October 23, 2012

Borrow money? ‘No thanks,’ say consumers

Posted in debt, Economy, recession, Uncategorized tagged , , , , at 9:43 PM by Robert Barone

Borrow money? ‘No thanks,’  say consumers

By Sheyna  Steiner • Bankrate.com
Highlights
  • Three-quarters of  Americans are not inclined to take on debt right now.
  • The Federal Reserve  announcement to keep rates low to 2015 may have dampened borrowing.
  • Uncertainty is  affecting consumer confidence, which impacts borrowing.
Financial  Security Index Charts » Borrow Money? No Thanks, Say Consumers
The Federal Reserve’s latest declaration to keep interest rates shockingly  low until 2015 has not galvanized the populace into borrowing truckloads of  money. In fact, most consumers say the Fed’s announcement does little to make  them more inclined to borrow money, according to Bankrate’s October Financial  Security Index.
Just 23 percent of consumers say they are tempted to take on more debt, but  74 percent say “no thanks” to low-rate borrowing right now, Bankrate’s survey  reveals.
At the Sept. 13 meeting of the Federal Open Market Committee, the Federal  Reserve’s monetary policy group, it was announced that the federal funds rate —  the very short-term interest rate controlled by the Fed — will remain close to  zero percent for a year longer than the group previously thought.
Though one of the stated aims of the central bank’s policy is to stimulate  economic activity through consumer spending and borrowing, economic theory  posits that the announcement may have the opposite consequence in the short  term, according to Bill Hampel, senior vice president of research and policy  analysis and chief economist at the Credit Union National Association.
“If anything, the effect of the announcement itself would be to reduce  borrowing today,” he says. “Some people may want to borrow now because credit is  so cheap, but you’ve just told them you don’t need to rush out and borrow now  because it is going to be cheap next quarter, next year, the year after that and  the year after that.”
Even in normal times, though, consumer loan demand is rarely moved by  interest rates, says Hampel.

What affects consumer borrowing

Though consumers do shop by price when they need a loan, a squishier metric  is actually more influential when it comes to deciding whether to take on more  debt: consumer confidence.
“If people were comfortable that they would be able to find jobs or keep  their jobs, then, even if rates were a little bit higher, they would be willing  to borrow more and spend. But that is not the situation,” says Brian Rehling,  managing director and chief fixed-income strategist at Wells Fargo Advisors.
Uncertainty about everything from the recession in Europe, the presidential  election and the looming fiscal cliff is limiting consumer confidence — as is  the still-high unemployment rate, currently 7.8 percent, according to the Bureau  of Labor Statistics.
All of that might be bearable if household incomes were moving up. But they  aren’t.
“Median income continued to fall even after the recession ended,” says Robert  Barone, economist, portfolio manager and partner at Universal Value Advisors in  Reno, Nev.
Data from the Census Bureau released in mid-September show that real median  household income in 2011 was $50,054, down 8.1 percent from 2007, the year  before the recession began. Real income reflects the erosive effects of  inflation.
“In today’s environment, it’s upside down: Incomes are falling. So, when  incomes are falling, people worry, ‘How am I going to pay it back if I borrow?’  no matter what the interest rate is,” Barone says.

No shortage of debt

While more consumer spending would boost economic activity, consumers are  still recovering from previous spending binges.
The most recent numbers from the Federal Reserve showed that total household  debt is at 103 percent of disposable income.
Hampel says that number represents total debt in the household sector — both  mortgage and nonmortgage debt combined. “It peaked at the beginning of the  financial crisis at 123 percent. Normal, back 10 to 15 years ago, was somewhere  south of 80 percent,” he says.

So what do low interest rates do?

In normal times, low interest rates might nudge consumers to borrow money,  but the Federal Reserve intends to stimulate the economy by helping homeowners  refinance their existing mortgages.
The most recent actions by the central bank — the announcement of the third  round of quantitative easing, or QE3 — pushed mortgage rates to new lows. If  many people can refinance their mortgages, that will free up some household  income that can then be spent or invested.
“That is sort of how the Fed policy of keeping rates low will stimulate the  economy: by increasing the disposable income of households through refinancing.  And also by keeping interest rates low, it will make it easier for households to  buy new houses, which will stimulate the construction sector slightly,” says  Hampel.
But refinancing isn’t taking on new debt; it’s just repackaging debt that’s  already on the books, so to speak. The real rush to borrow money may only come  just before the sale ends, about three years from now.

Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.

Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521.

Ph: (775) 284-7778.

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October 16, 2012

Why Jack Welch Has A Point About Unemployment Numbers

Posted in Economy, recession, Uncategorized, Unemployment tagged , , at 9:54 PM by Robert Barone

When the September employment data were released by the Bureau of Labor Statistics (BLS), depending on political persuasion, the news was either excellent or it was a sham. We saw reactions like those former General Electric CEO Jack Welch, who tweeted a suggestion of manipulation. On the other hand, the Obama administration has made political hay with the rapid fall in the unemployment rate in August and September.

