Don't Buy It

The rumor that the German government is considering endorsing a new bailout package for Greece has sent world stock markets soaring. Don't buy it. All this means is that Germany is willing to throw good money after bad. Along with the German government's ridiculous decision to abandon nuclear energy by 2012 (why not get rid of electricity as well?), the German government continues to live in it's own island of self delusion. Stocks should have a nice run today, but, after that, watch out.

Ending Athletes' Bankruptcies

I’d like to dedicate another blog post to the issue of athletes and financial literacy. Around the time of my previous post on the topic, NPR featured a story about professional athletes and their financial literacy (the link is provided at the end of this post). The article mentions Kenny Anderson, who earned more than $60 million during his 14 years in the NBA, yet declared bankruptcy the year his career ended. The story goes on to talk about what happens when athletes acquire great wealth without having a clue about money management. Even in the NFL, which has the most college graduates, players often do not have any experience managing money, including what they might learn from paying for a college education, as they generally attend college on a scholarship.

I sent the NPR story to Reggie Howard, who is the President of the United Athletes Foundation and cares deeply about this topic. His reply came back with even more sobering information. He was just informed that 15 athletes in one city alone have been victimized by a single financial advisor. Each athlete gave the advisor’s agency control over their bill payments and money management and all got a bad deal. No one ever talked about it, which allowed the advisor to continue to use the same method on each player. Reggie was outraged and ended his message with the passionate tone he uses when he talks about victimized players: “This subject really gets my blood boiling. We have to change this.”

Stories like this one illustrate yet again the dire consequences of financial illiteracy. Unfortunately, professional athletes—newly wealthy, young, and inexperienced—are ideal targets for scams or unscrupulous advisors when instead good financial planning is the thing they need the most. Even for those making very sizeable incomes, there is no guarantee that the money will last a lifetime; athletes’ career paths are very unique (for example, they can be quite brief) and risky (a serious injury can put a quick end to a high income), and this requires even more skillful money management than normal. Sound planning is needed to make sure that money will extend well beyond the careers of players, that it is invested to grow over time, and that it is not squandered in unsustainable lifestyles or in risky investments that players do not understand or have experience with. And athletes need to know how to protect their wealth, including how to avoid bad advisors and unscrupulous agents and how to make good decisions when presented with well-intended requests or investment suggestions from friends.

We cannot expect all professional athletes to be experts in dealing with money. They become wealthy very early in life, before they have had a chance to gain any experience in dealing with financial matters. Their colleagues are mostly other athletes or sports professionals, so it is not possible to get much help from their peers. In my view, some money management has to become part of the standard, ongoing services that are offered to athletes. In the same way that it is standard for athletes to have coaches, doctors, and managers to help take care of their physical fitness, so it should be standard to have help in taking care of their financial fitness. And this help has to be specialized, designed to fit the needs of the very specific career that athletes face. Finance and financial decisions are too important, with potentially profound consequences for athletes' lives, to just be left for the athletes to figure out on their own.

Like Reggie, I detest the idea of athletes going bankrupt. It is not just the fact that it is unjust, unnecessary, and ugly as hell. It is also that we look up to and admire these people. Unlike them, we cannot bound up two flights of stairs without gasping for breath, we have back pain from sitting long hours at a desk, and we have boring jobs and screaming children. But when we see these athletes play, they make us dream. We believe they are special and we admire their skills and talents. This is why we get very upset when we find out that an athlete has, say, a gambling problem or beats up his spouse. In our eyes, they are better than we are, and they should do better than we do. And to young people, athletes are practically superheroes. Telling kids about athletes’ financial troubles would be like breaking the news that the Bat mobile has been repossessed. If athletes are in financial trouble, then, well, they are just like the rest of us. I’d like to see them be better equipped to make good financial moves; maybe if they can do so, the rest of us will follow.

Here is the link to the NPR story.

http://www.npr.org/2011/05/19/136445218/for-some-athletes-a-short-lived-financial-success

Dionne in Dreamland

E. J. Dionne, the columnist for the Washington Post must not be reading his own employer's newspaper. Dionne devotes his column today to praising "other countries," who have, in his view, successfully overcome the challenges of health care, budget deficits, and unemployment. Dionne is careful not to list these countries or mention any specific country by name. Which countries is he referring to?

