College graduate with large tuition bill, horizontal

Significant student loan debt is certainly a growing trend. If you’re the parent of a child . . . you already know! Either you’re looking at the impending costs with concern, looking at the checking account and contemplating if you should take that elaborate vacation instead, or you’re counting what the costs were and hoping your child is making the educational investment worthwhile. Certainly, there are scholarships and grants; furthermore, we’d be the first to encourage students work, save, and help pay their own way. But, when it’s all said and done, parents usually end up helping and students usually end up finishing with some debt.

The Good

The good news is that most students who actually graduate are eventually finding decent employment. According to the New York Federal Reserve, persons with a bachelor’s between the ages of 22 and 27 have 4.6% unemployment. Now, we can argue about what the true unemployment figure is, however this 4.6% figure is at least in line with general unemployment currently reported.  Also, of note, is that both the average salary ($50,651) and the median salary ($43,000) are up in 2015 from previous years for Bachelorettes.

The Bad

That said, student debt is becoming a much bigger concern. There are over 40 million Americans who collectively owe over $1.2 Trillion in student debt. Furthermore, the variance from the average wage after graduation is significant with upper margins being held mostly by information technology, healthcare, finance, and engineering majors. The lowest paying majors are varied, but include sociology, theology, and education. Also to consider is work experience when graduating and where the student is willing to move for a job, which can also impact income greatly. The average student loan debt is also at a record high of over $37,000 with seven in ten graduates borrowing for their education, according to Cappex, a website that connects students to colleges and scholarships.

The Ugly

As if the bad, was not bad enough, we have the ugly. The ugly truth is that it’s not the graduates with student loan debt, which are the greatest concern. According to Mark Kantrowitz, publisher of Cappex, most graduates’ debt burdens are “manageable” meaning they can be paid off in 10 years. The bigger problem is non-graduates who take on the debt, but don’t earn the degree. Kantrowitz states, “We don’t have a student-loan problem so much as we have a graduation problem.” And to exemplify how this could impact all of us, Lori Harfenist of The Resident summarizes a Wall Street Journal article stating, “7 million Americans are flat-out refusing to pay back their student loans because they feel scammed by their universities and government.” And, who are all student loan programs now managed by? You guessed it, the federal government, which means the American taxpayer is the one on the hook. In conclusion Kantrowitz states, “ . . . if current trends continue, we may be in a crisis point in two decades from now.” We think it could be sooner than that.

The information provided in Eddleman’s Economic Insight is not intended to be used as investment advice; rather it is provided as general economic news and information for your awareness or for discussions with your investment professional. Please consult your investment professional or CPA for advice specific to your situation! Past performance is not indicative of future results.

Public Domain - GlassSteagall

The Glass-Steagall Act which is formally called the Banking Act of 1933 was enacted to prohibit commercial banks from participating in the investment business after the many bank failures of the Great Depression era. The idea was that banking institutions that safeguard and control our money supply should be separated from market investments such that greater stability of our monetary system remains intact. There were actually four main provisions of the Act that were somewhat chipped away at from 1933 until 1999 when the Gramm-Leach-Bliley Act (GLBA) repealed what was left.

The 1999 GLBA repeal bring us up to the 2008 financial crisis. Some critics argue that the repeal has allowed investment banks to gamble with depositor’s money held in affiliated commercial banks. Conversely, others argue that the key activities that lead to the crisis were not even prohibited by the Act. Either way, we’d argue that it is not easy to draw simple conclusions about such complex relationships, but there is no doubt that to maintain separate commercial and investment banking certainly could help to provide more stability to the money supply during a significant financial crisis.

So, why all this talk now about a 1933 Act that was repealed in 1999? Well, as of last week, the official 2016 Republican Platform includes a revived separation of commercial and investment banking. Now, I’ll not speculate about who will win the election nor about some of the other economic policies that are surprising (and there are several). But, if Trump were to win, would this policy have any opportunity to get traction and if so, what might it mean economically.

