The fiscal little hill

There seems to be little continued interest in the mechanics of whether or not Congress will eventually raise the debt ceiling. Today, a report of the GNP in the USA showed a slowdown and the likely suspect was said to be temporary sequestering of some budget items, including military expenses. By the afternoon, the markets had shrugged off the lower GNP and resumed the countdown towards reaching all-time highs for both the DOW and the S & P. What’s the deal?

My timing of reading various analysts opinions and listening to retail investor conference calls paid off this week. On one conference call, an analyst proposed a chronology for a series of events that will unfold in the next few months, all of which are calendared by our Congress to meet, discuss, and finally vote on raising the debt ceiling. After hearing this person give a detailed description of possible outcomes, including negative impacts on our economy and accompanying equity markets, it was clear to at least me that almost no event or no date matters at all anymore.  We have finally reached a point of information saturation.

What this actually means is that we may have arrived at a place where the fiscal cliff has morphed into a little hill and is, to quote a noted purveyor of economic forecasting,  “…a known unknown…that is; any additional information can no longer influence the markets…”  TMI (too much information) has numbed all of the public and most of our Congress. Very few care about important dates that previously indicated hard lines-in-the-sand by opposing politicians. Informationally, most agree that we are merely walking in the footsteps of similarly reported critical dates by naysayers and doomsayers regarding Greece’s debt issues.

Here we are today in a back-to-normal mode. Virtually everyone cares more about the upcoming Super Bowl, why Red John draws the smiley face on  “Mentalist”, or who will win the next American Idol. During the election cycle of 2012, some Americans appeared to care and a few may have even got to a point of beginning to understand the possible long-term consequences of the $16 trillion (and growing) national debt.  But rest well tonight, my friends. This subject has faded into the archives of useless information and is permanently filed under “what was that all about?”  When we all wake up some day much later in all of our lives, as Rip Van Winkle did after twenty years or so, maybe someone will dust off this file and bring it forth as noteworthy for discussion again. Until then…party on!

Today’s Modern Family

Know that my thoughts are supported by my own research, but like in previous and subsequent notes, I do not include reams of data with mind-numbing statistics. I am certain that anyone, including me, can find research to support a self-serving hypothesis. Surely, there are countless persons with contradictory opinions to mine, and I recognize our mutual freedom of speech to be able to express them.

Much  is being written about the disappearing middle class, today’s modern family. While it is hard to understand why governments and too-large-to-fail financial institutions are able to run unimaginable deficits, it is important to note that families aren’t able to conduct their financial affairs similarly.  A look at evolving spending pressures on some members of the new middle class, defined being at or ABOVE average family income, may conclude that some people have unusual (maybe excessive or unnecessary) expenditures for a multitude of budget items, including housing, cars, gizmos & gadgets for communications, and entertainment . This is not a vindication of anyone in the lower 50% of income levels, only a look at those who have achieved middle class income status and seem to be struggling with monthly cash flow issues too often.

Most recently, George Friedman waxes eloquently in “The Crisis of the Middle Class and American Power” about differences in the lives of families from the 1950’s-1960’s and today,  in 2013. He concluded that for those of us who lived in the 50’s and 60’s, “It was not an easy life and many luxuries were denied us, but it wasn’t a bad life at all.” It is this admission that begs for more explanation.  Mr. Friedman continues with an adequate comparison of the costs of providing basic essentials in both time periods of then and now. It is hard to disagree with any researcher’s math of the large differences in housing costs, food & clothing, health insurance and necessary car expenses. It is easy to conclude that today’s costs are ridiculously higher for families providing these fundamental living requirements. This observation is unchallenged  by this author.

It is, however, similarly important to note that today’s middle class has accepted demands for additional luxuries as requirements for ” basic needs,” those that did not exist in neither Mr. Friedman’s nor my world in the 50’s and 60’s. Let’s review a few of these and note the additional monthly cost of each. The first of these is that today the middle class demands a different kind of housing; today’s house, apartment, or condo is bigger and better than five decades ago. Air conditioning is standard, which significantly adds to utility costs. Uncountable electric appliances are in everyone’s kitchen, family room, den, and utility room…flat screen TV’s, microwave ovens, computers, and washers & dryers…just to name a few. These demand additional  initial outlays and operation costs including increases of utility costs.