Every month the BLS takes two surveys relative to employment, the Household Survey (officially titled The Current Population Survey), and the Establishment Survey (The Current Employment Statistics Survey). Both surveys have acknowledged flaws and both have a significant bias that pushes the number of jobs upward and the unemployment rate lower. To correctly interpret the data, one must understand how the statistics are calculated, how the biases are imparted, and the magnitude of those biases.

The Household Survey is used to calculate the various employment and unemployment indexes and rates. There are several of these indexes. Most of the public only hears about one of them, the one the BLS refers to as U-3 (7.80% seasonally adjusted (SA) for September). The public may be vaguely aware of one other one, the U-6. The numbers are produced from a monthly survey of 60,000 households. Here are some of the flaws:

•Because the sample of households is small relative to the total number of households, the series is notoriously volatile. In August, for example, the raw data (Not Seasonally Adjusted (NSA)) showed the number of jobs fell by 568,000. In September, that same number showed an increase of 775,000 jobs (NSA). The BLS reported this as 873,000 SA which is the number that the media got all excited about. Using the NSA data, over the two months, 207,000 jobs were created, or 103,500 per month on average. This leads to a very different conclusion from a single 873,000 data point.

•In 1994, the BLS changed the way in which it counts “discouraged” workers for the U-3 index. If one is unemployed for more than 52 weeks, even if one continues to look for employment, one is dropped from the labor force. A smaller denominator with the same number employed leads to a higher employment rate and a lower unemployment rate. Ask yourself how much sense this makes in today’s world where the average unemployment duration is 40 weeks and there have been several years where unemployment benefits last for 99 weeks.

•The definition of employment is biased. If one worked part-time in the last 30 days, even baby sitting for a few hours one time, one is counted as employed. There is no weighting for part-time work in the U-3 index.

•The biggest issue with the Household Survey is the seasonal adjustment (SA) process itself. Theoretically, for the year as a whole, the changes in employment by month should add up to the same number, i.e., the monthly SA and NSA changes should each add up to the same amount. And, theoretically, the SA should be calculated once at the beginning of the year. But, for the last few years, the BLS has adopted what they call a “Concurrent” SA process in which they recalculate the seasonal factors every month. The practical result of this method is that every month, all of the 12 seasonal factors change, which means that all of the year to date monthly SA data also changes. As a result, by December, the January number has changed 11 times, the February number 10 times, the March number 9 times, etc. Here’s the rub. The BLS will not publish the changed monthly data on the grounds that they don’t want to “confuse” the data users. Because they do this, the monthly change in the unemployment rate is not meaningful because the number it is being compared to has changed, but the BLS won’t tell us what it has changed to. The September 7.8% SA unemployment rate (U-3) as reported in early October is being compared to August’s 8.1% SA rate (reported in early September) despite the fact that August’s unemployment rate has likely changed due to the calculation of new seasonal factors. The BLS knows what the changed August number is, but they won’t publish it until January, 2013.

All in all, the U-3 unemployment number is deeply flawed and should not be relied on as the business media and even the capital markets do. A better (though still flawed) indicator of labor market conditions is the U-6 measure. For both August and September, U-6 showed an unemployment rate of 14.7%. Unlike U-3, U-6 adds back to both the labor force and to the unemployed “discouraged’ and “marginally attached” workers, i.e., those who have stopped looking for work but still want a job, and accounts for part-time workers who want full time employment. The flaw is that U-6 removes the long-term discouraged worker after 52 weeks of unemployment. Nevertheless, it is still a much better indicator than U-3. John Williams estimates that if U-6 counted the long-term discouraged workers, the unemployment rate would be 22.8%.

The Establishment Survey collects data from more than 141,000 businesses and government agencies. The sample is about one-third of all nonfarm payroll employees in the U.S., and, as such, it is much less volatile than the Household Survey. Normally, the business media concentrates on this survey. This survey suffers from the same seasonal adjustment issues as the Household Survey except that BLS reports the current number (141,000 SA for September) and the revised data from the immediate past two months. It does not report the changes from earlier months, so it is possible that jobs reported in the current month were “borrowed” from earlier months, which aren’t reported until the next January. In fact, Mr. Williams contends that this is precisely what happens in the second half of each year.

Besides the transparency issue in the SA process (which can lead some to the manipulation conclusion) which the BLS could easily remedy simply by publishing the changed data on a monthly basis, the Establishment Survey suffers from a significant upward bias, known as the Birth-Death model. In the 80s, the BLS was constantly embarrassed that it was under reporting the number of jobs in the Establishment Survey by approximately 50,000 jobs per month. That occurred because more small businesses were being established than were being closed. And, one could probably argue that this was also true in the 90s during the tech boom. As a result, BLS adds approximately 50,000 jobs per month to the Establishment Survey report. That seems inappropriate in today’s world.