First, how serious is the GOP and Trump about implementation of this policy? Most news outlets who have even reported on the issue are touting that Trump has “never endorsed restoring Glass-Steagall”. However, in August of 2015, Trump did address the Volcker Rule, which some consider to be Glass-Steagall lite. Furthermore, Carl Icahn who some consider a Trump advisor on the matter, proposed a return to Glass-Steagall over two years ago. These factors together with the fact that the policy has become an official part of the GOP platform, indicates to me that those making the proposal are serious. As for likelihood of implementation, there is bipartisan support from the grassroots. Support from the establishment is mixed with more Democrats who seem to support the measure than Republicans. Special interests groups would also likely be divided with multinational banks likely opposed and investment companies and some community banks likely in favor.

If implemented, the ramifications would depend largely upon the level of implementation. If only minor provisions were enacted, the average consumer might barely even notice and banking entities might merely have certain limits on certain types of transactions. However, if implementation occurred on a more grand scale, one could see the break-up of large conglomerate banks in a manner not seen since the Great Depression. For consumers the biggest change would likely be whom you receive certain financial services from. It could redefine how consumers think of full service banking. For the industry, it would certainly be a major shakeup.

The information provided in Eddleman’s Economic Insight is not intended to be used as investment advice; rather it is provided as general economic news and information for your awareness or for discussions with your investment professional. Please consult your investment professional or CPA for advice specific to your situation! Past performance is not indicative of future results.

AdobeStock_84743022 - United Kindom small

Did you miss Adrian’s brief commentary about Brexit on WBBJ? View it here!

Well, the people of the United Kingdom (UK) have made their voices heard and voted for Brexit. As you are likely already aware by now, Brexit is the decision of the United Kingdom to leave the European Union (EU). And, Brexit is not the only European upheaval on the horizon. In case you missed it, I wrote over two weeks ago about keeping a watchful eye on several European issues to be mindful of in the third paragraph of the “May Jobs Report and the Fed” blogpost. If you’d like more detail on the logistics of Brexit, BBC News has a good piece on the UK’s referendum, but despite calling the piece “All you need to know”, there is a great deal left untold.

What we know:

The first step in a series of steps for the UK to leave the EU: It is important to keep in mind that the“referendum” vote by the people was merely the first step. No official exit has actually taken place yet. While I anticipate the UK to leave officially, it is still not absolutely certain as the politicians could choose not to act on the will of the people. There is already some resistance, but I find it likely that should politicians delay too much, you’ll find the people of the UK ready to replace them to make this happen. Assuming Brexit moves forward without delay, it is still estimated that it may take as long as two years for Brexit to be completed.

Uncertainty yields market flights to safety: There is significant uncertainty not only about the ramifications of the Brexit vote, but even more so regarding how the markets will react years into the future regarding those ramifications. However, that uncertainty could yield positive or negative outcomes depending on what actions are taken from here. Keep in mind that what we have seen in the markets thus far is not based on what investors know; rather it is based on what investors don’t know. I encourage you not to assume that Brexit means doom nor that Brexit means boon!

More on the horizon: Spain, while shadowed by the Brexit vote, had a major election on June 26th that adds the European uncertainty. Despite claims by the People’s Party Mariano Rajoy to have “won”, the vote leaves in place political stalemates because the Party is short of a majority to take actions without consensus from opposing leadership. Furthermore, Greece faces major debt payments of over ~$11 billion over the next several weeks. And finally, France is having major issues with strategic fuel reserves. In mid-May, the French government estimated it had 115 days of reserves left, but the issue is more about logistics and as summer fuel demand increases, this could be another major economic issue to contend with.

Media, government and sales fearmongering: One thing which is already occurring from the Brexit vote is fearmongering. The media is one place where you should expect such to occur.  Here is about 60 seconds of media fearmongering if you already haven’t had enough. There’s no doubt that most major news sources will be playing up the worst aspects for news ratings for some time.

Another source which I anticipate to continue with the fear tactics will be governments. There may or may not be as much coming out of the UK, but certainly expect any other country entertaining an exit to have its leadership use every tactic possible. In particular, I don’t expect Brexit to be completely smooth sailing. Watch for political leadership to seize on any negative Brexit issues for all they’re worth.

