Tax cuts are a bad idea

A stimulus package should encourage spending. In that respect, it's ironic to rely on this tool, since an orgy of debt heavy consumer spending on credit cards and silly mortgages is what got us here in the first place. A mild, several year long recession would likely be good for the economy in the long-term.

What it needs is a controlled burn in the forest to clear out the dead wood. That's what a mild recession would do for us, and we probably should have had one a couple years ago. But we didn't, and that controlled burn has now turned into a massive conflagration set to level a major metropolis. It's too severe to just let it burn. Thus, I am resigned to a massive stimulus package.

That package should focus on infrastructure -- transit systems, roads, new power transmission lines, enhanced nationwide broadband access, new energy technology, new materials, bridges, space exploration, and other items of that ilk. Some of these projects may be pork, but that's okay. The point is to put people to work -- get those private construction companies moving again. Make sure their employees spend money in their communities and employ even more people.

At the end of the stimulus period, either the economy will be moving again, or it won't. If it is, that's great. If not, well, at least we will have all this new infrastructure which we desperately need. And people had work. The money will not be wasted.

An additional benefit of the massive infrastructure spending is that not only will we get this cool new stuff, we'll get it cheap. People will work for less money. Steel, oil, and other raw materials are cheaper than they have been for years.

Plus, if we make these investments only when "we can afford it" in a strong economy we are also stealing labor and resources from the private sector's own growth initiatives. Let's get the infrastructure done now when we don't have to compete with the private sector. The country will be stronger for it and already have the key blocks in place when the next boom begins.

Of course this is all money the government is borrowing and we have to pay back, but that is also cheaper than it has been for years.

If you have the capacity to borrow and spend money this is now the best, cheapest possible time to do it.

There was a lot of stuff like that in the House version of the bill.

My concern is the tax cuts. The $800 billion package include more than $200 billion in tax cuts and rebates. The latest details are a bit challenging to nail down.

The problem with tax cuts and government stimulus checks in a bad economy is that they don't encourage spending. Responsible people will not spend that money on new stuff. Instead, it will go to pay down bills. Or it will go into savings for the hard times ahead.

And that's exactly what people should do with those savings. That demonstrates great personal responsibility.

But it won't stimulate the economy. It won't get other people employed. It won't bring more manufacturing on line. It won't drive increased investment by technology companies.

In short, it won't move things forward.

But I don't see anyone opposing middle class tax cuts anytime soon. As much as I hate to say it, the best compromise will be to leave the tax rates alone. Don't send out a "stimulus" check. Instead, provide tax credits for purchases.

I normally don't like tax credits and deductions. They make completing tax forms more complicated than they should be and are one of the reasons our tax code is such a mess.

But the point of the tax reductions in the bill isn't to save people money. It's to stimulate the economy.

So let's replace those tax cuts with rebates for buying things. For education. Or for buying a new, energy efficient car. Or for making substantial home improvements (spend $10K on your kitchen? Get a $5K tax credit). Or for paying for child care. Or for moving to a part of the country that needs a specific set of skills.

By putting those tax reductions in the form of tax credits, we take the money out of the savings accounts and put it to working creating jobs for people. The people in those jobs can now, in turn, make their own purchase.

Saving money doesn't move the economy forward. Spending does. Whether that spending is private or tax payer funded doesn't matter. Nothing happens until someone buys something. And that's what a stimulus package needs to encourage.

Tax credits for buying stuff will do that. Tax rate cuts and generic stimulus checks will not.

Investment choices for 2009

Last year, I made my annual deposit into my Roth IRA and then did the best thing I possibly could have with that cash -- nothing. 2008 was obviously a bad year for the stock market (worst since the thirties). I still managed to beat the S&P 500 by about 2%.

And outside of stock market, I did pretty okay with some credit card arbitrage. Hopefully in this era of shockingly low interest rates, I'll have more opportunities for that.

The stock market always has down years. You can't have the big up years without those occasionally plummets. And long term, the stock market is still the best investment choice out there. So I will continue to put funds I don't plan to need for 10 years into the market.