From all of this, it is clear that the U-6 measure is a lot more reliable than the U-3, the one that is most widely reported. In addition, when dealing with the Establishment Survey, be wary of the 50,000 jobs bias.

When I began work on this paper in early October, I was skeptical that there could be actual manipulation of the data. Mr. Williams has documented at least three cases of manipulation which he says have been confirmed by employees or former employees going all the way back to the 1960s. That is not a lot. Yet, one must worry about the lack of transparency in BLS’s reporting. After all, for the years 2010 and 2011 for which we have final numbers released in January of the following year, there were much lower levels of job creation than originally reported. Unfortunately, the media pays no attention to such revisions, and the bias goes unnoticed.

In an October 9 Wall Street Journal op-ed, Jack Welch defended his tweet, indicating that the economy would need to be growing at breakneck speed for unemployment to drop from 8.3% to 7.8% over two months. While this is quite different from the “manipulation” charge, it does make sense. The fact is, almost all other underlying data point to weaker, not stronger jobs numbers. New part-time jobs dominated the Household Survey data in September. Goods producing jobs actually fell. The National Federation of Independent Businesses index of employment softened in September as did Monster’s employment index. All of this seems to be in direct conflict with a SA increase of 873,000 jobs in September (Household Survey), the largest increase since 1983. The data also show that in August and September, governments added 602,000 new employees. Anyone following state and local government finances knows that number has to be far from accurate.

While there is no direct proof of manipulation, there are a lot of sound reasons, based on flawed methodologies, and based on nearly every other underlying employment data series, not to trust the headline making unemployment data.

Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value
Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.

Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521.

Ph: (775) 284-7778.

October 5, 2012

If you want to build client loyalty, you must get personal

Posted in business relationship, Finance, Uncategorized tagged , , , at 11:04 PM by Robert Barone

Business is personal. There is no way around it. In a world where consumers and clients have seemingly unlimited options, they choose — and become loyal to — products and services that mean something to them personally.

Personal connections are not — and should never be treated as — a business ploy. Instead, they must be fostered as one of the most genuine ingredients of a successful business partnership. The very elements of successful business relationships— trust, communication, creativity and honesty — are exactly what personal relationships help build.

At Universal Value Advisors, we work in an industry where we deal daily with a client’s personal financial information. We know that building trust and communication through both a personal and solid business relationship are integral to a successful partnership. Here are five ways to foster relationships that will benefit you and your client:

Make your client comfortable

A business environment is often the enemy of good communication. People tend to stiffen up, remain distant and become reluctant to reveal information. In a business like financial planning — where personal information is crucial to the success of a financial strategy — making decisions on too little information can hurt investment strategy. Don’t be afraid to be different. Combat the communication-killing, button-down environment by purposefully designing an office that is more like a home environment. At the center of our office is a gourmet kitchen. We have served hundreds of lunches and appetizers to clients at this kitchen, and the result is always the same — the business tension subsides, real, honest communication begins, and our business relationship benefits. Make your clients feel comfortable. Develop a real rapport. Know that the time you invest in making a personal connection with each client will pay off in improved communication, a deeper trust and a better understanding of a client’s financial goals.

Listen

Listening is probably the most critical element in creating any relationship. Before you can plan with a client, listen carefully to discover what is important to him or her. Remember that the client leads in this relationship and you must listen to understand his or her needs and goals. You can discern the level of risk the client can tolerate only by listening. Don’t outsource your listening or impersonalize it by using a computerized questionnaire. This defeats the purpose of having a one-on-one discussion about important topics and alienates clients. Listen in-person and often. And let that listening guide the personal way you treat each client.

Be honest and give respect

The expectations of a business relationship should be built on honesty. Be straightforward with your clients about what you can and cannot do. Setting honest expectations and delivering on that promise is one of the simplest ways to create client loyalty. Different clients want different things. Respecting those personal preferences while using your expertise to maximize the effectiveness of a client’s business strategy is key to attracting and keeping those clients.

Loyalty

If you want loyalty, show loyalty. Establish your commitment to your client from the outset, and reaffirm that commitment regularly. Some of the accepted tactics in today’s business world, like “nickeling and diming” clients with hidden fees, might lead to short-term profit, but can destroy client loyalty in the long run. Show a client that you put his or her interests first, and trust that that loyalty will lead to a long-term, successful relationship.

Courage

Constantly communicate your strategy to each client, even if the message isn’t always upbeat. Share your vision to make sure you and the client are both aware of your course. When corrections are needed, engage in open dialogue and then move forward. Business relationships are not perfect. When you make an error, don’t blame others or external factors. If you believe a client would benefit from an investment or business move that others can more effectively execute, recommend that even if it means your own compensation is reduced.

Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.
 
Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521.
Ph: (775) 284-7778.