First, we should examine income levels in the U.S.:

Source:  Bankrate

The bulk of American households bring in $65,000 a year or less.  The current tax rate for FICA (Social Security and Medicare taxes) comes in at 7.65% with the remainder paid by the employer.  So the family making $65,000 a year is paying roughly $5,000 a year into FICA.  With the employer match, this figure comes out closer to $10,000 going into the system.  If we look at the current amount paid out to Social Security beneficiaries it is roughly the same per year:

The average monthly benefit paid out is $1,067.  Over 53 million Americans receive some form of Social Security benefits.  The working and middle class have had an implicit agreement with the government that if they work for many decades that in the end there will be some sort of safety net to protect them.  Yet the system was designed at a time when people died at earlier ages and we had many more workers than we had beneficiaries.  The math now is tipping in a very unfortunate direction:

As of today, nearly 19 percent of all Americans receive some form of Social Security.  Compare this to 1970 when only 12 percent of all Americans received some form of Social Security.  The above chart is merely going to grow even faster as many more baby boomers enter into retirement.  For those in the working to middle class the prospect of a secure retirement is looking more and more remote.  It would be one thing if people had the ability to trust in Wall Street and invest into the market.  Yet Wall Street with no real reform is largely a predator casino as we have seen with flash crashes and large hedge funds making billions of dollars betting on the failure of Americans.

The original Social Security Act was signed in back in 1935.  The initial design was to help the old, widows, and children of the poor to have at least some basic safety net.  It was never designed as a long-term retirement program.  Today, over 50% of those that receive Social Security benefits in retirement use it as their primary source of income.  With Americans living longer, the strain on the system is largely taken on by the working generations.

Here is an interesting chart showing the progressive growth of the tax over the century:

Initially, the amount taken out of a typical worker’s paycheck was 1 percent.  Today it is up to 7.65 percent (not factoring in the employer’s portion).  It is also the case that SS is capped at a certain income level so the wealthy actually stop paying above a certain level (as of 2010 this level is $106,800).  Going back to a previous chart, you see that nearly $57 billion was paid out in May alone.  The demographics of the system only point to larger and larger monthly payouts:

The above chart is similar to charts in Europe although not as extreme.  But we see a shift to more and older Americans.  By default, many of these people will start drawing more and more on the already strained Social Security system.  And younger workers in our current economy are facing a much deeper impact of the current recession.  Even before the collapse of the system, the young were already losing ground:

The median net worth of Americans from 25 to 34 has consistently dropped since 1985.  There was a big drop from 2000 to 2004 and I would imagine the trend has accelerated in the current recession.  Yet how were people able to continue buying more and more?  It was all fueled by access to debt.  It was largely a debtor mirage that kept the economy going in the last decade.  In fact, the median amount Americans have saved in a retirement account (those still working) is $2,000:

Source:  BLS

The fact that the mean is $50,000 tells us we have massive income disparities in the system and it also helps to point to the fact that most stock wealth is concentrated in the hands of a very few.  Another deceiving factor that was brought into the net worth equation was the net worth figure used housing values during a bubble to calculate net worth:

A giant part of net worth was pulled from housing equity that has now largely evaporated.  The fact that half of U.S. households only have $2,000 in retirement accounts tells us that many are close to a zero net worth after the housing bubble burst:

“(National Review) The macroeconomic consequences of this shift toward low-equity homeownership are visible in research from the Federal Reserve that examines the assets and liabilities of U.S. households. In the first quarter of 2001, U.S. households’ home equity stood at $7.7 trillion, or 61 percent of the value of all residential real estate. By the third quarter of 2008, it had declined to $7.6 trillion, even as outstanding mortgage debt increased by $5.6 trillion over the same period. By the first quarter of 2009, home equity was $1.35 trillion lower than it had been in 2001. Put another way: Despite the housing boom, the portion of residential real estate actually owned by households declined. This means that the increase in homeownership rates (and the subsequent rise in housing prices) was entirely debt-financed.”

In other words, say someone bought a home in 1998 for $100,000 and took out a $95,000 loan.  At purchase, they have a net worth of $5,000 (assume no other assets).  Fast forward to 2006 at the peak of the bubble and the home is now “worth” $250,000.  Seeing that they now have $155,000 in equity, they decide to pull out $75,000 pushing their total loan amount to close to $170,000.  The money is used to buy goods, take a vacation, and generally injected into the economy.  The housing bubble explodes and the home is now worth $150,000.  Yet they have $170,000 in outstanding loans.  This family went from having a $155,000 in equity (net worth) to suddenly going to a negative equity position of $20,000.  Today, one out of three U.S. homes with a mortgage is underwater.  This is why actual wealth is a better measure of financial well being than simply looking at home values especially in a bubble.

The higher unemployment for younger generations is making it harder to put more money into the Social Security money funnel. The low savings from the working generations tells us that many simply cannot save given the current economy.  Ironically, this means that many more will be dependent on government programs.  The calculus is troubling.  There are no easy answers to this.  A few of them include raising the cap to tax higher incomes or cutting benefits.  Seeing how powerful groups like the AARP are, it is doubtful benefits will be cut.

As I think back on the conversation with my neighbor that has served our country proudly in combat, how can you begrudge him?  He is living modestly, paid off his house, and let us be honest, $1,100 a month isn’t exactly Donald Trump territory.  Yet as I go out to work with millions of others, we wonder how things will be in one, two, or even three generations.  Having a paid off home and no debt actually sounds like the apex of a good retirement given our current financial predicament.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

The idea of not working and having a long retirement is actually rather new to this era:

When Social Security came about in the 1930s, it was largely a program to keep families from starving and from going absolutely broke.  It was never intended as a long-term benefits program.  Yet life expectancy has increased over time and now today, many Americans depend on Social Security as their primary source of retirement:

58 million Americans receive either Social Security or SSI.  37 million Americans receive Social Security benefits from reaching retirement age (this will grow with baby boomers retiring).  And don’t think that middle class Americans are living it up with Social Security.  The average monthly benefit from 53 million beneficiaries is $1,066 yet a large number of Americans depend on this as their primary source of retirement.  Some recent surveys say that as many as 1 out of 4 Americans will depend completely on Social Security as their primary retirement source.