After the plunge, there are bound to be some good bargains out there. I'm in the early stages of my stock shopping now. I'm doing more research in the coming weeks, but here are the companies I am considering as investment opportunities.

• Apple
• Alaska Airlines
• Allscripts
• AMD
• Best Buy
• Costco
• Exxon Mobil
• Ford
• FedEx
• Google
• Intel
• Microsoft
• Starbucks
• TiVo
• Toyota
• US Bank

I already own some of these, but I will take a look at every thing I already own and decide whether or not to keep it. The key factor in deciding whether or not to keep it will be, "Would I buy it at this price?" If not, it's gone.

Any thoughts on those companies as investment opportunities? What stocks are you looking at as we head into the new year?

Book Review 31: How to become wealthy

"The Millionaire Next Door" is a great read for anyone who wants to be wealthy, or who wants to understand what it means to be wealthy.

As the economy slows down and stock market declines dominate the news, it has never been more important to understand these issues than it is right now.

Are the nation's wealthy really bathing in Champagne, living in 100-room mansions, driving sports cars, carrying Hermes purses, and driving around in luxury BMWs?

According to Thomas J Stanly and William D Danko, in "The Millionaire Next Door" the answer is no. Most millionaires do not live the millionaire lifestyle. They drive older, domestic cars, shop at discount stores, and live in middle class neighborhoods. They don't wear flashy clothes and they didn't inherit their money from wealthy parents.

The book I read was published in 1998. It would be interesting to see how much or how little things have changed in the past 10 years. But I imagine it would mainly be some minor shifts in the statistics, an increase in younger entrepreneurs, and and increase in the number of female millionaires. The core elements of the book are unlikely to have changed, though.

There are two main points in the book:

1. The wealthy don't look wealthy; those who look wealthy are often in debt.
2. The most important key to wealth is to spend less than you earn.

What is so profound about these discoveries? Just this: Most people have it all wrong about wealth in America. Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.

Page 1

While each section may not appeal to every reader, there is something for every one. Those who relate to raw data will appreciate the charts and stats discussions. Those who prefer actual stories will find something here as well. And those who look for summaries of the key learnings will appreciate the authors' descriptions.

The book starts out with a description of the typical millionaire.

Usually the wealthy individual is a businessman who has lived in the same town for all of his adult life. This person owns a small factory, a chain of stores, or a service company. He has married once and remains married. He live next door to people with a fraction of his wealth. He is a compulsive saver and investor. And he has made his money on his own. Eighty percent of America's millionaires are first generation rich.

Page 3

The language here is intentionally gender specific. Generally, they discuss millionaire households where the husband runs the business and the wife runs the household expenses and budgeting. They don't do that to diminish the role of women in the millionaire household; in fact, appropriately managing the household expenses is a critical role in turning income into wealth.

They expand from this description of the typical millionaire and identify the key characteristics of millionaires.

1. They live well below their means.
2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They choose the right occupation.

Page 3-4

The authors get into deep discussions about the purchases most people associate with millionaires, and their data shows that millionaires aren't spending money on luxury cars, $1,000 suits, Rolex watches, and expensive homes.

About half the millionaires surveyed reported they had never spent more than $140 on a pair of shoes. One in four had never spent more than $100. Only about one in ten had spent over $300. If not millionaires, then who is keeping the high-priced shoe manufacturers and dealers in business? Certainly some millionaires purchase expense shoes. But for every millionaire in the "highest price paid" category of over $300,there are at least eight non-millionaires.

Page 34

The people who are buying the high-end consumer goods and luxury goods are not the wealthy -- they are people who may have a high income, but haven't accumulated wealth. Those individuals are often financing a millionaire life style with debt, and therefore, will never be wealthy.

The authors also touch on the question of immigration. It turns out that immigrants to the US disproportionately become millionaires. It's not that they are bringing wealth with them. They are starting from scratch and then building successful businesses.

Their grand children, however, less likely to become millionaires.

What about the number of years that an average member of an ancestry group has been in America? The longer the time here, the less likely it will produce a disproportionately large percentage of millionaires. Why is this the case? Because we are a consumption based society. In general, the longer the average member of an ancestry group has been in America, the more likely he or she will become fully socialized to our high-consumption lifestyle. There is another reason. First-generation Americans tend to be self-employed. Self-employment is a major positive correlate of wealth.

