The New Generals: AAPL and MSFT (G vs. V)
Thursday, June 3, 2010 at 12pmBy John Friedman
Much has been written in the past week about the value of Apple, as a company, now exceeding the value of Microsoft as a company. The more jargony way of saying this is that that AAPL’s market capitalization (often trun cated down tomarket cap) exceeds MSFT’s market capitalization.
In fact, last I checked, if you were buying Apple the company, lock-stock-and-barrel, then it would cost you $240 billion, while buying Microsoft lock-stock-and-barrel would cost you $236 billion. (Aside for financial wonks: I’m simply looking up these market caps on Yahoo Finance, so, yes, among other nuances I’m glossing over here are differences between the companies’ take-over premiums, as well as all those very detail’y valuation issues concerning cash on hand, outstanding shares, online financial data accuracy, etc.)
Enough has been said about this state of affairs to obviate any need to talk directly about it, other than to reiterate what a lot of very smart people have said, because it is something I, too, have said:
Never in my wildest dreams did I expect
this to ever happen. Not even close.
So all hats are off to Steve Jobs, who has accomplished something that, quite literally, no one has ever accomplished before (home-run, massively successful products in computers, music and phones, in that order, with text publishing and gosh only knows what else perhaps next). And all hats are on with respect to the other, sorrier Steve — Steve Ballmer that is, CEO of MSFT, and successor to Bill Gates — he the opposite of Jobs in so many ways.
Instead, what I want to talk about in here is something that a lot of folks can use a good dose of help understanding: the difference between growth stocks and value stocks.
A lot of people have heard those phrases, but haven’t a clue what they mean.
As it happens, I can give you a clue and then some, and I can do it using the two Steves and their companies to light the way . . .
* * *
Way back when, I used to explain the growth vs. value dichotomy in terms of The Generals. There was General Motors, which was a value stock, and there was General Electric, which was a growth stock.
Now both of those companies have changed since I developed that explanation. GM has gone through a bankruptcy and near-death experience, and is still badly hobbled; at about the same time, GE investors (there are lots of us) learned, in a whole new way, that GE was half bank, and that some of Jack Welch’s magic (he being the CEO who really grew the bejeesus out of GE) owed a lot to Jack pedal’ing-to-the-metal’ing the bank part of GE.
So that old explanation is kaput.
* * *
Ah, but now we have Apple, which people think can grow like all get out, and Microsoft, which, while still huge and stupendously powerful as a result of its Windows monopoly and the follow-on cash gusher that is Office, just ain’t growing the way it used to.
And it shows on the investing front. If you had invested in MSFT in, say, 2003, just as the market was about to take off in tandem with the Iraq war, you’d have seen the share price since then hover all about, but always inside the $20 to $30 range. And during that same time you would also have seen MSFT make its first foray into the dividend-paying part of its life, via a whopper of a special dividend in 2003, and then its payout of a nice, regular dividend, all marking Microsoft’s descent from the lofty plane of being the growth-stock-to-end-all-growth-stocks to being part of the more pedestrian world of dividend-paying value stocks.
Kinda like going from being a brisk young hipster to being a boring ol‘ middle-aged dullard.
During that same time period the price of Apple shares went from $9 to $260 — roughly a 28-fold increase (market oldtimers out there no doubt remember that Qualcom did a single-year 29-bagger during the late 90s). And during that time, as has always been true, Apple never paid out even a penny’s worth of dividends.
So, looking backwards, Apple grew like all get out and never paid a dividend, while Microsoft plodded along, paying a steady stream of dividends.
Or, in the parlance I use with clients, Apple wealthflowed while Microsoft cashflowed — i.e., Apple shares appreciated but never (short of selling the shares) generated a cash flow, while Microsoft shares neither appreciated nor depreciated, but paid out a nice steady flow of cash.
* * *
But how about looking forward? That, as it happens, is what counts in investing. And here all we have to go on is the market’s vote about what the future might hold — data which is in a language all its own.
