Dissociative Amnesia

Psychology, my college major, is a social science, not regulated by real math or hard science, but governed by just-conceived “statistically significant” theories. The field of study is fraught with periodic eliminations of previously-thought treatable medical diagnoses (neurosis of the 1950’s) and re-definitions of old disorders (was multiple personality-now dissociative identity disorder). Without diving deeper into today’s psychology theories, let’s focus briefly and admittedly amateurishly, on one of the newly-defined dissociative disorders, dissociative amnesia.
The Mayo Clinic states the main symptom of dissociative amnesia as “…memory loss that’s more severe than normal forgetfulness and can’t be explained by a medical condition…an episode may last minutes, hours, or, rarely, months or years.” Many of us have necessarily resorted to self-imposed, periodic onsets of dissociative amnesia when asked to discuss or understand today’s money matters. As we have gradually slipped into a world of global economics, we have been asked to forget a lot of what we learned was true about national financial certainties.Today, we are lectured that it is not important that any one county is literally insolvent, bankrupt, if you may.

That countries in Europe may be running ridiculous deficits to support their own political promises seems no more or less significant than our own country’s claims that being trillions (yes…12 zero’s after a number!) of DOLLARS in debt is inconsequential . Let’s once again try to comprehend the number trillion. (A) You are able to carry $10,000 of hundred dollar bills in your pocket easily. (B) You can stuff $1,000,000 worth of hundred dollar bills into a grocery bag and walk around with it. (C) $100,000,000 of hundred dollar bills can fit inside your walk-in closet or gun safe in the basement on a standard pallet. (D) For a billion…$1,000,000,000 of hundred dollar bills, it is possible fit all of the hundred dollar bills inside your triple-car garage. Now, get ready for this visual:

This is the number of PALLETS (double stacked) of hundred dollar bills it would take to total a trillion dollars, $1,000,000,000,000. It is not necessary for you to try to count these pallets, only to attempt to contemplate how much larger a trillion is than a billion, let alone a million.
Back to dissociative amnesia. Each of us, including the Chair(wo)man of the Federal Reserve and President of the United States, must immediately self- impose this psychological disorder in order to postulate how unimportant something so mundane as the federal deficit is today. We are also required to NOT associate national or global deficits with recent massive gains in the equity markets . We must not consider deficits when predicting future economic growth WITHOUT central bank stimulus. Additionally, it is mandatory that we now conveniently “forget” about ever again receiving reasonable interest rates on our retirement savings bank accounts.
Any of us who is determined to understand or discuss subjects like national deficits, seemingly endless stock market gains, or current non-existent interest rates, simply needs to forget virtually everything that used to be “normal,” AND as we have recommended above, merely self-impose dissociative amnesia. It is not necessary to place a time limit on our disorder, as only the future will dictate when we are allowed to remove it from each of our daily economic analysis efforts. As it has always been advertised that “misery loves company,” be assured that you are not the only one in the room experiencing cases of self-inflicted DISSOCIATIVE AMNESIA.

Pay forward, pay later, pay never

Right now there are six distinguishable generations alive:

                (1) Greatest Generation, people born from 1900-26. We are at the precipice of the disappearance of persons born in this generation. Too little cash-at-hand was the moniker of these people.

                (2) The Silent generation (Traditionalists), people born between 1927-1945. This article will not include discussion of these people, as their financial habits were not unique from their parents.

                (3) Baby Boomer generation, those born between 1946-64. This enormous in number group became mega consumers by learning to use credit (excessively,) changing the way they financed their appetites for a never-ending supply of retail products.

                (3) Generation X, born between 1965-83. This essay will not include comments for this group, as they merely adopted the same, some good and some bad,  financial consumption habits of the previous Baby Boomer Generation.

                (4) Generation Y, Millennial generation, born between 1984-2002. This group is recognized as unique from the previous two generations, not only using more credit, but using it earlier and without a plan for repayment.

                (5) Generation Z, the Digital Generation, those born after 2002…Enough time has not elapsed to judge the financial habits of this generation, but it is probable that they will be an extension of the Millennial generation.

                Without discounting the existence of the Silent Generation, the Generation X or the newest on the scene Generation, let’s look at how persons in each of these generations: Greatest Generation, Baby Boomer, Millennial, have dealt with financing their own lives. It is these three that have financial behaviors that are uniquely distinguishable from each other.

                The first of these is The Greatest Generation, so named by Tom Brokaw in his recent book of the same title.  All of the their Baby Boomer children have heard their stories of the Depression and World War II so many times , many actually believe they lived through them! This was definitely a “cash and carry” crowd, probably to a fault. Living through the ’30’s Depression without credit cards or access to other institutional lending choices forced these people to pay-as-you-go for virtually everything.

              Too much individual suffering during these desperate financial times and feeling the pain from the second traumatic American event in their lives, World War II, stimulated this generation to vote for government assistance programs like Social Security Retirement and Disability, Guaranteed VA health insurance and college assistance, and the crowning glory of Medicare. Remember that Medicare was a product of this Greatest Generation, as the Baby Boomers were not yet at an age to enter the voting booths in 1965. When recalling the distress these people encountered during these two terrible American events, we can can agree that  this generation did indeed “pay forward” for the government benefits they legislated and eventually enjoyed.

