More Millionaires Now than Ever

According to this article, there are now close to 9 million millionaires in the world. More interesting (but not surprising if you know about millionaires) is that they are investing aggressively in emerging markets around the world.

The ultra-rich (more than $30 million net worth) topped 85,700 around the world and grew at a faster pace than the overall number. The article points out that the fastest growing area is the Middle East and the leader is Dubai. Why? Low barriers to entry, no unions, cheap startup costs and no taxes.

Jim Cramer Crazy?

Interesting article here about how Jim Cramer, of CNBC, may have lost his mind.

Economy Update

5.3% (Q1) annual growth for the United States economy. The fastest growth in more than 2 years. Inflation holds steady at under 3%. Exports are also rising and have grown at 14.7% (annual). Housing spending is also up (3.1% instead of the estimated 2.4%). Looks like things are going good!

Quote of the Day

"You never get a second chance to make a first impression."

--Anonymous

Don't Put Much Faith in the "Experts"

John Stossel wrote an article about his Princeton economics teacher, Burton Malkiel. I have been reading, Mr. Malkiel's book and am almost finished. I'm quite impressed with his numbers concerning stock investment and his index-fund based investment strategy. I'll post more about the book when I'm finished with it.

Stossel talks about things I've already learned in the course of earning my MBA. Most experts cannot consistently pick stocks for a portfolio that beats the S&P 500. Sure every year there are lucky ones, but too many factors over the long run reduce even the most highly educated and savvy fund manager to scampering to beat the almighty S&P.

If you've been reading Cashtalk for awhile now, you already know this. Brett has posted an article about his own foray into the market (Brett would hardly call himself a savvy investor, but at least he tried!) and his recommendations for a stock market strategy here. And our stock market simulation game also proved that because of all the brokerage fees, picking and holding a stock would do just as well as buying and selling on a daily basis (or did it?).

So when you're deciding which fund to buy or which basket of stocks to hold, remember that odds are, buying the S&P 500 index fund will get you better or equivalent returns over the long run, with the bonus of having lower commissions and fees.

Stocks; Gold Fall in India: On Suicide Alert

Wow. The Mumbai exchange in India has lost almost 22% of its more than $600 billion value last week and beginning today. The Indian police are watching canals and rivers for brokers wishing to commit suicide.

No matter how bad you do in life with money, it certainly is never worth more than your life. Getting your priorities straight should prevent people from jumping out of buildings or tying a boulder to their leg and jumping off a bridge. Your family and values are way more important in life than money. Your dreams may be put on hold, but a short delay isn't worth the price of death.

Gold and other commodities are falling, too. Very strange. Some are recalling similarities to this crash and the 1987 "Black Monday" Wall-Street crash, citing fears about inflation and a sharp run-up of stock prices and weakness of bonds.

I'll keep you posted.

Time Value of Money: Buying a Car

I thought I would review the Time Value of Money after a friend of mine sent me a problem to solve.

Let's say you want to buy a new car valued at $25,000. Wait a minute! What are you doing? A new car loses almost a fifth of its value as soon as you drive it off the lot! Never buy a new car!

Okay...Let's say two guys with trench coats kidnap you at gunpoint and bring you to a new car dealership. They bring you to the smirking salesman and he says, "You have two deals: You can buy the $25,000 car for no interest and payments for 60 months or you can get a $4000 rebate today and pay 7% (yearly) interest on the balance for 48 months." Which is the better deal?

Your eyes dart across the street to the used car lot. You glance down at the "used car" section in the classifieds. Then you hear a "click" as the thug pulls back the hammer of his revolver. "Enough stalling! What's your decision!?"

First, let's figure out the payments. The first option (no interest 100% financing) would have a payment of $416.67 for 60 months. What's $416.67 x 60? $25,000.20.

The second option has payments of $502.87 for 48 months. That comes to $24,137.76. Seems a little cheaper, but remember that this includes a $4,000 rebate, so the number should be $21,000. The 3,137.76 is interest on the financing of the $21,000.

My friend suggested that I use the Present Value of money to solve the problem. Is this the correct approach? On the first option, the future value of his payments would be $25,000.20 after 60 months. The Present Value could be discounted at an alternative use of the money, say a CD at 5%. We can set up an algebra equation that looks like this:

PV(1st Option) = ($-416.67/0.004167)*[1 - 1/(1.004167)^60]

Notice how I've divided the 5% interest by 12 to get the monthly interest of 0.004167? This will give us a more accurate number.

If we solve for the first option's Present Value, we get $22,079.42.

