Category Archives: Economics

What Will Gold Prices Do Next?

May 23, 2013 3:22 pmLeave a Comment

For the last 5 or 6 years, gold has gotten a lot of attention and many people have gotten on the “buy gold” band wagon. But recently gold investors have gotten smacked around a little. If you are one of those people you’re probably asking what will gold prices do next?

It’s a fair question and it’s too bad that nobody can actually answer it with certainty. But even though nobody knows what’s going to happen for sure, it does make sense to consider some of the fundamentals to try to get a sense of where gold might be headed.

Take a look at the chart below. It depicts what’s happened to the price of the gold ETF GLD compared to the broader S&P 500 over the last 12 months. Buying the ETF is only one way to buy gold but it’s a good proxy to see what’s going on. As you can see, it hasn’t been a very pretty ride. In fact, gold is off about 15% for the year compared to a rise in the S&P 500 of roughly 10%. According to my math, that’s a 25% difference. El Stinko.

what will happen to gold prices

What’s behind the drop in gold prices and will it continue?

Again, I can’t answer this with certainty but I’m not hugely optimistic about the potential for gold in the near-term. There are a few reasons for this:

1. Artificial Run Up

It’s very easy to own gold nowadays. More and more people are only too happy to help you do so. In fact gold dealers spend a ton of money encouraging you to trade in a lot of your cash in exchange for a little bit of this yellow treasure.

Mutual fund companies offer up gold ownership by way of ETFs and mutual funds. Radio and TV stations bombard us with offers from all kinds of characters offering to sell us gold coins, bullion, Elvis statutes and the like. With more people rushing in buying up gold in various ways, is it any wonder that the price shot up like fireworks on July 4th?

2. Alternatives

As you can see from the graph below, gold prices really took off when stocks got flushed down the toilet in 2008. Investors searched for a “safe haven” to put their money because they were traumatized and financially devastated by the market. Those bad market vibes stayed with investors for a very long time and helped fuel the gold run up. That supported gold sellers and provided them with more opportunity to push gold on anyone who could fog a mirror.

what is happening to gold

And during that same time period, investors were worried about inflation big time. This was a result of the government’s long-standing policy of spending far more money than it took in. So if you try to recall the mindset 5 or 6 years ago it’s easy to see why everyone rushed into gold. The market thrashed investors upside the head, interest rates on bonds were almost non-existent and real estate prices…well…we all know what happened to real estate in 2008 and beyond. Gold was just about the only investment that wasn’t tanking so almost everyone piled on.

So much for history.

Why did gold tank recently?

According to the IBD, gold fell off a cliff because of Cyprus. The theory is that the Cyprus government will have to sell a big chunk of its gold reserves in order to pay its bills. That brings more gold on the market and that in turn depresses prices.
On top of that, inflation (the main reason people started buying gold several years ago) hasn’t yet surfaced in a meaningful way.

I’m not saying that we are out of the inflation infested woods – we’re not. But right now the economy is far from overheated. In fact, we are experiencing one of the most catatonic “recoveries” ever. That means there isn’t much price pushing and that means inflation isn’t a real problem right now. What this boils down to is that one of the main reasons behind gold’s meteoric rise is yet to manifest itself.

And the other force that is probably weighing on gold right now is that more and more investors are becoming more comfortable with risk. Slowly but surely, investors are dumping fixed income and opting for equities. Investors are finally wiping away the emotional fog and realizing that equities have been the place to be ever since 2009. That’s impacting even gold investors who are slowing selling their yellow metal stash and buying equities.

As I said at the start of this post, nobody knows what is going to happen to the price of gold. But the forces that are hurting its price might just be around for a while. Gold was, is and always will be a speculative investment. I have never thought it was a good fit for anyone who wasn’t willing to take risk and speculate. Truth be told, I have never been a fan of investing in gold. I stayed away from gold while it had a terrific run up. Some people would say that I was wrong about gold. Maybe I’m wrong again. Who knows?