                After the Greatest Generation’s second tragedy, WW II , the Baby Boomers showed up. Their children, the Gen X’ers & Y’ers, are justifiably sick of the listening to their Boomer parents stories about growing up in the care-free ’50’s or being part of Woodstock’s sex-drugs-rock & roll ’60’s. This generation caused Marketing Departments to blossom in America. Starting with Proctor & Gamble commercials on early TV shows (soap operas) and progressing to offering senior living choices, uncountable companies have tried to appeal to the buying habits of this massive 76 million number of people.

                Starting in the 1960’s, while still in college, the first in this generation began to learn about credit. Innumerable choices for borrowing for college, retail purchases, cars, and housing emerged. This generation converted from “cash and carry,” taught to them by the previous Greatest Generation of parents, to a “pay later” habit of  consuming. Just as too little credit was a liability for their parents’ financial stability, too much credit became a financial liability for the Boomers. Ultimately, too many of them lost their houses or ended up in bankruptcy (a taboo to be avoided at all costs by their parents) when the first financial crisis appeared.

                Lastly, the children of the Boomers arrived, this current combination of Gen X’ers and Y’ers. Without trying to differentiate the sociological differences of these two unique groups, let’s look at the way the latter ones, the Millennial, view financing their lives. It seems that they have been convinced, en masse, to accept massive debts before they even graduate from college. Combining this with the unparalleled expense of buying houses, cars, & on-the-go food choices, and keeping up with owning the newest electronic gadgets, it seems possible that far too many of this Millennial group may never get out of debt. Recently, a significant percentage of them are disappointingly beginning their careers in either part-time work or with no job in sight.

               The same level of opportunities may not seem as evident to these persons  as when their Baby Boomers parents looked for employment and seemingly could show up at a job interview and “simply make fog on a mirror” to get hired. The new norm for this Millennial generation is living at home into their ’30’s, allowing their parents to keep them on the company health insurance until they age 26, staying on the family auto insurance policy as long as the agent allows, using the family cell phone plan, and expecting to receive some kind of help with first their house down payment.

               While the financial pages list many new 20’s aged “tech billionaires,” and those that studied math-engineering-science-tecnology are doing fine in the workplace, it seems certain that the new moniker for the Millennial Generation will become the “pay never” crowd. History may record that too many of them had no opportunity to pay forward or even pay later, as their helicopter-parents did virtually everything for them as they grew up and that they were given too much support when the financial-job crisis of the last five years arrived. This generation has watched banks, insurance companies and auto manufacturers be bailed out from too much debt. They are digesting that people in bankrupt Greece and Detroit are still somehow afloat and continue to receive promised pensions and other government assistance.

                Perhaps they should not be faulted from expecting that some miracle will eventually bail them out.

Tulip bulbs or bubblegum?

It may be a decent time to recall Tulip Bulb Mania from Dutch history of the 1600’s. When the tulip contract market became primary to the overall Dutch tulip industry, limitless differentiations such as coloration, size and supposed rarity began to dictate price variations in tulip bulb contract purchases. While growing popularity and demand were contributing factors to increasing prices, “flippers” drove reasonable prices to skyrocketing levels. By the time tulip prices peaked in February, 1637, one single tulip bulb demanded ten times a normal worker’s annual income.

As more and more people insisted on participating in rising prices, tulip contracts even began to be traded on the London Stock Exchange and in Paris, too.  Eventually, defaults on contracts began the bursting of the bubble and markets plunged, resulting in an economic depression that lasted years for the Dutch.  A few people made a lot of money during the rise of tulip prices. But, like any other subsequent bubble-mania, the last-ones-in experienced financial losses that impacted the rest of their lives.

American history books record a couple of eras not unlike Dutch Tulip mania: the 1929 stock market mania-crash and the Dot.com bubble of the late 1990’s. Human behavior is the driving force of manias like these. Hopes of financial profits or locking in prices before inflation erodes purchasing power are both good reasons to pay over-market prices for a product. However, greed sometimes overcomes reason and causes people to pay unreasonable prices for some goods.  Just as fear of further loss may cause a person to sell a product at a less than reasonable price, greed may cause the converse behavior.

The truth is that no one can predict the size of a bubble before it explodes. Only AFTER it bursts are we able to see that it had grown too large. All of us can remember the aftermath of sticky bubblegum on our faces after we had pushed just one more breath of air into the magnificent bubble on our lips. The consequence was messy…ick!  And after every burst bubble,  we promised  to stop just a breath short of the explosion the next time.

Today’s drinking fountain discussions include these subjects: seemingly endless supply of new global investors, companies-countries whose growth appears limitless, impossible-to-comprehend computer trading activities, far above-average recent portfolio gains, apparent impossibility of normal market corrections, inconceivable size of financial product universe. …

Is it possible to be satisfied BEFORE the last breath is blown into our next bubblegum bubble?

Today, you need to be a TWENTYmillionaire!