The main language the market uses in this context is one of ratios, as in what would I pay for a dollar’s worth of annual earnings in each company? According to Yahoo, the market has recently been saying that it is willing to pay about $14 for each $1 that MSFT earned, while that exact same market has also been saying that it is willing to pay about $22 for each $1 AAPL earned. So MSFT sells at a 14 to 1 ratio, while AAPL sells at a 22 to 1 ratio (and, yes, to those in the know and in with the financial wonk geekspeak world, what we’re talking about here are P/E ratios, said out loud as pee EE‘ ratios, and all of it being short for price to earnings ratios).
So if, say, Microsoft the company earned $10 billion per year, the market would value MSFT via its shares of stock at $140 billion (14 times the earnings, for that same 14 to 1 ratio), while Apple earning the same amount would result in the marketing valuing AAPL via its shares of stock at $220 billion (22 times the earnings, for that same 22 to 1 ratio).
But let’s get close-to-accurate here, because everything we need to know to do so is embedded in the numbers set out above. Extrapolating, interpolating, arithmeticing (but not looking up the actual data), it looks like last year MSFT actually earned something closer to $20 billion, while at the same time AAPL earned something closer to $10 billion. Yet the market is saying that both companies are worth about the same (more accurate still: MSFT earned $17 billion and AAPL earned $11 billion, but for the sake of simplicity lets stick with the $20 billion and the $10 billion).
That, my friends, is what growth and value stocks are all about: here we have two companies that the market deems to be worth about the same amount, yet the company trading as a value stock is, in terms of earnings, somewhere in the neighborhood of being twice as big as the growth stock.
More generally: the market values a dollar’s worth of earnings in a typical growth stock at, say, $20, but values a dollar’s worth of earnings in a typical value stock at, say, $10.
Think of it this way: if you were looking at buying an IOU (so you got paid every month by the person owing on the IOU), and had to choose between two IOUs that both cost $10k, but one of which kicks off $500 per year (a 5% return) while the other kicks off $100 per year (a 1% return), which would you want to buy?
(If you say it depends on the creditworthiness of the person owing the money, you’d be a smart person . . . )
Stock investing, as it happens, is not so straightforward as that. I mean, which would you have rather bought in 2003? AAPL or MSFT?
* * *
But which to buy now — value or growth?
In practice, for most normal folks the growth vs. value dichotomy is more about someone else’s marketing needs, rather than being something they need to be totally smart about in order to continuously improve their overall financial health. So the dichotomy is great for mutual fund companies because it means they can market growth funds as well as value funds as well as blend funds (a mixture of the two). It gives them more stuff to sell.
After all, what car company sells only one model? Doing so would be so 1910. Nope: in 2010, and for mutual fund companies, something much more than a single model is what the marketing doctors ordered.
But putting that aside for the time being, what’s good guidance for you in your quest to improve your overall financial health? Value or growth?
At any given time, one or the other is apt to look better than the other. So sometimes growth looks great. Sometimes value looks great. And by a smidgen of a smidgen, most academic research these days indicates that value just might do a smidgen of a smidgen better than growth over the long run.
From my perspective, though, your financial health is best served by (a) knowing the first thing about the G vs V dichotomy (i.e., the stuff written out above) and to then (b) make sure that your investments do not favor either one and, instead, are nicely exposed to both growth and value pretty much even-steven, and (c) to then completely ignore it, all the while making sure you are pretty much even-steven on the G vs. V dichotomy.
The good news on this front is that a lot of online financial accounts can display this info for you and that, if you are designing your own portfolio, then you can avoid this whole layer of complexity (Yay! It’s always good to peel away a layer of complexity, and get it out of your life permanently) by investing in index funds, many of which are, by definition, even-steven on the G vs V dichotomy. So your portfolio is automatically not too much of either . . . and forever more.
True, if you are a sophisticated investor, you are for sure going to pay close attention to your P/E ratios and such (unless you are a technician, which is a term of art for a type of investor who looks only at charts, and ignores fundamentals and ratios and such, and which is not even close to what we are talking about today . . . ).
But for normal people, not so much.
* * *
Now should AAPL’s ascent make you want to buy AAPL shares now? Could it do another 28-bagger? Or will it hit the same wall that MSFT hit, and as a result stop growing like all get out?
Time will tell.
One thing is for sure, though: if AAPL stops growing, and its shares start being priced as value shares rather than as growth shares (as happened to MSFT shares), then, all things being equal, the price of AAPL shares would fall, roughly, by half.
