On The Roller-Coaster Ride

If you’ve got some of your retirement savings invested in the stock market, as many of us do, the last few days have been unnerving.  The market had an historic run up, and then it went down again.  Yesterday, where the Dow Jones Industrial Average at one point had dropped 1600 points, was an especially wild ride.

704254-001When the market behaves like this, what’s a normal investor, who’s not an insider or a financial kingpin, supposed to do?  You can get dizzy just reading all of the different views of what is “really” going on.  Some people say it’s just a predictable correction after years of historic gains.  Some say the Trump tax cuts have overheated the economy and the market is reacting to that.  Some say we’re long overdue for a bear market.  And some say the Federal Reserve Board hates President Trump and his focus on the stock market as a proxy for his presidency and just wants to bring him down low.

(The last theory, in which the Fed would be intentionally manipulating the market for overt political purposes, is especially troubling — and even in these conspiratorial times, seems pretty unbelievable.  To buy that theory, you’ve got to conclude that the Fed’s dislike for President Trump is so powerful that they are perfectly willing to take actions that torpedo the retirement portfolios of millions of individual investors just to give the President a black eye.  Could bureaucrats really be so disdainful of average Americans?  Call me naive, but I find that incredibly hard to believe.)

So what’s really happening here?  Beats me!  My guess is that the run-up has been so significant that there are lots of people out there who thought it was time to take their profits, and the downward movement caused by those sales then triggered some market-decline benchmarks that automatically produced further sales and caused the sharp fall — but that’s just a guess.  Maybe somewhere on Wall Street somebody knows the real answer for sure, but I doubt it.  The stock market is so complex, so huge, and so prone to human reaction that it’s difficult to explain these downward spikes.

So, to put the question again, what’s a little-guy investor to do?  If you think saving money for retirement is prudent — if you don’t, you probably wouldn’t read this post in the first place — and you need to find a place to put your money until the retirement day comes, there really aren’t many alternatives to the stock market that can produce a meaningful return.  Most of us aren’t offered opportunities to invest in real estate deals or development projects, and we probably wouldn’t be comfortable having a big chunk of our money invested in such illiquid things, anyway.  Bond yields are low, and banks pay next to nothing on CDs.  So where else are you going to put your money?  This reality suggests that basic, brute economic forces are going to continue to make the stock market a preferred investment option for people and businesses, not just in the U.S. but also abroad.

But you’ve got to recognize that the stock market is a long-term investment, and it’s going to be a roller coaster ride.  When you’re on the coaster, it’s pretty hard to get off on the highest hill, and you don’t want to exit the car and move onto the tracks at the bottom, either.  You just hold on, scream when the cars start that big downward move, and feel your pulse racing until the end.  Or, you can simply close your eyes, recognize you’re on the ride and there’s not much you can do about it, and focus on other things until your circumstances make you a short-term investor and there are true decisions to be made.

Who knows what this current jittery period will bring?  It’s time to hang on tight.

Happy New Tax Year! (Time To Move?)

With the turn of the calendar page to January, it’s not only a new year, it’s a new tax year, too.  And since Congress enacted, and President Trump signed into law, a host of changes to the federal tax code at the end of 2017 that take effect in 2018, people are starting to take a close look at what the tax law changes will mean — and whether they should move to a different state.

hg-salt-blog-finalYes, you read that right:  the new tax laws might cause people to move.  Why?  Because one of the things the law changes is the rules that apply to deductions for payments of state and local taxes.  Before, there was no limit on the deductions for state and local tax payments; now the deduction is capped at $10,000.  Advocates of the recent tax changes argue that the unlimited deduction had the effect of minimizing the impact of higher taxes in certain states.  Now, higher income residents in the high-tax states will feel more of the true impact of the state and local tax bite in their states.

According to CNN, the deduction for state and local taxes primarily helped taxpayers who earned more than $100,000 a year, who received almost 90 percent of the benefit of the deduction.  Moreover, the impact of the deduction was focused on high-income residents of high-tax states.  California and New York residents alone received about one-third of the benefit of the deduction, and more than half of the value of the deduction was focused on tax filers in just six states:  California, New York, New Jersey, Illinois, Texas, and Pennsylvania.  California’s top marginal state income tax rate, incidentally, is 13.3 percent.  In contrast, some states, like Florida, have no state income tax at all.

This difference in state incomes taxes — and the financial consequences it produces — is what is causing some people to forecast that the change to the deduction taxpayers might cause some taxpayers to vote with their feet and flee the high-tax states for tax-friendlier destinations.  And some politicians in the higher-tax states, such as New Jersey, have taken notice and are reconsidering their taxing strategies as a result.

Is changing the deduction for state and local taxes a good thing?  Of course, you’ll get different views on that issue, but some economists argue that anything that muddles the ability of a consumer to determine the true cost of an item interferes with the “invisible hand” and the optimal functioning of the economy.  Will bearing more of the brunt of high state taxes cause Californians to pick up and move next door to Nevada, which has no state income tax?  This year we might begin to find out.

Dissing The American Dream

An economics professor at the University of California Davis has crunched some numbers and concluded that the American Dream is a myth.

In fact, Professor Gregory Clark’s review of the data concludes that there has been no more social mobility in America over the past 100 years than there was in medieval England or pre-industrial Sweden.  Hard work, education, seizing opportunity, and saving doesn’t make a difference, he says.  Instead, the socioeconomic status of your children, grandchildren, and great-grandchildren will be closely related to your status.

