brains are evolving. Marriage is not easy to begin with. It seems to be getting even more difficult with this new dynamic in play.

Sunday, April 23, 2017

Consensus Isn't Science

On Saturday, in conjunction with Earth Day, the March for Science was held around the country.

The march was portrayed as a non-partisan but it seems that the only grievances of the marchers were directed at President Donald Trump.

What are their chief gripes?

It seems they are principally upset that Trump is not a blind believer in man-made climate change. In addition, he is proposing cuts to the National Institute of Health's budget and some other research programs funded by the federal government.

I was in Oxford, Ohio on Saturday and happened to come across the March for Science at their political rally on the campus of Miami University. It is probably not surprising that there were a lot of marches on college campuses since any NIH and science research cuts would hurt academia the most.

The March for Science gathers for speeches at Miami University in Oxford, Ohio 

Trump is proposing a 18% cut in the NIH budget for next year. To put that in perspective, the NIH spends about $32 billion on various research grants each year. The Trump budget proposes cutting about $6 billion of that total that goes for "indirect" costs for university overhead. It does not propose any cuts for direct research grants for science. It merely wants to cut back the money it is giving colleges and universities that is not going directly to research. Of course, the universities say they need this money for administration of the programs. Can you say bureaucracy?

I recently wrote about the massive subsidies the federal government is providing to the Ivy League in my blog post, "Higher Cost Education". The NIH grants are part of what I was referring to and it is not chump change.

  • The eight Ivy League universities actually derived more in revenues from the federal government through government contracts and grants ($25.27 billion) than in supporting their educational mission ($22 billion in student tuition) for the fiscal years 2010-2015.
  • The eight Ivy League colleges actually receive more money annually from the federal government than do 16 states!

The first question you need to ask is whether this is a March for Money rather than a March for Science on those college campuses?

It might also be worth remembering that the projected federal budget deficit for the current year is $559 billion. If we are to ever get the federal budget under control where are the savings supposed to come from? For some additional context here is a chart that shows federal spending on research from 1970-2016 in constant dollars

I have written about the climate change issue many times over the years. I wrote the following in 2011 in one of my first blog posts and it still summarizes my views on the issue. You can read some other posts that I wrote on the subject here, here and here.

I am not a climatologist or meteorologist. However, I consider myself a practical thinker who makes decisions by looking at facts. I have also learned that it is always important to look beyond the "facts".  How are the facts packaged and what is the motivation of the messenger?
Over the years, I have listened to the claims about human created global warming. Without even spending a lot of time on the science, these claims never seemed to make sense to me.  The planet is known to have warmed and cooled over the years.  Even if the data shows it is warming, how do we know it is caused by man when you look at past history?  We know there was an ice age.  We also know the ice melted.  How did it ice up? How did the ice melt?
I can't help but be a little skeptical when I also see the changing explanations about the climate.  In fact, it does not even seem to be global warming we are worried about any more, it is climate change. We also heard a few years ago that we would see far less snow because of global warming. When we got more snow, we were then told this was also caused by the warming. 
It is all very confusing for something that is supposed to be so settled in science. I also remember in the late 1970's and 1980's all of the talk from scientists was concern that the planet was cooling.  What happened?  That was only a few short years ago- a speck of time in the history of the earth.

When it comes to settled science, there is no doubt that we have climate change. It changes every hour, every day and every year. It has changed over the centuries.

The question is not whether it is changing but whether man is impacting that change and, even if that is the case, whether we can even do anything about it?

Whenever we hear about the "science" of human related climate change there is nothing "settled" about it. That is why we hear that this view is supported by the "consensus" of scientists.

Of course, "consensus" is not the same as facts. And consensus is not a scientific fact. A scientific fact is the law of gravity, the boiling point of water or the distance to the moon. 


Prior to the 15th century, the consensus of scientists was that the earth was the center of the universe.

In the 18th century, the consensus of medical scientists was that blood letting was the best method to cure illness.

As recently as 25 years ago the consensus was that peptic ulcers were caused by stress. We now know it is caused by bacteria.

I could go on and on. In fact, in most cases like these, the consensus of scientists was proven wrong by one person who did not believe the consensus and proved it wrong.

All of this "consensus" of science talk reminded me of a speech that the late Michael Crichton gave at Caltech (if there was ever a center for science that is it) in 2003 titled "Aliens Cause Global Warming". Don't the charts below show that has to be true?