Page 21-23

The more integrated into American culture and ethnic group becomes, the less likely it will produce millionaires.

While the authors cite the mixing of cultures as the reason for that, I expect it has more to do with the individuals involved, and less the culture. The fact that someone is willing to uproot their life, move to a new country, settle there, and do what it takes to be successful indicates they have the level of drive necessary to start a business and grow their wealth.

The other area that is particularly interesting is the question of economic out patient care. In other words, what happens when parents give their children money. Do the children build on that?

Sometimes. We often hear stories about successful people who are that way because they inherited wealth and built on it. Donald Trump is one such example. But that's the exception to the rule. Remember, only 20% of millionaires inherited their wealth.

The authors tell stories of people with middle class incomes who live in upper class neighborhoods because their parents are wealthy. The parents subsidize the adult children to help them afford their lifestyle. The problem is that the life style still exceeds their income and subsidy. The adult children come to rely on these handouts and never develop the skills or drive to build wealth on their own. Further, since they do live beyond their means, even if they did have the drive, they don't have the seed money to build true wealth.

There are countless examples of the inverse relationship between economic productivity and the presence of substantial economic gifts. …Independent of college tuition, more than two-thirds of American millionaires received no economic gifts from their parents. And this includes most of those whose parents were affluent.

Page 165

The children of millionaires who receive the least financial assistance (excluding education) form their parents are the one most likely top be successful.

Most affluent people have at least two children. Typically, the most economically productive one receives the smaller share of his or her parent's [sic] wealth, while the least productive receives the lion's share of both economic outpatient care and inheritance.

Page 165

The book can be summed in this story told by one of the millionaires the author interviewed:

My family in Nebraska understood the value of a dollar. Dad used to say seeds are a lot like dollars. You can eat the seeds or sow them. But when you would see what seeds turned into…ten-foot-high corn…you don't want to waste them. Consume them or plant them. I always get a kick out of watching things grow.

Page 129

The presidential campaigns are all talking about wealth. The economic challenges the country faces raise questions of wealth. The housing crisis raises questions of wealth. To understand these issues, don't get caught up in media portrayals of what it means to be a millionaire. Those portrayals don't reflect reality.

The Millionaire Next Door does. It's a great read for anyone who wants to become wealthy or understand what it means to be a millionaire.

You can find more of my book reviews here.

An overview of the mortgage crisis

If you want to get learn more about how the current mortgage crisis came about, This American Life recently did a great broadcast on it. They dissected the situation all the way from the person who had no business getting a mortgage to the person who had no business making that loan to the person who had no business buying that loan, and on up the chain of money.

The coverage has a nice balance. They don't vilify anyone as evil. But they don't excuse anyone from blame either. At each step of the way it's average people made bad decisions based on greed and peer/societal pressure.

You can listen to "The Giant Pool of Money" here. Or you can probably download it through iTunes.

Panic at the Fed

From CNN:

NEW YORK (CNNMoney.com) -- Even though the Federal Reserve slashed its key federal funds rate by three-quarters of a percentage point in an emergency meeting Tuesday, Wall Street is still betting that the central bank will lower rates again next week.

The Fed will hold a two-day meeting that wraps up on Jan. 30. And according to futures listed on the Chicago Board of Trade, investors are pricing in a 100 percent chance of at least a quarter-point cut, to 3.25 percent, and a 66 percent likelihood of a half-point cut, to 3 percent.

"There is a legitimate chance of another cut next week. The Fed wants to stay in front of things and at this stage, they'd rather err on the side of having rates be too easy than too restrictive," said Jack Ablin, chief investment officer with Harris Private Bank.

... More

I haven't been too worried about the economy. Sure, the markets have been falling, but that's what they do. They move one step backwards and two steps forward. Especially since we've seen a run up in recent months, it's to be expected. Perhaps the economy could use a recession to reset itself and prepare for stronger growth in the future.

Further, I'm in the market for the long term. I've got some time to recover from any losses.