Are you buying or selling gold right now? Why?

Neal Frankle

 

Neal Frankle is a Certified Financial Planner with more than 25 years of experience, author of the Wealth Pilgrim blog, and a featured contributor here on the “CIF Blog”!

Posted in Economics, Featured Contributors, Investments, Neal FrankleTagged

What Does Net Worth Mean?

May 9, 2013 7:01 pmLeave a Comment

Your personal net worth is something that is very easy to calculate. But what does net worth mean? And how do you use this information? Both are good questions. First let’s learn how to calculate your personal net worth. Then we’ll consider how to use it.

What is your personal net worth?

This is simply a number that represents the value of what you have accumulated less what you owe at some point in time. If your assets are worth $300,000 but you owe $100,000 you’re personal net worth is $200,000. Congratulations. You are going in the right direction. You can increase your net worth by:

  1. Saving More
  2. Investing Better
  3. Spending Less
  4. Earning More
  5. Getting Rid of Debt

These are the steps most of us undertake in order to assure long-term financial security.

If your assets are worth $4 gazillion but you owe $5 gazillion, you have a net worth of negative $1 gazillion. This is ugly. Very ugly. You can still use the same 5 tactics listed above to improve your situation. But I recommend you do so in overdrive.

Which would you rather have, a net worth of $100,000 or a negative net worth of $1 gazillion? Of course, most people choose the former.

So keep in mind that having a great deal of assets is fine but having a positive net worth is far more important when we talk about having enough money to retire.  Comprendo?

How to Determine Your Personal Net Worth

Again, this is really a snap. First list all your assets and what you could sell them for. (Personally, I don’t recommend including assets that depreciate like cars. That’s because they lose value quickly and may not be worth much unless they are collectibles.) Then make a list of what you owe. Here’s an example of a hypothetical personal net worth statement:

 

So in our example, this person has a positive net worth of $446,500 less $172,400 or $274,100. This is good and the person involved here should be proud of what she’s accomplished. But this isn’t where the story ends. Far from it.

How to Use This Information The Right Way

Let me assume that it’s important to you that you grow your net worth. Take a minute and think about why this is so. If you are like most people I know, this is important to you because you want to retire someday. You realize that the greater your assets and the lower your liabilities, the greater cash flow you’re going to have.

If this is how you think, you are right. And what this boils down to is that your net worth is important mainly because you can generate income from it at some point. If you have a negative net worth like the person with the gazillions, you won’t generate any positive income. That’s because the debts you have on your assets probably far out-weigh any income those assets generate. Having a negative net worth is a one-way ticket to the poor house friend. Don’t try this at home – or anywhere else.

In our example, this person has a net worth of $274,000 right now. If she liquidates her assets and invests that money (and earns 4%), she’s going to have a little less than $11,000 a year to live on. This is far better than a sharp stick in the eye but it isn’t enough to live on.

Why Your Net Worth Isn’t Anything To Worry About Even if It’s Very Low

If you use any one of the online retirement calculators, they may tell you that you need several million dollars in net worth in order to retire. This news is really depressing and it’s about this time that many people just give up. But don’t be troubled.

In most cases, your net worth isn’t all that important. And even if you think it is, you can take steps (starting tomorrow) to make it so.

Why tomorrow? Because that’s when I’m going to explain how to make your net worth irrelevant and still have the cash flow you need to retire worry-free.

Neal Frankle

 

Neal Frankle is a Certified Financial Planner with more than 25 years of experience, author of the Wealth Pilgrim blog, and a featured contributor here on the “CIF Blog”!

Posted in Economics, Featured Contributors, Neal Frankle

What are the Sequestration Cuts?

April 1, 2013 11:52 amLeave a Comment

Exactly what are the sequestration cuts and when are they going to take place? More important, is this something to fear? As you’ll see, the answer is no. You do not need to panic over the sequestration.