PV(2nd Option) = ($-502.87/0.004167)*[1-1/(1.004167)^48]
PV(2nd Option) = $21,835.93

What does this tell us? Do we really care what an alternative investment would make? We want a car, darn it! Especially to appease these goons and their revolver pointed at your head. The answer is yes. This tells us that for 7%, 48 month financing option, plus rebate , if I invested $21,835.93 at 5%, I'd have the equivalent future value. If I invested $22,079.42 today at 5%, I'd have the future value of the 1st option.

So which one is better? The lower PV gets me the same car at "less"money. And since these guys are pointing a gun at your head, you should just take the 2nd option: the $4,000 rebate and 7% interest. You'll save $243.54.

There you have it. Easy peasy!

The Smell of Money

When I was in China, I would often try to stay current with world news by either reading the Economist or Newsweek (International Edition). In one issue of Newsweek, there was a "perpective" article written by a former resident of a town in Iowa with a lot of pig farms around. The person recalls how her father and her would drive into town and the locals would sniff the air and smell the horrible odor of pig manure. Her father would take a particularly big whiff and then say, "Do you smell that? That's the smell of money."

Not all jobs are highly desirable, but after beginning the "Millionaire Mind" by Thomas J. Stanley, it seems that many millionaires tend to gravitate toward low competition, undesirable businesses with high profit margins. That's something you should keep in mind when choosing your own career path. Pigs, while stinky, often pay well.

But I digress. I was reminded of that article when I read this article today. Apparently scientists at the University of Illinois have found a way to convert pig manure into crude oil. That's right. Millions of tons of pig manure could potentially be transformed into oil and used in vehicles or other applications. Ain't technology great? I guess in the future, there will be one more way for that smell to be the "smell of money."

Investing for Education

Two guys from SmithBarney in Houston, TX (actually they're Vice Presidents) wrote this article about investing for their children's education. They are adamantly against the 529 plans and any of the state educational savings accounts. Why? They claim that recent laws in Congress open the door for states to tax other states' plans. Not good.

They also correctly point out that in 2010, the 401(k), Roth IRA, and 529 plans tax laws will expire. They may or may not be renewed by Congress. I can't imagine any Congress would remove the tax sheltered properties of the 401(k) or other savings devices, but it is a risk, I suppose.

Their strategy is composed of putting half of an investment into a municipal bond and the other half into a few, dividend-paying, high return stocks (if only they had pointed out a few examples!). Their ideas intrigue me, but I'm a bit skeptical. I'd like to hear your thoughts.

Happy Birthmonth Cashtalk!

Cashtalk has been around for about a year now! We just wanted to thank everybody who has had the time to contribute an article or post a comment. And we also wanted to thank the people that read this site, too.

Our mission to help people learn more about money and business is going strong. We'll continue posting interesting information about business and economic life in the United States and ways to save and be smart with money. If you would like to contribute to Cashtalk, just send me an email or post a comment and I'll get in touch with you.

What Percentage of the Gas Price is Tax?

It seems like everywhere you turn, you're taxed for something. I'm sure if you added up all the taxes you paid throughout the year, it would come close to 50% of your income (unless you're lucky enough to be in the higher tax brackets, in which case it would be higher, too). One of the taxes consumers pay is the gasoline tax; both the federal and state (and sometimes even local or city).

This site shows how much you in your state are paying for the gasoline tax. Every state has a different system for taxing gasoline. Some have extremely high flat rates. Others have deceptively lower flat rates but then tack on a percentage sales tax. Check out the chart and find out how much you're paying in your location.

You can also compare the amount of tax you're paying with the amount of profit a gasoline company makes per gallon sold. ConocoPhillips makes $0.07 a gallon of profit. This site explains how much the companies pay for the crude oil and how much it costs to refine it. Most of this accounts for the rest of the price of gasoline.

So next time you're at the pump and thinking you're being bilked, remember who is doing the work to get you your gasoline, and remember who's taxing you to fill that car of yours. And don't forget that either when you hear your local politician want to punish the refined oil industry, too.

Average Gas Prices by County

This is a great site that takes the average gas prices per county and then shades them a certain color on a map of the United States. You can also click on individual counties to get further analysis.

With the increasing price of gasoline, it is important to watch those pennies! I think it's hillarious (and a bit sad) that the most expensive places in the U.S. are California and New York, two states with tough restrictions on gas quality and excessive taxes on gasoline. Yet another casue of government crowding out.

Both California and New York have had predictions or indications of slowing economic growth. New York's method of taxing gasoline (by the dollar instead of by the gallon) makes it the highest gas tax in the U.S. Hurting consumers in this way is certainly no way to boost or even maintain a strong economy. It is my own prediction that both of these states with already high costs in other things, like housing and commodities, will continue to see a slow down in their own economies as people try and find solace in other states.