But then the Fed cut rates. Now, I'm am not so sure.

There is a fine line between bold moves to demonstrate leadership, and flailing panic.

Cutting rates by an amount not seen in 15 years, and doing it a week before you were planning to cut rates anyway, strikes me more as the latter.

Further, out latest economic woes occurred in part because it's been too easy to get credit. The country's consumer economy is balanced precariously on mountains of credit card debt that has in recent years been turned into mortgage debt.

People who historically could not have gotten mortgages for normal priced homes were able to get short-term cheap mortgages on absurdly priced homes.

Now, as the country starts to wake up with a hangover from the heady mortgage and credit card policies on the recent years, what does the Fed do?

Does it have the country eat a healthy breakfast?
Does it have the country drink a bunch of water?
Does it make us pop a couple of aspirin? ]
Does it crack open a packet of Alka-Seltzer?

No.

The Fed has the country slam a bottle of Tequila.

You know, if a big part of our problems were caused by too much cheap credit in the economy, maybe, just maybe, dumping a whole bunch more cheap credit into the economy, might not be the best long term solution.

On the other hand, may the credit card companies will start sending me 0% balance transfers again, and I once again play at credit card arbitrage.

Shatner-Palooza: Financial Tips

When Jon and I watched Mind Meld a couple years back, it seemed like William Shatner was always looking for the next gimmick -- the next dollar so he could eat. It seemed like the 70s did not treat him well.

Leonard Nimoy, on the other hand came across as someone who saw Star Trek for the opportunity it was, thought it could be fleeting, and saved & invested his money quietly and well so he could live out a calm life.

Shatner's finances took a turn for the better in the Dot Com days. When Priceline.Com hired him as their spokesman, he did the job for stock, not cash. From Wikipedia:

For years, Priceline's official spokesperson was William Shatner, who agreed to do the spots for free in exchange for stock in the company. The arrangement turned out to be quite profitable for Shatner, who sold much of the stock shortly before its value plummeted in the dot-com bust.

But in an interview published in Britain's Globe and Mail (I found the link on Fark.com), Shatner offer additional financial advice. If you have just starting to save for retirement, maybe Shatner has some tips for you.

His tips include:

• "don't buy anything that eats while you sleep."
• the stock market is "chancy,"
• "If you had the hindsight, real estate would have been a really good investment"

The most important tidbit, though, is this:

"If you're saving some more, you can treat yourself," he said. "If you're starting to save, treat yourself to a saving."

Happy investing.

Cost Cutting Not Good for Stock Investors

Imagine you're a runner, looking for an edge in your race. Imagine you're allowed to wear your adult-sized Heelys and you can now shave a full minute off your 5K time. And they're a bargain at $150! How many races will you win next year owing to this great technological advance? Five? Ten? As many as you enter?

How about zero?

...More

There's an interesting article over at Fool.com that covers the "Paradox of Thrift." Based on the experience of Warren Buffet, the theory is that most major cost cutting moves at a company will not help investors in the long term.

The idea is that a company could, for example, outsource manufacturing to China and cut its costs. Theoretically, they could see massive increases in profits then by simply keeping their prices steady. That increase in profits would boost the stock price.

The problem is that those same cost cutting moves are availble to the company's competitors, too. Once they cut costs, price erosion will begin. As prices come down, so do profits. And with lower prices, they may also see even lower revenue or lower profit margins, neither of which is good for the stock price.

So consumers may benefit. And these cost cutting moves may be necessary to survive in the business. But by themselves, they will not help stock investors.

Read more here.

Mildly Annoying Experience with HSBC

Today I got my HSBC Master Card Statement. In the "Important Information" section it says:

This is a notification that a change of address has been processed on your account. Please be advised that a confirmation letter has been sent to your previous address. If you have not authorized a recent change of address, please contact us immediately at the phone number indicated on your statement."

Of course I hadn't changed my address, and, strangely enough, the statement still came to my current address. So I called them and spent several minutes on hold.

The CSR I spoke to verified my address, and said it was correct in the system. Then he attempted to sell me on a credit line increase and lower interest rate. I'm currently paying 0% so I declined.

