Sunday, 6 May 2018

Come one, come all: choosing to leave the Consumer Carnival before it's too late

I

Look at this nonsense. That's the Dow Jones. Always going up, but why does it feel like I'm on a Ferris wheel?


Never forget that bankers are conscientious. They will make their money and their bonuses. They made money in the dot-com bubble, the real estate bubble, they are making it now and will continue to do so in the future. They are still there, making money. The names of the banks change, but by and large the people participating and driving the markets are still there.

Another downturn is coming, you can smell it. It doesn't matter what the banks do. If the real estate market was locked down as tightly as people wish, all that noxious consumer demand for bigger and more will find some other outlet. People might buy commodities, metal, foreign stocks, oil, corn, solar panels, windmills, or any of the other bubbles-waiting-to-happen.

The consumer behaviour today means there simply has to be a massive bubble somewhere. The psychology of people taking any money when it's waved in front of them without considering the risks is exactly the same psychology behind camping outside an electronics store to pay full price for the new iPhone. It is irrational.

"That's just it typical conservative dogma that the rich are not responsible for their actions when they lie to and steal from the poor." The poor?! The house-flipping, McMansion buying poor? The poor on their iPhones, wearing Uggs, hopping in and out of late model Priuses? Is that the poor we're talking about? Or is that just some hackneyed class warfare nonsense because that's in vogue now? Give me a break.

II

Whoever is poor now will be poor after any recession - their condition does not change. What will change is the condition of the middle class, specifically the upper-middle class. They are the one's preaching the mantra of free market capitalism when times are good and extolling the virtues of collective effort and profligate government spending when times are tough. The philosophy they ascribe to is whichever suits them most at the moment.

These people wanted it all, bought it all, and they will have to pay for it. If you walk into a casino expecting to clean up with a bulletproof blackjack system, too bad. The time to complain about the interest rate on a credit card is when you sign up for it, not three years of late payments and accrued interest later. The system is rigged against you. Does that surprise you? Does it come as some kind of adulthood revelation? Goldman Sachs hires lobbyists. They lobby all politicians equally. They don't do it to ensure a level playing field or tip the balance in your favour.

It's hard enough to get a job and scrape together some savings. Why wouldn't you invest even a cursory amount of time in trying to figure out how to keep it? Why wouldn't you make a conscious effort not to part with your hard-earned money casually?

Regulate housing all you want. Drugs are illegal, and children are taught about their danger, yet as adults, we still want to take that first hit. In fact, they will pay a premium to take that first hit. Cigarettes say the product in the package will kill you if used. And yet people still take up smoking, saying brilliant things like "everyone knows it looks cool." A person is smart, but people are stupid. A government by, of, and for the stupid people will be stupid itself. And it will be manipulated by the smart and the wealthy to serve their interests.

Of course, any lender who breaks the law should be punished, but much of what is happening again is not against the law. The information asymmetry is not in the lender's favour, it's in the borrowers. That's the point. The borrower should know how much he can actually afford, what his income prospects really are, etc. The system assumes she does know these things. When the consumer chooses to be ignorant, chooses not to ask the obvious questions, the consumer bears the responsibility for not doing what she should have done.

The consumer should never EVER think she is absolved of her responsibility to protect herself simply because the industry is regulated. Nothing can protect consumers from their own stupidity.

III

People have to understand that debt is a lever. It's a way to make $x do the work of $10x. There is no secret formula for personal finance. Money should never be approached emotionally.

It is pointless to pay off a stack of debt by starting with the smallest one, because debt can always be restructured. You can get cards with low balance transfer rates, for instance, and move things around. The amount you owe will be the same in total, but the rate structure doesn't have to be.

The way to deal with debt is to understand that it is a negative rate of return for you, and that by paying it off, you get a positive rate of return. If you owe X at 10% and have the same amount of money in a mutual fund making 8%, you are losing 2%. It's better to take the money and pay off the debt, and "keep" the 10% interest payment on the debt. This is why you pay the highest debt amount first, assuming your mortgage isn't the highest amount. If it is, you should probably refinance.

And stop borrowing money for things that only lose value. Incurring debt to buy cars and clothes is bad because those things are never worth what you owe on them. It doesn't matter if you like the object or it makes you feel good. This is the emotional part that screws people up. Instead of buying new clothes to feel good, eat an ice cream sundae, or go see a movie. You'll feel better about the substitution later when you aren't running from your bills.

But borrowing money at X% so you can invest is something that returns (X+0.5)% is smart. Don't do it for greed. If you think you can double your money by investing in something, go get an ice cream. Get-rich-quick doesn't exist. Slow and steady wins the race (not that it's a race). To quote JP Morgan, nobody ever went broke making a little profit.

Only pay in cash, and by cash, I mean actual physical currency, not cheques. Obviously, that's not possible when buying a car, but it is when buying a TV or an expensive dinner. And I don't mean cash advances on credit cards, I mean taking cash out of your checking account. Paying in cash will eliminate the accumulation of interest and finance charges that turn borrowing into an inescapable black hole.

The act of having to think in advance about how much money to take out of an ATM, or the frequent trips to the ATM coupled with seeing the pieces of paper leave your wallet, will really drive home the resource scarcity side of consumer spending that consumer credit is trying to conceal from you. Paying in cash is a great way for a person to internalise the need for a budget to plan their spending weeks in advance, not days in advance.