Now to open up this piece I admitted that I, and loads of other folks, never even came close to foreseeing that Apple would become a more valuable company than Microsoft. And though it’s hard to imagine Apple shares falling in half, experience teaches that it for sure can happen.
We have a model for how this would happen, in MSFT. As applied to AAPL, this would mean that one day Apple’s growth rate starts to drop some, so that its revenues over the next umpteen years, while increasing, are not increasing nearly so fast as they used to, while at the same time its valuation starts coming down from lofty growth valuations to everyday value valuations, so that it looks, in terms of P/E ratios and the like . . . just like Microsoft looks today.
Imagine that. Apple paying a dividend. Middle aged. No longer a hipster. It can happen.
But what do I know? Friedman’s Law of Symmetry says, among other things, that if I missed the up, then I shouldn’t be trusted to spot the down.
* * *
‘Til tomorrow, then, here’s to your financial health, and may it continuously improve . . . .
.
I Robot, Modified: Capital Punishment for Criminal Capital
Wednesday, June 2, 2010 at 10amBy John Friedman
Years ago I worked at a place called Winterland. It was a merchandising company that was spun off from, as I recall, the Bill Graham concert promotion juggernaut. Winterland had started out in a venue in The Fillmore of the same name, which was where, among other things, The Band’s The Last Waltz took place (and where a condo complex now stands).
Winterland sold t-shirts and other stuff with images of musicians on them, mostly in concert venues but also in stores and the like. It was a pretty nice business (other than the dealing with the musicians and their business managers part . . . ), although it did cycle through a bankruptcy reorganization in the late 90s.
Winterland is also one of the few companies that has ever pleaded guilty in a criminal court to killing someone. This came about after an employee was crushed to death in a silk-screen machine which had a safety mechanisms that someone at Winterland had disabled. Ouch.
After being brought up on criminal charges, Winterland pleaded guilty and paid a $350k fine; even though Winterland had, for all intents and purposes, killed this unfortunate person, no one went to jail. There was no eye-for-an-eye.
The lesson of that episode, at least to a jaded perspective, might be that corporations can get away with things that human beings cannot get away with — like killing human beings.
Kinda like I Robot, but with a corporation playing the role of the robot.
* * *
Much has been written lately about the personhood of corporations, with the trend being towards giving corporations more and more rights previously considered to be rights that only human beings should have. Nowhere, though, have I read anything about corporations, as a kind of quid pro quo, also being subject to all the penalties of the criminal law, including capital punishment.
Now this is not the place to talk about capital punishment of human beings. Those of you who know me or my writing can well guess how I feel about it. But this is the place to talk about capital punishment of corporations.
Yesterday BP’s stock price fell a third, which means that the value of BP fell by tens of billions of dollars. And there is talk that BP might be the target of a hostile takeover or other buyout or a bankruptcy.
On the other hand, as people tally up BP’s exposure for the oil volcano, it looks possible that BP could pay the full bill. Yup, it looks possible that BP has enough money to pay for all the damage it has caused.
I want to go on record as saying, though, that if half of what has been said about the recklessness with which BP dug this hole is true, then I think we should have a debate about applying capital punishment to the entity (leaving aside for the moment the discussion of jail for the perpetrators).
Now market-lovers will argue that the invisible hand will do its magic, and BP will be adequately punished, either through bankruptcy (Texaco did it . . .) or a buy out (Texaco did it . . . ).
But I’m thinking that that very well might not be sufficient. If BP did, as some say, overrule safety precautions, gerrymander the regulatory process and, in general, act like the biggest, baddest oil company around, and that behavior necessarily led to this calamity, then I say let’s execute BP. Yes: let’s use capital punishment on the worst capitalist.
Now we can all debate ’til the cows come home the wisdom of governments killing human beings who have killed; the whole eye-for-an-eye approach is a flashpoint for wedge politics. It seems to me the debate is a bit easier, though, when it comes to governments killing business entities that have killed human beings.
Here, then, let’s do consider a-corporate-charter-for-an-eye, with the proceeds from the corporate carcass used to right, as well as possible, the wrongs perpetrated by the corporate perp, and the excess, if any, going to the federal government to further support whatever regulatory framework needs to be strengthened to decrease the risk of a similar occurrence.
