The Independent Investor: Only The Rich Are Saving
Last quarter, the percent age of Americans' personal savings rate stood at 5.9 percent of their disposable income, according to the Bureau of Economic Analysis'. Given that number had fallen to as low as 1.9 percent in 2005, that's a large improvement. But who is saving and who is not is the real question to ask.
Our savings rate is clearly higher than it used to be relative to other countries. It is nowhere near the Chinese savings rate of 38 percent of 2014, for example, but it has improved to the point that we are now somewhere in the middle of the pack when looking at the 35 member countries of the Organization for Economic Cooperation and Development.
But before we break out the champagne in toasting our newly-thrifty nation, you might want to understand that it is most likely the top 10 percent of households who are responsible for the lion's share of this improvement. Given that income inequality is at historically high levels in this country (comparable to what they were during the American Revolution), an argument could be made that the "haves" in this country are so rich that they can't spend it all. And so they increase their savings rate.
We do know that as late as 2013, the bottom half of income earners saved little to no money. In 2015, a Pew Charitable Trust study indicated that 41 percent of households had less than $2,000 in savings and 25 percent of us had less than $400 on the side. After the financial crisis, there was some hopeful news for the common man on the credit card front. Debt had fallen every month from 2010 to 2015. However, it appears that is now reversing. At the end of last year, Americans had racked up $1 trillion in credit card debt, an all-time high.
The problem in America, according to many behavioral experts, is that we allow our lifestyles to dictate our savings rate, rather than the other way around. "Keeping up with the Joneses" is still alive and well throughout the country, as is the need to acquire the newest, most eye-catching devices or convenience.
To many of our citizens, our country "owes" us a living while we have an inalienable right to spend as much money as it takes to make us happy. Bottom line: 21 percent of working Americans are saving nothing and just 28 percent of us are saving more than 10 percent of our incomes, according to Princeton, Survey Research Associates.
In survey after survey, 38 percent of consumers say that the main reason they don't save is because they have too many expenses. To be fair, some of their expenses may no longer be under their control. If you already had a lot of debt, for example, whether it is a home mortgage, college tuition, medical or credit card debt, a certain amount of expenses must be earmarked for these past liabilities. There may not be anything left to save. But it doesn't give us license to keep spending more.
Procrastination is the second biggest reason for not saving. Over 16 percent of Americans admit that they simply haven't gotten around to it. And the younger they are, the higher the number of non-savers. Younger respondents also argue that they don't make enough money to save.
The good news may be that the unemployment rate is at record lows and wage growth is improving after years of stagnation. As a result, an outside observer might come to the conclusion that this should allow more people to save more, but this is America.
The question to ask: will Americans save it or spend it? If modern history is any guide, I'm betting on the latter.
The Independent Investor: World's Bread Basket No More
The recent controversy over dairy trade policies between the Trump administration and Canada is only the tip of the iceberg. While Trump is selectively picking on one particular product, the truth is that the United States is losing its competitive advantage in many areas of agriculture.
Government subsidies to the agriculture industry worldwide have always been a thorn in the American side. That's not to say that our farmers have gone without. We, too, subsidize our farmers. Taxpayers are expected to pay at least $87 billion to help farmers over the next dozen years. And for decades, we have been spending billions each year to protect them from lost income and crop failures.
The difference between then and now is that, despite other countries' farm subsidies, we were still No. 1 worldwide in a great variety of food stuffs. So we didn't care as much. Today this nation's market share for commodity such as wheat, soy beans and corn are shrinking rapidly. Exports of wheat, for example, have declined by over 50 percent since the 1970s, while countries like Russia have expanded wheat production by over 60 percent in just the last 10 years. As a result, Russia now dominates global wheat production.
And Russia is not alone. Countries in South America, specifically Brazil and Argentina, traditional agriculture countries, have also increased production, thanks to investment, technology, year-round growing seasons, and new planting methods. Four years ago, Brazil overtook the U.S in soybean exports (now the world's largest exporter) and will be the second-largest corn exporter after the U.S. this year.
How did Brazil accomplish it? Brazil embarked on its agricultural expansion forty years ago. The government enticed farmers to develop vast sweeps of unproductive lands in the north (called the Cerrado) where today over 500 million acres are now growing crops for exports.
There are any number of reasons why we are losing market share, but a lot simply has to do with increased worldwide production. For example, if U.S. crop production remains the same, while other countries produce more, then our market share slips. At today's prices for wheat, for example, American farmers are expected to plant 10% fewer acres this winter season because it is less profitable. Other countries will be happy to take up that slack.
