Sunday, May 30, 2010

The Choice is Yours

On December 30, 1956 the New York Giants under head coach Jim Lee Lowell crushed the Chicago Bears in a 47 to 7 rout. This NFL Championship team featured two assistant coaches, Vince Lombardi, offensive coordinator and Tom Landry, defensive coordinator. Both would go on to win multiple Super Bowl victories as head coaches. Ultimately, Lombardi and Landry were enshrined in the Football Hall of Fame in Canton, Ohio. The victorious Giants also featured a nucleus of Hall of Fame players including Frank Gifford, Alex Webster, Roosevelt Brown, Sam Huff, and Andy Robustelli.

Occasionally, in life, we have already won the game before setting a foot on the field because those who surround us will not allow us to lose.

Who are your “coaches?”
What are they teaching you?
Who are your teammates?
Can you trust them to cover your back?
Who is playing on your team?
What are you paying them?

Take a look around. Are you surrounding yourself with the kind of people who will take you to a championship; however you might choose to define that word for your own life?

The choice is yours.

Saturday, May 22, 2010

Small Business

Having worked for the Government or large corporations most all of my adult life I really know very little about the small business man other than what I have observed in my friends who have chosen to follow that path. However, I do believe teaching our children how to become entrepreneurs will become progressively more important as the number of “good jobs” has been declining for over three decades.

I remember one church dinner in particular. I was sitting at a large table with a number of other folks. I started up a conversation with a young man of early high school age sitting next to me. He was interested in all sorts of electronic contraptions, particularly microphones and sound equipment. As the conversation progressed, he expressed an interest in ultimately turning his hobby into a business. I tried to be very encouraging and supportive. I also tried to ask intelligent questions such as what kind of niche market would allow him to compete against the likes of Best Buys. I pointed out, Mapleshade as an example of a successful high end niche marketer. The make extremely high end stereo accessories, rebuild tube amps, and sell their own recordings of jazz and folk music. This conversation was obviously making his mother nervous. She started interjecting questions like, “Don’t you want to go to college?” I hope that someday he gets a college degree, runs a successful business, and lives a happy fulfilling life.

I recently listed to an abridged edition of How to Make Big Money in Your Own Small Business, by Jeffery Fox on CD. A couple of items were repeated so often they actually stuck with me.

First there are only three things any business can do for their customers.

1) make them feel good
2) solve their problem
3) some combination of numbers 1 and 2

The author also believes his 60/30/10 rule is critical to the success of any small businessman. He believes this rule applies to 1 man companies or even companies with even 10 full time employees.

60% of your time should be spent marketing and selling your product
30% of your time should be spent producing your product
10% of your time should be spent on administrative and managerial tasks

Of the 60% of the time spent in sales and marketing:

60% of the 60% should be spent in contact (personal visits, telephone, email) with existing customers. The author considers this so important that he recommends hiring a part time driver to allow the small businessman to work on his computer and telephone when going to visit customers in order to make certain they are happy.

30% of the 60% should be spent developing new, short term customers.

10% of the 60% should be spent developing new, long term relationships with short term customers.

By the way, the author considers a 60 hour work week a minimum for the successful small businessman (no exploitation like self exploitation). Now you know why I was never tempted to be a small businessman.

I have wondered how far I should go in comparing a local church to a small business. Obviously there are similarities in operations but differences in primary motivations. Still churches exist, at least in part, to make people feel good and solve their problems (the sin problem comes to mind). Pastors, like Joel Osteen, seem to understand this principle. A pastor I have met spent as much of his time as he possibly could manage with his existing customer base until at some point between 300 and 600 members he could no longer know everything about every one of his sheep. Moving on to a different role, as his church continued to grow, was the hardest task he ever faced.

I guess the real secret to running a successful small business is discovering something that you love and would do for free that makes people feel good, solves their problems, and can not be done by too many other people. Now, if I could just find a way to make money writing this blog (sigh).

Saturday, May 15, 2010

A Dream And an Excel Spreadsheet

After spending the last couple of weeks ranting and raving about the follies of governments, bankers, and other events I can not control, let me return to planet earth. There are some things that we can handle with planning, congruent action, and an appropriate feedback control system.

There is a young family. He is an engineer with a stable job. She is a stay at home mom with a toddler. They live in a house that is too small and too far away from dad’s job. A few years ago, when they bought their home, it was the best they could afford. Now mom is growing restive. She wants a house that costs roughly $150,000 more than the value of their current home. She wants it now. That is impossible. While this young family is no longer underwater, they would be lucky to cover what they owe on a first mortgage and a sizable off the books personal loan that allowed them to walk in the door of their current dwelling. It is a source of friction in the marriage. Dad actually wants a new house almost as much as his wife, but he realizes they are in no position to take on the extra debt and expense such a move would entail. By the way, he is right. They have a very respectable rainy day fund for a young couple, but if they used this money for a down payment and closing costs, they would be broke and would still need more money to complete the house purchase. This would be true even under the proverbial rosy scenario. Number 7 from my ten rules for young couples:

Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.

