Why Economics Should be Required.

I came across this bill being proposed in the CA Senate recently:

http://legiscan.com/CA/text/AB10/id/670306

The short version, is they want to raise the minimum wage from $8 an hour in CA to $9 next July and then $10 an hour July of 2016.

Really? Don’t we usually decrease the price of something when we want to sell more of it?

Economics people: We have relatively high unemployment in CA right now. Do you remember your supply and demand graphs? Unemployment means that the supply of labor currently exceeds the demand for labor. How do we fix this imbalance?

We can cut the excess supply. Given that our supply is “people” I don’t think that eliminating them is a really great option…

So we have to increase demand. OK, how do you immediately increase demand? That’s right! Put it on sale. A.k.a. decrease the price. When the milk and veggies are about to expire at the grocery store, the manager does not jack the price up. They decrease the price, to encourage you to buy it.

So, we have a bunch of people who want to work, and can’t find a job at $8 an hour. Do you think that they will find work if we increase the minimum pay to $10? You don’t have to be an economics genius to figure this doesn’t work.

Maybe instead we need a minimum wage holiday. A temporary decreasing of the minimum wage. to boost the demand for labor. When the economy goes into recession we lower interest rates to encourage spending, why not lower the wage rates. Maybe it will keep some people employed (albeit at a lower amount) than otherwise would have. $6 an hour isn’t great, but it is better than $0 an hour.

I don’t disagree with the idea of a minimum wage, per se, but with this bill it is clear someone just isn’t paying attention. Maybe next time the economy tanks we should talk to our politicians about a minimum wage holiday!

And yes, I fully expect to get an email from my brother in 5… 4… 3… 2…

 

 

 

When Someone Says it Better…

Cafe Hayek is an economics blog with a decidely “laissez-faire” tilt that I follow and enjoy a great deal. One of my favorite things about that blog is their quotation of the day, which exposes me to a great many other excellent books, blogs, essays, and videos.

Recently, a quote came up that resonated with me. I wrote a post a while ago entitled Work Makes Wealth. The basic thrust of my post is that no investment will make you wealthy. Investments protect and/or grow wealth, they don’t create it. There is no magic bullet.

I made that point using 576 words.

This guy did it in 28.

So, when someone says it better, give them credit and show it off.

From page six of Edmund Phelps‘s hot-off-the-press Mass Flourishing:

Understanding the modern economies must start with a modern notion: original ideas born of creativity and grounded on the uniqueness of each person’s private knowledge, information, and imagination.

Like I said, the most valuable ideas are hard to replicate. Creating something of value is the only way to accrue more valuable things to yourself.

 

 

 

Age of Turbulence – Book Review

downloadI just recently finished The Age of Turbulence: Adventures in a New World by Alan Greenspan. For those of you living under a rock, Mr. Greenspan was the Chairman of the Federal Reserve Board for the twenty years from 1987 to 2006. In addition to that, he has been involved in government and economics for nearly 50 years.

The book is broken into several parts. The first few chapters are Mr. Greenspan’s story: what got him into economics, his career, the people he met, the work he did, etc. I found this to be the most fascinating part of the story. I always enjoy the life story of any famous business figure, and this section did not disappoint.

Spoiler Alert: Even someone relatively young like me will recognize MANY of the names of people that have been in government for the same extended period of time. It really is true sometimes. There are something like 100 people that run everything. Sheesh. The good news I learned from this though, was that the stories of these people are, most often, stories of people who really are trying to do the right thing, often in situations with no good choices. But how they approached financial crises was a fascinating read.

In the second part of the book, Mr. Greenspan offers a chapter on several different countries and economic ideas. Some of these chapters were a little slow for me. It might be the timeliness. I am a little late to the game on this book, since it was published in 2006. The issues facing the countries might have been news at the time of the book’s publication. But all of the issues facing these countries have been their economic story for the last seven years. Maybe that is a testament to Mr. Greenspan’s foresight. This section almost read like a history book. Example: Yes, we all understand the problems facing Russia if they continue to base their economy on natural resources. But if you have no experience in economics at all, you might learn some new things and be exposed to some new ideas that you can easily relate to real-world events.

The third part of the book was the most academic and, accordingly, the most difficult to get through. It is a series of chapters giving Mr. Greenspan’s thoughts on different, relatively discrete, topics. Not having any serious economics training myself, the chapter on Current Accounts and Debt and their effect on global economic growth required me to re-read a few chapters. But I very much appreciated his non-political and purely academic approach to explaining these issues. You might be surprised to find that the economic issues many people worry about don’t concern Mr. Greenspan and which issues are largely ignored that really could be our undoing.