It’s true that President Obama and Congress failed to find common ground on spending cuts. Maybe the fiscal cliff was averted – for the time being – but the budget crises hasn’t been resolved.  As a result, the sequestration took effect on March 1st. Immediately thereafter many popular main stream media publications reported that automatic cuts are going to start taking place immediately and those cuts would cripple the government and economy. Let’s discover why these naysayers are off their rockers.

What are the sequestration cuts?

This year the government is supposed to cut $85 billion in spending. However, the CBO (Congressional Budget Office) foresees that there will only be $44 billion shaved from government spending in 2013. The other $41 billion will be planned this year but will be implemented in the future. So, the cuts in 2013 amount to about 1% of total spending. That’s what all the hoopla is about. I bet you could cut 1% of your budget without even rolling out of bed. For our government however, it’s as if we’re asking them to remove their own liver with a rusty spoon.  Pass the Advil please.

As I said, many major news outlets screamed about the draconian spending cuts that were going to be implemented starting Monday morning. Here is a sampling of some of what I read:

  • Office of Management and Budget will direct the Pentagon to cut its budget by 13%. Other government agencies will have to cut their budgets by 9%.
  • Lower rates will be paid for school construction and energy bonds.
  • EPA staff will be notified that they must take an unpaid 13 day hiatus from work.
  • Money that goes to support public rent assistance, farm loans and food programs will be reduced immediately.
  • Large military contractors will send out layoff notices this month.
  • The school-year will be trimmed and teacher layoffs will take place.
  • The Agriculture Department will have to remove 300,000 poor people (women and young children) from its various assistance programs.
  • The FAA will reduce its staff. Airports will be closed. Flights will be canceled.
  • The USDA will have fewer inspectors to visit meat packing plants. Some factories will close.

Why aren’t I tearing my hair out and wearing sack cloth? Because none of this is going to happen as reported and here’s why.

Almost as soon as the sequester became law, both the Republicans and Democrats agreed that they will make sure the government receives full funding as they continue to slug out how to implement the required $85 billion in automatic budget cuts.

Is your budget out of whack?  Are you heading towards your own  ”personal sequester”?  If so, check out You Need A Budget.  It’s a wonderful tool that will help you get control over your spending and get out of debt fast.  You may not be able to trim $85 billion from your spending, but you will get back on track muy pronto.

Even if this latest agreement fails to result in a solution and the automatic cuts are implemented, you may not have to head for the hills with all your survival gear.

Why You Shouldn’t Lament the Sequester

As I said, Congress is going back to the huddle to try to coordinate how to implement the spending cuts wisely. There aren’t any specific dates for budget cuts. Unless things change, the cuts will be applied evenly across the board but the impact will be program-specific.

If government agencies lay off employees they have to provide them with 30 days’ notice first. That means that it will be at least April 7th before anybody is laid off.  If you work for the government, you may have to start looking for a new job – but you have some time to start preparing for it.

Of course, some of the fallout from the budget cuts is tough to foresee. The Department of Homeland Security and the Department of Housing and Urban Development hasn’t chimed in on how and when they might cut their programs. Neither has the Department of Health and Human Services.

Immediate Cuts We Know About

The Air Force has already cut some flight training hours off its schedule. I don’t know if those hours are crucial or not to the defense of our country. I have faith that if those hours are crucial to long-term readiness, they will be restored.

The USS Truman Aircraft Carrier was supposed to be under way towards the Persian Gulf early last month but that departure has been delayed. That’s a direct result of the budget sequester.

The Capitol building in Washington D.C. closed some entrances. Also, the janitors at the Capitol building won’t be able to work overtime. Yawn.

Cuts That Might Happenwhat are the sequestration cuts

If cuts are made by the TSA and FAA, travel could be delayed and made more difficult. If cuts are made to the FBI it might be more difficult to detect and stop criminal and terrorist acts.

