Thanks Victoria Peckham for this flickr photo.
I often read John Mauldin. He has a unique perspective on the financial markets and macro-economic issues. Yesterday, I received his weekly e-newsletter and it had an interesting quote from Charles D. Ellis.

…Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:

Watch a pro football game, and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, ‘I don’t want to play against those guys!’

Well, 90% of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”

I began to ponder about this in regard to the real estate markets. I was able to establish that this statement works for the real estate market. In every market marginal value is constantly being ground out as competitors compete with one another. This is why free markets are so efficient and why competition reduces the cost to transact. Now in real estate the complexities of financing, insurance, construction and other specific knowledge, make transacting less efficient than say using e-trade to exchange stocks and bonds (this means you can find value in the inefficiency if you have the right adviser). Yet, real estate too must adhere to the indifference principal.

OK… so, work with me here. If you are a buyer or seller in the real estate markets (or any other markets for that matter)… And you are looking for value in your next transaction… And you yourself are not a big player in these markets (most home owners only transact several homes in their life times and often there is many years between transactions)… And you want to compete with others in the market…

Find the best help you can. Don’t just look for the agent that says, “I have lived and worked in the neighborhood for many years”. Although, specific market knowledge is important, the internet has now made it so any agent can search the local multiple listing service and see the limited inventory that is available. Look for the advisors that demonstrate the largest capacity to create marginal value in your next transaction. For example, in the Bay Area we have found that our strategies for buyers allow them to win competitive offers even when they are not the highest offer. We accomplish this by preparing our clients financially. Working with a competent financial planner/mortgage broker we developed a strategy for our clients that allows them to close their leveraged transaction in 7 days verses the typical 30 days. We do this with no additional transactional risk. This is based on the market mechanic that sellers are willing to take a lesser price if it means they get their money faster. This is just one example of the marginal utility that we create for our Bay Area buyers. This strategy has become even more valuable in the current liquidity crisis where sellers are highly concerned with whether a buyer can complete a transaction or not.

The real estate markets are tough. So, seek the best help possible.

2 nights ago I went to the Oakland Speaker Series for the first time. I listened to Fareed Zakaria speak who has been described as the most influential foreign policy advisor of his generation. It was very interesting to hear Fareed say that we live in some of the most prosperous times even with all of the current economic turmoil. He cited the lack of military competition amongst world super powers and the growth of capitalism and economic prosperity around the globe. He also said the amount of worldwide terrorism and death due to war has fallen over the last decade.

Then he made a point I never expected to hear from a CNN analyst embedded in a media centric culture. He first asked the question, so why are we all so scared? He then answered it by saying the news media now has channels dedicated to 24 hour coverage. He stated how they have the responsibility to fill all of the hours with content. Thus, we are constantly being bombarded with narratives that are not grounded in our personal realities. He used the weather channel as an example and joked about how you turn it on and they start talking about a storm in some faraway place that has no influence on your current situation. Yet, we sympathize with it and it affects our mood or the story we are living in.

Financial Ambition has long spoken about the false realities that the modern news media perpetuates and how it negatively effects our everyday actions. We have made these statements so that our readers and clients will not let the media influence their actions and decisions. We have witnessed that those led by the media’s narratives drift without strategic relevance for their own situations. When people accept the media’s narratives as their background thinking, it often causes action when observation or assessment would be more appropriate, or stagnation when action is imperative.

It was inspiring to hear a news media veteran illustrate and validate the media’s real purpose. Many people expect the media to tell the truth, when actually the media’s purpose is to draw in advertising dollars. So the next time you watch the news or read one of the many periodicals think about where the story is coming from. Are you listening to truth and reality or are you witnessing a story that has been manifested to trigger you to continue watching?

On a side note, I found that the Oakland Speaker Series is one of the best values in the Bay Area. For a small fee (on their web site the Oakland speaker series can be seen for $304 for 8 different events) you get access to some of the most influential speakers of our time. Some of the past speakers have been: Carly Fiorina, Robert Redford, Colin Powell, Tom Brokaw, Neil Armstrong and Alice Walker. I highly recommend it.