As fragile as Social Security might appear, the 401k has become the bigger scam for Americans.  Many companies only offer a handful of investments to Americans to choose from and many are managed by the same Wall Street crooks that have caused massive volatility in the markets.  The 401k has allowed many employers to push off the retirement question or even caring about their workers as they once did by:

-Using Social Security as the last stop-gap measure

-Claiming they don’t need to have any sort of pension plan

Many companies have no loyalty to any worker.  Over the decades Wall Street has brainwashed the public into believing that companies can do whatever they want to employees because Wall Street is just a “free market” where goods can travel where they want.  But as we are now realizing, Wall Street is simply one selective syndicate that decides to transfer wealth to the top 1 percent of our country with really no work involved.  It is manipulation and stealing of the productivity of the working economy.

The 401k was used with sophisticated charts put together by large investment firms showing Americans that if they only put away 5, 10, or even 15 percent of their income into the stock market through the magic of compounding, they too can retire rich just like their Wall Street idols.  Of course, this has all been a sham and many middle class Americans are waking up.  Over the last decade the stock market has done nothing but move sideways while miraculously, the banking sector has gotten bigger and bigger:

After 10 years, the S&P 500 is down over 20% even after the record breaking stock market rally.  No compounding going on here.  And when the market can fall 700 points in a matter of minutes, we start to realize that many retirement accounts are merely greasing the wheels of the Wall Street roulette game.

So this absurd notion of easy street has been pushed and sold by Wall Street to take away the responsibility banks and companies have for their workers.  They like to claim all is a free market but have no problem taking trillions in taxpayer bailouts.  Let us not forget that many Wall Street banks would be gone today without government assistance.

Let us dig deeper into the details of the 401k:

“(Bloomberg) The average 401(k) fund balance dropped 31 percent to $47,500 at the end of March 2009 from $69,200 at the end of 2007, according to a Fidelity Investments review of 11 million accounts it manages. The average balance of the Fidelity accounts recovered, to $60,700, as last Sept. 30 as the stock market rebounded.”

“Seven in 10 U.S. households object to the idea of the government requiring retirees to convert part of their savings into annuities guaranteeing lifetime payments, according to an institute-funded report today. The Washington-based institute represents the mutual-fund industry.”

I actually find this part interesting.  The average retirement account balance is small relative to what is needed in retirement.  How long will $60,000 last you without a paycheck?  Think you can cover your rent/house payment, medical bills, food, college for kids, and other items for 1, 2, or even 3 decades?  But many Americans, even after two decades of pure gambling on Wall Street still want to believe in that Horatio Alger myth:

“People value the tool of the 401(k),” Paul Schott Stevens, chief executive officer of the institute, said at a news conference in Washington. “They do not want government to take it away from them. They think the structure works very effectively.”

U.S. direct-contribution plans, which include 401(k) and other employer-sponsored retirement programs, held about $3.6 trillion as of mid-2009, according to the report. They account for 25 percent of total U.S. retirement assets. Annuities, with $1.4 trillion, represent about 10 percent of U.S. retirement funds.”

The structure does not work effectively.  The stock market has not gained over the last decade.  You would have done better by buying CDs or sticking your money into the mattress over the past decade.  This isn’t because we have no good companies in the U.S.  On the contrary, we do and we still have the strongest economy around the globe.  But Wall Street uses that as a way of leveraging to the max and putting solid companies at risk for raids and stock manipulation.

Yet Wall Street and the financial industry like to parade the “average” retirement account including the millions of the top 1 percent; the actual details are different:

Source:  U.S. Census

While it is true that the average retirement accounts for many Americans is near $50,000 half of Americans have $2,000 or less in their account. Many middle class Americans are simply not prepared for retirement.  Even with Social Security, this will only be a small amount.  So with a large number of baby boomer depending on a smaller income in years to come, what does this do to our consumption based economy?  Also, you have to sell your stocks to get the funds out of them so what is going to happen with millions of baby boomer selling stocks into a market where younger Americans have very little to save, not to mention save for retirement?

I found an article back in 2002 talking about the 401k and the same issues were present even then.  But these articles are quickly forgotten after the stock market and housing bubble took off:

“While the fall in savings due to the stock market losses are causing a huge financial strain, many workers have no savings at all. According to a USA Today/Gallop Poll, more than one-third of adults say they have no money saved in any kind of retirement account and half of all households did not save a penny last year. “The average American household has virtually no chance to reach an adequate retirement savings in the next 50 years,” commented Christian Weller of the Economic Policy Institute (EPI).”

Ironically things are worse today.  As we have shown in the above chart, the stock market is basically back to 2000 price levels.  A large part of Americans have no savings and no retirement accounts so they are completely at the mercy at whatever is available.  Keep in mind we now have 40 million Americans receiving food assistance.  401k accounts also had the phony allure of having “company” matching funds but this only went up to a certain point of income:

“Even when companies offered matching contributions to 401(k) plans, on average they only contributed 2 percent of pay, compared to the 6 to 7 percent of pay they typically contributed to traditional pension funds. Enron, like many companies, strongly encouraged employees to invest in the company’s stock. Thousands of Enron’s current, laid-off and retired workers lost most of their life savings when the company prevented workers from selling its stock held in 401(k) accounts, just as the stock price was plummeting.”

Much of that is gone today.  Many companies are now using the recession as an excuse to even take away the company match.  So now you are left putting money into the stock market while half of trades are basically computer generated trades in the big giant casino.  Average Americans are basically putting their money into the one arm bandit of Wall Street.  Yet someone as usual is taking the profits:

“Reports on account balances in 401(k) plans often give a more optimistic picture of retirement savings, because the assets of higher income workers skew the results. At the end of 2000, while the average account balance was $49,024, 44 percent of participants had balances of less than $10,000.

In contrast to the plight of working people, however, the top executives of companies engulfed in financial scandals have no retirement worries, even in those instances where their companies have collapsed. In the case of Enron, Jeffrey Skilling made $78 million. Laid-off Enron workers received a mere $4,500 severance payment, no matter how many years they had worked for the company.”