I asked for more information about the change of address. He said there was nothing to worry about because my address is correct. He then tried to sell me on a credit monitoring service, which I declined. Several times.

I pressed him again about the change of address. He said there was no problem and they were just verifying that my address was correct. I explained how that didn't seem right, since there was nothing about verifying my current address -- the notice said there was a change.

He explained that they need to verify the address because several people can have the same name. I asked for more information about the address change. His suggestion that it was simply because multiple people can have the same name made me even less comfortable.

He then suggested that I clicked something online. I assured him that wasn't the case. He said there was nothing else he could do, but there was no problem.

I was still not comfortable with that so I asked to be transferred to someone in the security department. He put me on hold for a few minutes and said he couldn't do that.

Then I think he tried to get me off the phone -- judging by the conversation he couldn't initiate the end of the call.

He explained that there was noting he could do.

I said, "I see."

He asked if there was anything else he could do for me.

I said, "Apparently not."

He said he was sorry he couldn't help more.

I said, "I see."

He said everything was ok.

I said, "I see."

Then he offered to transfer me to a supervisor.

I accepted that.

I spoke to the supervisor for about 45 seconds. He looked up my account, and he told me that the last time I called HSBC about a month earlier, they updated my employment information. It's in the same system as the address information, and that generated the change of address notice. He apologized for the inconvenience.

I suggested that might be good information to have on the notice or for the CSR to have available.

I thanked him for his help and we ended the call.

27 minutes total.

A Different Perspective 03: Boeing 787

This is why a town benefits from having different media options. This is the same story as published by Seattle's two different newspapers.

From the Seattle Times:

Boeing to pour billion more into R&D for 787, stretch version of 747
By Dominic Gates
Seattle Times aerospace reporter

As it announced strong quarterly earnings Wednesday, Boeing also projected large increases in spending this year and next on development of the new 787 and on the forthcoming 747-8 jumbo-jet derivative.

The boost in research-and-development spending — the second in as many quarters — raised the R&D budget to almost a billion dollars more than forecast just five months ago.

The additional money for next year includes funding to pay extra mechanics in Everett, if needed.

Yet with revenue and profit for the quarter strong, executives seemed confident Boeing can absorb that extra spending. They still raised 2007 profit forecasts and tried to dispel any suggestion the bump in 787 costs meant the program is running into the kind of trouble afflicting Airbus.
...

From the Seattle Post-Intelligencer:

Boeing 787 gives investors a sudden fright
Shares fall as company tries to avoid problems that could threaten jet

By JAMES WALLACE
P-I AEROSPACE REPORTER

The Boeing Co. threw a scare into Wall Street on Wednesday when it announced it was pouring hundreds of millions of dollars more into the development of its hot-selling 787 jetliner to head off problems that could otherwise threaten the project.

With the first flight less than a year away, the Dreamliner is still too heavy. And some suppliers are falling behind schedule.

Boeing said it has funded a contingency plan to hire more machinists to help with 787 final assembly at the Everett plant should they be needed to keep the program on track. The additional jobs -- Boeing wouldn't say how many -- would be temporary.

Boeing Chief Executive Jim McNerney, in a conference call to discuss third-quarter earnings Wednesday, reassured analysts several times that he believes the 787 issues will be resolved and will not delay the plane's entry into service in May 2008.
...

How Many CEOs would do this?

This sort of behavior reinforces why I bought the stock. Because the CEO and CFO benefitted from some poor record keeping -- not fraud, but just not detailed enough -- they are voluntarily forgoing bonuses. Sure, it's just a rounding error in their larger finanacial lives, but how many CxOs will do this?

2 Costco execs reject annual bonuses

They cite benefits from sloppy record-keeping involving stock options
By CRAIG HARRISP-I REPORTER

Costco Wholesale Corp. Chief Executive Jim Sinegal and Chief Financial Officer Richard Galanti are voluntarily forfeiting their annual bonuses after the company disclosed last week that they benefited from sloppy record-keeping on prior stock-option practices.

Sinegal is giving up $200,000, while Galanti is rejecting an $82,000 bonus, according to a Securities and Exchange Commission filing made public Thursday.