Balanced Budget and Federal Deficit

Walter Williams discusses, very briefly, two worrisome aspects of the U.S. economy in an article last week. He talks about the federal deficit. He claims that people say the deficit is a way to borrow against the future, but he says different. Really, the government potion of spending ($2.4 trillion) is "crowding-out" private investment and spending. He cites some interesting examples.

He also doesn't like the idea of a balanced budget. If the government spent $6 trillion and taxed us $6 trillion to pay for it, would that be better than a $2.4 trillion spending paid for by $2 trillion in taxes (leaving a $0.4 trillion deficit, of course)? His solution (and mine because I agree with him) is to cut spending overall, but we all know that isn't likely to happen.

Outsourcing the Drive-Thru

I can see it now: a mob of McDonald's employees protesting outside of a suburban McDonald's. Protest signs reading "Don't Eliminate Jobs" or "Super-size me but don't Outsource me!"

McDonald's and CKE Restaurants (owners of Hardee's and Carl's Jr.) are experimenting with national call centers of highly trained customer service specialists that would take your drive-thru order the next time you visit their restaurant. They are banking on the fact that someone in Santa Maria, CA can do a better job than the person standing only 100 ft from you the last time you pulled up for a Happy Meal. And not only better, but faster. And in the fast food business speed translates into better service and more profit.

This may or may not work. The article from the New York Times mentions some problems with transmission quality between the pilot restaurants in Hawaii and the call center in California. Often the operators have to ask the customer to repeat themselves. I'm not sure how this is much different from the current setup but it may irk customers and cause bad will.

I have to say that I'm excited about the idea, though. I love the idea of companies becoming more efficient and therefore passing the cost savings on to the customer. But what if they don't pass them on? How could they not? In a competitive environment (like fast food) if you can get a cost edge on a competitor, you are most likely going to want to increase customers by decreasing prices. If your competitor can't match your efficiencies and therefore prices, they will go out of business. That leaves more customers for the innovative restaurant. And that means more profit. We'll just have to see how this turns out.

The Economy Continues to Grow Stronger

Two good pieces of news the other day: 211,000 jobs were added to the economy in March and consumer confidence is up.

Who Pays the Highest Taxes?

The internet is a wonderful thing. So much information is available, if only you can find it. I stumbled across this website the other day and thought I should share it with you. It is quite relevant at this time due to the impending tax deadline of April 17th.

The U.S. Census Bureau posted the receipts of taxes of the United States and the amounts taken in by all of the 50 states. It then divided the amounts received by the population of those states to give us the amount that each person in the state paid. Which state has the highest per capita taxes? Vermont. Followed closely by Hawaii and Wyoming. California is actually below Alaska, which I found surprising.

Of course this begs the question, "Which state has the lowest per capita taxes?" The answer proabably isn't as startling: South Dakota, followed by Texas.

My state, Iowa, paid $1,938.85 per person. This is $253.42 less than the average in the U.S. of $2,192.27.

Check out the site here and find out if you are in a high-tax state or not.

Economics of Illegal Immigration

There is always something about the way Thomas Sowell describes issues that makes them easy to understand. He always gives clear, real-world examples to illuminate more complicated theory or just plain common sense.

With the current broil over immigration, and the fact that it effects most people in the United States in some way or another (and their money), two articles by Dr. Sowell attempt to put to rest common myths associated with illegal immigrants.

I was most surprised by his logical argument against the myth that we "need" immigrants to do jobs no one else will. His rationale against this is that everything should be based on price. And when people are illegally working for less money, than others lose out. He gives the example of news reporters:

If Mexican journalists were flooding into the United States and taking jobs as reporters and editors at half the pay being earned by American reporters and editors, maybe people in the media would understand why the argument about "taking jobs that Americans don't want" is such nonsense.

His second article covers the absurd idea that we need the immigrants for our farms. I had always believed that, having grown up in California, that it was because of the immigrants that we had access to the large variety of pickings from the field. But Dr. Sowell puts this into perspective by calling attention to the fact that most crops grown in the United States are un-needed! Their farms are being subsidized by the government to grow more vegetables and fruit than we need or can sell. What this leads to is the subsidizing of illegal immigrants by the government (let alone the worthless fruit that we, as consumers, are paying more for, because the market is restricted).

Read the articles and let me know what you think about this whole brouhaha.

Money and Inflation: A Macro-Economic Perspective

I have a test tonight in my Economics class and while I'm reviewing I thought I would share one of the topics covered in the examination: Money and Inflation. I want to thank Curt Wyse for looking up the information for me and N. Gregory Mankiw for writing it down in his book.

What are the three functions of money?
1. Store of value - money is a way to transfer purchasing value from the present to the future.
2. Unit of account - a yardstick with which we measure economic transactions.
3. Medium of exchange - money is what we use to buy goods and services.

