Understanding the Value of a Dollar

August 6th, 2018

Last week, my wife called me laughing hysterically about a situation that occurred with our son.  He wanted to go to the movies with his friends and asked for money.  After some back and forth about finishing his chores, the following exchange took place:

Mom: “It’s about time you learn the value of a dollar.  You should use your own money if you want to go to the movies.”

Son (without missing a beat): “Mom, I understand the value of a dollar.  That’s why I want to spend your money.”

He got some laughs for his witty comeback but still had to use his own money for the movie.  I’m confident the physical act of taking cash from his not-so-secret hiding spot and exchanging it for a movie ticket made him think twice about earning and spending money.

As we move more and more towards a cashless society, I fear people will forget how hard it is to earn and save money.  Our company doesn’t even issue paychecks anymore; we require direct deposits.  I’ve written about it before but I wonder how people would feel about their taxes if they actually had to write checks to all of the government entities that collect them versus having them automatically taken out of their paychecks, added on to the purchase price of items, and added to monthly mortgage payments.

A good friend of mine with whom I often have inspired political debates is in an occupation that requires him to pay estimated taxes each quarter.  He admits, “I’m a Republican four days a year, the days I have to write those tax checks!”  I have a feeling many more people would feel like him if they had to write checks for their taxes.

Be Wary of Relying on the Government to Increase Your Profitability

July 30th, 2018

With much fanfare, Whirlpool filed a case with the U.S. International Trade Commission, claiming foreign companies unfairly subsidized washing machines sold in the US.  In October 2017, the Commission ruled in Whirlpool’s favor, recommending the U.S. use tariffs and quotas to limit foreign companies’ roles in the U.S. market.  (For more on the case:  https://www.reuters.com/article/us-usa-trade-whirlpool/panel-finds-u-s-washing-machine-makers-hurt-by-lg-samsung-imports-idUSKBN1CA1W4)

Whirlpool claimed the ruling was a victory for “American manufactures and American workers.”  LG Electronics and Samsung claimed U.S. consumers would be hurt.  In January, the U.S. put tariffs on imported washing machines.  (https://www.ft.com/content/0badf278-c3c7-3eff-9ff3-0205916a04ec)  According to the U.S. Department of Labor, consumers have paid 20% more for washing machines through June of this year than they did in the comparable period last year.

More recently, the U.S. has imposed tariffs on steel and resins, two major costs of Whirlpool’s washing machines.  Whirlpool is now saying the tariffs, along with increases in freight costs, have dramatically decreased its profits.  (https://www.cnbc.com/2018/07/24/whirlpool-stock-plunges-as-tariffs-hit-suppliers-steel-costs.html)  It appears that Whirlpool liked tariffs when they “helped” the company but is against tariffs that increase its costs.  Funny how their views changed.

Since the trade decision was announced in October, Whirlpool’s stock is down over 29% and the company announced layoffs in January.  If that’s a win for American manufacturers and workers, I’d hate to see what a loss looks like.   Focusing and investing on improving your business might be a better strategy than relying on the government for increasing profitability.


Creating Division Will Work Until It Doesn’t

July 23rd, 2018

Last week, President Twitter set his sights on the Federal Reserve.  He said that raising interest rates “…hurts all we have done.”  This is the latest attack on a government entity to come from the executive branch.  Intelligence agencies, his own justice department, the Post Office, and Congress, among others, have all been criticized by Trump.

A major criticism of the Obama administration by Trump and Republicans was that the administration practiced “politics of division.”  Critics harped about identity politics contributing to social unrest and reducing unity in the country.  Trump is taking the politics of division to a new level, blurring the lines between the separation of powers that have served our country well for centuries.

Traditionally, presidents like loose monetary policy.  As I wrote about a few weeks ago, rising prices (inflation) create the appearance of economic growth even if there is none.   Trump’s background in real estate also contributes to his desire for low interest rates.   President Trump is not the first president to complain about the Federal Reserve raising rates.  George H.W. Bush in part blamed the Fed for his loss in 1992.  But Trump’s track record of creating divisiveness makes me wonder who is next.