Europe? Japan? He must mean China and India where there are no entitlement programs and not much in the way of a tax system. If somehow Dionne thinks that Europe and Japan are doing well in regard to the various items he ticked off in his article, he must have been living in a cave the last few years. Europe and Japan cannot afford any of the things that Dionne is talking about and their economies are on life support. He complains about US unemployment. Most of Europe would trade for our unemployment rate (now, or in the past four decades). Europe is busy trying to dismantle all the things that Dionne talks about. Where has Dionne been?

Dionne is typical of folks who memorize a position and then repeat it ad nauseum no matter how untrue it happens to be. Enjoy his silly article in today's Washington Post. You have to admire how he doesn't let the real world intrude on his views.

Even If There Were No Debt

The current discussion of Western European sovereign debt problems are ridiculous. So, too, are the discussions of American sovereign debt problems (state, local and federal). If you spend a multiple of your income every year, would it matter, long run, how much you owed on day one? Eventually, you would go broke regardless of the initial level of debt. In fact, if anyone bails you out now, you will just take a little longer to go broke and the debt will be much, much larger when you eventually do go under.

There are not enough assets in the Eurozone to prop up Greece, forget about Portugal, Ireland, Italy and Spain. For that matter, there is no real hope for ultimately paying off the national debts of Germany, France and the UK. They all spend too much relative to their income. Ditto for the US.

The Great Experiment, promising future old folks a guaranteed income and free or inexpensive health care cannot work. It's simply a matter of numbers. Debt can postpone the bankruptcy of these systems, but, in time, they will fail. The problem is that someone needs to be setting aside acorns for the winter...no one is doing that in the US and western countries. The irony is that Asians don't have the same worry (except Japan which has the same habits as the US and Western Europe). Asian countries don't have safety (sic) nets; what they have is high personal savings rates, which is, frankly, all you need to provide for retirement and old age health care. You really don't need anything else but that. But, that is precisely what the US and Europe lack.

These continual discussions of bailouts and debt restructuring will continue until they can't continue any longer. Anyone foolish enough to buy the sovereign debt of these countries deserves their fate. Even US treasuries cannot hide from the cold hard numbers. There is no serious political activity to halt the steady march to bankruptcy in every major western country, including the US.

Is this bad, necessarily? No, not really. As long as the productive resources of the economy are in play and incentives remain in place. The problem is that governments will seek to find ways out of their problem through higher taxes and broken promises. That changes the game. Bankruptcy is much better, though that, too, involves broken promises.

The only way to provide for income and health care in old age is to save during the working and productive years. If a society doesn't do that, then there is nothing around to consume when the old folks need it. Is there anything else worth saying about this topic? If you want health costs to quit spiraling out of control, then get government out of the health care business entirely, except in the provision of "charity" hospitals and medical care for the truly indigent (which is a very tiny fraction of any modern industrialized country). Free market health care would provide choice, low prices, and excellent care. Any other solution condemns the citizenry to long lines and poor health care.

Protecting GM Products

Suppose the government decided that GM cars are so great that consumers should take much better care of them than they do. So, to protect GM cars, henceforth all GM owners will be required by law to have them washed and waxed once a week. Surely their owners can afford that...that would only be about $ 35 per week for the wash and wax. Definitely affordable.

Would that affect the sale of GM cars?

Apparently, the answer, according to the government is no. Since owners can afford to wash and wax their GM cars every week then they should be required to do so.

What about Ford cars? Let's suppose the government doesn't like them, so it doesn't care whether Ford cars get washed or waxed, so they decide not to "protect" them with legislation requiring a weekly wash and wax. Why "help" those guys?

How would all of this effect the sale of GM cars? Ford cars? Who wins with this kind of legislation GM or Ford?

The answer is obvious: Ford wins. Consumers can afford the wash and wax, but if they simply buy Ford they need not bother with the wash and wax. That was easy.

