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How confident are you in your finances?

Finance/Finance & Business by

As the market continues its run upwards, it is important to look down and see how real, everyday people are doing financially?

Financial Literacy

According to the Financial Literacy Council, the US national average scores 62.42% of all questions correctly. Only 3 in 5 people questions understood on the most basic of levels. This is such a basic test that a large majority of the questions involve goal setting. A sample question:

Many celebrities, professional athletes, and entrepreneurs—people who can afford to live their desired lifestyles—have goals for their personal and professional achievements. Why do these successful people set goals?

So, we must all look at ourselves and where we lack skills.

Financial Worries & Healthcare

Today, growing inequalities and growing costs of living create a new issue, financial safety.

Lack of financial preparation, but also the lack of financial support in terms of both insurance accessibility, and copay coverage, have become deeply troubling to the average American.

According to Value Penguin, ” Between 2010 and 2011, average premiums increased 9.6% for individual policies and 5.6% for families.” This as a single year, is astounding. Especially given that the average pay only increased 3.13% according to the Social Security Administration.

Obviously, political changes need to be made. However, in the meantime, personal financial changes must also occur. But, how will change happen if the average American lacks financial literacy?

Growing Inequality

The video below is several years out of date, and as such, inequality today is significantly worse today. Despite these flaws, it still provides an scary insight into what is occurring financially.

An easy solution to the improving this, strengthening personal finance skills. Only by investing will personal wealth grow and individuals flourish.

Change

This problem extends to each of us. We must all learn. Political changes should occur. The American educational system should teach applicable skills like money management. Most importantly, we must all strive to save and invest.

To help encourage personal growth, The First Amendment Press will share resources and weekly articles to help individuals strengthen their pocketbooks and prospects for the future.

 

 

 

Made in America Mistake

Finance & Business/Politics by

As the United States removes itself from the Trans-Pacific Partnership, global trade is at risk. Is this trade important, or is it better to buy goods “Made in America”?

President Trump argues that isolationism can bring back American jobs, but this does not appear to be the case. Instead, it could hurt both national prospects and international relations.

North American Free Trade Agreement (NAFTA)


Approved in 1994 by Bill Clinton, NAFTA remains highly controversial.

The original goal: create a continental free trade zone that would maximize trade and output by creating a freer marketplace.

Has it worked?

Walter Kemmsies wrote:

40% of what the U.S. imports from Mexico is derived from U.S. sources. “This is the symbol of the success of NAFTA.” Twenty years ago, he estimates, that percentage was less than 5%.

NAFTA succeeded, but what does it mean to the American people?

Jobs

Opponents often cite the loss of American manufacturing jobs.

However, a Wharton study found that “Supporters of NAFTA estimate that some 14 million jobs rely on trade with Canada and Mexico combined, and the nearly 200,000 export-related jobs created annually by NAFTA pay an average salary of 15% to 20% more than the jobs that were lost, according to a PIIE study. Furthermore, the study found that only about 15,000 jobs on net are lost each year due to NAFTA.”

Even then, more jobs are lost to automation and modernization thanto cheaper international labor.

Low-skilled or non-professional human labour is relatively expensive compared to that of machines . As we move to the future, the need for manufacturing jobs will continue to decrease due to the automation of the manufacturing industry.

It isn’t worth blaming NAFTA, when it isn’t at fault. Rather, we should look at automation, and figure out how to employ American’s in sustainable, non-automatable, non-outsourceable ways.

us factory with goods made by robotsMade in America

So the individual solution proposed to this problem, buy American.

This is no longer possible.

If a single company manufactures a product abroad, all others must as well to stay competative.

Why?

Only 9% of people pay more for a product made in America. To make an item in America is to raise the price, and people will not pay the difference in the price increase.

Quality

Often seen as being higher in quality, there is no logical backing behind buying goods made in America

When a product is made in America, the cost of labor is increased. Then the company needs to cut costs in other ways.

The easiest ways to cut costs is to use lower quality materials, which are bad for you, or to cut labor costs.

Cutting labor cost can only occur in one manner, getting rid of the worker (automation) or making the cost per worker wildly more efficient (so, more outsourcing).

Perpetuation of Nationalism


To say “Made in America” perpetuates negative ideas. This idea reinforces, with a positive feedback loop, the superiority of one’s own nation. It hurts global relations.