There is a great series of YouTube videos of Warren Buffett speaking to the University of Florida’s MBA class. Part 1 has a great discussion about integrity and why it is fundamental for success. I found one of the most interesting segments (shown above) to be Buffett’s discussion of the rescue of Long Term Capital Management (LTCM). LTCM was a hedge fund that went belly up in late 1990’s and was rescued by a massive industry bail out, supervised by the United States Federal Reserve. Buffet speaks about how LTCM was run by 16 exceedingly high IQ, long term veterans of the investment markets that probably had a combined 300-400 years worth of experience. Buffet makes a fundamental interpretation about risk and how much is too much. He spoke to how these men foolishly risked their own livelihood when he stated, “To make money they risked what they had and needed for what they didn’t have and did not need.”

After watching this segment I began to think philosophically about how the destruction of LTCM was a smaller scale bail out that sounded very similar to our current credit crunch and massive US bail out. Both instances were caused by some of the smartest minds in their industries. Both ended with the destruction of businesses, where owners risked everything (including the jobs and the livelihoods of others) to gain much of what they did not need to be a viable business in the first place. Is greed the best word to describe this kind of behavior?

Buffet also spoke about how knowledge can create blindness. For instance, in the case of LTCM the owners were experts at mathematics, which blinded them to the simple fundamental human and business concerns that all businesses must acknowledge. I have seen this in my own industry, where some of the brightest have let their intelligence get in the way of their own ability to make prudent decisions surrounding real estate investing. I have also seen many others avoid this pitfall, by living in a mood of wonder. I have seen how part of success is an awe-inspiring willingness to learn more and explore new possibilities, while thwarting moods of over informed arrogance. There is also something to Warren Buffett’s ability to be explicit about the offers, actions and investments he makes and how he rarely relies on inexplicit decisions. We should all be mindful that the philosophies we hold directly influence the actions and practices we live in.
 

Fannie Mae and Freddie Mac were taken over by the US government on September 7th, 2008. This is result of the unprecedented changes that are occurring in the US financial and real estate markets. And there is no doubt at this point that the effects of our liquidity crisis will be felt worldwide. Yet, what does it mean for top 1% income earners that are also consumers of US mortgages? (If you’re wondering, you are in the 90th percentile of income earners if your annual household income is over $150,000; top 1% is above $250,000.) It has been almost two decades since the recession and real estate downturn of the early 1990s brought on by, among other things, the Savings & Loan crises. As we learned back then, top 1% income earners are not immune. I’d like to offer my speculation about the risks and opportunities available in the current volatile marketplace.

In the short term, I believe we will see falling interest rates as the US government touts increased liquidity and the international markets cheer the savior of their large investments in the US mortgage markets. This drop has already occurred as rates fell more than 1/2% in the last couple of days in treasury yields and certain conforming and so-called conforming-jumbo mortgages. This could be positive for a large group people currently holding US properties encumbered with interim fixed period ARM loans that are due to reset in 2009. I believe we are going to see a massive refinancing movement while these rates are low and this may act to lessen the blow of the second wave of foreclosures due to hit the US next year. Rates on many 30 year mortgage products are now at or below 6% which is extremely low in terms of historical averages at 9%. Note that many property owners will still not be able to refinance due to the drop in property values and the lack of their ability to get a satisfactory appraisal, as well as stricter underwriting guidelines. Yet, I think it is safe to say that this second wave of foreclosures is going to be less dramatic than the first wave that was primarily attributed to defaults of sub-prime mortgages. The first crippling wave of foreclosures during 2007 and 2008 was a product of highly risky sub-prime loans done in mass and then abruptly stopped as the markets collapsed.

Yet, it is my belief that unabashed glee is short sided. The takeover will shift Fannie Mae and Freddie Mac’s losses to US tax payers. If you are a taxpaying US citizen who does not own real property, then you are exposed to the financial burden without any of the benefits of owning real estate. Someone will eventually have to pay the piper for these losses and it now appears that this burden will be heaped on top of the US’s national debt that is already staggeringly high. Just like individuals cannot expect to heavily leverage themselves without consequence, neither can governments. Thus I speculate that in order for our government to strengthen its position in the global economy we will need to drastically cut debt and this translates into increased taxes and slashed government programs. We are already experiencing this issue of increasing taxes and reducing government programs at the state level as California once again struggles to pass a balanced budget. An increase in taxes means additional financial pressure that will have to be levied on US citizens at some point in time. This will be a destructive consequence to the US economy.