Finally, those selling financial newsletters or certain investments such as precious metals will certainly use this to their advantage. And, while I’m not completely opposed to a small holding in non-traditional investments as some advisors may be, I recommend not becoming overzealous just because of fear tactics.

Now, I’ll make some broad speculation. Keep in mind, this is speculative conjecture. Please, do not attempt to make investment decisions based on my musings; consult your investment professional.

What we don’t know:

Euro Demise: First, I think Brexit spells the eventual end for the Euro as we know it. The UK is the first of several nations that will likely exit. It is still undetermined if the EU will place trade sanctions on the UK, which have already been threatened. If the EU does, other EU countries may be more hesitant to exit and the UK will likely see some negative economic consequences. Despite sanctions, I think other nations will still eventually exit, it may just take longer. Of course “receiver” states, those which benefit more economically than they contribute may continue to try and hold the EU together. One must also consider that the UK kept the Pound as their currency in addition to the Euro, whereas other currencies such as the French Franc would have to be reintroduced, which would be more complex. Exits by stronger economic states means that if the Euro does continue to exist, it certainly will not be the currency which some thought would supplant the dollar.

Good for the UK: Economically, I believe it could be very good for the UK to exit the EU, especially if sanctions are not imposed. The UK is better positioned financially than most of the rest of the EU, and if the Pound’s value stays lower in comparison to the Euro and/or the Dollar, it will make business investment more attractive in the UK. But, not only will the UK have more economic independence, it will also have more socio-political independence. We’ve seen time and time again throughout history that more freedom means more economic prosperity. It may take years, or even decades, however I do believe that this is a good first step towards helping the UK re-establish greater financial strength and prosperity. We’ll have to see what other steps are taken by the UK to see how impactful this may be. Keep in mind that for a year or more, this could have the opposite effect. As I said before, uncertainty usually yields a flight to safety and there is a lot of uncertainty in the UK at the moment.

UK Immigration Reform: I believe there were many factors which drove the Brexit vote, not least of which were economic independence and Brits seeking smaller governance closer to home. Certainly, there were numerous socio-political and economic factors of influence. One factor not to discount is the European refugee crisis. Regardless of your personal thoughts on the refugee relocation throughout the world, one cannot deny the fact that it is putting financial strain on receiver nations and influencing the cultural landscape through Balkanization.

The Fed: I still believe the Federal Reserve Bank will raise rates as much and as fast as they feel they can. However, Brexit no doubt puts a hold on rate increases for a while.

 

The information provided in Eddleman’s Economic Insight is not intended to be used as investment advice; rather it is provided as general economic news and information for your awareness or for discussions with your investment professional. Our views may change at any time based on the constantly changing conditions that influence finance and economics. Please consult your investment professional or CPA for advice specific to your situation! Past performance is not indicative of future results.

Eddleman - WBBJ

Here’s a story I was interviewed for on WBBJ about Brexit. Obviously I had much more to say that had to be cut from the piece. Don’t forget, I actually had a brief blogpost weeks ago where I mention Brexit and what else is on the horizon. Expect more details soon in our Eddleman’s Economic Insight blog.

A man holding the classified section of the newspaper as if searching for possible employment.

As you’ve probably heard on the news, the May 2016 jobs report was “disappointing”, “concerning”, and a “surprise”, or at least those were the words used by Federal Reserve Chairwoman Janet Yellen. In fact, May’s job creation was the worst since 2010. And, while you might hear the 4.7% unemployment figure bandied about, there’s been considerable pullback in touting this number. Even mass media are now outlining what I’ve been saying for years, which is that the government statistics are unrealistic, though I’d call the numbers plagued with deception. There are actually six different unemployment statistics provided by the Bureau of Labor Statistics. However, I recommend persons look at the “Employment” rate for a better statistic, which is hovering at 59.7% at the moment. The Wall Street Journal has compiled a series of such alternative statistics in a recent article, The May Jobs Report in 12 Charts, but what does all this really mean regarding the economy, the Fed, and what you should be mindful of?