We are conditioned to see domestic goods as better, and thus we label them as superior. Often, we do this simply because of societal expectations. Thus, bias perpetuation occurs despite what we already determined as most logical.

Conforming to this ideology hurts international relations. Global trade has lead to an unprecedented age of peace and economic prosperity, all of which rose out of the ashes of World War II. By thinking globally, peace may be better maintained.

Should you buy American?

It is up to you, but realize, it won’t help bring back manufacturing jobs.

 

 

Dow 20,000 Conundrum: Why Markets are Destined to Drop

Finance & Business by

The Dow 20,000 conundrum dates to the 1990’s just before the Tech Bubble burst, when all indicators and experts pointed to a record breaking 20,000 points, but that prediction never came true.

All market action being a byproduct of human psychology will make 20,000 a key resistance point for numerous reasons. One, nobody is willing to take a risk under current conditions. Two, American political changes associated with the Trump transition yield uncertainty, to which markets will likely not respond well. Three, it has been longer than average since the last major recession. Finally, the Dow will not break the key resistance point because of the simple basis of the market, mass psychology.

Current Market Conditions

Through 2016, several major things happened, including Brexit, and a major shift in Chinese economic policies.

Though the Brexit effect is an obvious one, tanking the markets, there was a quick rebound. But in what world does this make sense? The world’s 5th largest economy, using any sort of logic, should not be able to lose the majority of its EU based international trade agreements without any market repercussions. This is indicative of the market’s misassumption of the future impact of the loss of these agreements.

Other issues include the slowdown of the Chinese economy. Now undergoing another bout of market reform, the world’s second largest economy is facing high levels of uncertainty.

Trump Transition

Though this could fit under market conditions, as Trump takes the White House, rapid market changes can be expected for numerous reasons.

Firstly, Trump’s policy is that of protectionism, trying to lash out and protect the manufacturing jobs that remain. Never in modern history has this worked. During the Great Depression it led to higher prices and a tariff war which only worsened the global economy. Should such a policy be implemented, cheap foreign goods which have allowed Americans to consume more, despite rising inequality, will disappear. To be “Made in America” is not a possibility in the modern global economy.

Take if you will an example from Mike Catherwood, the co-host of the radio advice show Loveline (1):

Take the classic “Born in the USA” outfit: blue jeans, white T-shirt, work boots. The three items, all USA-made, cost $421: domestic-made Levi’s 501s ($178), American Apparel white T-shirt ($18) and classic Red Wing work boots ($225). The same outfit with imported goods is far cheaper: Brahma-brand work boots from Walmart ($33), a white Hanes T-shirt ($6) and Gap classic blue jeans ($60) add up to cost less than $100.

This, combined with worsening income inequality do not bode well. There is no bringing back manufacturing jobs. It is no longer possible.

Rather than accept that the US is not a manufacturer, time, energy, and focus will be directed towards the retention of lower quality, lower paying jobs. The United States is an informational power, not a manufacturing power. This will not be the case during the next presidency, driving down future outlooks.

Cyclic Markets and The Next Recession

Naturally, markets’ boom and bust, going from overbought, to oversold. Since 1854, the average boom lasted 38.7 months, just over 3 years. The average bust lasted 17.5 months.

The most recent boom is running on its 82nd week. What justification does the market have to keep going up?

There is the uncertainty between: The Trump Transition, an OPEC oil grip, US-Russo tension, both in cyberspace and Syria; and Brexit.

Psychology

Prominent investors predicted to hit 20,000 since the tech bubble, running to publish books, but it never came.

The market does not run up forever, it stumbles along the way both due to market factors, but more importantly, mass psychology.

A paper published in 1993 (2), written by R. Glen Donaldson and Harold Y. Kim attempted to either confirm or disprove the existence of price barriers. According to their abstract:

It is found that the DJIA’s rises and falls are indeed restrained by “support” and “resistance” levels at multitudes of 100 but that, having broken through a 100-level, the DJIA then moves by more than otherwise warranted.

Time will tell, but the markets have no reason to hit the 20,000 mark, especially not with the current resistance point hold.