Now more than ever top 1% income earners who endeavor to capitalize on their existing assets and/or enter the real property markets need superior help. Questions such as whether or not to refinance existing debt, if to sell and/or buy now, trade up, what financial structures are most tax efficient, and so forth, are vital to answer in order to preserve and increase their wealth. The answers to these questions will significantly impact the profitability or loss in your real property transactions, whether for investment or for your personal residence. It is critical that your financial, real estate and tax advisors are able to make powerful interpretations of your current and future situation. When there is a disruption in the marketplace, such as our current economic situation, there is heightened risk and also amplified opportunity. Make sure that your advisors are capable of handling all of your concerns during this turbulent time. If you are looking for financial, mortgage or real estate assistance feel free to contact us for a free initial consultation so we can adequately assess your needs.

Thomas Sowell provides an interesting and often counter-intuitive look at the economic issues facing the country.
Our Government Problem-Solvers
At election time, pols can’t help but “do something” — even if it makes matters worse.

By Thomas Sowell

We don’t look to arsonists to help put out fires but we do look to politicians to help solve financial crises that they played a major role in creating.

How did the government help create the current financial mess? Let me count the ways.

In addition to federal laws that pressure lenders to lend to people they would not otherwise lend to, and in places where they would otherwise not invest, state and local governments have in various parts of the country so severely restricted building as to lead to skyrocketing housing prices, which in turn have led many people to resort to “creative financing” in order to buy these artificially more expensive homes.

Meanwhile, the Federal Reserve System brought interest rates down to such low levels that “creative financing” with interest-only mortgage loans enabled people to buy houses that they could not otherwise afford.

But there is no free lunch. Interest-only loans do not continue indefinitely. After a few years, such mortgage loans typically require the borrower to begin paying back some of the principal, which means that the monthly mortgage payments will begin to rise.

Since everyone knew that the Federal Reserve System’s extremely low interest rates were not going to last forever, much “creative financing” also involved adjustable-rate mortgages, where the interest charged by the lender would rise when interest rates in the economy as a whole rose.

In the housing market, a difference of a couple of percentage points in the interest rate can make a big difference in the monthly mortgage payment.

For someone who buys a house costing half a million dollars — which can be a very small house in many parts of coastal California — the difference between paying 4-percent and 6-percent interest would amount to more than $7,000 a year.

For people who have had to stretch to the limit to buy a house, an increase of $7,000 a year in their mortgage payments can be enough to push them over the edge financially.

In other words, government laws and policies at federal, state, and local levels have had the net effect of putting both borrowers and lenders way out on a limb.

Yet, when that limb began to crack, the first reaction in politics and in the media has been to look to government to solve this problem because — as always — it was called the market’s fault, the lenders’ fault, and everybody’s fault except those politicians who created this dicey situation in the first place.

Markets often get blamed for conveying a reality that was not created by the market.

For example, the fact that “the poor pay more” for what they buy in stores in low-income neighborhoods is often blamed on those who run these stores, rather than on those who create extra costs through crime, vandalism, and riots.

If the store owners were making big profits, the big chain stores would be rushing in to share in the bonanza, instead of avoiding low-income neighborhoods like the plague.

Markets were also blamed for the Great Depression of the 1930s and New Deal politicians were credited with getting us out of it. But increasing numbers of economists and historians have concluded that it was government intervention which prolonged the Great Depression beyond that of other depressions where the government did nothing.

The stock market crash of 1987 was at least as big as the stock market crash in 1929. But, instead of being followed by a Great Depression, the 1987 crash was followed by 20 years of economic growth, with low inflation and low unemployment.

The Reagan administration did nothing in 1987, despite outrage in the media at the government’s failure to live up to its responsibility, as seen in liberal quarters. But nothing was apparently what needed to be done, so that markets could adjust.

The last thing politicians can do in an election year is nothing. So we can look for all sorts of “solutions” by politicians of both parties. Like most political solutions, these are likely to make matters worse.

— Thomas Sowell is a senior fellow at the Hoover Institution.

© 2008 CREATORS SYNDICATE, INC.

It is interesting to see that Wachovia just tightened its guidelines on its, “pick a payment” loans. This is especially interesting to me, because at the beginning of the year we had a presentation at our office from a World Savings executive that touted the flexibility of this loan. My opinion is well reverberated in Mike Mueller’s recent post on the Lenderama blog.

“Seriously, The Neg Am loan has a very valuable place in the finance world when properly used.  I believe Wachovia (world Savings) had the highest performing Neg Am Portfolio in the biz.”