IMG_3184Professor Clark’s students apparently are skeptical of his data — how did he get it, how did he analyze it, and did he manipulate it? — and his conclusions.  So am I.  The reason for the skepticism is that many American families have featured living examples of the American Dream who lifted themselves up by their bootstraps and radically changed their circumstances.

In our immediate family I can think of at least two:  my grandfather, who was born into a Kentucky hill family so poor he was thrilled to get a single orange for Christmas, moved to Akron because there were jobs there, took a messenger job with a bank, rose through the ranks, and retired 55 years later as the bank’s president and chairman of the board; and my father, who made it through law school without buying a book because he couldn’t afford it, had a facility for numbers, and achieved great success as a businessman that allowed him to retire at an early age.  I don’t care what Professor Clark’s numbers say — I know from direct family history that America is truly the Land of Opportunity.

Professor Clark seems to think he is some economics truth-teller who is bursting the bubbles of his students.  He isn’t, because family example is far more meaningful and real than an economics professor and his dusty statistics.  The American Dream is powerful precisely because we know it has happened.  It sounds like Professor Clark could stand to do some dreaming himself.

Hotel Shampoo Economics

It’s been, literally, years since I have paid for a bottle of shampoo.

WhyIMG_20140608_080658?  Because I have to travel regularly for my job, and I always use hotel shampoo when I am on the road.  I long ago realized that hotel shampoo does a perfectly satisfactory job of cleaning my hair.  If it does a perfectly capable job on the road, why not use it at home?  So, for years, I have taken a plastic bag with me when I travel, keep the used shampoo — because I never need more than a fifth of the little bottle — and bring it home.  Now we’ve got a drawer in our bathroom that is full of little bottles of shampoo, conditioner, and hand lotion.  I’ll take this bottle with me when we leave the Fairlawn Hilton today and add it to the collection.

For me, shampoo is a generic, wholly fungible product.  I don’t have any special shampoo needs.  So if I can avoid buying shampoo, why not save the money I would spend on a product that I can otherwise get for free?  Not buying one bottle of shampoo might not be a huge amount of savings, but over the years it adds up — and in any case I’d rather keep the money than needlessly give it to some large corporation.

Shampoo is a good example of ways in which people can exercise discipline over their personal finances.  Are there products that you buy that you really don’t need (or don’t even use)?  Would a generic product serve just as well?  Do you really read the magazines or newspapers you subscribe to, or have to have a landline phone?

Personal economic freedom is the product of many such little decisions.

B.Y.O.T.P.

The other day Kish told me a little story about one of her prior jobs that, I think, says something profound about the human condition.

It happened one summer during college.  She was working in a small Ohio town in one of those older buildings where you would find several different business offices on a floor.  In this building, the offices shared a single, unisex bathroom.

IMG_4041When Kish went to use the facilities for the first time, she noticed there was no toilet paper.  No squeezable Charmin.  No quilted Northern.  Not even a roll of some cheap, so-thin-you-could-see-through-it institutional brand.

So she stopped by one of the other offices to ask where the communal toilet paper could be found.  The women working there explained that the toilet paper was not supplied by the building manager; instead, all of the offices were supposed to contribute to a common toilet paper fund.  However, a guy working in one of the offices always failed to pay his fair share.  After a while, the workers in the other offices got so angry at his refusal to chip in that they decided not to stock the bathroom.  Instead, everyone would simply bring, and use, their own toilet paper.  And that’s what they did.

Never mind that such an approach would inconvenience and embarrass a client or customer of one of their businesses!  Never mind that it looked silly to see people marching toward the bathroom with their own personal roll!  Never mind that a time would inevitably come when one of the workers on the floor would forget their bathroom companion until it was too late!  No matter the consequences, the stubborn workers on the floor just weren’t going to support the freeloader.

What better example of why communism, as an economic system, has failed?

Garbage, Our Leading Economic Indicator

Amidst the durable goods orders, and factory output analyses and aging inventory evaluations that typically are the focus of the dismal science, there lurks an economic indicator that is highly accurate and smelly, too — garbage.

A study has concluded that, of the 21 categories of items shipped by rail, the one that has the highest correlation to Gross Domestic Product is garbage.  Trash has an 82 percent correlation to economic growth.  The correlation is logical, and obvious, because the more people produce and purchase, the more they throw out.  So, if you want to assess how the economy is doing, keep an eye on the volume of refuse collected by your friendly neighborhood garbagemen.

Unfortunately, the garbage indicator isn’t predicting good economic news — carloads of waste are way down.  We’ll just have to keep our fingers crossed that the decline no longer accurately predicts economic activity and instead reflects that our neighbors have finally gotten serious about recycling and composting and other trash-minimizing activities.

No Cause For Optimism In The Real World

The latest Conference Board measurement of consumer confidence is out.  It recorded another decline, marking the fourth straight month the index fell, and surprised experts who’d predicted a smaller drop in consumer confidence.

I’m skeptical about efforts to measure consumer confidence in a country as large and diverse as America.  I wasn’t consulted.  Were any of our readers?  (How about a show of hands?)  And the only surprising thing, really, is that economic experts would be surprised about their inability to  forecast something as unpredictable as consumer sentiment.  Economists are almost always wrong in their predictions.  Why do you think Thomas Carlyle called economics “the dismal science”?  The weather forecast on my iPhone AccuWeather forecast is far more reliable than the musings of out-of-touch economists.

No one in the real world is surprised that consumer confidence is slipping.  Economists do things like measure whether rates of decline in one month are smaller than the rates of decline in the prior month, and conclude that things are getting better.  People in the real world don’t think that way — we just see that decline is continuing.  Where’s the cause for optimism that significant job creation will finally start in this recession that has lingered for almost four years now?