The Federal Reserve Bank was formed in 1913 with the purpose of stabilizing the monetary and financial systems. And, while the Fed has continued portray itself as proactive, it has become mostly reactionary. So, despite all its hints of a June rate increase up until a few days ago, I’d be very surprised if we see any change in rates. In fact, I’d classify Yellen’s comments this week as strong backpedaling. Will the Fed raise rates again this year? I think they will take every opportunity they can to raise rates as much as they can as soon as they can. I say this because the Fed wants to be able to lower rates during the next crisis without having to go negative. To do that, they have to get rates up from where they are now. But, what should you really keep your eyes on?

Well, obviously the economy is still very shaky. But, its important to distinguish between the markets and the economy. I would anticipate continued volatility over the short-term in the markets. But, the US economy is not the only place to be watchful. Europe has several, major socio-economic factors coming to turning points in June. Britain will have a vote to potentially exit the Euro on June 23rd called Brexit and polling indicates the voting will be very close with a slight lead projected at the moment for “Remain”. But, depending upon the outcome, you could see the Prime Minister David Cameron exit as well. And, Britain is not the only country potentially looking at major issues in late June/July. Spain has a major election on June 26th that could greatly impact its economic outlook. Furthermore, Greece faces major debt payments of over ~$11 billion in June and July of 2016. And finally, France is having major issues with strategic fuel reserves. In mid-May, the French government estimated it had 115 days of reserves left, but the issue is more about logistics and as summer fuel demand increases, this could be another major economic issue to contend with.

So, what should you do? Make sure you are prepared for potential volatility ahead. It is impossible to predict the outcomes of major economic drivers, much less how the market will react to such drivers. But, make sure you position yourself and your portfolio proactively, so that you can be comfortable with the outcomes whether the market goes up or down and whether those moves are a little or a lot. If you’re unsure of how you want to do that, meet with your investment professional to discuss these impending issues or give us a call, 877-5WEALTH.

The information provided in Eddleman’s Economic Insight is not intended to be used as investment advice; rather it is provided as general economic news and information for your awareness or for discussions with your investment professional. Please consult your investment professional or CPA for advice specific to your situation! Past performance is not indicative of future results.

automated-mcdonalds-ordering

Today, we never think twice about using an ATM, but sooner than you might have expected, you may see the use of similar “automatic” kiosks in various industries such as fast food. And while technological replacement of labor is not a new thing or a bad thing, government manipulation of the economy is a bad thing. In this case, government’s economic manipulation will have the most dramatic negative effects on those whose plight some argue a minimum wage will help, including minorities and the poor. Not unlike the plight of the “buggy whip makers ” addressed in Theodore Levit’s 1960 Marketing Myopia, technology may soon replace vast numbers of entry level positions. However, today it will not be in one industry where persons can simply be “retrained”. Today, government is essentially seeking to remove the first rung of employment entirely. How?

The Fair Labor Standards Act was established in 1938 and set the minimum wage at 25 cents an hour. Initially, minimum wage law was established to “push out”  immigrant workers, women, and minorities. The idea was that businesses would be unwilling to pay these persons the higher wages, and this would push these workers out of the labor force and mainstream society completely. While the objective of the initial labor reformers is morally wrong, the outcome they sought to achieve is accurate. Thomas C. Lenard, professor of economics and history at Princeton says, “If they were right, and a $15 per hour minimum by 2022 proves to be too high too fast, the workers who will lose their jobs will disproportionately be people of color, immigrants, the disabled and women — the very people labor reformers vilified as low wage threats a century ago.”

Today, who will be effected by such a big jump in the minimum wage? Unfortunately, workers without alternatives are the individuals who are most often injured by an increase in the minimum wage. Typically, a person who is committed and hardworking at their minimum wage rate will receive small raises over the years. When the minimum wage is raised, it effectively wipes out the raises and recognition these workers have earned. Now, their effective income will go down as the cost are distributed from the employers and passed on to the consumers. This means that the cost of living will rise at a faster rate than the minimum wage, making those people earning minimum wage go deeper into poverty.

Another thing to considers is how small businesses will handle an increase in the minimum wage. Some small businesses will be unable to compete by raising their prices. This will cause these small businesses to go out of business. Now, instead of their employees making “more” money, they will be making nothing.