This is a battle for the survival of the middle class.  Many baby boomers who once believed Wall Street would be there to protect them will find they are out to sea with no paddle.  Maybe this will wake many people up to take action but given the strong belief in the get rich myth, you wonder if many would rather be paupers as long as they can believe in the phony notion of big money with little work and effort.  After all, Wall Street has mastered that game plan.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

Follow us on Twitter!

ShareThis

Let us examine the growth of this debt over the last forty years:

The growth in local government debt has exploded since the 1970s.  We went from $295 billion in 1968 to $2.3 trillion today.  But as Greece is demonstrating, there is such a thing as having too much debt and at a certain point the markets no longer have an appetite for so much borrowing.  Average Americans probably have a hard time examining the large numbers being thrown around.  Yet state and local governments are now finding a hard time balancing their budgets.  In many cases, the ability to balance their budget goes in direct conflict with paying out pension distributions.  Or in many cases states need to raise taxes or cut services.

Wall Street enjoys exploiting this fact because they actually loot the public sufficiently with golden parachutes and ridiculous bonuses that they never need any sort of pension.  Yet the truth is, many of the gold plated pensions are just another side of the Wall Street mentality coin.  That coin relies on having others pay for your bailout or extended retirement.

Now Wall Street has implemented the biggest transfer of wealth in history with the $13 trillion in bailouts and backstops.  But many pension funds also bought into what Wall Street was pushing.  Let us examine the California state pension systems.

California Pensions – $500 Billion Underfunded

The Stanford Institute for Economic Policy Research issued a stunning report on the three largest pension systems in California.  The report was titled Going for Broke and what we find is a rather daunting mountain that California has to climb if it seeks to remedy their pension system.

Let us look at the three largest systems:

In total these cover 2.6 million of California state workers.  These are CalPERS (the largest), CalSTRS, and UCRS.  But if you look at the funds performance through the crisis, all of the funds saw 23 to 25 percent declines.  These declines only exacerbate the shortfall of the system.

The odds of shortfalls are virtually assured for all systems.  We are now entering a stage where many workers will be retiring and drawing into the system.  Expectations for deficits are large:

Part of this stems from the notion that markets will always return a standard rate.  As we have seen with the massive market volatility, markets are largely unpredictable especially when they become casinos for the wealthy.

As the report finds, these funds do not have the flexibility required in an unpredictable market:

“A public employee’s pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment. Such a pension right may not be destroyed, once vested, without impairing a contractual obligation of the employing public entity.”

It becomes a matter of law to pay even if the economy has rendered a new reality.  As Greece is showing, having very early retirement rates with generous packages is not supportable with a younger generation that isn’t having larger families.  The math doesn’t work but good luck changing that.  Some will argue that people contribute into these systems.  This is true but not anywhere to cover the actual payout over time:

In other words, there is a shortfall of coverage and a market decline only pushes the problem to the surface for all to see:

“As mentioned earlier, the pressing nature of California pension shortfalls is due in part to the losses CalPERS, CalSTRS, and UCRS sustained in the mar­kets over the past 18 months. CalPERS expects an average annual investment return of 7.75 percent, CalSTRS targets 8.00 percent, and UCRS expects 7.50 percent.”

Those expected rates of return are simply too optimistic.  These funds are expecting 7.5 to 8 percent annual returns in a market that is giving 0 percent rates to savings accounts and 4 percent for 30 year fixed government debt.  Instead of realigning to this low yield environment fund managers went all in to the market and gambled on Wall Street:

It is amazing that many fund managers look at the above as “safe” but it is anything but safe if you are losing 23 percent.  Part of the bets were flat out risky:

“(LA Times) SACRAMENTO — The value of residential real estate investments owned by the country’s largest public pension fund has plummeted 35% — a paper loss of $3.3 billion for current workers, retirees and their state and local government employers.

The California Public Employees’ Retirement System reported Wednesday that in the year ended June 30 its real estate portfolio declined to $6.08 billion from $9.36 billion, based on 461 independent appraisals of its investments in 288,000 housing units across the country.”

Housing, both residential and commercial has not recovered.  So these losses are still likely part of the funds new reality.  The massive rise in equities probably has helped but it is a long way from that 7.5 to 8 percent annual return:

Past performance is no indication of future returns especially when more and more retirees are going to draw from the system:

“In 1999 California passed Senate Bill 400 (SB400), substantially raising benefit factors and lowering retirement ages for public employees (see Table 3). Based on a National Institute on Retirement Security report, average monthly public pension benefits in California were $2,008 in 2006, the eighth highest nationwide.”

Now that $2,008 monthly benefit does not factor in additional healthcare benefits which cost a lot and are also provided.  Just do the quick math, let us assume someone retires at 55 and lives to 85 and receives that $2,008 monthly benefit:

$2,008 x 12 = $48,000 $24,096 x 30 = $722,880 in total paid out

We are also assuming no COLA adjustments which some of these plans have.  We aren’t adding the added healthcare cost which an older retiree will be using up.  Something tells me that a state worker did not even come close to putting in $722,880 over their working career.  And you wonder why these pension funds combined are projected to have a $500 billion shortfall?  And good luck if the stock market turns lower or simply remains stagnant for years.  California is only one example of many.

The paper lays out a few suggestions including higher contributions, a hybrid 401k/403b system, and safer investments but also a tiered system.  In reality, Wall Street has not wanted to deal with reality and has used the taxpayer as a bailout for their wealth protection.  Now that taxes are being talked about including a value added tax (VAT) people are getting angry.  You didn’t think bailing out Wall Street was free?  The same reality will hit the state pension systems.  Younger workers are going to enter a tiered system where they have to pay out more with no future guarantee while they watch older workers take on funds that they will never see.  I’m sure that is politically going to go over well.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

Take for example what Americans are saving.  A recent survey from the Employee Benefit Research Institute’s annual Retirement Confidence Survey found some startling data:

43% of workers in the survey stated they had less than $10,000 in savings while an amazing 27% of workers said they had $1,000 saved.  Many of these Americans are one illness or a job loss away from being broke (many are called the working poor).  It is no surprise that the survey found that only 16% of those who responded felt comfortable about retiring, the lowest rate in a generation.  What this survey highlights is that more and more middle class Americans are going to struggle in their retirement.  Thanks to the Federal Reserve artificially slamming interest rates lower, many Americans on fixed incomes or Social Security will see no cost of living adjustments even though their daily cost of living items will increase in price.  This is targeted destruction of the middle class.

