Rocketing Markets and Retirement Plans

5 Year Dow Chart
1 Year Dow Chart
Gadabout has been sitting on edge, watching as all major USA stock indices have soared over the past 5 years. The DOW is up over 20% the past year alone, and up nearly 90% from 5 years ago. This rather rapid growth is not slowing and has a different feel from the late 90’s dot com boom. The 90’s were frenzy years, highlighted by throwing money at the markets based upon emotion where fortunes were made and lost over just a few years. Today, despite war and contentious relationships in DC, the markets are silently jogging up smooth pathways. No hype, just pure money making, and it is not a newsworthy event.

Gadabout believes that part of the resilience is attributed to government employees and their supplemental retirement plans. These plans are called Thrift Savings Plans (TSP), and most employees maximize their allowed deposits of around $15,000 annually. TSPs offer only a handful of options ranging from government securities to index funds. There are over 22 million government employees (the statistics are more difficult to break down than I thought, so errors are expected in the numbers I am throwing about, but they are close) and if only half are maxing out their accounts $165 billion dollars is being invested in US stocks and bonds annually.

The uniqueness of these deposits is that they are stable. Stable in the sense that they are not likely to be liquidated since penalties would be applied if withdraws are made. They are essentially 401Ks for governmental employees. These accounts are also invisible to their owners. Once set up, deposits are automatic and continue to pump cash into the markets regardless of market performance. The word “predictability” comes to mind.

We started off with the IRA experiment in the 70’s, 401Ks and there similar instruments in the 80’s, and rocketing TSP participation in the 90’s and the new millennium. The middle class is joining forces with the upper classes through active participation in these programs, and future outcomes may prove dramatic. Consider that as retirements increase over the upcoming decades, retirees will likely have IRA, 401K, legacy retirement plans and social security to pay the bills. Even low level government employees making less than $45,000 per year, will be retiring with 3 retirement plans—excluding social security. I think that is real progress and this may be the most remarkable story not being told—except by Gadabout Jack that is.

I am keeping my humble assets invested in the markets, and if I take a fall, no matter because it feels so good at the moment! Why say no, when it feels so good to say yes?

Gadabout's History Lesson

Alert!

The sky is falling
Upon blind, sheltered Lemmings
Talking on iPhones

Gadabout believes that the health of the economy is much healthier than most of us are led to believe. Yes, some people are scrapping by and facing challenging hardships, but for the vast majority all is coming up roses. During the presidential election of 1980 (the first presidential election Gadabout voted in), candidate Reagan proposed the question, “Do you feel better off today than you did 4 years ago?” Those were powerful words that led to a landslide election victory. For the benefit of younger readers, the country was a mess in 1980. Home interest rates were above 15% (that’s right, 15%), unemployment was nearly 10% and personal income was flat. We were in the dumps! Gadabout joined the military after graduating from the number 1 Mechanical Engineering College in the state because there weren’t any jobs!

If you have been keeping an open ear to the endless campaign rhetoric, then you have noticed that the dialog never touches upon a skyrocketing stock market, low unemployment, a firm housing market (excluding a rather small correction the past year), and an upbeat national personality. We are led to believe that the rich are too rich (yes, I believe we should examine taxing the super rich), we are loosing a war and the health care system is out of whack. Yep, we need to work on all of these areas and make further progress, but Gadabout feels better today than he did 4 years ago. Except for being 4 years older and feeling the years in my hips and knees, I certainly don’t feel worse.

Look, Apple’s iPhone sold 500,000 units during its debut weekend. $500 for a phone! How bad can things be in the country when we are all running around celebrating paying $500 for a phone when Verizon will give you one for FREE if you sign up for a 2 year service plan? Americans like feeling bad and depressed regardless of their personal successes and fortunes. The Talking Heads tell us the sky is falling, so we all seek shelter and hitch a ride on the “bitch and moan” bandwagon. In the 70’s and 80’s very few could have afforded a $500 dollar phone, let alone buy a new car or home. Come on, folks; the cold war is history, we are working and creating, and paying our bills on time!

Last point—do you spend more money on your pet’s health care than your own? Yeah, I thought so.

World Oil Consumption Sham

Gadabout has been running the numbers on world oil consumption trends as related to population statistics, and the numbers tell a different tale than what we are led to believe. Americans have been labeled as oil abusers because we consume a disproportionate amount of the world’s oil supplies. This is a true fact when contrasting one country against the next using descriptive data, but the trends are shifting towards a leaner America.

First off, there are a few factors that should be noted concerning the USA before looking at consumption, production and import data. The USA is nearly 100 percent industrialized, meaning that we don’t use mules to plow fields and such. The USA is a rather large country with population centers established at great distances from each other, resulting in consumption patterns unlike smaller countries. Lastly, America is a wealthy country, and wealth engenders consumption beyond what is minimally required for national efficiencies; meaning that additional activities such as boating, flying, and lawn maintenance, ATVs skew the data. Skewed, because other countries are catching up with the USA in wasting oil at the same time the USA is scaling back. Other factors include tourism, domestic illegal immigration population, and guest workers and students; all of whom disproportionately consume American oil.

The United States is the number 3 oil producer in the world, behind number 1 Saudi Arabia and number 2 Russia. The USA produces roughly 7,000 thousand barrels (t/bs) daily, 3,000 less that Saudi Arabia; and consumes 20,000 t/bs daily. Proportionately, this equates to 24% of the world’s daily consumption. Wow, Gadabout uses about 18 gallons a week in his Chevy Trail Blazer!

“Okay, Gadabout, what is your point?” you say. Well let’s look at some facts:

USA oil consumption dropped 1.3 percent in 2006 from 2005. In fact the 20,589 t/bs a day was LESS than 2004. USA consumption has only increased by less than 1 % a year since 1996, while our annual population growth rate is nearly 2 %. Maybe Americans are beginning to conserve!

Let’s look at 2006 numbers and calculate national consumption rates per capita. For the USA we would divide 20,589 t/bs (20,589,000) by 301.1 million = 0.068 barrels per capita per day.

Daily Per Capita Consumption:

USA 0.068
Canada 0.067 (those silly Canadians)
Japan 0.041 (they are small people)
China 0.006 (they still use mules)
UK 0.029 (small country with nowhere to go)
Germany 0.032 (very efficient people)
Australia 0.042 (catching up)
South Korea 0.053 (how can this be?)
France 0.031 (probably lying)
Switzerland 0.036 (no opinion)

As you can see, America is not the oil bandit that the world makes us out to be, and with our per capita trend DECLINING the big picture is favorable for the future. China’s oil demand has increased 100% over the past 10 years compared to less than 10 % for the USA.

The USA will continue to show declines, and the declines may actually accelerate during the next 10 years. One of the USA’s biggest problems is the continued use of heating oil used in the northeastern area of the country. This consumption sump must trend downward through increased use of alternate sources. Noteworthy is the fact that Americans are driving more efficient cars, and with the explosion of hybrids and next generation diesel engines, we’ll likely see significant declines in per capita consumption. Our airlines are saving fuel (those full planes are a pain in the ass, but it is effective) too. Watch out world, once again the good ole US of A will be leading the charge on efficiency! Don’t let the pundits confuse you—Gadabout is here to dispel myths and uncover truths!

Subprime Lending Mess Good for America

Gadabout has been keeping his eye on the subprime leading headlines, and posits a polemic position on the matter. Okay, first, what is a subprime? Well, it is essentially lending to individuals with less than desirable credit ratings at higher interest rates under less than optimal terms. In the mortgage business, it is all about closing a deal, and making a killing with fees and so forth. Everyone makes a buck when a real estate deal is closed; real estate brokers and agents, attorneys, surveyors, title insurance companies and home inspectors. Since so much cash is distributed in the name of the buyer, it is important for the housing industry to keep the machine turning. And it turned so wonderfully from 2001-2006.

Subprime lending accounts for about 12 percent of the big picture in mortgages and the default rate (2.5 %) for these loans is 10 times the prime rate lending industry. Ten times the prime rate sounds scary, but in the big picture it is a relatively small segment of ownership. Sure, a few homeowners will default and lose their homes, but savvy investors are waiting in the shadows to gobble up these prizes and generate a profit. Who loses in this horse trading? The owners who default ruin their credit scores, and the lender will most likely lose a bit too.

Let’s look at an example:

Earl and Betty buy a $200,000 home with a zero dollar down payment. They take a teaser low interest rate ARM and after a couple of years the interest rate climbs from 4 % to 6.5 %. Tax assessments increase also so their initial monthly payment jumps from $1,200 to $1,800, and they start falling behind. Oh, don’t forget that they dumped several grand for furniture, landscaping and new curtains, so the credit cards are maxed out too. Anyway, they default and an investor picks up the property for $155,000, and flips it for a profit at a final sale price of $182,000. Every group makes money again through fees and taxes!

The final point is that the lower selling price helped BRING DOWN inflation, thus offering first time homeowners more choices and lower prices. Subprime lending is a small portion of the mortgage industry and regardless of the fact that lives are temporarily ruined, lots of others make a killing off these serial closings and turnovers.

Gadabout does agree that the housing market has taken a downturn and in some areas, like Las Vegas, prices have crumbled. There are problems out there and some people are hurt and will face a serious hit in the future, but the "bubble" never "popped." It may have deflated a bit, but it remains a bubble. And with the national unemployment rate at 4.5%, the country still has steam. As always, be cautious, read the fine print, and don't live beyond your means.