There is an interesting phenomenon occurring in 2016. For the first time in history, the top 1 percent of the population will have more wealth than the bottom 99 percent. This video posted to the Economist Facebook page shows a graph highlighting the change in position of the top 1 percent versus the bottom 99 percent over time. The narrator claims that 2016 will be a more unequal world than ever before. While this may sound alarming, it does not necessarily indicate that times are tough for the bottom 99 percent.

poverty-absolute

The above graph shows the number of people living in absolute poverty and the number of people not living in absolute poverty. As you can see, the number of people not in absolute poverty is rising, while the number of people living in poverty is shrinking.

So how can both of these things happen? As long as the total wealth of the world increases, it is possible for the amount of people living in poverty to decrease and for the inequality gap to increase.

One way to look at this is to consider the fixed pie fallacy. With a fixed pie, for one person to get more of the pie, someone else has to get less. Traditionally, people view wealth in this same way. They assume that wealth is a fixed amount, and for one person to make more money, someone else has to make less.

However, this is not the case. Instead of taking more slices of the same pie, the pie gets bigger as the total wealth increases. So now, even though the top 1 percent is making more, the bottom 99 percent is also making more. Think of it as having the choice of a small slice of pie from a gigantic pie, or a larger slice from a microscopic pie. In the case of the gigantic pie, everyone receives more.

Capitalism

 

Today, a great portion of our society puts a large value on equal outcomes and the morality of considering our fellow man, but are equal outcomes really the best way to develop a moral society? Karl Marx, Immanuel Kant, and others argue that individuals cannot be trusted with their own self-interest, but how are we, as a society, to find individuals with no self-interest whatsoever? In a discussion between Milton Friedman and Phil Donahue, Friedman outlines that there is not a moral means on which to construct a system of societal structure better than capitalism. He argues that even in socialist societies, people are not rewarded for their virtues. He also argues that societies are not progressing because of mandates from the government, but by individuals pursuing their own self-interest. This leads to man serving their fellow man, instead of the government supporting their fellow man. To hear Milton Friedman’s full argument on the differences between socialism and capitalism, watch this short three minute video.

Walter Williams argues that it is more moral for people to serve their fellow man and earn a claim on what he produces rather than to do nothing and still receive a claim on what is produced. He also says “The free market calls for voluntary action between individuals. There’s no coercion. In a free market, if I want something from you, then I have to do something for you.” In a capitalist society, if people are happy with a business and continue to support it, the business will grow and thrive. If the people are no longer pleased with a business, they can stop giving their money to the business, and it will naturally fail. Walter Williams outlines this well in this educational five minute video.

For a more in depth look on the moral defense of capitalism from Ayn Rand, who developed the philosophy of Objectivism, watch this 38 minute video.

 

capeverde3jpg

Recently, the Washington Post published an article wherein a connection was drawn between recent improvements in living standards for Cape Verde and recent efforts to build more roads. While there is a correlation between the development of new roads in the country and a decrease in the poverty level, it is hard to believe that infrastructure has brought Cape Verde out of poverty and into prosperity.

One must be careful in any discipline about looking at correlations and assuming cause and effect; finance and economics are no different. In fact, there are some spurious correlations, which one can only muse at even considering causation.

But if infrastructure is not the cure to poverty, then why has Cape Verde seen living standard improvements in recent years compared to other African countries, such as Liberia? One theory would be to look at how their governments operate. While both countries are considered democracies, the government in Liberia has significantly more corruption than the government of Cape Verde. This corruption adds a great deal of unnecessary cost to many products, which causes many citizens of Liberia to be unable to afford basic needs. In Cape Verde, there is not only less corruption, there is also more economic freedom. This allows for free trade to occur, which in turn produces more affordable products. In fact, Cape Verde’s economic free trade levels are rising rapidly, exceeding other African nations and even meeting the economic freedom of the United States, which is falling. And what about the infrastructure correlation? What we find as more plausible is that those infrastructure improvements were made as a result of the economic prosperity of the individuals. This is because all wealth is built in the private sector; government merely reallocates and redeploys that wealth.