Secondly, auto selection is a lot different decision for most middle class families than the 50’s or 60’s. Rather than settling for a pre-owned  (very used) car, the primary vehicle now is probably a minivan or SUV and most likely it is replaced more frequently, in order to add the most recent driver accessory. Today, this car has a sun roof, power steering & windows, hand-free cell phone capability, a third seat area, and a TV monitor for in-ride movies.  While it is easy to blame the cost of gasoline and new car sticker price as the most important transportation cost rises, it is essential to look “under the hood” and note the additional upfront outlays for newly-necessary gadgets for our driving experiences.

Another cost that the new middle class freely elects to absorb as a now necessary ingredient of normal monthly living expenses is increased (limitless) communication abilities. A peek at this category’s expense in the 50′ & 60’s shows a $5 monthly single in-home telephone bill and the cost of a black & white TV, with free access for 3-5 network stations. Let’s take a look at today’s house: it has at least two cell phones, umpteen TV’s with cable-dish access, and internet capabilities for at least one computer. Without considering the purchasing requirements for these devices (including a new I-phone, I-pad, or I-something every few months),  a calculation of the just monthly fees for each of these embarrassingly boggles one’s mind.

A last new cost associated with the new middle class is entertainment costs. In the 50’s & 60’s most of us were satisfied with eating out once @ week, enjoying a drive-in movie (with popcorn and coke) on the weekend and playing in the back yard or sharing time with each other at neighborhood or school functions.  Not only do most of these activities seem laughable to today’s not-so-nuclear families, but the new requirements for entertainment seem boundless. A few of these are: several meals at fast food and low budget restaurants (Chic Filet, Micky D’s, Applebee’s, etc.), wrapped inside a fine dining experience once or twice a month (newest local specialty restaurant). When one adds a stop at Starbucks for a $4 cup of Java a couple times each week, just eating costs alone seem staggering. Now let’s add another required entertainment need for the new family form 2013…kid’s team sports fees,  including driving costs to-from virtually every activity imaginable for our soccer-mom kids. Today, a family actually has to pay for venues so their kids can have fun and grow up with acceptable social skills.

A few other not-so-obvious new costs for 2013 middle class families pop up with a closer look at a year’s end budget review: trips to Vegas, where it is important to have an experience that “stays in Vegas,” impulsive on-line shopping, which has added a newly diagnosed middle class suburbanite: the shop-o-holic. New pressures exist to purchase must-have clothing items like the newest Nike shoes for each 13 year old future basketball phenom, the very hippest jeans and mom’s latest make-up accessory for reducing visibility of aging . Need we continue?

In conclusion, while few contest the impact that inflation has had on family living expenses for basic essentials like food and shelter since the 50’s-60’s, it appears that evolving peer pressures have resulted in increased consumer spending of middle class members. The pertinent question may be, “Once a family’s earnings provides an entry into the middle class, how does a family today continue to absorb additional costs of providing luxuries that families from the 50’s & 60’s never considered possible, let alone necessary for daily pursuit of happiness?”

While it may be possible for today’s modern family to earn the way into the middle class with education and desired employment, it is entirely possible that some families may be over-buying their way to a quick exit out of the middle class via unserviceable debt and eventual bankruptcy. I suppose the trains of progress never stop, but  it may be beneficial for some families to consider a cost-value analysis for each trip.

Are you normal?

       

A deep, dark secret that I seldom disclose to anyone but my closest friends and only after I have established a granular of credibility is that in college I majored in a social science: psychology. While many of my friends were learning how to differentiate assets from liabilities (accounting), pondering the accuracy of supply & demand (economics), and being confused by complicated year-end reports (finance),  I was studying how people behave or misbehave. I learned in Psychology 101 that while most people consider themselves “normal,” there are likely only a very few that are just that. After all, normalcy is derived from calculating the average (mean) of large groups of numbers, in which a mere handful of individual representations are exactly that product. Following the math, since so few of us can truly be said to be normal (average),  is it correct that most of us must then be abnormal?

Let us put aside for another time the debate that normal behavior could also be a representation of either the mode (highest frequency) or the median (exact center point of a range of measurements), rather than the statistical average (mean) of large groups of observed behavior. Now that we are thoroughly confused with the math of observing what is normal, perhaps we could agree that most of us are at least able to recognize what is NOT normal.  I will always remember PIMCO’s Bill Gross’  conclusion that global markets may be neither normal  nor abnormal, but paranormal.