So how would that work? I’m doing my best to write short in here, so I have to leave that topic for another day. But I do have room for the financial health tie-in, and for the fold-back.
In terms of our overall financial health, we’ll all be better off when business decision-makers everywhere know that especially egregious and harmful-to-others behavior on the part of the entity risks the very existence of the entity itself (as well as the freedom of the decision-makers themselves).
Because it seems that, currently, some of them (a lot of them?) think they can get away with murder.
Until tomorrow, then, here’s to your overall financial health, and may it continuously improve.
.
A la Krugman
Tuesday, June 1, 2010 at 11amBy John Friedman
I write long.
Given my druthers, when I have an idea to write about I exhaust my thoughts on that idea — let them all pour forth. And then I usually go back and chunk that stream up enough to make it easier to read. And then, to wrap it up and put a bow around it, at the end I typically fold-back, coming full circle to, with a flourish, make a big point. Voila!
The Goldman piece that I sent out as a group email in May was the longest and most intense group email I have ever written. It had the chunks and the fold-back and the big point at the end, but it was, admittedly, a workout of a read.
Some folks tell me they liked it. Some folks tell me they loved it. Some folks even wondered where it came from (as Neil Young said to Charlie Rose, I merely act as the receiver . . . ).
But many did not read it at all, due to length. Too bad, that, because I think the Goldman piece might be one of the better pieces I’ve ever written (ahhh, but it is so very hard to judge these things . . . ), and bears one of the most important big points of all at the end to boot (i.e., trust only your fiduciaries).
Now, though, I am going to try something quite different. Having watched Paul Krugman get better and better at writing short posts, and having read him a lot now, I admire the facility, I see the challenge, and I take it up.
So, beginning today, 6/1/10, look for a short post each day. Maybe more. I’ll do my best to not make all of them about investing which, gosh knows, is beaten to death day after day after day in the blogosphere.
They will, as always, focus on financial health. Yay.
Until tomorrow, then, here’s to your overall financial health, and may it continuously improve.
The 2010 First Week of January Test — The Test Explained, and the Two Aspects of Financial Health Explored
Wednesday, January 6, 2010 at 8pmBy John Friedman
When last we communicated, I suggested that you quickly and without editing yourself write down your thoughts about how you felt, right at that very moment, as you conjured up the new year. And, if all went well and you were not too much of a night-owl email-reader late Sunday night/early Monday morning, then chances are that this suggestion found its way into your thoughts sometime during the morning hours of 1/4/10, the first Monday of the new year — and thus came upon you when you were likely to be, for the first time in 2010, thoroughly ensconced in your normal routine. Did it happen that way? And did it find you merry or wary in that routine?
Regardless of whether you were merry or wary, or somewhere in between, or lots or little bits of both, the odds are also that, at that moment, you enjoyed a certain clarity of perception — a clarity that you do not normally feel during the other 360+ days of the year, when you are so thoroughly enmeshed within your daily routine that self-reflection is low on your list of to-do’s, but a clarity that instead comes from being well away from that routine for a week or two, celebrating and enjoying, and then hooking back up with that routine, all at once and with some jolt, on the first Monday of the new year, staring into the empty vessel that is the new year, as in, we now join our program already in process . . .
When it works, the suggestion in the email can get us to tune in to that once-a-year moment of clarity, and help us understand how we feel about the lives we’ve built for ourselves, one decision after another after another after another, lo’ these many years . . .
So how did it feel?
Hmmmm . . .
And, you might ask, what does this have to do with financial health, the topic at the hearty of all of these writings?
* * *
The Starting Point: We are All Economic Beings, Making a Living
We start with this proposition:
We are all economic beings, so much so that you can no more withdraw from the economic world in which you live than you can withdraw from the gravitational force holding you down to earth
We are all, then, little economic fishies bobbing up and down amid the economic sea, just as we are all physical masses dutifully falling towards the biggest mass around (with this time of year many of us hoping to be a bit less mass falling a bit less assiduously). True, you could retire to a cabin in Alaska and sustain yourself without resort to any modern amenity, but that would be to merely replace the modern economic world with a less-modern economic world: in both you are actively seeking out and then maintaining shelter, sustenance, etc. for you and for those you love.