These mortgage products do have there place in the financial world. I also agree with the executive that visited our office at the beginning of the year. These products are useful and powerful for the right individual situation. Maybe, the changes in Wachovia’s policy have more to do with their own business concerns and buying Golden West mortgage, then with the validity of the product that was successful for Word Savings for so many years. Just check out this CNN Money story that illustrates how 3.8% of Golden West’s pool of pick a payment mortgages went belly up after Wachovia purchased them in 2006.

The answer is that there are no bad loans in the marketplace. Loans are not people thus they can’t act good or evil. Mortgages are either placed by a person with the strategic knowledge to effectively care for an individual’s entire financial situation or they are not. I have many clients who have taken World Savings pick a payment loans and they have met their financial strategies without causing any despair or foreclosures.

I think the conversation in the marketplace needs to change from the loan product, to who is doing your loan. Are they competent to take care of your mortgage concerns with out betraying the other financial concerns that you have? Many banks and brokers have done mortgages with a blind eye to the customers financial situations and concerns. Often, you can’t even blame the person doing the loan, because they are not even competent to take care of their own financial concerns, let alone yours. Maybe contracting guidelines is not the answer for banks. Maybe, they should start to think about how they operate in regards to the knowledge of the people they have doing the loans. Maybe if they observed, assessed and acted to care for a clients mortgage in the context of their total financial situation they would have a huge stack of loans that could sell on Wall Street as mortgage backed securities. Warren Buffet eloquently explained the breakdown in the mortgage markets when he said, “In extreme cases, mark-to-market degenerates into what I would call mark-to-myth.”

Thanks Ocean Flynn for this flicker Photo.

For those of you whose plan is to work until you are 70, here’s a warning about that strategy.

For a Good Retirement, Find Work. Good Luck.

Bill Neugent, an engineer in McLean, Va., is doing his bit to ease the looming generational financial squeeze as the nation’s 75 million baby boomers begin to retire. He’s working longer.

Mr. Neugent, 62, plans to work full time until he is 65 and then part time for the Mitre Corporation, a federal research contractor that encourages older workers to stay on.

There are, it seems, too few such workers and employers. The average retirement age for men now is 63 and for women 62. But the emphatic conclusion of recent research into retirement policy and labor markets is that working another two or three years would have a surprisingly powerful impact on the retirement living standards of millions of boomers and on the economy.

The economic gains, according to a report published this month by the McKinsey Global Institute, a research group, would include increased household savings, higher tax collections and a reduction of the fiscal strain on Social Security and Medicare; together, that would add an estimated $13 trillion to the economy by 2025, or about a year’s total output of goods and services today.

“It’s the only answer, but don’t count on the story turning out that way,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College and co-author, with Steven A. Sass, of the book “Working Longer: The Solution to the Retirement Income Challenge” (Brookings Institution Press). “It’s going to take a lot of education and changes in policy and attitudes.”

The biggest obstacle, experts say, is that most companies are reluctant to retain or hire older workers. At the top of the corporate ladder, executive recruiters are routinely told not to seek anyone over 50, notes Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School.

Similar sentiments, Mr. Cappelli said, can be found across the job spectrum. He points to a batch of evidence. In one survey, one-fourth of companies said they were not inclined to hire older workers. In a research experiment a few years ago, thousands of made-up resumes were sent to employers; younger workers who had the same qualifications as older workers were more than 40 percent more likely to be called in for an interview than someone 50 or older. In an industry survey, a majority of technology companies candidly said they would not hire anyone over 40. (more…)

Notable & Quotable
June 19, 2008; Page A15, Wall Street Journal
Arthur Laffer speaking last month to graduates of Mercer University:

Pursuing your dream of prospering will benefit everyone . . . When I graduated from Yale University, we had a serious commencement speaker not like the one you are stuck with today. The commencement speaker was President John F. Kennedy. And the point I’m making today is the same point he made all those years ago. He said, “No American is ever made better off by pulling a fellow American down, and all of us are made better off whenever any one of us is made better off.” He concluded by using the analogy that “a rising tide raises all boats.”

Never forget or be ashamed of the fact that pursuing your own self interest furthers everyone’s interest. Without you, the poor would be poorer.