IV

I won't even bother putting a "this is not investment advice" disclaimer here. This blog is just me writing stuff down. If this interests you, then use it as a springboard to read a book. Start with The Millionaire Next Door. It's not about personal finance, but it will reset your social attitudes about money and wealth, and how wealth is accumulated. Everyone needs a little of that.

Anyway, from what I've discovered, the best thing you can do with your money is to invest in yourself or your children. Go to school, get new training, start a business, read books, practice a skill. The next best thing is to eliminate debt (excluding mortgage). Typically people have formulae for determining how much savings you should spend to pay down debt, but most would be happier if they just eliminate all credit card debt, car payments and the rest.

Barring those things, here's the basic story: The rule of thumb is that the more interest, or yield, something offers, the more risk is involved. Interest is essentially what is exchanged for you risking your money. Also, low-risk=low-reward.

Most banks will insure your money in a savings account up to $100,000, but it earns little interest sitting in there and may actually result in losing money to inflation. CD's pay more interest, but you can't touch your money for the duration of the CD. Bonds are safe, but you have to know which ones to buy and what to watch out for. Bonds also fluctuate in price like gold. Gold and commodities aren't as good, because while a two-year chart looks great now, a two-year chart two years from now might look like a nightmare.

What you really want is some kind of short term bond mutual fund ("short term" refers to the kind of bonds it holds). Mutual funds are great because you can put in and take out your money whenever you want, unlike bonds and CDs. Let's take Vanguard (VFSTX) as an example. It has a decent yield (which is sort of like interest) and also can appreciate in value. This particular fund has had one down year in the last 24 years, and that year it was only down 0.08%.

This kind of fund is very much buy-and-forget. They are one of the safest places to put money, but your funds won't appreciate all that much. Keep in mind that these funds also pay you interest along the way, which is typically reinvested, so the charts tracking the price don't show the full story.

When you pick a mutual fund, however, you need to be careful because different fund companies often charge expenses, loads and fees. These are ways for the company to take your money out of your investment. Vanguard has built its entire company and every one of the hundreds of funds it manages on the principle of no load, and rock-bottom expense ratios. All of the money you cannot afford to lose for the rest of your life should be kept there. This is not a slick Wall Street operation - Vanguard will collapse when the world ends, not a moment sooner.

Jack Bogle started and ran Vanguard group is an old-school personality. He lives frugally, invests conservatively and his business model is based on lifetime relationships with investors, not on clever financial wizardry. You don't see Vanguard people on TV as much as Warren Buffet because they aren't the type to have publicists. This is the place where your crusty great-grandfather who grew up in the Depression would keep his money. Slow and temperate. Vanguard also offers low-cost financial advisory services, which you might need if/when you get married and have kids and don't feel like trying to figure out how to buy life insurance.

V

The problem is the consumer culture. Your culture. The problem isn't the government. The problem is the people. Until we own this and take responsibility for it, we will never address the real problem, and we will repeat it again and again.

The problem is people waiting in line overnight to spend money on toys. Why is it that every time I admonish people for not trying to find a deal to save a few hundred dollars, they tell me their time is worth more than they would save, yet somehow that calculus doesn't apply to camping overnight outside the Apple Store?

People don't care about their time, they're just saying that because they heard it on some movie. The truth is they're lazy and self-indulgent, and there is no limit to their ability to rationalise their stupidity. They will inconvenience themselves for the privilege of giving a company their money. Some privilege...

The problem is people who believe they can have it all. Not only can you not have it all, there's a good chance that in the process of trying, you'll end up with nothing at all. Society can't survive when people need an app to tell them how much to tip at a restaurant but don't hesitate to take interest-only mortgages. Society turns into a wasteland when people brag about it how little they're paying, then blame the government when they go upside down.

You can't make roughly $50k, spending $1500 of it on a 4KTV, but then connect it to a service with no 4KTV channels instead of an antenna with free 4KTV programming. That stupidity is not acceptable in the industrialised world. And it isn't the stores' fault for selling it.

We're still buying SUVs when petrol was at $1.08 because we thought the price would stay there forever. Then we bought overpriced hybrids when petrol is $2.26 because we think the price will stay there forever. Now your car's been repossessed and you still don't realise the same guy sold you both cars.

VI


Awaken for your slumber.

You're standing in the midway, a belly full of sweets, oversized stuffed animals crammed under your arm, listening to the laughter and cheers as the fairground frenzy swirls around like a warm ocean current. You stare at the manic spectacle, your mouth agape, mesmerised by the flashing lights and piping organs, hoping the carnival will never end.

But you don't see.

The barkers, the signals, the hawk-eyed agents. The rigged games. Footswitches and marked cards. The money counted in the backlots. You don't see the crowd flowing from the gate to the back end and the evacuation of pockets along the way.

You don't see because you don't want to see.

You're having fun, it's all good, chillin' out and takin' it easy. There's no time like a good time.

So step right up, four throws for a buck, guess your weight, take a break, come inside, win a prize, it's not hard, pick a card, have a treat, take a seat, the sun is down, the Ferris wheel goes round and round.

There's nothing like a carnival. And it ain't a carnival without the rubes.

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