And keep in mind this survey is comparing 2009 and 2010.  What happened to the rally here?  Workers clearly did not participate in the stock market rally.  Why?  Because a large part of the rally also hinged on “productivity gains” which is a nice euphemism for laying off people and making current workers juice out more production.  So this translates to great profits for the Wall Street elite while unemployment in the last year has done this:

Source:  BLS

It might be hard to save for retirement if you are getting fired.  And that is what millions of Americans experienced in 2009 as the stock market went on a massive rampage as Wall Street was fueled by taxpayer bailout money and decided to load into stocks.  Keep in mind that many of the large multinational companies are making a boatload of their profits internationally.  This is great for those companies but as most Americans know, small business is the juice of the American economy and most small businesses sell to domestic clientele.  A clientele that is increasingly poorer and unemployed.  We used to call this group the middle class.  This isn’t lost on some:

“(RR) Companies in the Standard&Poor 500 stock index had sales of $2.18 trillion in the fourth quarter, up from $2.02 trillion last year, and their earnings tripled. Why? Mainly because they’re global, and selling into fast-growing markets in places like India, China, and Brazil.

America’s biggest companies are also showing fat profits and productivity gains because they continue to slash payrolls and cut expenditures. Alcoa, for example, had $1.5 billion in cash at the end of last year, double what it had on hand at the end of 2008. Sounds terrific until you realize how it did it. By cutting 28,000 jobs – 32 percent of workforce – and slashed capital expenditures 43 percent.

The picture on Main Street is quite the opposite. Small businesses aren’t selling much because they have to rely on American – rather than foreign – consumers, and Americans still aren’t buying much.”

One of the disturbing trends especially when it comes to retirement is the massive increase in health care costs.  It is absurd to use health care costs (i.e., premiums, etc) to inflate GDP but that is exactly what is happening:

Source:  BEA

It is absurd that in 2008, as the economy was flying off a cliff and other service industries were contracting health care still managed to pull in 0.31 of the 0.32 gain in the entire year for this sector.  Take a look at 2009.  What service sector did the best in another troubled year?  Health care.  So to say that gouging Americans like the 39% hike in premiums in California is good for GDP is nonsense:

“(ABC) Reports that Anthem Blue Cross is raising premiums on some customers by 39 percent on March 1, have prompted the Secretary of the Department of Health and Human Services, Kathleen Sebelius, to write a letter to the company, Golden State’s largest private insurer, asking the company to “provide a detailed justification for these rate increases to the public.”

“Additionally, you should make public information on the percent of your individual market premiums that is used for medical care versus the percent that is used for administrative costs,” Sebelius wrote, noting that the profits of Anthem Blue Cross’s parent company, WellPoint Incorporated, have soared.”

Ask any middle class American about their health care costs and the likely story is that prices have gone up consistently over the last decade as incomes have gone stagnant.  How is this good especially when many baby boomers are now reaching retirement age with little savings as we have seen and are now going to shift a larger portion of their income to health care?

In many ways the health care industry is much in line with how Wall Street banks have operated for the last forty years.  They’ll gouge and exploit the middle class until every dollar you earn is either yanked by bank bailouts, health care costs, or taxes.  Let us run the numbers on a hypothetical family in California to see how this plays out.  We’ll use a family making $61,000 a year (Census 2008 data):

Now the above is merely a hypothetical budget.  I welcome people to comment on different items one way or another.  The above is a two adult household with no children with two cars.  This is very typical for California but I’m sure for other states as well.  But as you can see from the above, given that this household is at the median there isn’t much room for large amounts of flat screen TVs, expensive nights out on the town, or leased BMWs.  Yet many across the country lived like this and clearly that was on borrowed time and was all a ruse usually magnified by credit cards.  Now as many near retirement they are realizing that the only game in town is Wall Street and that has now become a large casino.

I know many people scream personal responsibility.  I’m the first to agree.  But there is this massive amount of cognitive dissonance when people blame the middle class and working class for this mess when Wall Street who created the financial instruments of destruction, not only got away with the biggest transfer of wealth in history, they are actually getting richer because of bailouts.  This is like putting a bank robber in prison for stealing $100 to feed his family while letting that same banker go to Wall Street and rob millions of Americans for billions of dollars and not only letting him go, but putting structures in place to make him richer!  Is it any wonder why there is so much anger festering in America?

Retirement is getting harder and harder for many middle class Americans.  What use is $1,000 a month in Social Security when your out of pocket costs for medicine is going to cost you $300 to $500 per month?  How did we do it before?  Stable banking that allowed people to pay off their mortgages and allowed people to live securely in their homes once they retired even with a small Social Security check.  But now, many have tapped out their equity and mortgaged their future.  Unlike Wall Street Americans don’t have access to the Federal Reserve.  Massive part-time employment, weak worker protection, a corporatocracy raiding the workers, and a disappearing middle class.  Get ready to work longer America because Wall Street needs that money to fund their bailouts and billion dollar bonuses for wrecking the economy.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

The current recession by many accounts is one of the worst since the Great Depression.  Some 26 million Americans are without work or underemployed and many other millions have seen no pay raises or have seen their hours cut back.  With an aging population and rising healthcare costs, many are facing a balance sheet that seems impossible to balance:

To understand this data even better, let us break out the income by top earning households:

In order to be in the top 20 percent of households, a family would need to earn $90,000 a year.  To be in the top 10 percent a family would need an income of $118,200.  Yet these numbers are clearly out of the reach of the 50 percent of U.S. families making $50,000 or less a year.  Let us put out a hypothetical budget of a household making $50,000:

With this budget we are assuming a few things.  First, we are being generous in assuming no state income tax.  In a state like California, this can add up to a 10 percent burden depending on the circumstances.  But for our purposes, we are assuming no tax here (for example, Texas).  The gross monthly pay comes out to be $4,166 but after taxes, the net pay is $3,287.  This is where you can see why the middle class is having a tough time maintaining in the U.S.