And, true, you could be retired, but most retired people I know are, if anything, more enveloped in their economic world rather than less, as the shift from supporting themselves via their respective pools of laboring to supporting themselves via their respective pools of stored-up capital shifts their thoughts from their worklife, with all its intrigue and complexity, to their capital, which by comparison is fairly one-dimensional, making them all the more intensely focused on their single, unique pool of pooled-up capital — or lack thereof. So, yes, retired people have days that look different from working people, but they are still very much a part of the economic world.
And let’s call our relation to that economic world making a living. It’s quite a phrase, that one, isn’t it? Living is what all of us, except those who haven’t even sufficient rohealth or hope, wish to be doing for as long as possible, while making is a very active verb to throw into the mix, and the preposition a makes it sound like we can only have one at a time, as if to say, you generate one of these for yourself, and it’s far better than not having one, but you can only have one at any given time.
So the Alaskan makes a living by hunting and gathering, and by avoiding being hunted or gathered by other hunters and gatherers, and the retired person makes a living by understanding his or her financial situation, and by endeavoring to maintain, foster and conserve his or her stored capital so that the idea of becoming a healthy centenarian does not also involve being destitute.
Most of us, though, make a living by constantly exchanging our endeavoring — our brawn, our brain, our expertise, our consciousness, our hours, our human capital — for dollars, the ultimate medium through which we interface with the economic sea upon which we bob, up and down.
* * *
A Nasty Sea
So let’s talk, briefly, about the sea we’ve all had our making-a-livings bobbing up and down in, shall we? We Americans used to, with at least a bit of schadenfreude, look at Japan’s Lost Decade (the 1990s) and say to ourselves, good thing we’re not like *them*. But now we know that we, too, can have a lost decade, because, on just about every economic measure, the aughts were big fat zeros. Zero jobs created. Zero wealth created in the stock market. Zero aggregate life-improvement of the economic kind.
The main article making the rounds on this topic is in the Washington Post from last weekend (see http://bit.ly/7aaUJK, a copy of which is also included down below my signature), noting, among other things, that this is the first decade in our lives during which households in which people work ended up worse off at the end of the decade than they were at the beginning of the decade. And then there is the Schwab billboard off 101 in San Francisco, plain as can be, no images, just text, and in Schwab’s blue and brown trade dress, with a simple first-person declaratory statement from an anonymous speaker: I was closer to retirement ten years ago than I am now. Ouch, huh? This statement rings too too painfully true for most 50-and-olders reading this email, yes?
And though these emails are mostly a-political, I’ll add that I’ve had enough conversations lately about the topics in this chunk of the email, and seen enough responses to my email earlier this week, to know that some (most?) of your minds at about this point are wandering back to the Land of the (C)Hanging Chads in November and December of 2000, wondering about what might have been . . . and swearing silently (shouting loudly?) at the powers that were.
But what is, is, right? And the plain fact — the is that is is’ing — is that there’s been precious little joy coming into our economic lives from the economic sea. The bobbing, as it happens, has been mostly flat to down, and more down than flat lately (with a big exception for the post-March 9, 2009 stock market, which is up ~60% from that day’s low, but still down considerably from its 2007 level, and essentially flat from its Y2K level). The external financial world, then, has been naught but headwind seemingly for ages.
* * *
The Two Aspects of Financial Health
The external financial world dominates in the sphere of financial health I call numeric financial health. As its name implies, you can’t talk about this aspect of your financial health without talking about the numbers that populate your financial world. As a result, every tool I’ve ever built to help people with this part of their financial world is in Excel. Similarly, because numbers are the dominant concept in business, this is where virtually all financial services providers (banks, brokers, money managers, insurance agents, mortgage brokers, etc.) ply their trade.
So when the stock market (the external world) goes flat for a decade (detail: the S&P500, which consists of shares of stock in large U.S. companies that tend to grow rather quickly, returned negative 0.9% per year for the decade — after reinvestment of dividends) that hurts your numeric financial health because the money you’ve stored in stocks loses value; the numbers got smaller. So the external world has hurt your financial health, right in the numeric gut.