Politicians run negative ads and attack campaigns because they work.  At some point, however, they seem to cross the line and forget we’re all on the same team.  It’s time for the pendulum to swing back to unification.  If someone or a political party can deliver that message, he/she/they will stand a good chance of winning elections.

How Long will Technology’s Planned Obsolescence Game Work?

July 17th, 2018

Last week, my phone stopped connecting to its cellular network.  I contacted the carrier who told me it’s a known problem with that phone model.  He sent me a link to a page concerning the problem and told me to take it to the phone manufacturer’s store.

I made an appointment with their self-proclaimed “Genius Bar.”  I got there and explained the problem.  The man who checked me in said, “We love when the carrier blames us.  It’s usually not us.”  I knew I was in for a fun time.

I got called by the technician.  I explained my problem again.  The woman was nice and said, “Even though your phone is out of warranty, we will fix the phone for free as a courtesy.  You need to leave the phone here.  We’ll give you a loaner.  We’ll send your phone out and when it’s back, we’ll let you know and you can swap the loaner for your phone.”

As you might imagine, she lost me with “as a courtesy”.  I didn’t break the phone.  They admit it’s a known problem.  I wasn’t too thrilled with setting up a loaner phone and then having to set my phone up again either.  I also wasn’t excited about returning to the store.   So, I went to the carrier’s store and got a new phone.  Their planned obsolescence scheme worked.  (They claimed that’s not their strategy but it sure seems a little fishy to me.)

But will it work forever?  The PC market did a great job of forcing upgrades when it was the dominant connectivity device.  The smart phone market has followed the PC market’s playbook with great success to date.  What happens when faster wireless networks roll out?  Do phones get “dumb” again and the true computing power will rest in the cloud?  Only time will tell.

In the meantime, expect “more known problems” on your devices.  The “geniuses” are going to take advantage of us for as long as they can.  Every technology eventually gets replaced.

Inflation is a Debtor’s Best Friend

July 10th, 2018

The USA owes a lot of money to a lot of people.  The current national debt stands at $21.2 trillion and growing.  http://www.usdebtclock.org/  Take a look if you want to cry.

As I read an article about the economy over the weekend, I thought about what the Trump administration might be trying to accomplish with its seemingly nonsensical trade strategy.  They are trying to inflate the debt.  Let me walk through my logic:

  1. Economists don’t normally agree but virtually every economist agrees that tariffs will raise the cost of goods and services. If the US continues to place tariffs on imported goods, those costs will be passed on to consumers.  Hello inflation!
  2. Trump is very proud of how he used US bankruptcy laws to eliminate debt. The US government cannot declare bankruptcy like an individual or company can.  However, the US government can print money.  Basic supply and demand: having more of a good makes it less valuable.  If the government prints more money, it stands to reason that money will be worth less or a dollar will buy less than it did.  That is the true cost of inflation.
  3. Trump is a real estate developer. It is common for real estate developers to borrow a lot of money to do a project.  When one borrows money, inflation (rising prices) is generally good for that individual.  Let’s say a project costs $100.  Put 20% down, borrow 80%.  It is expected to sell for $110, or 10%.  However, prices go up.  Instead of selling for $110, it sells for $120.  After paying back the $80 that was borrowed, the profit is now $20 instead of $10, or 100% more.  (For simplicity, I did not factor in interest expenses or a rise in construction costs.  The general conclusion remains the same.)  In general, real estate developers view inflation in a positive light.
  4. Put another way: if I borrow $100 and inflation is 2% and I pay that back in a year, my real dollar payback is $98.  (My $100 today only buys $98 worth of stuff in a year.)  If inflation is 5%, I am only paying back $95 in today’s real dollars.
  5. Most consumers do not recognize inflation. Wages will most likely go up during inflationary times, making workers think they’re getting raises.  In reality, they will probably lose purchasing power.