The press is not saying what it means for people to not have enough money and I think we can count on them never saying this.  The very people who are writing the articles for the major newspapers don’t understand what it means so they are incapable of saying.  Also, that won’t sell newspapers so that’s another reason they won’t tell the unhappy story of what will happen.  Not enough money at retirement means they will not be able to buy the products and services they need.  The drugs they need to stay healthy will be unavailable to them and no one is going to pay the bill for them.
A Few Final Thoughts On Planning For Retirement
By Martha M. Hamilton
Sunday, June 15, 2008; F01

I have spent the past two years focused on a subject that was almost an afterthought for most of my working life — financial planning for retirement. I knew when I started writing this column that the subject was vast and complex, but I had no idea just how complicated it was.

The new retirement landscape requires us to take on a job once handled by professionals. We now play a larger role ourselves ensuring that we will have adequate resources. That means saving and investing, often on our own, and trying to protect against such unknowables as how long we may live and what financial markets will be like in the future.

I’ve learned a lot in the past two years, and since today’s column will be my last for The Washington Post, I would like to emphasize the most important lessons.

· First and foremost, we need to pay more attention to our children’s financial education. It didn’t occur to me to talk to my daughter about money management when she was younger. It may have been because I thought she would pick it up automatically or because her teen years were so complicated that we never had the time. But she did stumble upon at least one principle. In her late 20s she called me, excited to have just learned about the magic of compounding from a friend in New Orleans.

I could have sworn I’d mentioned how compound interest multiplies, though she swears I hadn’t. It may just have been that talking to your kids about money is the same as talking to them about sex and drugs: They assume you have no personal experience, so they pay no attention.

I never did talk to her about the importance of beginning early to save for retirement. This year, though, she opened a Roth IRA with my encouragement. If you can, persuade your kids to start saving in a Roth when they take their first part-time jobs. With a Roth IRA, you pay taxes at the time you put the money into savings and take accumulated earnings out many years later tax-free. Most young people probably will be in a higher tax bracket as years go by, so a Roth is a better choice for them than a savings plan in which you pay taxes down the road.

On the positive side, Alec (also known as Sarah) inherited Scottish frugality from both sides of her family. Both her dad and I grew up in families that watched spending carefully. My dad was recycling in the 1960s, picking up neighbors’ yard trimmings to put on his compost pile. And my ex-husband’s family would stop the car and pick up produce that bounced off trucks in Texas — something we once did on the Eastern Shore, as well.

Since she is not a big spender, she has avoided a huge trap — the accumulation of crippling credit card debt.

· Second, although workers are increasingly reliant on their own savings, we are not saving enough or investing as wisely as we should. Health-care costs in retirement could be $200,000 to $300,000, or even more. Most of those who are lucky enough to have a retirement savings plan such as a 401(k) have less than half that amount. That doesn’t leave much to live on.

And many workers have no access to an employer-provided retirement savings plan.

Lower-income workers have a higher percentage of their earnings replaced by Social Security, which accounts for 90 percent or more of the earnings of 40 percent of all retirees. The lack of savings is going to hit middle- to upper-middle earners hardest, potentially resulting in a sharply reduced standard of living in retirement.

· Third, in addition to health-care costs, I have learned to fear inflation — and longevity. Inflation is way scarier to me than recessions are, because it virtually never lets up. And it can erode your savings the same way a trickle of water can carve a canyon, given enough years.

Even mild inflation is dangerous. Say you have $100,000. At an inflation rate of only 3 percent a year, it will be worth just a little over $50,000 in 20 years.

I remember the 1970s, when inflation rates rose to more than 14 percent a year. That was pretty scary.

As for longevity, a long life is less of a blessing when you outlive your savings. We all have a tendency to underestimate our longevity, myself included. For most of my life, I expected to live to about 90, based on family history. But now, with my mother going on 95 and with some experts saying you should add about five years to your life expectancy based on family history, I’m guessing I might live to 100.

I am fortunate to have a pension that will provide monthly payments for life, but it is not adjusted for inflation. As a result, I want to delay taking Social Security as long as possible. A large number of workers claim Social Security at age 62, or as early as they possibly can. That results in lower payments for life. I would rather wait and have the cost-of-living adjustment on the biggest base possible.

A growing concern that I have developed in writing this column is for the large number of workers whose savings will be inadequate in retirement. This could occur for any number of reasons: because they did not save enough or did not invest as wisely as professional pension experts, or because they used their savings to survive a break in employment or, unwisely, took the money out in a lump sum when they changed jobs and spent it. Fortunately, lots of smart minds are focused on this problem, coming up with suggestions to either improve retirement savings plans or to replace them.