And when you’re working for the formerly-great state of California (which most of us still love dearly, yes? Though now with a decided mix of feelings . . . ) and you get furloughed for two days a month, you earn less money from your endeavoring, and, all things being equal (a/k/a ceteris paribus) you either save less or you dissave more. Here too the external world has hurt your financial health of the numeric variety.
Ah, but if you take those two free days a month that you did not have before, and put them to use in ways that enrich your life (e.g., more time with your kids or spouse, or more time to pursue your passions of, say, painting and bicycling and magicianing), then there might’ve been some gain in spite of the loss of numeric financial health you suffered, yes? And what if, having those two free days a month for a full year leads you to decide that you would be a happier economic being, bobbing along in the economic sea, by making your living as a magician whose main act is to simultaneously bicycle and paint portraits of your also-bicycle-riding spouse and kids, rather than as a state employee? What then? And what if you make that leap and, two years later, you determine that, by gum and by golly, and regardless of whether it improved your numeric financial health or weakened it, the change was the best, most life-enhancing move you’ve ever made?
Why, then you’d have improved your non-numeric financial health. Non-numeric financial health is where our internal selves interface with the external economic world. It’s where our making-a-living resides, and it can be strong, weak or somewhere in between. Strong non-numeric financial health comes when our making-a-living financial self is consistent with, complements, and furthers the other selves we have inside of us; it’s a part of our happy center. Weak non-numeric financial health comes about when our making-a-living financial self conflicts with, detracts from, and diminishes the other selves we have inside of us; it’s apart from our happy center.
Lots of combinations and permutations flow from these two aspects. The ideal, to most people’s way of thinking, is to have plenty of both: enough stored dollars that you needn’t worry about the number of dollars in your life, ever, along with a making-a-living that helps you to be ever happier. Pre-2008 Madoff presumably had lots of numeric financial health but nada non-numeric financial health, while the Na’vi look to be this year’s model of what it’s like to have zero numeric financial health and plenty of non-numeric financial health (if you don’t know the Na’vi, you’re a month or so behind the popular media blockbuster curve . . . ).
* * *
How Healthy are the Two Aspects of Your Financial Health?
To assess your numeric financial health, you need to do two things: you need to (1) add up all the numbers in your life that represent stored dollars, and then (2) ask yourself whether the numbers, changing over time as they are bound to do (due to the external world and due to your ability to either save or dissave), give you comfort that you can probably meet your reasonable financial needs over the long run.
Now, if you’ve never added up all those numbers, first of all, you have lots and lots of company, so please don’t be hard on yourself, and, second of all, you truly do owe it to yourself to add ’em all up. In fact, end-of-year add-’em-all-ups are ideal. Doing them each January will, guaranteed (what’s this, a financial guy who uses the G word?) improve your overall financial health, if for no other reason than you will have better data (yes, that was a financial guy using the G word) (but note that it happened in a non-numeric do-si-do off of a numeric point, and stayed way away from a numeric guarantee . . . ).
And how about assessing your non-numeric financial health? Why, that’s what The First Week of January Test is all about. If Monday morning found you back in your normal routine, making a living, and feeling absolutely psyched to the gills about 2010, then you passed with flying colors. And if instead you felt sick to your stomach for the first time since 12/24/09, as that little hole in your stomach that had closed up a bit over the holidays was now re-opening on 1/4/10, perfectly synchronized with your return to your routine, then you have some work to do on your non-numeric financial health during 2010: you are finding the particular chunk of the economic ocean in which you swim quite toxic.
As it happens, most folks are in the middle. Top notch non-numeric financial health is quite rare. The ubiquitous lottery question comes in here: if you won the lottery, would you change what you do with your days right away? If you wouldn’t, then you have top notch non-numeric financial health; your making-a-living is so consistent with your inner self that changing it simply because of a windfall of dollars doesn’t make any sense. Sounds rare, yes?
Bottom notch non-numeric financial health is, unfortunately, not so rare. Many of us, as it turns out, are constrained in various ways, and through various absences of good luck, and thus find our making-a-livings far removed from our happy place; our interface with the economic world out there is not a happy one. The good news here is at least two-fold. First, in general (if not currently), we live in a culture in which it is relatively easy (relative to most other places and most other times) to re-allocate our most precious resource — our very own human capital. It’s scary, but it’s doable (I speak from experience, as it took me three tries, one each in my 20s, 30s and 40s, to get the allocation just right). And, second, most of us can find something meaningful, beyond mere monetary compensation, in our work, even if the work is far removed from our happy center, if for no other reason than accomplishing is part of almost all work, and, for most humans, accomplishing can be satisfying. Us fishies, as it happens, gotta swim.