Explain Milton Friedman's famous claim: "Inflation is always and everywhere a monetary phenomenon."
The quantity theory states that the central bank (the Federal Reserve for all you Americans out there), which controls the supply of money, has ultimate control over the rate of inflation. If the central bank keeps the money supply stable, the price level will be stable. If the central bank increases the money supply rapidly, the price level will rise rapidly. Thus, as Friedman says, inflation is a monetary policy. It is dependent upon how much money the central bank keeps in circulation, not the strength or weakness of the economy.

Use the concept of "seigniorage" to explain the "inflation tax."
Seigniorage is the ability of the government to print money. When the government prints money (and puts it into circulation), it increases the money supply. An increase in the money supply, in turn, causes inflation. Thus, when the government prints money to raise revenue, everyone's existing money becomes worth less through the inflationary increase in prices. While not a physical tax, the effect of this inflation tax is the same in that the government increases its revenue at the expense of the citizens.

What are the three notable costs of expected inflation? What is the major cost of unexpected inflation?
Notable costs of expected inflation:
"Shoe Leather Costs" - Since an increase in inflation causes people to hold less money, they will make more trips to the bank to withdraw smaller amounts. (Leaving money in the bank allows them to partially offset the inflation through the higher levels of interest rates they earn on their bank deposits). The "Shoe Leather cost" is so named since people will wear out their shoes more rapidly due to the increased trips to the bank.
Menu Costs - This is the cost of reprinting and distributing catalogues and menus due to the higher frequency of price changes during high inflationary times.
Price Variability Costs - These costs are related to menu costs and account for the decrease in margin between printing of menus/catalogues. During times of high inflation, the purchasing power of a currency declines, but it is impossible to keep all catalogs/menus current. Thus, a firm's relative prices will fall as inflation changes purchasing power between printing of prices.

The Cost of Unanticipated Inflation:
The major cost of unanticipated inflation is the redistribution of wealth among individuals. This happens because people take anticipated inflation into account in their decision making, but cannot do the same for the unanticipated. For instance, when taking out a long term loan, both parties agree on an interest rate based on the anticipated inflation. If inflation ends up being much higher, the borrower pays back the amount with less valuable dollars. This causes the borrower to end up with some value/money the lender was supposed to have had, but was unable to collect due to inflation. Similarly, individuals on fixed pensions are often planning on a certain level of inflation. If inflation is higher or lower than the estimate, they either end up with more or less purchasing power.

The Effects of a Higher Minimum Wage

Thomas Sowell continues his series "Something for Nothing" by writing about the effects of higher minimum wages on an economy. He cites this article from the Economist, reviewing an economic quandry that is occuring in South Africa: The economy is booming, but investment is stagnant. Sowell uses this as an example and cites a rising unemployment rate as a key symptom of inflated minimum wages, as the article suggests. Why? Because wages should be set at what someone's productivity warrants, not what the government thinks is "fair."

If I pay you $10.00 an hour because I have to, but your work is only worth $8.00 an hour to me, then why should I hire you at all? Why not just make the workers I already have work longer? Or better yet, why not get a machine to do the same job? Or even better still, why not out source the job to an economy that believes in paying workers by what their productivity demands you pay?

As if an inflated minimum wage wasn't bad enough for South Africa's economy (and others), Sowell cites job protection laws as having an even worse effect on the economy when compounded with the wage. The employers of SA can't fire their workers easily. So why should they hire more? There is too much risk of hiring somebody you can't fire. Also, when the economy picks up in a boom, why hire more workers if the employer can't fire them when the economy slows down again?

Sometimes, when campaigning for higher minimum wage laws or job protection laws, people think about themselves or somebody they know who may have lost their job, or can barely live off the $5.50 an hour they receive at some fast food joint. While this may be good anecdotal evidence, it fails to take into consideration the effects of the macro economy and thus when these types of laws are passed, it turns out to hurt them more than if things had remained the same.

South Africa's economy is very productive and growing at a respectible 5% a year. They are one of the most productive economies in the world, but because of the greediness of politicians and the short-sightedness of the constituents of South Africa, they are not reaping the benefits they should be.

You Can't Get Something For Nothing

It has been a month since the last post and for that I apologize. I have been taking two very demanding classes in my program. I hope to continue posting regularly in the future, but it may be sporadic until I graduate in May. Thank you for stopping by anyway.

Thomas Sowell posted a good article here stating the obvious in a very eloquent way, "You Can't Get Something for Nothing." In this multi-part series he uses real world examples, such as the auto workers union, teachers unions, and other monopolistic groups and explains their effects on those they seek to gain more from.

The specific example in the article deals mainly with GM and Toyota and sheds some light on a major factor in GM's rapidly decaying position and Toyota's steadily increasing position in the automobile market of the United States.