The only ways our government can pay back the massive debt we have accumulated and continue to accumulate are:

  1. Grow.  Given an aging population and a lack of a coherent immigration policy, that is hard.
  2. Sell assets. There’s a lot of national parkland that could be developed…
  3. Print money. That’s the solution banana republics use.  Is that what we’re turning into?  I hope not but given the economic policies (tax cuts, increasing spending, trade wars), maybe that’s the solution our government has embraced. Sad.


A Touching 4th of July Moment

July 3rd, 2018

Close friends host a party every year for the 4th of July.  Their neighborhood has a big party, culminating with a large fireworks display.  As my buddy puts it, “It’s Americana at its best.”  It truly is a special party that my family looks forward to attending every year.

Because of the way the holiday fell, the party was this past Saturday.  As usual, it was a great time with great friends.  His sister came in from out of town for the party.  My friend traditionally flies the American flag over his house.  For a long time, he flew the flag that draped his father’s casket.  Over the years, the flag started to show its age so he replaced it.  My wife and I were sitting near his sister and him when the fireworks display ended.  Their conversation went like this:

Sister: “There’s something special about fireworks that make you realize how blessed we are to be in this country.  I look at the flag and think of Pops.  Is that his flag?”

Brother: “I know what you mean.  Pop’s flag started to show its age so I replaced it.  I want it to last.  I have it folded up in the house.”

Sister: “I know Pops is still with us.”

Brother: “I know.  I think of him every time I raise the flag.”  Like most men, my friend would not be described as the sentimental type.  He was at that moment.

It was a tender moment between siblings.  I thought of the great memories with all the people I have lost.  I know a part of them is still with me.  I also thought about the patriots, past and present, that fought and continue to fight for our freedom.  Thank you to you and your families.

Have a safe and wonderful holiday.

The First Trade War Casualties

June 26th, 2018

As the Trump administration continues its quest for “fair trade” and our trading partners respond, the first casualties are beginning to emerge.  The EU announced tariffs on motorcycles imported from the US.  Harley Davidson announced it is going to move some of its production to its overseas plants. In its announcement, the company said:

“Increasing international production to alleviate the EU tariff burden is not the company’s preference, but represents the only sustainable option,” Harley-Davidson said in a regulatory filing on Monday.

(Full article: http://money.cnn.com/2018/06/25/news/companies/harley-davidson-motorcycles-tariffs-trump/index.html)

Harley Davidson already has factories and infrastructure overseas.  They can shift production to avoid the tariffs.  The small companies that manufacture parts and provide services to Harley Davidson cannot.  They’ll end up losing business if trade issues are not resolved.  Losing business means job loss.  Did anyone in the Trump administration do any second level thinking?  Have any of them heard of the law of unintended consequences?  Sorry, those were dumb questions.

To some extent, the US has been taken advantage of regarding trade.  Intellectual property theft and tariffs on our goods that are higher than what we charge certainly exist.  Both sides also subsidize politically connected industries (check out the US sugar industry).  The US has also benefited from extremely low prices because of trade.  We’ve traded a lot of paper (dollars) for goods.  Cheap labor and manufacturing subsidized by foreign governments has benefited the US consumer.  Of course, US workers, particularly low-skilled manufacturing employees, have not seen great benefits.

Regardless of how the trade war ends up, expect to pay more for everything.  The consumer represents about two-thirds of the US economy.  US consumer spending supports a lot of foreign jobs.  Another sign that a slowdown is headed our way.


The Dog Days Are Here.  What Else Will Come Sooner than Everyone Expects?

June 18th, 2018

As we lounged around the pool on Father’s Day, my wife and I discussed how it seemed more like late July or early August weather than mid-June weather.  The temperature pushed ninety degrees and the humidity was not far behind.  After a cold spring, the warm weather feels great but it got me thinking about what else could come sooner than we think.  Being a nerd, my thoughts went to the economy.

Economic growth is up.  Employment is up.  The Federal Reserve is projecting growth for at least the next two years.  All are positive signs, pointing to a rosy economic outlook for the next few years.