Works Cited:

  1. http://www.huffingtonpost.com/2012/09/17/made-in-america-the-luxury-label-will-cost-you_n_1891127.html
  2. https://www.jstor.org/stable/2331416?seq=1#page_scan_tab_contents

 

 

Impoverished Neighborhoods Impact Small Business Creation

Finance & Business/Opinion by

To own a business is one of the best ways to move up in class, but for the poor hoping to entrepreneurially move up, the price of real estate constricts mobility into higher income regions, increasing their chance of failure.

The Idea:

For the past 10 years, there has been a strip mall at the end of my $60,000 price per house neighborhood, where no matter what business moves in, it fails. This can be symptomatic of 1 of 2 things: a slew of terrible businesses and ideas, or a social issue.

I will take the latter stance.

Several weeks ago, my boss, a small business owner and I discussed the placement of business locations. One determining factor she uses when deciding where to place another coffee shop is the type of car that the people in the area are driving. When I questioned her rationale, she parried with:

Why would neighborhoods of people who drive beater cars spend $5.00 a day for a specialty coffee?

I understood her point.

A perfect simple truth–many businesses are destined to fail, solely based upon where homeowners are able to afford to live.

Solution?

This is an issue of Capitalism, and its cyclicality. In theory, a free market economy’s intent is to allow everybody an opportunity to own their own business. In reality, free markets allow some to have more opportunity and more freedom than others.

To solve this inequity requires a change in the structural fabric of either the prevailing economic system or in the design of cities themselves.

If it were possible to consolidate all of a city’s shopping outlets into a single location, then the free market playing field would be leveled. A small business could then compete with a larger business more easily.

Imagine if the mom and pop grocery store were to be next door to Walmart. How much easier would it then be to support the small, local business?

Though it is not clear cut, it is best to see the world as it is–and to remember a key real estate principle in the process: location, location, location. A small business located in the right place will make all the difference in the world towards its survival.

Which of the following photographed locations seems more likely to allow the business owner to have a sustainable income?

 

ETF Cost Beating Investment Strategy

The Issue

The primary issue with ETFs (exchange-traded funds), much like mutual funds, is the cost of operation. Thus, single shares in conglomerates are a much more effective personal investment strategy.

Normal ETF’s have 2 fees: the cost of the trade and the cost of management.

This can add up considerably, especially over the course of, say 40 years, a lifetime of investing. Should $10,000 be invested at the normal return of 7%, it yields $149,744. If ETF fees are taken into account, investing the same amount would yield only $124,160. Thus, ETF management fees would make a $25,000 difference.

Superior Investment Strategy

Wouldn’t it then make more sense to buy a single stock?

Yes and no. To own an ETF is to have a strong, diversified holding without having to develop and maintain one’s own portfolio. Yet, there is something better.

There are many companies that are heavily diversified in their own holdings. Companies such as Berkshire Hathaway and General Electric are like this. In example, Berkshire Hathaway owns the following companies (1):

  • American Express
  • Apple
  • Coke
  • Goldman Sachs
  • Kraft Heinz
  • Phillips 66
  • 21st Century Fox
  • US Bank
  • Procter And Gamble
  • Visa
  • Verizon
  • Walmart

Difficulties arise in trying to find other companies with an equal level of diversity to Berkshire, but, there are options. Some companies, such as Google, Amazon, Foxconn, Procter and Gamble, and GE, have highly diverse holdings and are expanding into many different sectors, making them appear to be valuable long term holdings.

Despite that Google and others are attractive to investors, the goal is to find companies that are so diverse that they are “too big to fail” in the long run. Financial institutions are a good place to look, having given loans to and invested in every sector. A Forbes investigation discovered the following.

The real power to control the world lies with four companies: McGraw-Hill, which owns Standard & Poor’s; Northwestern Mutual, which owns Russell Investments, the index arm of which runs the benchmark Russell 1,000 and Russell 3,000; CME Group which owns 90% of Dow Jones Indexes; and Barclay’s, which took over Lehman Brothers and its Lehman Aggregate Bond Index, the dominant world bond fund index. Together, these four firms dominate the world of indexing. And in turn, that means they hold real sway over the world’s money.

To control the way people see the markets is to control everything. These companies have that power, and as a result, are the top picks for long term investment, though Berkshire Hathaway may also be recommended due to the strength in its holdings and Buffett’s twist of Graham’s classic investment strategy.

The Exception:

The previous investment strategy was useful, but must be compared by individual to leveraged ETFs. If the fund is highly leveraged, it then becomes possible to expect returns that outweigh market return.