We are assuming the person is renting a home.  Rent of $1,200 should be sufficient for a nice home (a 3 bedroom and 2 bath home in Texas).  In terms of utilities including gas, electric, and phone I went on the conservative side.  These costs have been creeping up now that oil is back up.  Groceries are always a big expense in a household.  For the middle class family, food can take up to 15 to 20 percent of their net pay.  And food has gone up in price.  Now, people are getting more for less because of smart packaging:

You also see less quantity in items like cereal for example.  For most middle class Americans housing is the biggest line item.  This applies to both renters and homeowners.  Roughly one-third of net pay will go to housing.  In the above budget, we are assuming the household has one car payment at roughly $300 per month.  They may have two car payments so you would have to adjust for this.

Next, we need some form of emergency fund.  We are setting aside $400 per month here.  Ultimately, you want to have 3 to 6 months of expenses set aside.  At roughly $2,800 in monthly expenses, we need to set aside $8,400 at a minimum.  At $400 a month, this will take us 21 months.

We are spending $100 in entertainment.  This probably amounts to 2 movies and 1 night eating out.  Many Americans do more of this.  I’m not advocating one thing or another but just pinpointing why someone at the middle income level is going broke and it doesn’t take extravagant spending.

Haircut and clothes are optional, I know but if you work in a professional environment you might need to have a decent set of clothes.  This line item can adjust depending on your work environment.

So what are we missing?  How about retirement funds and healthcare?  These are expensive items.  You can see that $300 to $500 a month for healthcare will have to come from another line item in the budget.  Retirement?  Ideally they will invest pre-tax dollars into the market but people are shaken up since the S&P 500 has become basically a Wall Street casino.

So it is easy to see how people can go under with a $50,000 household income and that is what we are seeing with the rising unemployment rate and the massive jump in bankruptcies.  It is interesting to note that states with income tax and no tax are having problems.  California for example had to patch up $60 billion in deficits this year alone.  But if you think states with no taxes are immune to problems, take a look at the Gini Index for states in the U.S.:

It is interesting to note that a handful of states have higher income inequality and two states that you would expect at opposite ends of the spectrum, New York and Texas both show up in this data point.  Only 5 states have higher than the U.S. Index average for the Gini Index.  It is also interesting that some of the states also have some of the highest poverty rates:

So the solution to the current crisis isn’t so clear cut.  You have states with high taxes like California having problems and states like Texas with no income tax having some of the highest poverty rates.  Bottom line is many families making the median of $50,000 a year are being crushed in the current recession.  It is all good to say things are getting less worse but we are not seeing any job growth.  That is a major issue.  With an aging population, how are people going to pay for food and healthcare?  Social Security just announced no cost of living adjustment for the year.  These are all issues we will be facing in the upcoming years.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

Now many people fail to realize that the best one day gains and the worst one day gains occur during periods of massive distress, not during bull markets.  Let us take a look at the worst and best 5 days on the Dow:

It is rather apparent that maximum fluctuation does not mean things are going well.  In fact, four of the five best days in the Dow occurred during the Great Depression and one of the five days occurred during our current massive recession.  The five worst days include three from the Great Depression and the 1987 stock market crash.  Let us first look at the current rally:

It took 17 months from the peak in 2007 to the “bottom” in March of 2009.  In that time frame, we lost 57 percent in the S&P 500.  A drop only rivaled by the Great Depression.  Yet our current rally is going on 5 months and is flirting with 50 percent.  Never have we seen this unrelenting drive up.  Even after the 1987 crash, it took some time to rally 50 percent and the economy was in much better shape at that time with lower unemployment:

How long did it take?  From October of 1987 to July of 1989.  Not exactly 5 months.  And this rally is happening with tepid earnings, massive unemployment, and the U.S. Treasury gearing up for Plan C to bailout the enormous commercial real estate bubble which will make the subprime debacle look like a walk in the empty subdivision park.  If we look at a 60 year chart of the S&P 500, we will not find a 50 percent rally in the span of 5 months:

The only other time that we saw such a massive rally was during the Great Depression when the market did bottom out.  But that bottom came after an approximately 90 percent drop in stock market value.  So many are betting that March was our Great Depression bottom.  But even then, with the mother of all economic contractions, we did not see a 50 percent rally in 5 months.  The absurd irony of this all is earnings are not good.  Sure, companies revise estimates to beat the street but overall they are not solid.  If you need any more evidence, just look at this chart:

It would be one thing if earnings were flying off the charts and stocks looked cheap.  That is not the case.  Make no mistake.  This is a hope filled rally not guided by the fundamentals.  It is a rally based on the psychology of “well things have to get better just because” and ignoring earnings, employment, and all other indicators.  It would be one thing if the market evened out.  That is understandable.  But to go up 50 percent in 5 months?  This reeks of a bubble.  At a certain point things will pull back and it will get ugly.  The recent GDP report which showed only a 1 percent contraction, better than expected, was only the case because of government spending. The consumer is spending less.  That is why consumers are being egged on to spend more with gimmicks like the cash for clunkers program.

The banks are only walking because of trillions in taxpayer bailouts.  The system is completely relying on the taxpayer crutch.  How long can this go for?  This market volatility with huge unemployment only signifies that this will be a slow recovery.  The market is rallying as if this will be a short and quick recovery.  I think the rally may go on because we are talking about the same infrastructure that made crappy homes double up in the matter of years so anything is possible.  But one thing is certain, if earnings don’t show up and employment doesn’t start picking up we are heading back down and in a fierce way.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

Yet many people forget how that money was spent or will be spent:

Now the above gives you a general sense of the plan.  Much of the money sent to states is already spent.  Not much stimulus occurred here because states used the funds to patch up brutal deficits like those being experienced in California.  Also, a large portion of the money was in tax cuts.  That amount is $282 billion.  Much of that money is already factored into the current economy.  Yet the stimulus bill was more like a band aid and less of a stimulus plan.  The overall idea of a stimulus bill is to create jobs but when you dig into the bill, there really wasn’t much money dedicated to this.  However, let us now look at the Wall Street and banking bail out:

*Source:  Bloomberg

In fact, if we look at only two line items here, the Term Auction Facility and the Currency Swaps program, these two dwarf the 2009 stimulus bill.  So why is the stock market rallying yet 26,000,000 people are unemployed or underemployed?  Because Wall Street has become a casino and most of the “bail out” funds have gone to the rigged banking system.  Keep in mind this is the same banking system that created collateralized debt obligations trying to convert toxic waste mortgages into “solid investments” and sold them off to so-called investors.  This is the same industry that hungered for subprime mortgage debt and allowed the real estate industry to give loans to anything and everything.  This is the same Wall Street that held the American public financially hostage last September and October.  This is the same industry that offered wicked incentives to the real estate industry for finding any loan even if it was fraudulent to put into their mortgage-backed security portfolios.