And then there is the strength of the greenback. The U.S. dollar has been stronger than both the Russian and Brazilian currencies. Since most crops are priced in dollars, it makes our exports more expensive compared to theirs. Lower energy costs has also helped our competitors because it is now much cheaper for an Eastern European exporter like Ukraine to ship wheat between Europe and the Middle East and still make a profit. It is a similar situation wherever you look.
And don't think that our foreign competitors are still farming with wooden hoe and bags of apple seeds. State of the art satellite-guided combines, genetically-engineered seeds from the top global producers, and computer programs that can dictate the price of harvested crops months in advance are all tools of the trade now.
What could change this balance would be some kind of natural disaster somewhere outside of the U.S. to turn our competitive position around in the short-term. Over the longer term, as costs in competitor countries for labor and land begin to climb, and the worth of the dollar falls back to earth, our comparative advantages should help us regain market share. However, the day when we could call America "the bread basket of the world" appears to be in our rear view mirror.
The Independent Investor: Should College Be Free?
Recently, New York became the first state to offer a tuition-free college education to middle-class students at two- and four-year public colleges. Tennessee, Oregon and the city of San Francisco have also given similar benefits to students attending community colleges in their states. It's about time.
The headline of this column was taken from a series of articles I first published six years ago. At the time, I argued that the benefits of a college education today were about equivalent to the worth of a high school degree back in the 1940s and 1950s. Back then, graduating from high school opened the door to a good job, while creating a population of largely, law-abiding citizens (and guaranteed educated cannon fodder for the country's military in time of war).
Back in the day, when Thomas Jefferson first suggested creating a public school system, he and others like him argued that a free and common education would create good citizens, unite society and prevent crime and poverty. It took decades before that concept became law but, once implemented, it worked as the founders expected.
However, as society changed, a high school education was no longer sufficient. The computer age ushered in different educational demands and skill sets that students could only acquire in a higher-education environment. For all intents and purposes, college (and vocational schools) has replaced high school as the entrance ticket to the "American Dream." As such, I reasoned that since public high school education is free in the United States, why then should Americans pay for college?
Under the New York legislation, tuition will be free for residents who earn up to a specific income cap, which will be phased in over the first three years. Families who earn less than $100,000 a year would qualify for free tuition. Over the next two years that income level will rise to $110,000 in 2018 and $125,000 in 2019. The other tuition-free initiatives in Oregon, Tennessee and San Francisco have made tuition free for residents at all community colleges, regardless of income.
New Yorkers are required to take 30 credits a year, although students who encounter hardships can pause and restart the program or take fewer credits per semester. College will still cost money. The cost of fees and room and board, for example, are still the student's responsibility and could cost as much as $14,000 a year.
In announcing the program, its author, Gov. Andrew Cuomo, said "Today, college is what high school was — it should always be an option even if you can't afford it."
State officials estimate the program will cost $163 million in the first year with 200,000 students' eligible for the new program. Now, Rhode Island is considering a similar law that would make two years of public college tuition-free.
Criticism of the program largely centers on the cost. Higher education has gotten so expensive through the years that some form of government assistance already picks up the tab for half of the nation's education costs through a maze of loans, credits and whatnot. It appears that government has recognized that "pricing out" education for a growing portion of the population might not be such a good idea.
Others question the worth of a college education if it is free. What is the incentive to excel, to find a good job afterward if you pay nothing for it? They argue that so many young people today "hide out" in college, majoring in the easiest subjects possible (regardless of job market demand), while partying half the night and every weekend.
They have a point. My suggestion: while tuition may be free, to receive it you must excel in the entrance exams and have maintained good grades in a variety of subjects in high school, if you don't, than pay your own freight. What are your suggestions?
The Independent Investor: Tense Times in Trumpland
The geopolitical landscape is heating up. U.S. relations with Syria, North Korea, China and Russia are in turmoil as the Trump administration flexes its military muscle. None of it bodes well for the stock market.
War cries and wealth are like water and oil. They don't mix well. For investors, there are far too many unknowns, especially when U.S. warships are steaming toward the Korean Peninsula. In Syria, American troops were spotted alongside Jordanian Special Forces troops along the border, despite our president's assurances that boots on the ground are out of the question. Actually, that isn't quite true, since U.S. Special Forces have been operating alongside our Syrian allies for some time.
Then there is Secretary of State Rex Tillerson's visit to Moscow. This diplomatic venture is a followup to last week's U.S. surprise tomahawking of one of Syria's airbases. Tillerson will be using America's new-found, willingness to use military might in order to further our diplomatic ends. In this case, to convince Putin to sever ties with Syrian dictator Bashar-al-Assad.