I thank The Washington Post for giving me this opportunity to write about an extraordinarily important issue, and I thank the readers for their helpful feedback and column suggestions and for contributing to my continuing education. I am not leaving the subject: I will continue writing on retirement issues for the online AARP Bulletin.

Join Martha M. Hamilton and Teresa Ghilarducci, an economist at the New School for Social Research and author of “When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them,” at noon Tuesday for an online chat at washingtonpost.com.

Too much debt takes away people’s autonomy. They lose their freedom to work where they want and with whom they want, they lose freedom to change jobs or careers because they need the next paycheck. I worked with client’s personal financial situations for 7+ years and the biggest problem I saw was that people were unwittingly auctioning off their autonomy to Mastercard or to their mortgage provider. When I had this conversation with clients, many changed habits because they now had the facts and could see what their purchase of new kitchen appliances or that Mercedes would do to their freedom. Clients still purchased homes because of the history and hope for house appreciation we have seen in California. But, they usually told me they would hold off buying that next car or they could live awhile longer with their furniture all for the sake of keeping more of their freedom.

I think the answer continues to be knowledge about money, compound interest, saving and investing. The conversation needs to change to one of new virtues being no credit card debt and a bank account instead of the old virtue of having the nicest clothes, best wines, exciting and expensive vacations, Mercedes, a boat, plasma TV and huge house.

The New York Times
June 10, 2008
Op-Ed Columnist
The Great Seduction
By DAVID BROOKS

The people who created this country built a moral structure around money. The Puritan legacy inhibited luxury and self-indulgence. Benjamin Franklin spread a practical gospel that emphasized hard work, temperance and frugality. Millions of parents, preachers, newspaper editors and teachers expounded the message. The result was quite remarkable.

The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.

Sixty-two scholars have signed on to a report by the Institute for American Values and other think tanks called, “For a New Thrift: Confronting the Debt Culture,” examining the results of all this. This may be damning with faint praise, but it’s one of the most important think-tank reports you’ll read this year.

The deterioration of financial mores has meant two things. First, it’s meant an explosion of debt that inhibits social mobility and ruins lives. Between 1989 and 2001, credit-card debt nearly tripled, soaring from $238 billion to $692 billion. By last year, it was up to $937 billion, the report said.

Second, the transformation has led to a stark financial polarization. On the one hand, there is what the report calls the investor class. It has tax-deferred savings plans, as well as an army of financial advisers. On the other hand, there is the lottery class, people with little access to 401(k)’s or financial planning but plenty of access to payday lenders, credit cards and lottery agents.

The loosening of financial inhibition has meant more options for the well-educated but more temptation and chaos for the most vulnerable. Social norms, the invisible threads that guide behavior, have deteriorated. Over the past years, Americans have been more socially conscious about protecting the environment and inhaling tobacco. They have become less socially conscious about money and debt.

The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity. Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is starkly regressive. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income. Aside from the financial toll, the moral toll is comprehensive. Here is the government, the guardian of order, telling people that they don’t have to work to build for the future. They can strike it rich for nothing.

Payday lenders have also played a role. They seductively offer fast cash — at absurd interest rates — to 15 million people every month.

Credit card companies have played a role. Instead of targeting the financially astute, who pay off their debts, they’ve found that they can make money off the young and vulnerable. Fifty-six percent of students in their final year of college carry four or more credit cards.

Congress and the White House have played a role. The nation’s leaders have always had an incentive to shove costs for current promises onto the backs of future generations. It’s only now become respectable to do so.

Wall Street has played a role. Bill Gates built a socially useful product to make his fortune. But what message do the compensation packages that hedge fund managers get send across the country?

The list could go on. But the report, which is nicely summarized by Barbara Dafoe Whitehead in The American Interest (available free online), also has some recommendations. First, raise public consciousness about debt the way the anti-smoking activists did with their campaign. Second, create institutions that encourage thrift.

Foundations and churches could issue short-term loans to cut into the payday lenders’ business. Public and private programs could give the poor and middle class access to financial planners. Usury laws could be enforced and strengthened. Colleges could reduce credit card advertising on campus. KidSave accounts would encourage savings from a young age. The tax code should tax consumption, not income, and in the meantime, it should do more to encourage savings up and down the income ladder.