I suggested setting up a special fund to finance the move, predicting that in five years or so they could be in very good shape to buy that new four bedroom house on the cul-de-sac in a nice little town not too far from here. The developer is offering the houses for sale with a 4% down payment. Given a $400,000 house and $7,000 in closing costs, I suggested a goal of $27,000 (5% down and $7,000 in closing costs). This is pretty optimistic, but by that time there is a good chance that their current home will go up in value and at least the personal loan will be repaid. They might walk with enough equity to cover any unforeseen contingencies.

If they put aside $450 a month at 0% interest, this is a goal they can achieve. A good insured Certificate of Deposit will obviously cut the time. The next question becomes how to squeeze $450 out of their current budget. First of all, I expect they do not have a formal budget. Now might be a good time to start one. Number 5 from my ten rules for young couples:

Many people recommend a budget. We have never had a budget except the one in my head. That worked pretty well for us but I think a formal budget would be even better.

Really, I think before a structured budget can be developed, it is necessary to find out where the money is currently going today. They might be surprised. Number 4 from my ten rules for young couples:

When your money stash is declining (and it will) find out where your money is going. Keep detailed records (every penny) of your expenditures if necessary. My wife and I did this twice during the early years of our marriage. It proved a very enlightening exercise.

In particular, the amount of money I was throwing into the coffee machine every night (I worked third shift at the time) was truly frightening. I bought a thermos and started making a pot of coffee every night before I left for work.

This is an example of a very achievable goal. This is a goal that is simple to describe (a new house in five years). Both husband and wife see it as desirable, it is believable, and progress towards the goal is measurable. I encourage them to undertake this project and wish them good fortune and early success.

For more on goal setting check out the February 2009 archive for this blog or cut and paste.

Sunday, May 9, 2010

Best Looking Horse at The Glue Factory

“It was a great week for treasuries, the US dollar, and gold. That's a combination that no inflationist and only a small subset of deflationists would think likely.”
Mish Shedlock

“The U.S. is the best looking horse…at the glue factory.”

Portugal, Ireland, Italy, Greece, and Spain severely threaten the stability of the Euro.

The United States is dealing with $15 Trillion debt more like $55 Trillion if underfunded mandates are included.

The Yen is threatened by debt that is a higher percentage of Gross Domestic Product than that faced by America and a demographic time bomb.

Another week like the last one and there may be some buying opportunities.

Saturday, May 8, 2010

A Real Letter to a Real Congressional Candidate


I am an old friend of X, one of your most committed supporters. In the course of thinking about our country’s economic quagmire and having heard so much about you from X, I was wondering what you had to say on the subject and so checked out your web site. I didn’t find anything substantive or useful. I am not sure how you will be able to lower taxes given that we have something like $13 Trillion of national debt that we must pay the Chinese and others. That does not count the unfunded liabilities such as Social Security and Medicare. Since we were told Social Security was not a tax but an investment program (ha!), the baby boomers are not likely to want a cut in their benefits. I didn’t see any comments on protecting the value of the American dollar on your web site. This is a bit disturbing as the other way to get out of debt is inflation. I would like to hear some details of your economic plans and something about the credentials and philosophical background of your economic advisers. Do you have any such information?

The following equation is a very simplistic application of the first law energy balance to economics.

Taxes in = Money owed + Expenses out

Cutting the size of government addresses one part of the equation, but how do you plan to pay down the debt without inflation or more taxes? How can we escape this trap? I would really like to hear your answer.

I fear we, as a nation, are not ready for the truth. I expect that in ten to twenty years we will behave like Greece or Argentina and riot over broken promises. Unless good and wise men find a way to unravel this mess in a slow and systematic manner, which I am afraid will include higher taxes, we will follow other countries into a collapse of some sort. I am smart enough to see what is coming but not smart enough to say when or how it will happen.

I am particularly praying for the unemployed. However our politicians choose to solve the debt equation,stable wealth producing jobs are the key to any recovery. Automation, illegal immigration, and outsourcing are gradually eroding the possibility of the American dream for ever larger numbers of men and women. There are limits to what Government can accomplish with other peoples’ money. Private charity can not begin to deal with a social transformation of this magnitude. How can we address this problem?

I wonder what will be in his reply.