2013 may seem paranormal to many of us; that is, it looks odd that the stock markets are calm, even positive about the final fiscal cliff conclusion…a slight income tax increase for a very few Americans combined with little-understood promises to curtail decades of spending growth.  It appears that the confusion about the importance of the fiscal cliff and lots of other geo-political issues have divided people into three identifiable investor-behavior groups: (1) those who have resorted to 1970’s-type saving…they returned their money to low-no risk instruments, like Bank CD’s. These people have been burned twice (2001, 2008) in the stock market, regardless of what they tried, and have “thrown in the towel.” (2) some have put the pedal to the metal and gone “all in.” That is, they have concluded that riskier choices are the only way they can reach their retirement goals and have abandoned risk-free options. This group seems willing to lose it all in lieu of settling for current low interest rates. (3) a few are seeking  professional financial advice to help them navigate the high seas of money management and are using old diversification strategies, but are including new tactics;  i.e.,  alternative ideas and products.

It may be difficult for us to agree about labeling these three respective groups of people as abnormal, paranormal, or normal. Let’s remember that what looks one way to one person, may look differently to the next person. Or to put it another way, “It’s all in the eye of the beholder.” How are you behaving this year…normally, para-normally, or abnormally?

2013, Hansel and Gretel?

In the fairytale, “Hansel and Gretel,” after a long wondering  from home and subsequent starvation, it was hard for the children to resist the delicious gingerbread, cakes and sugars from the cottage in the woods.  If we review most statistics from 2012, it looks like we have landed in our own gingerbread investor house. After malnourishment from investment returns since the crisis of 2007, it may be similarly difficult for investors to accept that we may encounter our own “old lady-witch” if we are tricked into believing our cottage is full of only tasty treats. Are we able to take our sweets from the 2012 and know exactly when to NOT over-stay our welcome, as I’m sure Hansel & Gretel would have wished they had not done?

I categorize my investments into five groups: (1) Cash-Fixed Income, (2) High(er) yield-total return, (3) Active Asset Allocation/Living benefits , (4) Equity positions: domestic, international and alternative, and (5) Hard assets (mostly real estate). Without boring anyone with the details, a summary is simple: all five categories over-performed (especially domestic equities), some more than others. Voila! There were no stinkers in the group for first year in recent memory.

Happy New Year to 2013! While no one near my age is particularly glad about one more year’s pages being torn from the calendar of life, most of us are relieved to have the economic worries of 2012’s behind us. The year closed with a (not so) grand bargain passed by the Senate; one between America’s two political parties and the President. This deal proved that both parties have made compromises that seemed to satisfy Wall Street and the truth is now evident: 2012 was a year for the bulls and now the bears are retreating to their caves for the winter to ponder whether or not they can re-appear with an audible growl sometime in 2013.

Are we finally at the idyllic place we want to live in 2013? If we step back and look not at our results from 2012, but at the problems we face in 2013, we can see that our fairytale location may be similar to Hansel & Gretel’s gingerbread house. There may be more than one not-so-perfect confrontation if we are enticed to stay.  A few BIG problems are inside the oven in the house: Europe’s debt issues (Greece leads the list still.), our own increasing debt (now over $16 TRILLION), possible downgrades of US treasury instruments, less spending from the biggest spenders…as they will pay more taxes now, individual investor skepticism of Wall Street, aging of America as Baby Boomers retire by the thousands daily, under qualified-under employed-unemployed youth (including graduates with substantial college debt), just to name a few.

Today, we are all enjoying the treats from 2012, but each of us needs to devise a plan to become more “anti-fragile,” Nassim Taleb’s new word for the English language.  It is with this advice that we should remodel our own life plans, including investment choices for 2013. As Gretel shoved the witch into the oven so she and Hansel could avoid a tragedy, we all need to  be able to react immediately and effectively when any disaster appears in 2013, so we are able to, as Taleb instructs in his new book, “turn lemons into lemonade.”

For economics-investment addicts, like me, Taleb’s book: Antifragile, things that gain from disorder, is a great (required) read for 2013.