Even though Medicare benefits are beyond the reach of the sequester, payments to providers of Medicare benefits aren’t. As a result, payments will shrink by 2%. Doctors and hospitals aren’t going to like this.

So, yes, there will be consequences of our government tightening the belt. But nobody knows what that is going to look like.

Which programs won’t be cut according to the Congressional Research Service (CRS):

  • Social Security Benefits.
  • Medicare Benefits
  • VA Benefits
  • Pell Grants
  • Medicaid Benefits
  • Welfare & Food Stamps
  • Children’s Health Insurance Program
  • Child Nutrition Programs

As is often the case, things are rarely the way they seem. We can’t predict how government spending cuts will be manifest and we can’t predict the ultimate outcome.

Certainly there will be spending reductions and that’s going to translate into some pain for some people. I don’t want to understate that. But there might be a very shiny silver lining. These spending reductions could be the first steps we take that eventually lead the United States towards a financially stable economic future.

How do you feel about the sequester? Are you worried or are you generally optimistic?

Neal Frankle

 

Neal Frankle is a Certified Financial Planner with more than 25 years of experience, author of the Wealth Pilgrim blog, and a featured contributor here on the “CIF Blog”!

Posted in Current Events, Economics, Featured Contributors, Neal FrankleTagged

It’s Not How Much You Earn; It’s How Much You Control

February 18, 2013 10:48 amLeave a Comment

Man's Hands Signing DocumentOwning a home is part of the American Dream. Financial experts tell us owning a car is better than leasing. And who would think of not owning the clothes you wear? The concept of “that’s mine” runs so deep it’s probably hardwired into our brains. To prove it, just try to take a toy away from a two-year-old.

On the other hand, the control of an asset is often more valuable than ownership. If you could lease a new $25,000 car for one dollar a month for 10 years, do you really care if you don’t own it? Absolutely not.

Or take a middle-aged tenant with a lifetime lease on a property subject to rent controls who pays rent at a tenth of current market rates. Who has the more value from that asset, the tenant or the owner? Clearly, the tenant has a valuable leasehold interest that in some cases could be worth more than the ownership interest.

If we can have regular access to something, whether it’s using a beach house through a home swap, sharing power tools, or renting a trailer to haul a piano, we don’t need to own it. Often, we’re financially ahead not to own it.

Can this same concept apply to the income you receive? It may. For some people, having access to benefits and services they don’t “own” through their earnings may be the better deal. This is the conclusion Gary Alexander, Secretary of Public Welfare for Pennsylvania, reached in a paper called “Welfare’s Failure and the Solution.”

He published a chart showing the government benefits that accrue to single mothers. Alexander states, “The single mom is better off earning gross income of $29,000 with $57,327 in net income and benefits than to earn gross income of $69,000 with net income and benefits of $57,045.”

According to Alexander, benefits that accrue in Pennsylvania to a single mom with two preschool children, who earns $29,000, include health insurance for her children ($5,000), various childcare benefits ($15,000), housing ($6,000), and food ($2,300). A single mom earning $69,000 doesn’t qualify for any of these benefits and actually takes home $182 less than the mom earning $29,000.

A chart in Alexander’s paper with even more serious implications illustrates that 110 million privately employed workers in the US now support 88 million welfare recipients and government workers. This trend is not economically sustainable. While the government can print all the money needed to fund the 88 million, inflation becomes a huge concern. If inflation and taxes continue to climb, at some point, the producers/taxpayers may say “enough.” They will either choose to become recipients instead of producers, or they might relocate themselves and their skills to a country that rewards productivity and incentive.

The financial blog ZeroHedge.com published an article on this topic on November 27, 2012. The piece calls it a “painful reality in America” that “for increasingly more it is now more lucrative—in the form of actual disposable income—to sit, do nothing, and collect various welfare entitlements, than to work.”

This is a difficult subject to raise. I am sure my inbox will fill with unhappy emails from folks who will miss my point and others who will give me illustrations of those less fortunate who legitimately depend on welfare.