So there you have it. Numeric financial health is all about the numbers populating your economic life — are they of a scale that gives you some comfort? And non-numeric financial health is all about how you make your way in the economic world: is it, unto itself, worthwhile for you?
* * *
A Few January Activities to Help You Improve Your Overall Financial Health
Now, it’s true that most financial-planning urges happen at two times during the year: in January, with the coming of the New Year and hope springing eternal, and in April, with the coming of tax obligations and reality crashing down.
My hope is that you leave April for taxes and tax-toiling, and that you use January as a time to do a few basic exercises to help yourself improve your overall financial health.
More specifically, my hope is that, from here on in, and with my help or without, you will use January to (a) assess your non-numeric financial health, via The First Week of January Test, and (b) assess your numeric financial health by adding up all the numbers in your life, using your end-of-year account statements that will wend their way into your mailboxes in the next couple of days (I refer here to your normal monthly or quarterly statements, *not* the tax statements that will arrive sometime this month — though they too can be quite informative, especially for retirees, for whom they very much represent the equivalent of a W2).
And then, if you are of a mind to do so, you can go on to the third step, which is to do some goal-setting, both numeric and non-numeric, for the year, writing them all down with measurable accountabilities and timelines, so that you can know whether you accomplished your goals or not.
Sound like a plan?
Hope so.
Thanks, all, and may 2010 surpass your fondest wishes, and here’s to you and to your overall financial health . . . yay . . .
Aughts were a lost decade for U.S. economy, workers
By Neil Irwin
Washington Post Staff Writer
Saturday, January 2, 2010
JF Comment: Many folks have been thinking that the 2000s were all about running as fast as they could just to stay ahead of falling backwards. Does that sound about right? Well, if so, then it’s always nice to have someone put some data together to support your thinking, isn’t it? The article below does that, in a lay, non-jargon’y way.
By the way, running as fast as you can just to stay ahead of falling backwards is what the Red Queen did in Alice in Wonderland and, yes, the RQ in JFRQ comes from that reference, in a very round-about way.
Complete URL: http://www.washingtonpost.com/wp-dyn/content/graphic/2010/01/01/GR2010010101478.html
Shortened URL: http://bit.ly/7aaUJK
For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different.
The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity that is leading economists and policymakers to fundamentally rethink the underpinnings of the nation’s growth.
It was, according to a wide range of data, a lost decade for American workers. The decade began in a moment of triumphalism — there was a current of thought among economists in 1999 that recessions were a thing of the past. By the end, there were two, bookends to a debt-driven expansion that was neither robust nor sustainable.
There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well.
Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 — and the number is sure to have declined further during a difficult 2009. The Aughts were the first decade of falling median incomes since figures were first compiled in the 1900s.
And the net worth of American households — the value of their houses, retirement funds and other assets minus debts — has also declined when adjusted for inflation, compared with sharp gains in every previous decade since data were initially collected in the 1900s.
“This was the first business cycle where a working-age household ended up worse at the end of it than the beginning, and this in spite of substantial growth in productivity, which should have been able to improve everyone’s well-being,” said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank.
Question of timing
The miserable economic track record is, in part, a quirk of timing. The 1990s ended near the top of a stock market and investment bubble. Three months after champagne corks popped to celebrate the dawn of the year 2000, the market turned south, a recession soon following. The decade finished near the trough of a severe recession.
But beyond these dramatic ups and downs lies an even more sobering reality: long-term economic stagnation. The trillions of dollars that poured into housing investment and consumer spending in the first part of the decade distorted economic activity.
Capital was funneled to build mini-mansions in Sun Belt suburbs, many of which now sit empty, rather than toward industrial machines or other business investment that might generate economic output and jobs for years to come.
“The problem is that we mismanaged the macroeconomy, and that got us in big trouble,” said Nariman Behravesh, chief economist at IHS Global Insight. “The big bad thing that happened was that, in the U.S. and parts of Europe, we let housing bubbles get out of control. That came back to haunt us big-time.”