Friday, May 7, 2010

The Death of the Middle Class (Part II)

Americans have been a peculiarly optimistic people. Perhaps it is in our blood. For the last forty years, as long as we have records on such questions, the majority of Americans believed that their personal financial situation would get better in the next six months. This was true even if they believed that the majority of Americans would be worse off in six months. Although the numbers have gone up and down with the fortunes of our economy, the majority continued to think that their lives were going to get better. This remained true until 2007. Since then a majority of Americans believe that their lives are going to get worse. In the past we believed pay cuts and layoffs were temporary problems to be overcome with luck and pluck. Something has changed. A majority now believe their future and the future of their children will never get any better.

The middle class is getting squeezed. Many have lost their jobs. If they have found new work, it does not provide the pay and the benefits of their old jobs. Their retirement accounts and the value of their homes have been battered, sometimes by as much as 50%. To complicate their problems, adult children are returning to their parents’ homes. I have friends and acquaintances who have suddenly found one or two unemployed adult children with no money, school and/or consumer debt, and no where to go knocking on their doors. Covering little Julie’s car payment when their financial house is a bit shaky represents a real sacrifice, one that is not likely to be appreciated by Julie. Fathers and mothers who have always been able to provide for and protect their families from the storms and vicissitudes of life are suddenly running low on cash. One woman I met while working in Florida ran an excellent family restaurant. She said her adult daughters treated her as their own personal ATM machine. The parental ATM is closing at a time when young adult unemployment is at its highest levels since World War II.

Men and women who have successfully held jobs their entire adult lives are facing a bleak future. If they are lucky, they are watching their saving dwindle as unemployment benefits, while welcome, are not likely to be enough to cover their daily expenditures. What do you do if you can not pay your mortgage and you can not sell your home because you owe $100,000 more than its current value?

The following comes from a New York Times article titled “The New Poor,” “During periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased about 3.5 percent a year, according to an analysis of Labor Department data by Lakshman Achuthan, managing director of the Economic Cycle Research Institute, a research firm. During expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.”

Automation and outsourcing are gradually eroding the possibility of the American dream for ever larger numbers of men and women. Throw in a major medical problem and it is truly over for an unemployed American worker. There are limits to what Government can accomplish with other peoples’ money. Private charity can not begin to deal with a social transformation of this magnitude.

It is time to pray.

Saturday, May 1, 2010

The Death of The Middle Class (Part I)

On last Sunday’s Meet the Press, Senator Christopher Dodd of Connecticut observed, "We've lost almost $11 trillion of household wealth in the last 17 or 18 months." Basically, that means one of two things; neither of them is any good. Probably a majority of that amount came out of the equity held in single family homes or 401-K retirement accounts. Today, U-6 unemployment, the most accurate measurement, stands close to 17%, a depression era number. The “good” jobs for Americans of average ability with a high school diploma have been sent to China, India, or some other low wage country. The costs of key components of our economy including education and health care have skyrocketed at rates far in excess of the rate of inflation. Finally, total tax burden on the middle class has increased to unprecedented levels. It will continue to increase. I could say more but I make a serious effort, perhaps not always successful, to keep my personal political opinions out of this blog.

First of all, where did all that wealth go? If I remember correctly, I bought my house for $98,000 in 1987. A couple of years ago it was “worth” more than $450,000. Then, in a matter of months, the value of my home, real wealth, dropped to $300,000. The house was still there. I was still living it, but $150,000 of my wealth, money planned for use in my retirement, had just vanished. The destruction of this kind of wealth had more to do with unreasonable expectations than any kind of a sinister plot. Housing prices go up forever, right? Banks, real estate flippers, and the average American all believed that single family homes would continue to increase in value. We were wrong.

There is another kind of wealth that was destroyed in this debacle, wealth that was never wealth at all. I recently read an article about an economics professor and lawyer who is considered an expert on white collar crime. He explained some of the investment vehicles devised by the likes of Goldman Sachs as nothing more than teaser bets, like the over under, sold by sports books in casinos. The over under is a bet on a football game. It has no direction connection to the outcome of that game, only the combined number of points scored by the two teams. The casino is unconcerned with the outcome of the bet as the casino is content to take its cut of the winner’s share.

As I understand it, a synthetic collateralized debt obligation is a naked bet on whether a particular pool of mortgages goes up or down in a specific time frame. If it is going up, its value increases and if it is going down its value decreases. Over time, if the pool of mortgages continues to perform the synthetic CDO receives some payment from the underlying credit default swaps. If the pool of mortgages fails, the owner of the synthetic CDO can be left with a very large debt, far larger than the initial investment. The brokerage house makes its money on the day of the sale. In the movie Scarface, the old drug dealer tells Tony the “rules” of a successful business. One of those rules is, “Don’t get high on your own supply.” The banks became involved with their own money in CDOs, credit default swaps, and truly esoteric naked gambles like synthetic CDOs. The problem is these are institutions insured by the Federal Deposit Insurance Corporation and similar government entities. Ultimately, the American middle class taxpayer will foot the bill for the follies of these criminals.