There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.

A good friend and past client just sent me this National Public Radio podcast that explains how the Liquidity Crisis was born. I had listened to this on the radio the other day. It gives a real ground level, human perspective of how we ended up where we are today.

You can download the pod cast for $.95 or listen to it for free online. It is 1 hour long but worth the time spent if you want to understand why the liquidity crisis occurred and who it affects. Click the link below and give it a listen.

http://www.thislife.org/Radio_Episode.aspx?episode=355

I wanted to also thank my client who sent me this pod cast link. In his e-mail he said that this pod cast helped him to have a much more in-depth understanding of the Liquidity Crisis. His contact gave me a chance to reflect in this post and also gave me some more in-depth thinking about why our clients have fared so well in this crisis. The good thing I see about the Liquidity Crisis is that it has gotten our clients to take a closer look at their finances.

For years, we have been offering our clients financial help when buying and selling property. We did this because we could see how easy it could be for a buyer or seller to betray their financial concerns in a transaction without even knowing they had. I believe this is why my clients have prospered during this crisis while I have watched other home buyers and sellers suffer. As I have long said, “Real estate agents must be competent to care for all of their clients concerns.” Thus, as stated in the previous posting called, Guidance Verses Advice: Which Is A Philosophical Standard Of Care, this is why I distinguish myself as real estate advisor not as a typical realtor. The tactic of making a real estate transaction is simple and often fairly standardized, but creating strategies that care for your client’s futures and putting them in a better situation after the transaction than before is a completely different story.

Readers of this blog will surely not be satisfied with $1M at retirement. They’ll likely want to have 10 times that amount, maybe more. That may be a difficult number for most people to confront but then again, most people haven’t done the math to see how much they need. If you aren’t sure about how to calculate how much you need, leave a comment and we can go through the numbers together.
Don’t be fooled by the book that says $1M is enough, it isn’t by a long shot.

So What if $1 Million Isn’t What It Used to Be?

SOMEWHERE along the line, having $1 million — like the ability to diagram sentences, do math in your head, and the dollar itself — became devalued.

Today, when magazines routinely compile lists of the world’s billionaires, and trillion-dollar federal budgets are commonplace, a mere $1 million seems quaint. Still, it is a nice round number to aim for as you plan for retirement, and is the focus of two new books.

Indeed, writing that you need at least a seven-figure nest egg (more…)

The press is filled with bad economic news.  If you’re nervous, this article might help.  Or you can call your financial advisor.  Hopefully you’ve been wise enough to choose an advisor who has gone through several of these cycles so they can be helpful to you and not in panic themselves.
Resist the Urge to Panic

This article on MSN Money illustrates a situation that we all should get used to reading about as there will be millions upon millions of boomers who will have some variation of this happen to them.  The article still doesn’t really talk about what it means to be too old with too little money.  They kind of talk around the problem but they don’t get real about what sacrifices and compromises this man must make in his life.  He will suffer first then suffer some more and then when he needs critical health care, he won’t be able to get it.  Can you spot the mistakes that he made?  Are you working to avoid them for yourself?

I was sent this You Tube video from a friend. I found it interesting in the context of top 1% performance. It is especially interesting if you couple it with Curt Van Emon’s recent post Interesting Commentary on the Top 1%. This Thomas Sowell article stated, “At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005.”

Why do we talk about earning in the top 5%, knowing how much you need to have for your loooooooooong unemployment (often called retirement) and saving as much as you can while you are young and using compound interest to your benefit?  Read the disturbing article below for some grounding for our position.

The Change No One Will Talk About

Dear Readers,

I didn’t comment on this when it came out in August as I was on vacation when it was published and I just never circled back to it.  The author of this article is a journalist.  Remember this.  He’s writing to sell newspapers, not educate you.  His job is to entertain you.

There is an assumption here that those that already have a few million are working to keep up with their neighbors but this is not how I see it.  For example, if Celeste were to retire today with $5M capital at work, current accepted financial thinking is that she could safely withdraw 4% of her money to live on.  This is a $200,000 gross income annually to support her current lifestyle.  I am very sure that this is not enough.  So Celeste is probably not hustling to work to keep up with her neighbors, she and her husband need more capital at work to produce a higher income so she can sustain her standard of living through a long period of unemployment (commonly called retirement).  It isn’t politically correct to say that $5M isn’t enough but that doesn’t make me wrong.

http://www.nytimes.com/2007/08/05/technology/05rich.html

The fees you pay matter over the long run so you may want to take a look at what is happening with your 401(k).  If the fees are too high, send an email to your human resources department and make a complaint.  It may help if they hear from enough employees.