Of course, Crichton's entire purpose in the speech with that outrageous title was to call attention to the "increasingly uneasy relationship between hard science and public policy." There is no better evidence of that than in the March for Science. This march had nothing to do with science per se. It had much to to do with public policy. More importantly, it was about money. It almost always is.

Consider a few of the observations that Crichton made about the subject of consensus science.

I want to pause here and talk about this notion of consensus, and the rise of what has been called consensus science. I regard consensus science as an extremely pernicious development that ought to be stopped cold in its tracks. Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled. 
Whenever you hear the consensus of scientists agrees on something or other, reach for your wallet, because you’re being had.
Let’s be clear: the work of science has nothing whatever to do with consensus.
Consensus is the business of politics. Science, on the contrary, requires only one investigator who happens to be right, which means that he or she has results that are verifiable by reference to the real world. In science consensus is irrelevant. What is relevant is reproducible results. The greatest scientists in history are great precisely because they broke with the consensus.
There is no such thing as consensus science. If it’s consensus, it isn’t science. If it’s science, it isn’t consensus. Period.

It is advice worth remembering especially to those who are among are our best and brightest who seem to be letting their emotions overrule the more logical parts of their brains.

Of course, it is easy to do. All the more so when gigantic sums of money are involved.

In one of my earlier posts on the subject of climate change, I cited the fact that since 1993 over $193 billion had been spent by the federal government on research on the subject. I pointed out that if there is that much money in play for academics, researchers and climatologists into proving global warming, how much effort is going into looking at data that might be contradictory to that conclusion? 

Indeed. Consensus isn't about science. However, the scientists that marched on Saturday seem to want us to believe it is. And at its core the consensus they are trying to promote is for us to keep spending our tax dollars on their research projects---whether it is science or not.

"It is difficult to get a man to understand something, when his salary depends on his not understanding it."
                                                                     -Upton Sinclair

Thursday, April 20, 2017

Less Cheese, More Moves

There are more real agents in Cincinnati than there are current real estate listings.

That is a factoid I picked up last week when I had lunch with a real estate agent friend.

I asked him why people were not listing their houses for sale as I had seen that low levels of real estate listings were the norm in a number of U.S. cities. For example, CNBC recently reported that the supply of homes for sale in the U.S. was the lowest it has been since 1999.

He shrugged his shoulders and said that a lot of people just seemed to be satisfied with where they are. They simply did not want to risk a change in their lives.

A couple of days later I came across this op-ed by Kyle Smith in The New York Post on "Why Americans have stopped moving" which delves into the issue in more detail.

Americans are stuck. Locked into our jobs, rooted where we live, frozen at our income levels. More than at any previous point in our history, we’ve stopped moving — whether moving up the income ladder or packing up a truck and finding another home. We’ve grown ossified, rigid.

Smith sees a bigger issue under the surface and suggests that something has changed in the American character and the American economy that seem to be reinforcing each other. Parts of the country are booming and parts are stagnant. Why the disconnect and why aren't people doing something about it?

It wasn't always like this. Americans have a long tradition of moving towards opportunity. Does anyone remember, "Go West, young man"? What about the thousands upon thousands of people who left Appalachia to work in the steel mills and manufacturing plants of the Midwest after World War II?  Grandparents like those of J.D. Vance who wrote Hillbilly Elegy.

...labor mobility is in a funk. Especially after WWII, millions of Americans with limited resources — southern blacks — moved hundreds of miles from home to take up industrial jobs in the north. At the peak, more than 30 percent of southern-born blacks moved north, from 1920 through the 1960s. Even when technological limitations made long-distance travel extremely onerous, in the late 19 century, we were willing to travel in search of opportunity. In the second half of the 1800s, more than two-thirds of US men over 30 had moved away from their hometowns, and more than a third of those moves were for more than 100 miles.

Smith does a good job of explaining the problem but he does a poor job of explaining why it is happening.

He blames high real estate prices in New York City and San Francisco. He blames low white collar office productivity. He cites the fact that fewer start-up companies are being formed.

None of these explanations seem to explain anything by my way of thinking.

If all of this is true then why do we have so many immigrants flooding into the United States? They don't seem to be deterred by any of these factors. If they are willing to move across thousands of miles to seek opportunity in the United States how come Americans will not cross a state line?