Market Watch observes that, “According to the report by economist David Autor of the Massachusetts Institute of Technology that was presented at a Washington conference about the future of American Jobs. The four middle-skill occupations -- sales, office and administrative workers, production workers and operators -- accounted for 57.3% employment in 1979. That portion fell to 48.6% in 2007, and declined to 45.7% in 2009.” Our high paying, wealth creating, stable factory jobs have been sent to China. The front office work from those abandoned factories has been sent to India. Now companies like IBM, are sending high skill jobs like computer programming to those same countries. Today, an X-Ray of your body may be read by a doctor in India earning far less than an American radiologist performing the same task. To add insult to injury, I once read that New York City parking tickets are being processed by Indian office workers.

These are the jobs that have contributed the most to the American standard of living. When my father was 40 years old, an American man with a high school diploma, willing to work 40 or 50 hours a week could reasonably expect to buy a house, a car, and support a wife and a couple of kids. That is no longer true. The American man has lost jobs at an even faster pace than the American woman. If he is fortunate enough to find any job at all in this horrid environment, it is likely to be a low paying service sector job. Our high paying, wealth producing, industrial jobs are likely gone forever.

David Autor continues, "Perhaps most alarmingly, males as a group have adapted comparatively poorly to the changing labor market," Autor wrote. "For males without a four-year college degree, wages have stagnated or fallen over three decades. And as these males have moved out of middle-skill blue-collar jobs, they have generally moved downward in the occupational skill and earnings distribution."

An article published by “The Street” entitled GDP Report: An Anti-Middle Class Recovery states that, “This recovery is decidedly anti-middle class. Wages will not keep up with rising prices, health care premiums and taxes. A good deal of the gains, so far, are going to Wall Street and the medical and intellectual property industries.” The new health care proposals will greatly increase the total cost of medical services. The cost of new services given to the poor will be passed on to hospitals, pharmaceutical houses, and insurance companies. They in turn will pass the cost onto state governments, local governments, and most of all the Federal government. A certain amount of this expense will be passed on by the provider to the existing customer base, the American middle class. The rest will be paid for by increases in taxes. Remember, while the government can prevent a insurance company from increasing rates, they can not force an insurance company to sell coverage at that price. This is happening in Massachusetts, a state that implemented a form of socialized medicine some years ago. The insurance companies were not allowed to increase their rates, so the companies quit selling new policies in Massachusetts and have threatened to leave the state.

The bills for health care and other government programs will be paid by the middle class. Today, close to ½ of all Americans do not pay any Income Tax at all. Some of these people actually receive money from the Government. The rich, with access to accountants and tax attorneys will always be able to limit the damage to their pocketbooks better than the middle class. Besides that, there are really not enough rich people. Even if the tax man took 80% of everything they owned there would not be enough to cover the bills. Once again, that leaves the middle class holding the bag and there are fewer of us every year.

On April 30, 2010 the U.S. Bureau of Economic Analysis announced that the gross domestic product increased for a third straight quarter and that in the first quarter of 2010 consumer spending rose at the fastest pace in three years. By definition three consecutive quarters of growth tells us the Great Recession of 2008-2010 is over. These trifling increases have not begun to erase the trillions of dollars lost in the last two years. Even as the Gross Domestic Product is increasing we continue to lose jobs. Since June of 2009 we have lost over 900,000 jobs. Depending on whose numbers you wish to believe, our country needs an increase of about 120,000 new jobs a month just to keep up with the increase in population. U-3, the official measure of unemployment continues to hover around 9.7%. U-6 which includes involuntary part time work hovers just below 17%. Neither of these numbers covers workers who have just given up and are no longer even looking for work. The number of workers unemployed for 27 weeks or longer climbed from 6.5 million in March from 6.1 million in February. That means 44.1% of all the unemployed have been out of work for more than six months. These numbers come from Jim Jubak’s column entitled “The Recession is Over? Yeah, Right.”

I sorry to say it, but the unemployed former members of the American middle class are just holding on by hook or crook. They are not creating wealth, paying taxes, buying cars, giving to charities, or increasing the investments in their 401-K accounts, but I will have more to say about that subject on another day.

Jeremiah 8:20 (NIV)

The harvest is past, the summer has ended, and we are not saved."