As I’ve written ad nauseam, costs are going up.  Raw materials are up.  Freight costs are up significantly.  Wages are starting to creep up.  The cost of borrowing, while still below historic norms, is rising.  The aforementioned Federal Reserve has indicated it foresees raising interest rates significantly over the next two years.  And there’s the little matter of a potential trade war.  All of these factors have the potential to derail economic growth.  Put them together and they’re a recipe for a recession.

Most economic forecasters predict we’re at least two years away from a slowdown.  A vast majority of these same experts missed the Great Recession (as did yours truly).  I don’t like being negative, but if I could make a wager, I’d bet the under on a slowdown starting before the experts think it will.  It might not be bad (and, barring any crazy political maneuvers, will be much less painful than the Great Recession) but a majority of businesses will feel a slowdown in the next six to twelve months.  Prepare.

The Cost of Healthcare Continues to Rise

June 11th, 2018

About a month ago, our soon-to-be-teenage son flipped over the handle bars of his bike and required an emergency visit.  (He was not supposed to be riding his bike but the inability of a boy to listen will be the subject of many future blogs).  The nurse asked him if he would like ibuprofen for his pain.  I jokingly but prophetically asked, “Should I go to the pharmacy across the street and buy it myself?”  She laughed and brought him medication.

The bills have come in.  The ibuprofen dose cost $23.50.  At the store this week, I discovered I could buy a bottle of branded ibuprofen with 100 doses for $4.99.  The really disturbing part is that the X-ray of his wrist cost only $29!  The follow up visits (yes, 2 visits) to an orthopedic doctor cost $60.00.  On top of all this, I paid $300 just to step in the emergency room.  I haven’t even added in my health insurance premiums.  Is it just me or are these amounts a little whacky?   I’m sure the consultants that figured out how to maximize revenue-per-patient-visit cost significantly more than all of the treatment he received.    (If you’re wondering, he severely sprained his wrist and had some scrapes and bruises.)

Right wingers will argue the medicine costs so much because of malpractice insurance and the cost of a potential lawsuit if something had gone horrible wrong.  They would also cite government price controls through Medicare and Medicaid inflate prices for the private sector.  My left wing friends would say, “This is why we need the government to provide healthcare to everyone,” conveniently leaving out how to pay for it.  (For all my friends in the healthcare profession who want universal healthcare, be careful of what you wish for.  A big reason healthcare costs are more in the US than everywhere else in the world is our medical care professionals are much more highly compensated than they are in other countries.  I will also remind them everyone country with universal healthcare has a VAT tax, the most regressive tax politicians have been clever enough to devise).

I relay all of this fun information because healthcare inflation continues to impact our economy.  It’s a real cost for businesses and individuals.  Obamacare did not help “bend the cost curve” as was promised.  My Republican friends have brought nothing to the table despite campaigning about changing things.  Unless healthcare costs are reigned in, we are headed towards major challenges in our economy.

What Has Changed in 50 years?

June 5th, 2018

Fifty years ago today, Robert Kennedy was shot in California.  He died the next day.

Exactly two months prior to that fateful day, he was in Cleveland to give what was supposed to be a campaign speech.  Martin Luther King had been shot the day before.  Rather than give a campaign speech, Kennedy gave what is considered one of his greatest speeches, focusing on the absurdity of violence.  A link to the full audio and text of the speech is below.  Do yourself a favor and read it or listen to it.  Better yet, listen to it with your kids.


The following paragraph from his speech is as applicable today as it was fifty years ago.

“Yet we seemingly tolerate a rising level of violence that ignores our common humanity and our claims to civilization alike. We calmly accept newspaper reports of civilian slaughter in far off lands. We glorify killing on movie and television screens and we call it entertainment. We make it easier for men of all shades of sanity to acquire weapons and ammunition that they desire.”

It’s time for some grownups to step up in our government and engage in thoughtful dialogue about the epidemic of violence that plagues this country.  If a business was as ineffective as our elected officials at solving problems, it would cease to exist.  If we don’t want another summer of discontent like 1968, it’s time to start solving problems.  Or maybe it’s time to vote against every incumbent politician.