Nowadays, moving from one state to another has dropped 51 percent from its average in the postwar years, and that number has been decreasing for more than 30 years. Black Americans, once especially adventurous, are now especially immobile. A survey of blacks born between 1952 and 1982 found that 69 percent had remained in the same county and 82 percent stayed in the same state where they were born.

Smith seems to have missed the most obvious explanation---America's social safety net.

The social safety net has become so large and all encompassing that it no longer provides protection--it has reached the point that it has trapped and ensnared millions of people. People don't move because they don't need to move. Their situation may be less than ideal but they have subsidized housing, they have food stamps, they have Medicaid. Millions gets a government check each month. There is no need to move.

People used to move because they needed to in order to put money in their pockets and a roof over their heads. They were willing to take a risk to better a bad situation. There are few situations anymore where Americans feel the pain of a bad situation like people used to. We have taken care of that by removing much of the discomfort. We have also destroyed people's incentive to do something about bettering their lives in the process.

Spencer Johnson wrote a very popular book almost 20 years ago entitled, "Who Moved My Cheese?"

The book is about four characters who live in a maze and have grown accustomed to a nice, big piece of cheese that they live off of. Two are mice who are simple and instinctive and two are "little people" (named Hem and Haw) who represent the complexities of us as human beings. Hem and Haw even move their homes closer to the cheese to make it the center of their lives. However, the cheese gradually gets smaller and smaller until it is all gone.

The mice see the situation for what it is when the cheese is gone and immediately head out into the maze to search for another supply of cheese.

Hem and Haw refuse to accept the reality that the cheese is gone. They linger near with the hope that the cheese will be replenished. They spend their days bemoaning how unfair it is that the cheese is gone. They complain endlessly that they are victims of fraud or theft.

Hem and Haw eventually grow hungry and Haw tries to encourage Hem to join him in a search for new cheese. Hem is fearful of moving even though he is hungry. He won't move. Haw ventures out on his own. It is scary in the maze but Haw begins finding small chunks of cheese to sustain himself along the way. Eventually he finds a new supply of cheese that is bigger and more varied than he could have ever imagined. Of course, the two mice had found the new cheese long before Haw arrived.

The core lesson of "Who Moved My Cheese"is that change is inevitable in our lives and to live life to the fullest you have to embrace that reality. Change is scary but breaking through your fears sets you free. Those who continually seek security end up living in constant fear of losing it.

Human beings are naturally risk averse. Therefore, providing a steady supply of cheese actually works against our long term best interests. No pain almost certainly means no gain in the end when humans are involved.

Should you think that government "cheese" is our only problem in this regard, consider this additional factoid that came out this week from the U.S. Census Bureau.

More Americans aged 18-34 are living with their parents than with a spouse.

57% of 18-34 olds were living with a spouse in 1975 compared to only 27% today. By contrast, 31% are living with their parents today compared to 26% in 1975. It should be noted that the Census Bureau counts college students living in dormitories during college as living with their parents for this purpose.

What do we seem to need to get America moving again?

A little less cheese---from government and parents---might be worth considering.

It is hard to say no when someone is in need. However, what is often needed is not a free lunch but the freedom to overcome their fears and move beyond them. For many, that is the only way you will ever get anyone to move.  Over 200 years of American history and the influx of millions of immigrants into the United States in recent years proves it.

Tuesday, April 18, 2017

Lessons On Investing

I gave a presentation on achieving financial success to a hundred or so graduating college engineering students two weeks ago.

For this audience, my primary message was simple and straightforward.

You have the greatest asset in the world for financial success---your youth.
Live beneath your means. Save and invest. Start when you are young and stay with it.
Compound returns will guarantee that you become wealthy.
It is no more complicated than that. 

Despite the fact that the formula is simple, very few people seem to be able to follow it.

Consider these statistics from the Economic Policy Institute (data as of 2013).

Nearly half of all families have no retirement savings at all.

The average retirement savings account holds $95,776.

However, that number is pumped up by the few that have saved a lot. When you take account of the many that have nothing, the median is just $5,000.

Even for those ages 56-61 nearing retirement, the median retirement savings is just $17,000.

Besides failing to save in the first place, many fail to achieve financial success because they can't keep their hands off of their savings, they lose too much to taxes or they make poor investment decisions with their money.

You see all three of these working together when someone borrows from their 401(k) account. On average, about 20% of participants in a 401(k) plan have a current loan from their 401(k). Almost 40% of plan participants have taken a loan out over the last five years.

There are many reasons why taking a loan from your 401(k) is a bad idea but the biggest reason is that the loan terms effectively make the loan fully callable if your employment ceases with that employer. Could there be anything worse financially for anyone than to lose their job which then becomes the trigger for a loan being called?

It is probably not a surprise that 86% of those with a 401(k) loan that leave their employer, default on the loan. This then triggers full taxation of the loan amount and a 10% penalty. A sure-fire way to end up with little or no retirement savings.

One of the other big messages I conveyed to the college students was to "watch their pennies." People tend to think that pennies are not important. That is why I seem to find so many laying on sidewalks. I never ignore a penny on the sidewalk.

You understand this when you see what a penny's difference can make when it is compounded over time.

Take the example of a graduating college student who receives a $2,000 gift at graduation from her grandparents. Her grandparents tell her to invest it in a retirement account and to add $2,000 to the fund each year for the next 45 years as a tribute to them. She does just that.

That money, compounded monthly at an 8% annual return, will give her almost $1 million at age 67. However, if she only earns 7% (a mere penny on the dollar less per year), she accumulates only $682,000. If she earns 9%, her retirement nest egg becomes $1,356,475.

An extra 1% in extra investment return per year makes a huge difference over a lifetime. The same goes for an extra 1% in investment management or advisor fees that reduces your investment return. Those fees can be well worth the money if Warren Buffett is picking stocks for you or managing your investments. However, the fact is that only 19% of active investment fund managers around the world are doing better than their benchmark index according to a recent Bank of America study.  However, those active managers are charging premium fees even though they may be delivering sub-par returns.

Why is it hard to beat index investing?

The easy answer is that the benchmark index has no fees. For a manager to beat the index they have to deliver outsized returns at least equal to their fee. That is not an easy task.

New research provides the answer as to why this is so hard. The reality is that stock market index performance is heavily skewed to a handful of stocks each year. A few stocks typically drive annual stock index performance while 70% of stocks will perform worse than a Treasury bill according to a study by J.B Heaton, Nick Polson and Jan Hendrik Witte.

A few quotes from the Bloomberg Markets article on the research.

The distribution of returns in the stock market is bizarrely lopsided. Often, equity benchmarks are so reliant on gigantic gains in just a handful of stocks that missing them—as most managers do—consigns the majority to futility. 
A concentration of outsize gains in a minority of index members is tantamount to a death sentence for anyone who gets paid for beating a benchmark. It’s a pattern of returns that virtually ensures everyone outside of an indexer owns mostly deadbeat stocks.
By itself, the observation that you need to pick winners to beat the benchmark isn’t news. What else are fund managers paid for? The point of this vein of research is that the contours of the market itself make the odds against picking winners prohibitively long. 

Lessons worth remembering whether you are a college student, a 401(k) participant or an active investment manager.

Sunday, April 16, 2017

Fair or Not? You Decide.

"Don’t tax you. Don’t tax me. Tax the guy behind the tree."                                              -Former Senator Russell B. Long

The income tax filing deadline is upon us and there are two things most people know for sure.

They are paying too much in taxes.

The "rich" are not paying enough.

A Gallup poll last April 15 found that 61% believed that the upper-income pay too little in taxes.

As you might expect, this view is skewed one way or the other if you are a liberal or conservative, Democrat or Republican. Interestingly, it is not as skewed along income lines as it is by political philosophy.

The views on using heavy taxes on the rich in order for the government to redistribute wealth are even more extreme when comparing Democrats vs. Republicans. 80% of Democrats believe there should be a heavy tax burden on the rich in order to redistribute income compared to only 22% of Republicans. However, again, you don't see these extreme views along income lines.

Another truth about taxes I have discovered over the years is that most people have no idea how heavy the tax burden is on the rich already. They also believe that the rich are using all sorts of loopholes to avoid paying their fair share. As a former tax attorney and CPA, I hate to tell them that most tax loopholes have been gone for over 30 years.

What is a fair share of taxes?

As we have seen from the quote above, "fairness" seems to exist in the eye of the beholder.

However, let's look at that question more objectively.

The information below is from the most recent Congressional Budget Office analysis on "The Distribution of Household Income and Federal Taxes" based on 2013 data. This data is categorized by income quintiles comparing before-tax incomes with the federal tax burden for each group. This analysis also breaks out the top 1% of income earners.

Federal taxes in this analysis includes individual income taxes as well as payroll taxes, corporate income and excise taxes.

As you can see, the only group which is paying a higher share of taxes as compared to their share of income are the highest quintile of income earners---"the rich".

The lowest two quintiles are paying far smaller shares of tax compared to their incomes than those with higher incomes. In fact, the top 1% are paying 34% of their pre-tax income in taxes. The lowest quintile--- a mere 3%.

The amount of federal taxes paid as a percentage of pre-tax income by income quintile group is as follows.

Source: Congressional Budget Office

Fair or not? You decide.

It is also interesting to see where the components of pre-tax income come from for each quintile income group.

Source: Congressional Budget Office

If you want to consider the current redistribution of income by the federal government, consider that 38% of before-tax income of the lowest quintile of income earners is in the form of government transfers (Social Security, Medicare, Welfare).

The so-called 1% could also get their name from the amount of their income they are getting in the form of similar government transfers---a mere 1%.

By the way, it takes $1.6 million of income to be considered in the top 1%, $327,000 to be in the top 5% and $201,000 to be in the top 10% in this CBO report.

What is also interesting is the degree to which the middle class in the 3rd and 4th quintiles are reliant on income from labor to support themselves--about 2/3 of their household income comes from labor income. Only 2%-3% of their income is coming from capital income and gains.

On the other hand, the Top 1% derives only 35% of their income from labor. Almost 2/3 of their income comes from business income (23%) and capital income and gains 38%).

It really drives home the lesson my father taught me growing up when he would drive me to an area nearby to where we lived that had large, beautiful homes. He would say to me as we drove down the street, "The people who live in these homes don't do it on salary or wage, they have got people working for them or they have capital working for them." I never forgot what he told me and this graph shows that my father knew what he was talking about.

I don't know that I have ever seen a better graphic to show where the jobs come from that pay the labor income or the taxes that pay for the government transfers that the bottom 80% rely on to live on than what you see above.

Looking at this graphic, what do you think happens if a tax increase cuts into the income of the rich? Do you think it might have some impact on jobs and the labor income that ultimately sustains the masses? What about a tax cut for these people? Who would really benefit?

38% of the before-tax income of the poorest 1/5 of Americans is already being paid by the rich and 34% of the next quintile by redistribution by the federal government.

Fair or not? You decide.

If we want to just look at the federal tax burden compared to income with regard to federal individual income taxes alone, the numbers are even more stark. This is the most recent IRS data from the 2014 tax year compiled by The Tax Foundation.

Consider the fact that those with adjusted gross incomes of less than $100,000 account for 43% of all the income reported on U.S. individual tax returns. However, these taxpayers only shouldered 15% of the total federal income tax burden.

Those making $100,000 or more accounted for 57% of all income but paid 85% of all federal individual income taxes.

Those making $250,000 or more accounted for 28% of all income but paid 55% of the tax bill.

Fair or not? You decide.

I am not happy with what I pay in taxes.

However, I am just happy there is a guy or gal behind the tree that is paying even more than me.

This is a day to be thankful for every last one of them.


Some historical perspective on the differences today compared to 104 years ago when the individual income tax was first implemented.

Credit: Americans for Tax Reform

Tuesday, April 11, 2017

Incentives Drive Results

There is one absolute when considering human behavior.

Human beings respond to incentives. We quickly understand what is in our interest and what is not, and we respond accordingly. We will act in accordance with what is in our best interest. Period.

Incentives drive the world. If the incentives for people are properly aligned, you will get the result you want.  If the incentives are not properly aligned, you will get poor results.  Whenever you get a poor result it is likely that you will find that the underlying incentives were not aligned properly.

For example, our illegal immigration problem from Mexico and the outsourcing of jobs from the U.S. to Mexico can be explained in one chart. It is all about incentives.

Wages in the United States are four times what they are in Mexico. That is a powerful incentive for a Mexican worker to want to work in the United States rather than in Mexico.

Wages in Mexico are one-fourth what they are in the United States. That is a powerful incentive for the owner of a manufacturing plant to transfer its production to Mexico.

Considering the natural incentives in place in the form of the wage differential, wasn't it rather foolish to not enforce our immigration laws and to also sign a free trade agreement with Mexico?

Is it any wonder we got the result that we did in mass illegal immigration from that country as well as the loss of scores of U.S. jobs to Mexico?

The incentives by themselves told us it would lead to a bad result. Our public policy then made the situation even worse.

We see this all the time in public policy.  If you pay people not to work, they will not work.  If you give aid to single mothers with dependent children, you will end up with more children who are dependent. If you penalize corporations by taxing repatriated earnings, they will not bring money back to the United States they earned (and were taxed on) overseas. If employers get a tax advantage for providing health care to their employees, you end up with an employer-based health system rather than an individual-based market. If you provide low-cost federal student loans, more kids will go to college but more and more loans are necessary for everyone because colleges can increase tuition with little consequence.

Nowhere have we seen the perverse effects that occur with misaligned incentives more clearly than in the welfare system of the United States.

Many of the major elements of our social safety net programs were introduced as part of President Lyndon Johnson's "War on Poverty" in the mid-1960's. One of those programs was the Food Stamp Act of 1964.

Of course, today it is no longer officially called the food stamp program, it is called the Supplemental Nutrition Assistance Program ("SNAP') and they don't use stamps anymore, recipients get an EBT Card (Electronic Benefit Transfer).

If it was a "War on Poverty", we lost the war a long time ago. It seems that the more money we spend on combating poverty, the more people who end up in poverty.

When the food stamp program began in 1965 there were 500,000 people initially receiving food stamps. Over the last four months, an average of 43.1 million people are receiving food stamps according to the latest numbers from the U.S. Department of Agriculture. That is down from a high of 47 million people in 2013 but it is still an astronomical number when the unemployment rate is 4.7%

The chart below shows the growth of the number of households on food stamps by state since 2000.

Could it be that the incentives are not aligned properly when it comes to food stamps?

The State of Maine, led by Republican Governor Paul LePage, recently began enforcing work and volunteer requirements in order to continue receiving food stamps. These have been part of federal law since President Clinton signed welfare reform legislation into law in the 1990's. However, many states had waived out of the requirement in the wake of the Great Recession.

In effect, the "new" rules are old rules that were first used in the 1990's and had a dramatic effect in reducing the welfare rolls and getting more people in the work force. However, the Obama administration and big government liberals wanted nothing to do with anything that might actually have been proven to work.
The new rules prevent adults who are not disabled and do not have dependents from receiving food stamps for more than three months - unless they work at least 20 hours a week, participate in a work-training program or meet volunteering requirements.
In other words, for those who are able-bodied and do not have dependents to care for, they need to get out and do "something" to better their lives in order to continue receiving food stamps. Work, get trained or volunteer. It is their choice. However, if their choice is not to do anything, they are stricken from the food stamp rolls. Once stricken, an individual must wait at least three years before they can again receive food stamps.

What happened once Maine starting enforcing the rule this year?

75% of these people decided that the idea of working, getting trained or volunteering was too much effort to expend to continue getting food stamps. Maine had 12,000 such individuals receiving food stamps at the beginning of the year---it now only has 2,680 as of the end of March.

Incentives drive behavior. Incentives drive results.

If you want the right result you need to pay attention to the incentives in any system involving human beings.

If people in poor countries are incentivized to immigrate to the United States because it pays 4 times as much in wages, you better make sure you have a way to deal with it. That is why there are immigration laws and why they need to be enforced.

If business owners are incentivized to move their manufacturing to a lower labor cost market, you better have a way to deal with it. You don't allow those owners to chase the lower wages and then turnaround and let the products flood back into the U.S. market without some type of import duty, tax or tariff.

When we start studying the incentives that drive people, and develop public policy around that reality, the country and world we live in will be a much better place.

Sunday, April 9, 2017

Higher Cost Education

April is the time when high school seniors are making their decision on where to attend college. The acceptance letters have been received. It is time to send the the deposit money in. It will be the first of many checks over the next four (or five?) years for these students.

College enrollment has been in decline the last few years.

This has been largely driven by a declining number of those turning 18 in the U.S. population. This decline is leveling off but will still result in approximately 5 million fewer 18-year olds each year over the next decade than there were in 2009.

This will put additional pressure on the budgets of many colleges and universities as they compete for a smaller applicant pool while being burdened by higher debt loads that funded a massive amount of building and renovations over the last decade.

Two years ago I wrote about the higher education "arms" race in Ohio with specific reference to the substantial levels of debt that Ohio public universities had taken on since 2004. It is the same across the country where public universities have doubled their debt load over the last ten years, according to Moody's Debt Service.

Where has the money gone from all of this borrowing?

Some went for new classroom buildings and technology upgrades. However, a lot of the debt has been taken on to pay for student amenities such as rec centers, student centers, food courts, hip residence halls, climbing walls and lazy rivers.

In recent years, colleges have embarked on a massive facilities binge in a competition to attract students that is reminiscent of the old-fashioned defense arms race between the U.S and the U.S.S.R. Dorms that resemble the TajMahal, recreation centers that look like they could be an Olympics venue and dining halls that are fit to serve meals straight from The Food Channel.

It all costs money, and tuition and fees need to go up to pay for the luxuries, and the added debt. Bucking the trend is career suicide to the college administrators should they fail to enroll the necessary numbers to fill their incoming classes with a declining pool of eligible students. After all, nobody wants to lose a good student and the tuition money that comes with her because they did not have a rock climbing wall in the rec center.

However, the reality is that the university borrows the money for the facility upgrade, it passes the cost on to the student, who has to take out a federal student loan to pay the tuition and fees, and the federal student loan program is, in turn, funded by additional federal government borrowings (or Federal Reserve QE)!

Federal student loan debt
Does not include an additional estimated $400B+ in private student loan debt

A vicious cycle if there ever was one. Where does it end?

Most states in the Northeast and the Rust Belt will face the greatest enrollment challenges as these states will see larger declines in the number of 18-years olds than states west of the Mississippi River.

This chart shows the expected change in college age populations between 2009 and 2028.  All the Northeast states are looking at declines of over 20% as are Pennsylvania, Delaware and Michigan. The Rust Belt states are generally looking at declines of at least 10% in prospective students.


Of course, not all colleges are going to feel the challenge of declining student age  population the same. The top-ranked and highly competitive schools in a state or region have the high ground. They will get the students to fill their dorms and classrooms. It is the colleges further down the higher education food chain that have the most to lose.

Consider the Ivy League schools that span the Northeast states. All these states will be experiencing declines in college age populations exceeding the national averages over the next decade. However, the Ivy League is unlikely to feel any effect at all from this decline in the student population.

They draw from a national student base, they have unparalleled brand appeal, they have huge financial endowments and they receive massive federal taxpayer support in the form of federal contracts, grants and direct financial assistance for students.

The numbers are staggering as compiled in a recent report by Open the Books, a non-profit organization whose mission is to compile and post online spending at all levels of government.

One big item that Open the Books has focused on is the size and tax-exempt status of the endowment funds of the Ivy League schools which now total over $119 billion. That is equal to about $2 million per undergraduate student.

To put that it context, that amount of money is enough (even without any more gifts) to pay for the entire tuition of every undergraduate student at the Ivy's for the next 51 years.

Needless to say, Open Secrets questions whether the tax-exempt status should be maintained for these university endowment funds.

You begin to understand this perspective even better when you considerh that the eight Ivy League universities actually derived more in revenues from the federal government through government contracts and grants ($25.27 billion) than in supporting their educational mission ($22 billion in student tuition) for the fiscal years 2010-2015.

The eight Ivy League colleges actually receive more money annually from the federal government than do 16 states!

Read the full report.

The law of supply and demand would suggest that with reduced numbers of college-age students that there should be some moderation in college costs over the next decade.

However, with the federal government providing more than $100 billion in funds that annually pay those college costs, that is not likely to happen.

Isn't it curious that those two areas of the economy which have seen the greatest infusion of government money have also seen the highest inflation costs over the last 40 years?

 Coincidence? I think not.

Thursday, April 6, 2017

Made in China

President Trump will be meeting this weekend with Chinese President Xi Jinping in a summit at Trump's Mar-a-Lago estate in Palm Beach, Florida.

It promises to be an interesting few days considering that Trump consistently criticized China's business and trade practices during the campaign.

Let's look a little deeper at the trade between China and the United States.

Imports from China were practically non-existent 25 years ago. Today the United States is importing over $400 billion of goods per year from China. This is producing a $300+ billion annual trade deficit with that country.


This trade imbalance is the reason Trump has been so vocal in questioning the fairness of the trade and business practices of the Chinese relative to the United States.

Back in 2012, I wrote how the trade practices of the United States and China differed. And how the United States was getting taken to the cleaners as a result.

A Chrysler Jeep Cherokee SRT8 costs $189,750 in China.  This is over 3 times what it costs in the United States. Why the difference?  China imposes import duties and taxes on the sale of the American-built SUV in their market
We hear all this talk about free trade but it often seems that it is a one-way street.  We provide a freeway into our market-the richest and most lucrative in the world-but we often see roadblocks are placed on our access to foreign markets.  How about free and fair trade?

The United States is the largest export market for Chinese goods. 20% of China's exports go to the United States. China needs the United States market to continue to grow their economy. This gives Trump a little bit of leverage in any talks about the relationship.

This chart  (click to enlarge) shows the level of imports from China by product category ordered by China's share of all imports of those products. For example, 90% of all umbrellas and sun umbrellas that are imported into the United States are from China.

What is interesting in the chart is that the number of categories in which China is making up more than 40% of the share of imports for various products (Toys, games and sports (80%), Footwear (60%), Bedding (50%), Electrical machinery and equipment (40%).

It is also troubling to see that just two product categories (Electrical machinery equipment-$136 billion and Machinery, mechanical appliances-$107 billion) make up more than half of the total amount of Chinese imports. These are exactly the products that used to be made in the Rust Belt. Look no further than this statistic to better understand Trump's appeal in those states. Those voters know where their jobs went.

Of course, as President Trump was quick to say, China only bears a portion of the blame. The United States let it happen though poorly designed trade agreements and a tax system that was totally out of step with the rest of the world.

The United States has the richest, most lucrative market in the world but our policies essentially invite the rest of the world to access it with little or no cost. Most other countries apply some type of value-added tax or border tax on imports so that those products coming into the country bear some cost of supporting the market they are using.

Not the United States.

One of the many Chinese umbrella maufacturers

Consider an umbrella manufacturer in the United States. It pays its employees and also pays the employer share of FICA. It must pay for their unemployment insurance. Under Obamacare, it must provide healthcare. It pays property taxes on the plant property and personal property taxes on the equipment. It is subject to an immense number of regulations from the EPA to OSHA. Then, if there are any profits left, it must pay a corporate income tax. 

A single umbrella manufactured in the United States carries a staggering amount of costs that support why the United States is the United States. Schools, hospitals, the social safety net and all the rest.

What about the umbrella that was manufactured in China and imported to the United States?

It provides nothing. There is no contribution at all to pay for Social Security, Medicare, Medicaid, food stamps, schools or anything else, not to mention the defense security of the market that makes it such a stable, lucrative market.

This cannot continue. 

The United States must reform its tax system with some type of border-adjustable tax system that will tax imports coming in so that they bear an appropriate cost to support our market. At the same time, exports from the United States should get a tax break just as is the case in the tax regimes of most of our trading partners.

That is what is required to level the playing field. I would expect to see some type of border-adjustable tax in President Trump's tax reform proposal later this year.

Retailers, who are probably the biggest beneficiaries of the current tax and trade regime, are already preparing a big fight. A group of the largest, including Best Buy, Macy's, Walgreen's and Wal-Mart, have launched a coalition called "Americans for Affordable Products" to resist any change in our tax laws that might make imports pay some tax costs in our system.

After all, as I have written before, quoting Daniel Kahneman,

"Reforms always create winners and losers, and the losers will always fight harder than the winners."

I am not sure the retailers and the others relying on imports are going to be able to fight and win this one in the end. However, it promises to be a real dog fight.

Consider the numbers.

Over $400 billion in imports from China.  $2.7 trillion in total imports into the United States annually. Considering U.S. exports with it, the United States is on the wrong side of a $800 billion trade deficit.

A border-adjustable of tax of just 10% has the potential to bring in $270 billion of new federal tax revenues that is not being captured anywhere currently in the system. That is a tremendous amount of money that could be used to offset other taxes in tax reform, provide export tax relief,  shore up Social Security or Medicare, pay for infrastructure spending or  ease the transition from Obamacare. Just a small slice of it could even pay for a border wall with Mexico.

The uses of this money are endless for a dealmaker like Donald Trump. That is why I will be shocked if this is not one of the major items in any tax reform package.

All of the companies who are funding "Americans for Affordable Products" must think this is where this is headed as well.

Made in China has grown across our land the last 25 years.

This weekend may mark the beginning of Made in the USA once again standing a fighting chance.