So, it is with American low-skilled labor. Congress has loaded American labor up with various "protections." Unemployment compensation, medicare, social security, the right to sue for real or imagined indignities, and so forth. Think of American low-skilled labor as GM cars. The government is protecting them and business can afford it. But will they do it?

Nope. Why hire American low-skilled labor when you can outsource or simply buy labor-saving equipment? Labor saving equipment requires no unemployment comp taxes, no social security taxes, no medicare taxes, no health care benefits and, best of all, the machine can't sue you!

Cutting taxes, raising spending, conservative schemes, liberal schemes.....none of this really matters. The government is "protecting" low-skilled employees by making them much more expensive than outsourcing or capital equipment. The market response is the same as in our GM/Ford example. If you protect GM cars, then Ford will be the winner. If you protect low-skilled labor, low-skilled labor will be the loser.

That, in a nutshell, is why we are now entering a "new-normal" for unemployment among the relatively unskilled part of our labor force. They have been artifically priced out of the market by overt government policy. Highly skilled employees need not fear -- they are less likely to sue and all of these add-on costs are a relatively smaller fraction of their overall compensation.

Once again government welfare schemes hurt the poorest among us.

Tax Big Oil? Who Pays

The new solution to high energy prices proposed by the Administration is to increase taxes on oil companies. An interesting energy policy! Forbid drilling and exploration of new energy sources and tax existing production. Is the plan to eliminate energy supplies?

Who pays the tax on oil companies that Obama is proposing? Who owns the oil companies? The answer: the average middle class American in their pension funds and college endowments and foundations. They are, by far, the biggest owner. So, the plan is to tax middle American pension funds through their holdings in stocks. There isn't some unseemly rich guy out there owning American oil companies. It is the average American. He is the greedy oil guy. So, by all means, lets tax him.

So another "soak the middle American" scheme proposed by Obama -- this time as a solution to higher energy prices.

You can't make this stuff up,

Financial literacy and football

I was recently invited to participate in a panel on financial literacy that was organized by the United Athletes Foundation (UAF) and the STAR EMBA program at the GW School of Business. It was held at the New York Stock Exchange, and it was good to go back to NYSE a second time. I had accepted the invitation without giving much thought to who would be in attendance at the event. A few days before the event (which was held April 29, 2011), I was given the list of the panel participants: Robert Marcham (moderator), Annamaria Lusardi, Ray Lewis, Rushia Brown, Chuck Lewis, Bill Imada, Sam and Char McNabb, and Gordon Brown. I had not heard of these financial literacy experts before and wondered whether they were academics as well (please, remember that I was born in Italy, so I do not know very much about American football or basketball). So, it was not until I arrived at NYSE that Friday that I discovered that Ray Lewis was THE Ray Lewis of the Baltimore Ravens, Sam and Char McNabb were the parents of THE Donovan McNabb, and Rushia Brown was THE Rushia Brown. There I was sitting on a podium to the right of superstar Ray Lewis, speaking to an audience of athletes and their families as well as the President of the UAL, Reggie Howard. Oh boy, I was in deep trouble!

I was the first on the panel to speak. I talked about the troubling state of financial literacy in the population, of the divide between those who know and those who do not know, of the sharp contrast between the complexity of financial markets and the very low level of financial knowledge that most people have. I spoke of the dire consequences of the lack of financial literacy; it is those who are less financially literate who pay more for financial services, who are more likely to engage in high cost mortgages and to default on them, and who are less likely to take advantage of the financial markets or to accumulate wealth. In the same way in which skills, practice, and experience help athletes to score and avoid faulty steps, financial literacy empowers people to take advantage of the opportunities offered by financial markets and to avoid scams or running into financial trouble. I also spoke of the difficulties that athletes may face in managing their finances and taking care of themselves, their families, and their communities both because of the peculiarity of their short careers, the increased complexity of financial markets that everybody is facing, and, of course, their fame.