I spent most of my life dreaming of being a millionaire. When I was a boy,  everyone my age was mesmerized by the television show, the MILLIONAIRE. A rich guy walked to the door of a financially struggling family and, POOF! That person was now a millionaire. None of us were foolish enough to believe that could ever actually happen, but many of us did spend the next 50+ years trying to become one.

In the last few decades, I wore out many hand-held calculators by building future value computations that resulted in my becoming a millionaire. In quiet conversations with my colleagues and best friends, we discussed the value of that million dollars and we all fantasized about the security it would provide us in our retirement. In the mid-1980’s, a million dollars would provide ample income if invested in a risk-free treasury bond. Furthermore, a person did not need to go very far out with maturities to get a reasonable yield. Let’s review the 30 year history of the 2 year Treasury Note yields and subsequent income on a ~$1,000,000 investment.

                1984:  ~12%        $120,000 @ year income

                2007: ~4.5%          $45,000 @ year income

                2013: ~0.22%           $2,200 @ year income

It becomes more mind-boggling when you do some simple reverse math and calculate the amount necessary to invest today in a two year treasury note in order to produce the same income as a one million dollar two year treasury note yielded in 1984: >~$54,545,545! We could include inflation as a factor included in establishing the value of $120,000 of income today as compared to 30 years ago.  If we assumed an average annual inflation of 4% for the past 30 years, our calculations would reveal that it would be necessary to have ~$3,500,000 spinning off 12% income to provide similar purchasing power as the same $1,000,000 did in 1984.

But, ladies & gentlemen, this is NOT $54 million. What happened? Today, a meager millionaire  investing  $1,000,000 invested in a two year treasury note is required to “step out of the box” and do something entirely different with his-her money to be able to expect a reasonable retirement income. Looking back just a few years, at 2007, we can see that a person could still get ~$45,000 annual income from a two year riskless treasury note. Again using reverse math…today, a person needs ~$20,000,000 invested in an identical two year treasury note to provide the same $45,000 annual income.

Differences in riskless rates of return that are this magnificent are producing at least four behavior choices for retirees and persons nearing retirement: (1) continue to use riskless investments  and consequently spend additional principle each year to maintain the same life style. (2) continue to use riskless investments, but protect principle by reducing life style costs, (3) continue to use riskless investments, but working longer or returning to the work force to provide additional monies for retirement costs, or (4) change investment philosophy and now utilize investments that have market risk in order to provide retirement income for now or later.

Decide what your risk tolerance is BEFORE changing your investment philosophy. Make sure to understand that systemic (market) risk of vehicles like common equities not only have the benefit of rising in value, but they may also decrease in value for reasons unimaginable today…terrorist bombs, CEO fraud, geological or meteorological event, legislative or regulatory changes, etc. Know that providing for a riskless retirement is a lot more difficult today than it was just a few years ago.

And good luck becoming a TWENTYmillionaire!

Time, a valuable commodity

,

First, a little more about my education…I did not formally study calculus or algorithms after high school. Regardless, I have always had a fancy for math and after personal computers were created, I was hooked. I bought the very first IBM PC and soon thereafter discovered Excel. Since then, my life has not included even one day without counting, sorting or spread-sheeting something. Luckily, I found a career that allowed me a total immersion in numbers and I present this first lesson I learned about creating wealth.

While there is some argument about the actual truth of this story, some people say that Albert Einstein, the first person to bring science and math into pop culture, called compound interest the greatest mathematical discovery of all time. This comes from the man who solved the mystery of energy. Sometimes, it is the simplest concepts that are the most dazzling.

This example explains his astonishment: if you invest $100,000 at 7.2% SIMPLE interest for 10 years, each year you will receive $7,200 and at the end of 10 years you will have received $72,000 total interest. Added to your original $100,000,your investment will have grown to $172,000. Instead, if your investment could receive the magic of automatic compounding, you would be able to make ” interest on your interest” each year, and at the end of the same 10 years, with the same 7.2% annual interest (COMPOUNDED each year now) your end value would be $200,423, a double of your original investment, or $28,423 MORE than the same investment with SIMPLE interest.

A fun math fact becomes evident with this example: The Rule of 72: when the number 72 is divided by the compounded percentage growth for each period, the quotient is the approximate number of periods it will take to DOUBLE your money. Using our example: 72 divided by 7.2 equals 10 years. And we can see that our 7.2% compound interest took approximately 10 years to DOUBLE our $100,000 original investment to ~$200,000. This cannot happen without using an investment that offers compound interest, or “interest on your interest” each year. (You can amaze friends & associates by understanding and illustrating this concept at your next cocktail party.)

A simple extension of this is the Rule of 144: when the number 144 is divided by the compounded percentage growth for each period, the answer is the approximate number of years it will take your investment to quadruple. Using the same compounded interest rate; 144 divided by 7.2 equals 20, or in 20 years, at 7.2% automatic compounded interest, your money will now quadruple; $100,000 becomes $400,000.

Young people, make sure to take advantage of your most valuable asset, TIME! Older people don’t have as much of this priceless commodity. Today, I traveled with my father and uncle & aunt  to visit a dear relative who is nearing the last days of his life. An assessment of the preciousness of time commanded space in our conversation as we drove home together.