However, an advisory must be declared regarding the risk increase. For example, in 2009, geared ETFs focused in financials lost 90% in several months (2).

For this reason, if using leveraged ETFs, it is advisable to use highly diversified ones, like leveraged index funds. SPXL fits this bill. If one that is better is found, it will update.

To Conclude

The heightened risk still does not, in most cases, justify the increased returns. Instead of ETFs, individual stocks in diverse companies will save money and secure individual voting rights not guaranteed while using such funds.

Works Cited:

  1. Berkshire’s SEC Filings
  2. The sector lost 50% or .5 while levered 3 times, so the loss sustained equaled {[1-(.5^3)]*100} or 87.5%.
  3. http://www.forbes.com/sites/brendancoffey/2011/10/26/the-four-companies-that-control-the-147-companies-that-own-everything/#55155aa37f3b

 

 

The Debt Incurring American Dream

Since 1931, when Historian James Truslow Adams first popularized the notion of the American Dream, American’s work toward obtaining a stable 9 to 5 job, home ownership with a green lawn, and a motor car. But in the long run, is chasing this dream what is best?

Although home-ownership has been shown to restrict geographic labor mobility and to effect job search behavior of unemployed, there is no evidence so far on how it affects their future re-employment outcomes. We use two waves of detailed German survey data of newly unemployed individuals to study the effect of home-ownership on the job search behavior of unemployed and their re-employment outcomes. We show that unemployed who own a home are less willing to move and also less likely to apply for jobs for which one would have to move. However, we do not find any evidence for compensations of their restricted mobility by more intensive (more search channels or applications) or different (more active or informal) search behavior. Furthermore, we find that home-ownership does not seem to harm the employment prospects of the unemployed. Although the re-employment probability in the short-run is slightly lower, we find that after one year home-owning unemployed have found better re-employment jobs, in terms of wages and job satisfaction, than their renting counterparts. (1)

Thus, it may be concluded that home ownership, in this aspect, neither benefits nor hinders the search for work, despite its upfront appearance. However, this is a short-term outcome, for in the long-term, it may be concluded that home ownership is far from beneficial.

History

Historically, to own property was to be an elite member of society. Now, this isn’t the case, as America provided the opportunity of “democracy” in which everyone could be a member of this elite class of landowners, thus shifting the defining fabric of what it meant to be elite.

Times have long since changed. Today’s ruling class is not defined by property. The definition lies in stocks and asset ownership. Yet, despite this, the American dream remains to own land.

Over the past 50 years, the average annual rate of change in the median housing price has been 5.4 percent (2), but this figure cannot be used. This is because during the same time period, the median size has increased 63.3 percent (3). Weighing for the percent change in size per year, it may be concluded that the true price per square foot has increased about 3.82 percent (annual price increase minus the average increase in size). Inflation over the same period averages 4.11 percent per year from 1970 to 2016 (4).

Using this line of reasoning, people who buy houses and hold them as their “life’s biggest investment” are in fact losing money due to inflation.

Loans

Furthermore, in order to buy the house, most people have to get a mortgage, most often settling for a 30 year fixed rate. Using the assumption of a 30 year mortgage and better than perfect credit, one could get a mortgage for about 3 percent today. This is one of the lowest rates in American history. The median home price is about 230,000 dollars today (5 & 6). Assuming that one makes a 20% down payment or $46,000 towards the purchase of a house, (this is a generous assumption considering 83% of Americans don’t have $1000 savings (7)), that they make the minimum monthly payment every month, after 30 years, the total paid on interest would amount to $95,000. At that point, one would have paid more money for their house than their house is worth, especially once the house has gone through 30 years of wear and tear.

If you invested $46,000 in the markets (the financial tools of the elite) and adjusted to inflation, there would be 5.38% average annual return, over 30 years totalling $221,566. But, this isn’t possible for the average American, so instead, we buy houses, and lose the true American Dream to those at the top.