Ray Lewis spoke next. He simply blew everyone away. He spoke of what financial literacy means to him, and the problems he has faced. He reflected on the grim statistics we had heard from the moderator that more than 70% of NFL players are bankrupt, unemployed, or divorced a few years after retiring. He talked about how many young athletes are ill informed about investing and managing their money and the problems that result. And he spoke of the need for athletes to be worry-free when on the field practicing or playing—absolutely nothing should distract from the focus on the game. He spoke with a passion and an intensity I have not seen in any person. I have a Ph.D. in economics and am myself passionate about financial literacy, but I could not have articulated the case for financial literacy the way Ray Lewis did.

Sam and Char McNabb spoke of the continuous worries that parents of athletes have about their children. From the anticipation of who will be drafted to the journey through the games, injuries, victories, and losses, they spoke of the desire to protect their son from making bad financial decisions, but the difficulty they face in knowing where to turn for advice. It was when Char McNabb spoke that I realized that about half of the audience were mothers of athletes. She asked them to raise their hands, and so many hands went up! I cannot begin to tell you how appealing it was to see that it is their mothers who the athletes brought to this event; it is them they turn to, whom they trust. I developed an instant affinity for these football players! And when the speaking was finished and I watched the mothers posing for a group photo, I could clearly see where the determination of these athletes comes from!

Sitting among these extraordinary people, I started to dream. What if these athletes became the champions for financial literacy? What if they spoke to students and told them how important it is to become financially literate. Students would listen to them; they look up to athletes. Imagine if we could organize a competition among schools, and the students who got a perfect score on a financial literacy test would get to spend an hour with, say, Ray Lewis or Reggie Howard, to listen to the stories of how they trained to win a game and why they care about financial literacy. Imagine if one of these players decided to become a spokesperson for financial literacy. Imagine…

As I hope I have conveyed, this was not my usual financial literacy conference, and not my typical audience. But it was a special day, and it illustrated how profound and widespread financial illiteracy is and how severe the problems associated with it are. And everybody can be affected by it, even the superstars we watch on TV. At the close of the panel, I got a warm handshake from Ray Lewis; he said he enjoyed my talk. It was . . . priceless!

You can look at some of the photoes of the event on our Facebook. Here is the link: http://www.facebook.com/media/set/?set=a.174503175936844.49893.119369231450239&saved

Finally, Some Job Growth

Friday's unemployment numbers were undeniably good news, even though the headline unemployment rate increased from 8.8 percent to 9.0 percent. The important news is not the unemployment rate but the number of new jobs created in the private sector of the economy. That number, nearly 300,000 after including revisions to earlier reports, is a very, very good number. Lets hope future months continue at that pace. Such growth would make my forecasts too pessimistic, but, heck, I've been wrong many times before. Lets hope that this month is the start of something big.

A Glimpse of Sanity in Massachusetts

Massachusetts, a state on the brink of financial disaster, has removed the right of collective bargaining by public employees over health care issues. Massachusetts' overwhelmingly Democratic legislature acted for the same motives the state of Wisconsin legislature acted earlier this year -- to reign in the exhorbitant "deal" provided to public employees that taxpayers cannot afford.

The public employee unions cannot demonize the Massachusetts action as a Republican attack on unionism since the Republicans were not in the forefront of the effort in Massachusetts to strip the public employee unions of bargaining rights -- it was done by the Democrats!

Wonder why the President didn't weigh in on the Massachusetts action?

Pump Prices

One way to discourage energy production is to raise taxes on energy producers. That idea is at the center of Obama's energy strategy. Four bucks a gallon for gas is cheap, I suppose, to the Obama crowd, so why not remove the tax incentives in current law to increase oil production?

This continues the Obama Administration's strategy of punishing those who make good decisions -- in this case the oil industry.

On the Obama Administration logic, why not have a special tax for Apple? Apple created products that consumers wanted -- the Iphone, the Ipad. Why not go after them with a special tax increase? Apple, like oil companies, guessed right. Why not punish them too?

Imagine you know a way to increase oil production at lower cost. Would you consider investing in such a process knowing that Obama is waiting in the wings to raise your taxes if you are successful?

One more example of absurd government policy designed to make a serious problem -- higher oil prices -- even worse.