So on the one hand, we have a stimulus bill of $787 billion that people can feel and then you have $13.5 trillion committed to the banking and Wall Street bail out with already $4+ trillion used.  And you wonder why the stock market is up 46.5 percent in four months?  The stock market is no longer connected to main street.  Take a look at some mainstream media analysis of this:

*Source: Futurnomics

What can be more telling than that CNBC screen capture stating the recession is over and then, right beneath it you see the Bank of America and Merrill Lynch logos?  The recession may be over for Wall Street and banks thanks to the $13.5 trillion committed but Main Street is still very much in a recession.

Keep in mind the U.S. Treasury and Federal Reserve have already committed this money and we still have the $3 trillion commercial real estate bubble that will burst and we have covert action like Plan C where they are preemptively getting ready to use taxpayer money to bail out more toxic financial waste.

Why is all this failing so miserably for the public?  We have the worst of Keynesian thought mixed in with the worst of free market thinking.  In a nut shell, Keynesians believe that in difficult economic times the government should step in to create an environment that will help economic conditions by stimulating work and demand.  In war, this works perfectly as it did after World War II and issued in 30 years of prosperity for the U.S.  Yet using too much of this during peacetime will create problems like the 1970s stagflation.  That is, politicians will use Keynesian mixed-market planning in times of political desperation like when Nixon stated, “I am now a Keynesian” and was re-elected for a second term in a very difficult economic climate.  An advisor to Nixon at the time Milton Friedman chastised his action but that is how politicians will operate in desperate times.

After that, the school of free market thought entered and de-regulation was put up on a mantle.  This led to economic recovery but also gave us the S&L crisis and was a precursor to our current financial de-regulated mess.  Unfortunately, it would seem that we are using the worst of both systems.  We are using Keynesian principals to bail out the so-called free market banks.  They are using both theories of Hayek and Keynes in completely unjustified ways.  We really have no idea how things will end but many Americans are feeling as if they are on path to financial serfdom.

We have bankruptcies rising at colossal speed.  The 30 year housing bubble has burst with deep consequences.  We keep borrowing money every day from our foreign lenders.  Unemployment is still rising with the real unemployment rate closer to 17 percent.  Keep in mind that even though we are not flying off the edge, companies are not hiring.  That is the second part of the equation that is leading to modern serfdom.  Sure, companies may not be laying off current employees at the peak levels of this recession but they are not hiring either:

*Source:  Gallup Poll

As usual, it pays to look at who is doing the hiring instead of clamoring around Wall Street and the mainstream media analysis like middle school girls.  As you can see from the above, those letting people go is still high.  We went from about 40 percent of those surveyed in February of 2008 saying they were hiring to the current 22 percent.  Those letting go was about 11 percent in February of 2008 and now it is near 27 percent.  But again, who needs a job when you have trillions funneling into Wall Street.  And what good is a tax cut when you are unemployed?

The road to financial serfdom is paved with bad intentions here.  The U.S. Treasury and Federal Reserve are operating under the premise of “what is good for Wall Street is good for America.”  It is not.  When are we going to investigate Wall Street with a strong arm?  And don’t you think it would make sense to investigate why things failed before committing $13.5 trillion to the cause?  Interesting how they already know how much money they need right?  That is why you shouldn’t be surprised when you get reamed with another trillion for commercial real estate, more trillions in bad toxic mortgage debt, and the government running to bail out Wall Street for bad bets.

You cannot be dogmatic in these cases but it is incredible what is happening.  Looks like the financial overlords on Wall Street want to make Americans into their financial serfs.  Who needs a job when you can watch CNBC all day and watch them drink champagne while they cheer big earnings for banks since trillions has been given to this industry?  Hard to lose money with a trillion safety net.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

First, let us examine the growth in the healthcare field over the last decade:

As our economy is shedding jobs in multiple sectors, healthcare has remained rather stable.  This of course has to do with the fact that many baby boomers are now retiring and requiring more healthcare services.  If you really doubt this, all you need to do is watch the nightly primetime news and see the advertisements.  Every other ad is about some new pharmaceutical and how it will make your life perfect.  It is a fascinating study in sociological trends our country will be facing.  In addition, it would logically follow that healthcare is now taking up a larger percentage of all employment in our country:

Only recently has healthcare employment crossed into the double-digit realm.  Of non-farm employment, healthcare now makes up 1 out of 10 jobs.  And you can see that it has been growing through both the earlier 2001 recession and the current recession.  Although the current deep recession has put the breaks on employment including healthcare to a lesser degree.

Another reason this is such an important issue even from an economic standpoint is that more and more money is being spent on healthcare.  And this is happening at a time when more and more Americans are losing their jobs and losing healthcare coverage.  Recent estimates find that 48 million Americans are without healthcare.  Let us take a look at expenditures in the healthcare field:

Medical care expenditures now make up 12.7 percent of our GDP.  That is an astounding number.  And this number will only continue to grow because we are only at the frontend of the baby boomer retirement tsunami.  This couldn’t be happening at a more challenging time for our economy.  In fact, this issue has been neglected through the 1980s, 1990s, and 2000s.  We now have no choice to deal with this crisis but we are facing a global recession that is shifting priorities like a ship in a tempest.  This has all occurred even though healthcare costs have seen some stabilization:

It will be a challenge confronting our society and will also force us to examine what we value and given a climate of limited resources, will force us to prioritize where we want to spend our money.  We cannot do everything that we want.  This new austerity is making us realize that we cannot pursue everything even though there are many worthy proposals on the table.  Let us examine the demographics of the Untied States:

What you are going to see, is the top half of the chart increase as more and more baby boomers retire and age.  In addition, the birth rate in the United States has also been falling so what you have is a reverse pyramid structure starting to take place.  That is, more and more younger workers are going to support more and more older workers.  To highlight this point, let us take a look at a chart:

*Source:  Perot Charts

What many older workers are already realizing in this climate is that retirement is not assured.  Social Security is not a lot of money.  I think some tend to think of entitlement programs as golden parachutes but they are anything but.  Let us look at Social Security for example:

The average monthly Social Security benefit for those receiving benefits is $1,056.  You are not going to be rich with that and you certainly won’t be able to afford expensive medical treatment with that amount.  So the strain starts to occur because of the raw number of people receiving benefits.  In January alone $53 billion in benefits were given out to 51 million people.  And with an aging population, you can rest assured more people are going to depend on Social Security only to get by.

And even though in the midst of the this economic crisis, the U.S. Treasury and Federal Reserve also need to confront the rapidly changing needs of our economy and not simply focus on banking or housing.  Healthcare is something that will be a major issue in the upcoming decade.  Unlike banking or housing, this is a booming field with many opportunities for successes and failures.  And what is even more daunting is Medicaid and Medicare spending:

All these charts are confirming the same thing.  Healthcare is becoming a larger part of our economy and eating up more resources.  Yet will this make us competitive in other areas if this starts crowding out capital in other industries?  We already realize that the global economy is not sympathetic to mistakes.  These are major issues that we will be facing and having a deep recession does not mitigate the responsibility of dealing with this.  There will be a major debate and dialogue regarding healthcare and our hand is now forced to deal with it.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

Not all that glitters is gold.  And not everyone touting to be a financial expert should be regarded as such.  Americans have lived in what could be considered a decade built on a debt façade.  As many Americans strolled their neighborhoods, possibly taking the dog out for a walk, many suddenly would come across a neighbor with a new sleek silver Mercedes Benz or other foreign car.  Many thought, “how could it be that they now have the means to afford a $100,000 car?”  At this point, many could have resisted the siren call but many actually mistook debt for wealth and went out and went into debt to also get a luxury car.  This story replayed itself many times over especially with the allure of the 3 decade long housing bubble.

The Federal Reserve issued its Survey on Consumer Finances last week and this largely went underreported because the fixation has been on the stimulus plan.  Yet this detailed look at the finances of American families shows us how the average American household has lost a decade of wealth largely in part to the obsession created by the housing and banking industries (two industries now draining the government for incredible sums of money).  Many are now awaking from their debt slumber to realize that the luxury car, the large home, and all the household amenities financed by debt were never really an asset.  It was a borrowed identity.  It was as if millions of Americans had the chance to live the life of a tiny millionaire even though they had negative balance sheets.  The survey highlights this problem.

In this article, we are going to examine the balance sheet of the American family to see where the money actually went.  We will try to break down some of the myths but also look at the menace that is deflation that shows up in lost wages and declining home values, which apparently has shocked many in the mainstream media but is very predictable if you only follow the money.  What we will find in the article is how the top 10 percent of our country have had a largely profitable decade while the other 90 percent have been running in the same place and falling back.

The first chart we should look at is the source of income for most Americans.  There is this large notion that most people are self-employed but this in fact is a myth.  The large majority of Americans actually earn a paycheck from an employer.  Another important point is 75 percent of Americans don’t derive any income from capital gains yet we constantly hear about this.  Let us look at a chart highlighting some fascinating data:

So what can we gather from this data?  For both 2004 and 2007, nearly 90 percent of Americans derive most of their income from wages.  Business, farm, and self-employment income makes up a very small percentage of income for 90 percent of Americans but for the top 10 percent, it makes up 21.5 percent.  Capital gains are virtually invisible for 75 percent of Americans and creeps up for those in the 75 to 89.9 percentile range.

This survey is released every 3 years.  So what happened in 3 years?  For the top 10 percent, in 2004 “business, farm, self-employment” and capital gains made up 29.8 percent of the income for those in the top 10 percent.  Guess what happened in 2007?  Those 2 sources now made up 39.1 percent.  Next time you hear the cries of capital gains just remember who they are talking about here.

So we have established that the vast majority of Americans derive their income from their wages paid by employers.  So how did wages do over this time?

You’ll first see some strong growth for the 1998-2001 survey.  I would venture to guess that a large part of this was due to the tech bubble.  But the startling data is for the 2001-04 and 2004-07 data.  The median income has fallen over this timeframe.  The disturbing point is that for the most recent survey, the mean income has gone up and this was largely based on the stock market and real estate bubble which benefited the top 10 percent while neglecting the bottom 90 percent.  You need only look at the data to verify this information.  Plus, it isn’t like the Federal Reserve is actually trying to encourage Americans to save although this data is screaming for us to do so.  Yet a point emerges and that is, the Fed may actually realize that Americans have nothing to save hence their lack of focus on increasing savings.  It is a moot point.

The survey is rich with data.  The place where this wealth discrepancy is shown the most is when we look at the actual numbers for income and net worth:

For the latest survey, 80 percent of Americans families make less than $98,200 and 90 percent make less than $140,900.  And any financial expert worth anything realizes that true wealth is signified by your net worth.  That is, assets – liabilities = net worth.  If you have a $700,000 home but owe $800,000 you are not wealthy although people that look at your home may think you are.  Yet as we all know, most Americans loaded up on real estate which is now in a major decline and this data largely does not capture this fall.  The true story is revealed on that net worth figure.

For those at the 25^th percentile net worth increased by $1,400.  (11%)

For those at the 50^th percentile net worth increased by $29,000.  (31%)

For those at the 75^th percentile net worth increased by $106,100.  (39%)
For those at the 90^th percentile net worth increased by $279,900.  (44%)

When you start breaking down the numbers you can see who has been doing the best this past decade and at the expense of the vast majority of Americans.  The next chart I want to show is the massive amount of debt used to fuel the real estate bubble:

It is interesting to note how much money was funneled into real estate during this time.  The biggest debt for the majority of Americans is the primary mortgage.  This steadily increased from 1998 to 2004.  You also see a jump in debt to finance “other residential property” as many bought vacation or investment properties.  This slight jump is big since the mortgage market is over $10 trillion.  But take a look at debt to finance other investments aside from real estate.  It falls in half over this decade.  This tells you where people were dumping their money.