In hindsight, all that media speculation about President Trump's cozy relationship with Vladimir Putin seems somewhat far-fetched, given that Tillerson (who was also thought to be buddies with Vlad) is reported to be pursuing a hardline against Putin's failure to reign in its client state.
On yet another front, it appears President Trump has had enough grief from the "Fat-Boy" — chubby Kim Jong-un, grandson of the nation's founder, Kim II-sung, In a duel of tweets, the dictator warned of "catastrophic consequences" from any U.S. military action, while "The Donald" warned that "North Korea is looking for trouble" and that we would "solve the problem" with or without Chinese help.
Both sides have backed up these words with firepower. The U.S. response, in the form of an aircraft carrier and three guided-missile destroyers, is heading for North Korea while China has amassed 150,000 troops on its border with North Korea. In addition, Chinese medical and backup units have been stationed on the Yalu River in support of the People's Liberation Army.
Most military strategists believe that April 15 might be the day when things could heat up. It is the 105th anniversary of Kim Long-un's grand pappy. It could be an auspicious date too for "the Fat-boy" to brandish the puppet state's military might.
While all this is going on the markets have grown increasingly restive. The threat of war is normally a time when investors seek safety. Safe-haven plays such as gold, U.S. Treasury bonds and the U.S. dollar benefit from these concerns. They have done so this week. About the only good thing that can be said for these tense times is that they don't last too long.
If tension escalates, stocks usually fall fast over the course of a few days. If, as has happened in the past, geopolitical events resolve themselves, markets recoup their losses in an equally short time. Since the new administration appears to be trying to remove two thorns in our side simultaneously, the chances of further tension seem high. My advice is not to panic. Hang in there and remember that this too shall pass.
The Independent Investor: Don't Let Romance Blind You to Finances
Don't let romance blind you to the financial downside of living together. Unmarried couples need as much, if not more, financial and estate planning than those who are married. Without it, one or both partners may lose everything they have committed to the relationship. Here is a primer on what steps you should take.
Over 6.7 million unmarried couples are co-habitating in America at last count. Over 90 percent of them are heterosexual, in case you're wondering. As such, these couples, regardless of sexual orientation or length of the relationship, are considered and classified as unrelated individuals in the eyes of the law.
And the rights of unmarried couples are different depending on your state. Not all states, for example, recognize common-law marriages. As a result, without legal safeguards, the children you are raising, the assets you have mutually accumulated, and the house that you share can easily be taken from the surviving partner. The law will assume that any property and the care of surviving children should pass to your next of kin. Even your stated wishes of what you would want to happen in the event of your death or disability may not be followed.
OK, now that I have your attention, the first rule is to protect your estate. Your estate is everything and anything you own, or have contributed to before your death. Next, there needs to be documents established for situations that may be short of death but that still safeguard your rights. This would include what happens to you and/or your partner in the event of disability or illness, which might require someone else to make medical and financial decisions for you.
Such an agreement is commonly known as a domestic partnership agreement. Think of it as similar to a pre-nuptial agreement.
"Where is the romance in that?" might be your first reaction. "I will sound like a money-grubbing, so-and-so if I broach this with my partner."
Granted, it isn't a discussion normally accompanied by candlelight and soft music, but every relationship needs to be anchored in reality. The facts are that every unmarried couple should, at a minimum, discuss and implement a domestic partnership document as well as develop an understanding on expense sharing and individual insurance for household effects.
Next in line would be homeowner's insurance, unless the unmarried couple jointly own their home. That's because homeowner's insurance doesn't automatically cover both of you. If one person owns the residence, the other should at least purchase rental insurance to protect his or her belongings.
Finally, if both partners believe they are in a long-term, committed relationship, estate planning is a must. A married couple has at least an implied estate plan. The IRS and the courts have already established and safeguarded the rights of a married surviving spouse in the event of death. No such regulations exist for an unmarried couple. As such, everything needs to be documented in legal form.
At a minimum, there are at least 10 documents and/or provisions that an unmarried couple should at least consider: a domestic partnership agreement, a health care proxy, a will and/or living trust, durable power of attorney, beneficiaries (especially designations on retirement accounts), properly titled property, life insurance, funeral wishes, welfare and custody of any children.
All of the above may sound complicated and/or not worth the effort. You would be right, as long as you never break-up with your partner, or if you never die, but if you feel that either one could happen to you sometime in the future then heed my advice.