Better Savings Plans

 November 27, 2007

That ‘Top One Percent’

By Thomas Sowell
People who are in the top one percent in income receive far more than one percent of the attention in the media. Even aside from miscellaneous celebrity bimbos, the top one percent attract all sorts of hand-wringing and finger-pointing.

A recent column by Anna Quindlen in Newsweek (or is that Newsweak?) laments that “the share of the nation’s income going to the top 1 percent is at its highest level since 1928.”

Who are those top one percent? For those who would like to join them, the question is: How can you do that?

But that’s only good for one year, you may say. What if they don’t have another house to sell next year?

Well, they won’t be in the top one percent again next year, will they? But that’s not unusual.

Americans in the top one percent, like Americans in most income brackets, are not there permanently, despite being talked about and written about as if they are an enduring “class” — especially by those who have overdosed on the magic formula of “race, class and gender,” which has replaced thought in many intellectual circles.

At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005.

Among the top one-hundredth of one percent, three-quarters of them were no longer there at the end of the decade.

These are not permanent classes but mostly people at current income levels reached by spikes in income that don’t last.

These income spikes can occur for all sorts of reasons. In addition to selling homes in inflated housing markets like San Francisco, people can get sudden increases in income from inheritances, or from a gamble that pays off, whether in the stock market, the real estate market, or Las Vegas.

Some people’s income in a particular year may be several times what it has ever been before or will ever be again.

Among corporate CEOs, those who cash in stock options that they have accumulated over the years get a big spike in income the year that they cash them in. This lets critics quote inflated incomes of the top-paid CEOs for that year. Some of these incomes are almost as large as those of big-time entertainers — who are never accused of “greed,” by the way.

Just as there may be spikes in income in a given year, so there are troughs in income, which can be just as misleading in the hands of those who are ready to grab a statistic and run with it.

Many people who are genuinely affluent, or even rich, can have business losses or an off year in their profession, so that their income in a given year may be very low, or even negative, without their being poor in any meaningful sense.

This may help explain such things as hundreds of thousands of people with incomes below $20,000 a year living in homes that cost $300,000 and up. Many low-income people also have swimming pools or other luxuries that they could not afford if their incomes were permanently at their current level.

There is no reason for people to give up such luxuries because of a bad year, when they have been making a lot more money in previous years and can expect to be making a lot more money in future years.

Most Americans in the top fifth, the bottom fifth, or any of the fifths in between, do not stay there for a whole decade, much less for life. And most certainly do not remain permanently in the top one percent or the top one-hundredth of one percent.

Most income statistics do not follow given individuals from year to year, the way Internal Revenue statistics do. But those other statistics can create the misleading illusion that they do by comparing income brackets from year to year, even though people are moving in and out of those brackets all the time.

That especially includes the top one percent, who have become the focus of so much angst and so much rhetoric.

The bad financial news isn’t over on a national scale. On an individual basis, we advise clients to clean up their credit card debt. Credit card debt is a wealth killer as it saps real money from a borrower and it does so quietly when one only pays the minimum each month. At an interest rate of 18%, a credit card balance will double in 4 years.

U.S. Credit Card Debt Seen As Next Nightmare
2007-11-07 06:44am
Americans now owe nearly as much on their credit cards as the estimated $1 trillion subprime loan debt that has sapped the housing industry and put a squeeze on the U.S. economy.

Newsmax.com reported Wednesday now owe a record $915 billion on their credit cards alone. Worse, defaults and delinquencies in the credit card industry are beginning to mount.

Credit card companies wrote off 4.58 percent in payments between January and May, almost a third more than in the same period in 2006, according to Moody’s Investors Service.

As a result of that action lenders like Citigroup, Bank of America, American Express and others already in trouble from the subprime mortgage collapse are being further weakened.

The U.S. economy itself is in danger as well, since it depends on consumer credit spending. Seventy-two percent of the U.S. economy rides on consumption alone.

With oil and gas prices up and the U.S. dollar falling, some analysts see economic disaster looming on the horizon, Newsmax.com reported.