Another chart shows us that many Americans took out more equity from their homes but also used this money to finance other real estate purchases:

So as you can see, the obsession with housing has been a very bad move financially for our country.  So guess who is on the other side of the equation?

Debt to commercial banks and mortgage or real estate lenders steadily increased over this decade.  And guess which institutions are asking the government for the largest sums of money?  It is that top 10 percentile that actually profited the most during the boom times.  And as the data shows us, the average American household hasn’t had a jump in wages over this entire time.

Interestingly enough, over this past decade Americans as a whole have pushed away from financial assets.  Take a look at this chart:

Only 17.9 percent of Americans own stocks outright but what has grown is the usage of retirement accounts which of course are simply a different way of holding stocks.  And this was an unfortunate move.  Since stocks and retirement accounts make up over 50 percent of the financial assets, many have seen large declines since the markets have shed nearly 50 percent of their values.

As much as Americans want to consider that they are diversified they are not.  Consider the amount of Americans that own psychical gold as an asset for example:

Just to give you a sense, gold was at $270 back in May of 1999 and is now at $950 an ounce.  Most of the time gold was seen as an archaic form of holding on to your money but this is just to highlight how ill diversified Americans were for the economic shock we are going through.  Diversifying meant to many that you owned a bunch of U.S. stocks and real estate in a few locations.  Even if people had 10 percent in other assets aside from real estate and stocks, many would be in better shape.  Yet much of this comes from the structure of the system.  The obsession with housing and debtor mentality are now going to come under direct fire.

The data in the survey shows us that many Americans were really just borrowing the artifacts of wealth for a few years.  Ironically, those that made the loans are asking the government for a bailout while most Americans are losing their main source of income, their wages.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

On Friday, the unemployment report came out and shocked to the downside.  Most analyst were expecting the unemployment number to come in at -350,000 when the actual number was -533,000 jobs lost.  This sent the Dow 30 down over 200 points yet at the end of the day, the market ended up strongly by 259 points.  The S & P 500 which is a better measure of the overall economy, went up 3.65%.  When we see action like this, it is hard for many not to begin to look for a bottom.

I would argue that a bottom is far from here.  Even looking at economic fundamentals with employment and sector growth, the country is set for a powerful contraction.  $50 trillion has already disappeared from the global economy since the peak in October of 2007.  Today we are going to look very closely at the S & P 500 and try to determine whether it is a smart time to invest in the broader markets.

First, let us take a look at a graph of the S & P 500 since 1936 through 2008:

Looking at data since 1936 the average P/E for the S & P 500 is 15.79.  The current P/E for the market looking at second quarter data is 24.92.  Since that time, the P/E has started to look more attractive but you have to be cautious as to why this is occurring.  First, the current P/E ratios are betting that earnings will not take hits in 2009 which they clearly are.  The formula itself looks at a stock price and measures it to earnings.  Well as you know, many companies are reporting weaker and sometimes no earnings.  This obviously is going to hurt the overall ratios and makes what looks like an attractive investment, a bottom trap.

If you think it can’t go lower take a look at some of the historical quarter lows:

1942:  8.47

1949:  6.52

1974:  7.71

1980:  7.65

1989:  12.61

The current P/E for the S & P 500 as of 12/5/2008 is 18.01.  This may start looking attractive because earnings for the most part are being projected the same by numerous companies.  This of course is inaccurate.  So what you have, is over the past year the price going drastically lower while earnings have yet to catch up.  This is where the economic fundamentals come in.  Clearly earnings come from a vibrant economy and losing the most jobs in 34 years is going to force many of these companies to cut back.  Let us look at how the S & P 500 is broken down:

The S & P 500 is made up of 500 leading companies in leading industries of the U.S. economy.  Companies have to have a minimum market capitalization of $4 billion to make the index.  Most regard this as a better overall gauge of the U.S. equities markets than say the Dow 30 components which only reflects 30 companies.

You can see in the above chart that 5 of the heaviest weighted sectors will be facing difficulties in the upcoming year.  If energy prices stay as they are because the menace of deflation goes longer than expected, this will cut deeply into earnings.  Consumer staples?  Early reports are showing us that consumers are tapped out and spending on more necessities as opposed to want goods.  Could it be because the United States is looking at over $50 trillion in debt and is maxed out?  This sector will be contracting as well.  Health Care?  This may be one of the few areas that does hold up but people in tough times cut back no matter what.  Financials?  Well this area has been the hardest hit and it is easy to understand why with the bursting housing bubble and the destruction of equity and credit markets over the past year.  IT?  Take a look at the NASDAQ and you’ll see how they are doing.  AT & T just announced it will be cutting thousands from its workforce.  This area will contract as well.
So what does this all mean?  Expect lower earnings.  So even though the index price has been declining (after all the S & P 500 is down over 40% for the year) it is no bargain.  Even if we assumed a healthy economy, the price is no bargain.  Throw in the fact that we are in recession and you can understand why the S & P 500 is still overvalued.  We haven’t even come close to the historical P/E of 15.79 which includes good times as well.

Here is an easy way to wrap your brain around this.  Wal-Mart has been holding up well since they sell needed daily goods which consumers will always need.  They are up for the year 22%.  Their current stock price is $58.21.  Their last earning per share number was $3.42.  So they have a P/E slightly above 17.  So even Wal-Mart who if we look at both economic and stock fundamentals, is priced to withstand the recession better than many other companies in the S & P 500 is still lower priced than the overall index at 18.01!  What does that mean?  The S & P 500 is still over priced.

Let us take a quick look at the damage:

S & P 500 Market Cap:

October 12, 2007:      $13.75 trillion

December 6, 2008:     $7.66 trillion

A drop of $6.09 trillion in market cap in a little over one year and the index is still overpriced.  Shows you that we had more bubbles than simply the housing bubble going on here.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis