My students are discussing the future of computers. One student talked about Luddites, and another wrote this reply.

I wonder if it is a fear of change that the Luddites embrace, or the idea that technology causes distinctions in society (”computers benefit big business and big government most”, and by implication, not the average person.

I think the Luddites would not want any such class distinctions, and to use a really nice phrase from earlier in the text, the Luddites may not even want to allow for the establishment of the “haves” and the “have-laters”. –CK

It struck me as interesting that we have moved from the “have-nots” to the “have-laters” in most things, not just access to technology as represented by the “digital divide”. There is an assumption that everyone gets everything sooner or later. That’s the American way. But is it realistic? We’ll see.

I’m reminded of the old joke: Two American autoworkers outside the factory see the boss drive up in a Cadillac and the one says to the other “Someday I’ll drive one of those.” Two British autoworkers see the boss drive up in a Rolls Royce and the one says to the other “Someday he won’t drive one of those, either.” That used to be very funny. Now? I’m not so sure…

What the Rich Know and the Poor Don’t

This seems sooo simple. Just two questions? Actually, the rich don’t ask these questions, or they wouldn’t be rich either. But here are the questions.

1. For those who are still saving for retirement the question is “How much money do I need to save this month to cover my longer-term financial needs?” If you are already retired, the question is “How much money can I spend this month so that I don’t run out of money during my lifetime?”
    
2. “What return on investment did your assets earn last year?”

The article goes on to explain why knowing the answers to both questions is essential. As SO points out these are stupid and dangerous questions. You can’t know the answer to these questions.

Darn. I like simple. I was hoping this produced some reasonable approximation.

Predicting the future is a bad idea. Those retirement planning calculators are a hazard to your health and financial wellbeing. Plug in the numbers and poof - you will live in comfort until you drop dead at age 92 years 4 months and 7 days. Sorry, it is never that easy. What about all the assumptions that you and/or the calculator made about inflation, return on assets, cost of living, changes in lifestyle over the 40 year planning period? Are those reasonable expectations? How do you know? You can’t.

For the last several years housing has been appreciating at 20% per year in many areas. Retirement calculations that assumed even a portion of that for future returns are starting to look shaky. Houses around us are already down for the year. Oops, I’ll run out of money at lot sooner.

Better questions

• What is your current annual spending?
  Like most people, our expenses vary considerably month to month, so basing planning on annual rather than “this month” spending will yield more realistic results. This may seem obvious, but it could be important.
   
• What is the value of your current assets? What income are you entitled to in the future?
   
• What are your investment strategies? What risks are associated with each strategy?
  Yes, strategies (plural). Any strategy has risks and returns. Government Treasuries are risk-free but they don’t return much either. (If this isn’t true, there are much bigger problems beyond the scope of this discussion.) Other strategies have higher risks and returns. This is where it gets more complicated - are the returns appropriate for the risk? For example, for many formerly investment-grade, now-junk bonds based on sub-prime mortgages, the promised returns were not nearly high enough for the huge risk of the investment being wiped out.
  
  Another potential problem is dealing with normal economic cycles - perhaps 30+ years long. Taking money out of assets during periods of downturn may significantly reduce the returns long-term. A return of 10% of nothing is zero. Retaining assets through good and bad times is essential to the overall strategy.
   
• What is the likely range of real return based on that strategy for those assets?
  Real returns - inflation adjusted. So if the Consumer Price Index (CPI) goes up 3%, it takes an 8% return to get a 5% “real return” so those Treasuries with 4% yield are making about 1% real return.
  
  Putting money in an ETF is cheaper than mutual funds or individual stocks, and much cheaper than paying to have money “professionally” managed. The usual measure of success is beating the Dow or “the market” or some other relative measure. But if the market is down 20% and my ETF is only down 19% I’m still in deep trouble. I need a real return of 5% for my money to last a lifetime.
   
• Given the spending rate, the assets, the strategies, and the range of returns, does the income cover the outflow?
  This is the hard part. Protect the principal. Those Treasuries are looking good. However, figuring out how to get a better real return is more difficult.

There are those who’s measure of success is beating Warren Buffett. The problem with that is, short-term, he isn’t even playing. He invests in companies that he believes will be profitable over time. When he buys in, these companies are “bargains” - good companies in businesses he understands that have the potential to perform better than their current stock price suggests.

In theory, anyone can do this. Understanding a company’s business and making an informed decision about the future performance of the company relative to its current stock price is hard work. Determining value and deciding when the price is low is not something one gets from the latest issue of Money magazine.

The discussion has been informative, but there is much still to do.

http://www.savingadvice.com/blog/2007/11/19/101913_what-the-rich-know-and-the-poor-dont.html

Fairfield balances on the edge as housing prices plunge
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/11/18/MNG4TBOR2.DTL

Life goes on… This story itemizes lots of strong leading indicators of tough times ahead - construction, business in all sectors, government sales tax forecasts, and still paints a rosy picture for everyone who lives and works in Fairfield.

• median home price fell to $400,000 in October from $510,250 the year before, a 23.6 percent free-fall
• in the months of July, August and September, 129 Fairfield homes were lost to foreclosure, compared with 15 in the third quarter of 2006.
• Kenton Rainey, its new police chief, decided to rent, convinced he would be able to buy a home later for much less than he’d have to pay today
• 40 of the more than 400 members of Local 104 of the Sheet Metal Workers Union are unemployed
• Old Republic Title Co. employs just 15 people now, down from about 75 four years ago.
• Staff is down to about 50 from a peak of about 130 a few years ago. To get business, the company has been lowballing bids to the point that its profit margins have evaporated. “We’re down to the cost of doing business”
• flooring contractor sales are down 39 percent despite aggressive discounting

Not only is business down, but several interviewees are going into survival mode - hunkering down in hopes of staying open through tough times already here for them.

“You would think there would be more depression and despair. But in this market here, there’s still some strange optimism. People haven’t thrown in the towel. …

Fairfield is an interesting candidate as the poster child for middle America today. If nothing else “everyone” drives through it regularly as it straddles I-80 on a major east-west route to the Bay Area, leading to the state capital in Sacramento, and gateway to recreation areas in Tahoe and northern Nevada. You can see most of the consumer spending as you wiz by - well maybe crawl by, as traffic is often pretty snarled up through there. The point is, individual stores, car dealers and mall parking lots are visible from the freeway.

It is easy to have a pretty accurate gauge of how Fairfield is faring. Not too well, actually according to the statistics in the article. So are lines at Starbucks a leading or trailing indicator? I’m guessing not leading. I continue to be amazed how much people spend on expense coffee.

The papers are full of it. Newscasts include in-depth interviews with dozens of experts - who knew there were so many people who are expert on all this stuff and have time to be interviewed about the severity of the situation. Last Wednesday, an out-bound freighter was driven into one of the piers of the Bay Bridge. 58,000 gallons of gunk was spilled into the bay. And, before we knew it, it was everywhere, causing hazards to wildlife and boaters, and massive volunteer opportunities.

A caller on a Friday morning talk show was really upset. The folks rescuing birds had their act together and were deploying hundreds of volunteers to find birds in need of assistance. But nothing was being done to contain and clean up the source of the problem, because neither the organization or the equipment were ready to move in the event of a disaster.

Sailing in the bay has been shut down for the time being. The risk of damage to engines and boat fittings is high. Several yacht harbors have deployed oil booms in an effort to prevent damage to boats, docks and beaches within.

The finger pointing is already starting. Apparently, the Coast Guard radar showed the freighter off course, but the pilot said there was no problem. It was foggy, but it is difficult to imagine that the radar was mistaken. However, for their part, the Coast Guard weren’t too quick to let the extent of the spill and the need for definitive action become known. By then, the tide had turned and the mess was spreading with the ebb and flood. The saga continues…