The fourth part of the book starts to transition from looking less at an economic explanation of the present and more about the extrapolation into the future. I particularly enjoyed the chapter “The World Retires, But Can It Afford To?” The way these things are treated was just fascinating. I think it is very well written in that these chapters are, to my mind, a perfect combination of academic rigor and approachability. When I learned something that did not make sense, I was able to identify the assumptions and understand in which scenarios the assertions were likely true or not. In many cases, Mr. Greenspan elegantly explained both sides of an argument, as well as the extenuating factors. There are simply far too many ideas and arguments to explain in something as limited in scope as a blog post, but suffice it to say that I now have a good handle on the issues facing the world for the next 50 years.

It has been said that if you can’t explain your position or suggestions to a lay-person, then you don’t truly understand them. It is clear to me that, despite our thoughts on politics and economics, Mr. Greenspan is one of the most accomplished and talented economists of the 20th century.

If you are a small business owner, this book is probably not going to make your busienss better, so it is not going on my “Business Guru” reading list. But if you have any interest in economics, I highly encourage you to check this book out!

Eating Cake

downloadI love cake. You probably do too. Who doesn’t love cake? The trouble is, everyone wants to have their cake and eat it, too. But you can’t.

In my world, it goes something like this:

Well, I want to pay less tax, but I don’t want to spend any money saving the tax.

I want to decrease my tax liability, but I want to keep all my money.

I want a higher return, but I want to be able to get to my money at a moment’s notice, too.

I want my money to grow, but I don’t want to it to go down or be at risk.

I want to have the best investment and financial advice around, but I hate fees.

Everything is a trade-off. Every decision you make, every dollar you spend, every minute that goes by is a resource being used one way, which means it cannot be used in any other way.

That isn’t bad, though. Adam Smith and the growth in standard of living since the industrial revolution have taught us that specialization has increased wealth all around. Those people that allocate their time, talent, and treasure in specific and purposeful ways are achieving better overall results. Those who don’t are trying to ride the middle of the road by paying for some advice, but only a little bit. Or by trying to save money on taxes but only doing the cheap or easy tactics. Or taking some middling risk and ending up disappointed that you get middling returns.

Sure, the investment account of the people who specialize might take a big dip sometimes, but that is offset by very safe money should they need emergency money. They might not be experts in taxation, but they hired someone they trust to give them advice, and they are getting better results from it. They might not have spent time in lots of different jobs getting life experience and having different adventures, but they are probably noticeably ahead of their peers in both pay and seniority at whatever career they have decided to stick to.

Life is trade-offs. You want to have adventures and live it up after college? That is awesome, more power to you. But don’t get to 35 and get mad because you can’t afford to buy a house or do the other things that people your same age (who worked all through their 20s) are doing. You want to pay less tax? We all do! But don’t whine about taxes, then get mad at yourself a year later when you pay the same amount of taxes you did last year because you put no money or time into new tax strategies.

Don’t let life just happen to you. Don’t look back and wish you had made other choices. It really isn’t that hard to figure out where you want to be and what it takes to get there.

Pick your goals, get realistic information on what it takes to get there, decide if the cost is worth the benefit and go.

You can either have the cake or you can eat it. If you eat it, you won’t have it anymore. But you know what you will have? A belly full of cake.

Management

Managing. It’s a funny word. It can mean lots of things. You manage your schedule. You manage your finances (at least, you should). You manage a to-do list, you manage relationships, you manage to juggle your job, social life, and personal goals. You might even be the boss or supervisor of someone and have to manage them. And while all these things use the same word to describe the activity, there is very little correlation between the actual tasks.

Some of these types of management involve decisions about people. Some of them are about resources. Some are specifically the most valuable resource of all, time. Other types of managing involve making decisions about hard resources like money or material. The only thing that they all have in common, really, is decisions. All management involves making decisions.

I manage for a living. It’s weird to think about that sometimes. Can you imagine asking a little kid what he wants to be when he grows up and instead of “astronaut” or “firefighter” he says “manager?” How bizarre would that be? Even in college, few people say they want to be professional managers. We all have a job that is linked to a skill or a knowledge set or an industry. “I’m going to be an accountant,” I’d say.

Yet being a manager is one of the most critical jobs that exists in business. We relish in the standard of living that a free market brings. But what makes the free market work? The free market works because it allocates resources much more effectively than any central planning system ever could. But despite talk of invisible hands, there is no magic to the free market. It happens because of people making decisions. Billions and billions of decisions a day. And who makes those decisions for a business? The manager.

When to hire, when to fire. Where to allocate resources. When to spend, when not to spend. Who should work on which project. Who should get their project pulled to help support another project. Which clients take priority. Which projects are the most important. How to protect the downside or how to maximize the upside. When to encourage, when to admonish and when to support. What kind of support. Who needs to be introduced to whom. Where the next deal is going to come from. Where the cash for payroll is going to come from. For rent.