However, the painful long-term costs and consequences of welfare is one of the essential topics we need to talk about if we are to solve our nation’s fiscal problems. If our representatives come to depend more for reelection on those who receive tax funds than those who provide tax funds, we will only dig ourselves further into debt.

Rick Kahler

 

Rick Kahler is a Certified Financial Planner, President of Kahler Financial Group, author of the “Financial Awakening” blog, and a featured contributor on the CIF Blog.

Posted in Current Events, Economics, Featured Contributors, Rick Kahler

The Ultimate Stealth Tax: Inflation

January 30, 2013 10:05 pmLeave a Comment

InflationWith all the talk about tax rates and the fiscal cliff, hardly anyone has mentioned what is probably the most effective and least understood tax in the federal arsenal: inflation.

Wait a minute. Isn’t it confusing to call inflation a tax?

It is. That confusion is exactly why inflation is the ultimate stealth tax.

One of the few deficit-reducing measures that has the support of both parties and President Obama is a change in the way the government measures inflation. Our lawmakers have agreed on another in a series of adjustments to the way they calculate the consumer price index (CPI). The proposed changes will understate the future CPI even more than the current formula already does.

This maneuver is a brilliant way for deficit-reducing lawmakers to both cut spending and increase taxes, without calling their action either a spending cut or a tax increase.

How is this possible? First, here’s a brief explanation of the proposed change, which is called the chained Consumer Price Index. According to an AP article published in the Rapid City Journal on December 5, 2012, “the chained CPI assumes that as prices rise, consumers turn to lower-cost alternatives, reducing the amount of inflation they experience.”

The assumption is that, if the price of pork rises while chicken doesn’t, people will buy more chicken. Yet they’re still buying protein. Therefore, presto—no inflation has happened. This argument is like saying if the price of gasoline goes up and the cost of walking doesn’t, people will just walk more, so there’s no problem.

The chained CPI is a spending cut because many entitlement programs are indexed to the CPI. These include Social Security, government pensions, veterans benefits, and the interest on some of the national debt. The lower the increase in the CPI, the less benefits will rise.

The AP estimates that once the new CPI is fully phased in, a 65-year old on Social Security will receive $136 a year less. At age 75 the reduction will be $560 annually, and at 85 it will be $984 less.

In addition, as wages increase at the real inflation rate, entitlement programs won’t keep pace. Gradually, fewer people will be eligible for programs like food stamps, Medicaid, heating allowances, and Head Start.

The chained CPI is a tax increase for much the same reason. Many income tax brackets and deductions are indexed to inflation. Smaller annual adjustments to the brackets because of the lower CPI will push more people into higher tax brackets.

Tweaking the CPI is nothing new. Politicians from both parties have done so for years to give the illusion of a lower CPI than that calculated by previous methods.

ShadowStats.com, run by John Williams, calculates the current unemployment and inflation rates using the formulas from the 1980s. According to that methodology, the unemployment rate (U-6) is 15% and the CPI is 9%. Yet the government has tweaked the CPI so much that today the official CPI is 2.5%. Under this newest proposal, inflation would be 2.2%.

You may think understating the current CPI by 0.3% isn’t any big deal, but it is. The decrease represents a 12% drop in the inflation rate, which understates the increase in our cost of living. If your employer reduced your wages by 12%, you’d probably see it as a big deal.

Proponents figure the newest CPI adjustment will save $200 billion in spending increases and raise $65 billion in new taxes over ten years. It doesn’t matter whether you call it inflation, chained CPI, or plain old gimmickry. A tax increase by any other name is still a tax increase.

Rick Kahler

 

Rick Kahler is a Certified Financial Planner, President of Kahler Financial Group, author of the “Financial Awakening” blog, and a featured contributor on the CIF Blog.

Posted in Current Events, Economics, Featured Contributors, Rick KahlerTagged