Works Cited:

  1. http://ftp.iza.org/dp8972.pdf
  2. http://www.census.gov/const/uspriceann.pdf
  3. http://www.aei.org/publication/todays-new-homes-are-1000-square-feet-larger-than-in-1973-and-the-living-space-per-person-has-doubled-over-last-40-years/
  4. https://www.minneapolisfed.org/community/teaching-aids/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913
  5. https://ycharts.com/indicators/sales_price_of_existing_homes
  6. http://www.realtytrac.com/news/home-prices-and-sales/june-and-q2-2016-home-sales-report/
    1. I decided to include 2 sources, since there seemed to be a little bit of conflicting data.
  7. http://www.marketwatch.com/story/most-americans-have-less-than-1000-in-savings-2015-10-06

Market Manipulation in the 2016 Election

Finance & Business/Opinion by

sp-at-2016-electionAs the United States election drew to an end, the Stock Market’s overnight trading grew wild, the DOW dropping nearly 5 percent overnight. Before falling, speculation of a democratic victory had the markets up roughly 100 points before a Trump victory in Ohio. The day before, the market ran upwards as the FBI cleared Hillary Clinton of the second round of charges for emails. This is indicative of a bias in the market, illustrating that the viewed as pure and logical stock market is anything but, serving a grander political and economic cause, consolidating power through the influence of money.

Market’s are a place that are supposed to run based on the actions of the firms which compose said market, but these motions are controlled almost entirely by individuals. There has always been inequality, as there always will be, but since 1970, this inequality has been growing. From a conflict perspective, the control of the market and political system allow those in a position of power to maintain it through the use of the markets, while individuals make their own positions worse through the ready employment of emotion, perpetuating their own position as proletariat. Thus, a conflict lens will examine how inequality is perpetuated through the bias in market movement and the resulting perpetuation of this inequality through individual choices, making their impact not on the market, but upon the individual.

Growing inequality has led to disproportionate ownership of stocks through control of the banking system and the stock market by the people at the top of the payscale ladder, as the top one percent owns 50.9 percent of the securities in America. To own stocks is to own power over the inherent structure of America, where money is power. By seizing such a higher percentage of the market, it is possible for the choice of an individual, or a small, elite group of individuals to have a structured selling off or buying of stocks, shifting the market outlook in a single moment. Having this capacity, it is then possible to buy low and sell high every time, as the market responds to these choices. What then happens to those who are not market movers? The bottom 90 percent of people by income have less than 10 percent of the wealth. Without financial representation, there is a continuation of wealth of the rich, while the average proletariat is required to work indefinitely, seeing none of the added benefit.

Politics is supposed to represent the people, and upon the news of the FBI Clinton acquittal, the fully unpredictable market has once again taken a turn which only benefits those at the top, but this is not entirely the fault of those with money. As the market fluctuates in natural cycles, though quite probably controlled, the majority of people lose trust in the markets which for some, guarantee success. Rather than take advantage of the system, which remains the greatest social equalizer, half of all Americans have no funds secured in investments. But, is this an individual problem or a structural one?

It is assumed that those with control have every intention of maintaining it, which would then mean that it would be required as a legal standard to be well versed in the basic life skills associated with financial literacy. Yet, there is currently no educational standard for which people must comply; only 60 percent of people are considered to be passably financially literate, in a test for which passing only requires 53 percent of the questions to be correct.

Regardless of political party or affiliation, the market would have risen as it has because the elite want it too. Upon news hillary was cleared, the market rose; upon news Trump was the president elect, the market rose. Historically, the neither the party in control of the executive branch, nor cooperation/gridlock in congress has led to any statistically relevant change in market’s percent change. Therefore, this bias is based not in politics, rather in the economics of oppression.

Individuals have the capacity to change this, but without economic diligence and a change in personal consumption habits, the exploitation of the consumer will continue. The stock market is supposed to represent all available information to act in a pure system to help facilitate investment, but intolerable levels of income inequality have shifted the balance of information, of the playing field to only represent the wishes of the top of the earning ladder. Market developments during the 2016 election have once again shown that despite the potential of the people, monetary control is being perpetuated through a surge of buying.

Sources:

  • https://thinkprogress.org/how-unequal-we-are-the-top-5-facts-you-should-know-about-the-wealthiest-one-percent-of-americans-a1d36a0f10f6#.jx08nmyqs
  • http://www.businessinsider.com/why-so-few-millennials-invest-in-the-stock-market-2016-7
  • http://www.kiplinger.com/article/investing/T043-C008-S003-how-presidential-elections-affect-the-stock-market.html

 

National Financial Capability Test

 

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