The housing bubble both caused, and was enabled by, a boom in indebtedness. Total household debt rose 117 percent from 1999 to its peak in early 2008, according to Federal Reserve data, as Americans borrowed to buy ever more expensive homes and to support consumption more generally.
Consumers weren’t the only ones. The same turn to debt played out in commercial real estate and at financial firms. It resulted in a corporate buyout boom that often produced little of lasting value. It is a truism of finance that for businesses, relying heavily on borrowed money makes the good times better but the bad times far worse. The same thing, as it turns out, could be said of the nation as a whole.
The first decade of the new century was an experiment in what happens when an economy comes to rely heavily on borrowed money.
“A big part of what happened this decade was that people engaged in excessively risky behavior without realizing the risks associated,” said Karen Dynan, co-director of economic studies at the Brookings Institution. “It’s true not just among consumers but among regulators, financial institutions, lenders, everyone.”
The experiment has ended badly. While the stock market bubble that popped in 2000 caused only a mild recession, the housing and credit bubble has had a much greater punch — driving the unemployment rate to a high, so far, of 10.2 percent, compared with a peak of 6.3 percent following the last such downturn.
The impact of the real estate crash has been broad. Among middle-income families, 69 percent owned a home in 2007, more than four times the proportion owning stocks. And as the housing meltdown cascaded through credit markets, the banking system was buffeted, rocking the whole financial system on which the world’s economy rests.
With luck, lessons
Economists and policymakers will be chewing on the lessons of the Aughts for many years to come; the events of the past two years alone are enough to launch a thousand economics dissertations. If past periods of economic trauma are a guide, this research will yield a deeper understanding of how to manage the economy.
The Great Depression of the 1930s led to new insights about the impact a financial collapse can have. The primary lesson — espoused by Ben S. Bernanke as an academic before acting on it as Fed chairman — was “Don’t let the financial system collapse.”
The Great Inflation of the 1970s brought a rethinking of what drives inflation, such that economists now put a premium on maintaining the credibility of central banks and keeping inflation expectations in check.
The lessons of the Bubble Decade are still being formed. At the Federal Reserve, the major lesson that top officials have taken is that bank regulation shouldn’t occur in a vacuum; rather than monitor how individual institutions are doing, bank supervisors should try to understand the risks and frailties that the banking system creates for the economy as a whole — and manage those risks.
Fed leaders have been more skeptical of the idea that they should routinely raise interest rates to try to pop bubbles. “I can’t rule out circumstances in which additional monetary policy actions specifically targeted at perceived asset price or credit imbalances and vulnerabilities” would be advisable, Fed Vice Chairman Donald L. Kohn said in a recent speech.
“But given the bluntness of monetary policy as a tool for addressing developments that could lead to financial instability, the side effects of using policy for this purpose, and other difficulties, such circumstances are likely to be very rare.”
And the question of how Washington can prevent a recurrence is an overarching theme in the Obama administration’s efforts to overhaul the financial system and support growth through investments in clean energy and other areas. “One of our challenges now,” President Obama said in November, “is how do we get what I call a post-bubble growth model, one that is sustainable.”
The financial crisis is, for all practical purposes, over, and forecasters are now generally expecting the job market to turn around early in 2010 and begin creating jobs. The task ahead for the next generation of economists is to figure out how, in a decade that began with such economic promise, things went so wrong.
An Exquisite Balance
Monday, January 4, 2010 at 9amBy John Friedman
It’s a Monday!
Mondays can be tough sometimes, yes? Why, songs have been written about how tough Mondays can be . . .
And this is not just any Monday. No, this is the first Monday of the New Year! So we look back at all the fun we had during the holidays, and with a grin and a certain thickness of mind and body, we bid adieu and get on our way.
As we do so, let’s look at how all of us economic beings (this is, after all, a blog about financial health) feel in the first week of the new year, shall we?
It’s good to do so because, at this time of the year more so than any other, we can all judge how well we’ve aligned our economic selves with the other parts of our selves. We can do that by seeing how we feel as we climb back into the saddle — back into our working selves — after being mostly off work for a week or maybe even two.
So how’s it feel?
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