And on, and on …

Multi-variable equations with multiple unknowns and conflicting critical paths are standard operating procedure. Why am I telling you this? Maybe it’s because I had a busy day managing and almost no one even knows what I did all day. But mostly because I want people, in particular business owners, to not underestimate the value of this operation.

Most of life and business are made up of shades of gray. If it was all black and white, we wouldn’t need managers. But gray is tough. Gray requires one person to make a judgment call. Someone who is willing to be wrong and take their lumps. Gray requires someone to make a decision. The manager.

Here’s to the ones where the buck stops.

What To Look for In a CPA

I had a very nice reader email me my thoughts about what to look for in a CPA. They were looking for someone local to their area. Offered without comment is my response to her:

 

As for finding someone my advice would be to make sure that you pick someone you get along with, first and foremost. If you have different work styles, generational gap, cultural issues, or just a funky vibe keep looking.

 

The next most important thing is to make sure that your interests and the interests of the person you are hiring are aligned. What I mean by this is, how do they bill? What other services do they offer? If they bill by the hour, then you might hesitate to call, for fear of getting a bill you can’t/don’t want to afford. This can cause you to not seek out advice when you need it! This is why I bill, and advise you to find someone who does also, on a flat fee basis. When I quote a price for a tax return, it includes tax projections throughout the year, unlimited tax questions, etc. I find it easier for everyone to just have one price to “be your guy”. It also makes sure that I do things right the first time and explain everything clearly and well. Because if I don’t, it makes more work for me, which I do not get paid for!

 

Find someone who takes the time to understand your business, and who works with people like you. I do not mean someone who is in the “widget” business like you are. CPA work is, for the most part, industry agnostic. What I mean is, if you work on a paper system, make sure he/she understands that. If you like face to face meetings, he/she should too. If you live most of your life online, your adviser should understand the ins and outs of how that works. In addition, when you interview them (and you should) they should be asking insightful questions that demonstrate they have a grasp of what you do to make money.

 

Lastly, look for professional education and designation. I would suggest a CPA, I think they are the best equipped to handle these things. I might be biased in making the recommendation though :-) Additional education and designations are great as well. Not because of what they mean, per se, but it shows a drive to go above and beyond that can be very positive.

 

What to avoid:

If you don’t understand what they are advising you to do, stop and ask them to clarify. If they struggle to explain it in a way you understand it stay away. This is a dead giveaway they don’t know it very well either.

 

Avoid people that seem to just be agreeing to fill in forms for you. Someone in your position needs so much more than forms prepped. Make sure they understand this and will offer suggestions, ideas, and insights into your business. A good adviser knows the problems you will face better than you do and will take steps to help protect you before you even know you need it. If they are reactive, not proactive, stay away.

 

The best place to start, in my opinion, is with people you know. See who other business owners are using. Talk with your local chamber and see who is active in the community.

 

That being said, I would be happy to try and answer questions you might have that are specific to your business or financial situation in general. I love working with people who have the drive to start “side businesses” and the smarts to make them successful!

 

Don’t forget the special offer that I am doing right now. If you get in touch with me and let me prepare your taxes via dropbox or Evernote, I will give you 25% off my normal price! This won’t last forever, so give drop me a line soon!

 

Evernote, Taxes, & A Special Offer

Hello again friends.

As that lovely time of year sneaks up on us again, I wanted to re-post something I wrote last year at this time. A about a year ago, Brett Kelly and I wrote blog posts about how we did his tax return entirely via Evernote. It was a great post and was a really fantastic proof of concept. Brett’s post was better though.

This year, I wanted to take it one step further though. Because I love Evernote so much and I love having a digital workflow so much I want to offer you cash to let me do your taxes via Evernote.

That’s right. If you contact me, mention this blog post, and share an Evernote notebook with me where you have stored your tax documents  I will give you 25% your tax prep fee. In some cases, that can be as much as $250 (or more) in your pocket.

No, I am not kidding. You can save 25% on your tax prep if you let me do your taxes via Evernote. 

So check out my side of how it worked here and also from the client side.

And if you want to make your life easier and save some serious dough, email me at andrew@nchwealth.com  and we will get started.

 


 


Taxes, and Tails and Wagging of Dogs

Had a great conversation with a new friend last night. It is a relatively common conversation in my world. I know about XYZ and want to start a business, but don’t know anything about business. So what do I do?

 

I love these conversations because it is always at this beginning stage that all the best ideas, passion and creativity happen. It is so much FUN to be invited to be a small part of the process.

 

They always come with varying levels of being overwhelmed. They may have read about the difference between corporations and LLCs. They know someone who has done payroll and talked with that guy about how to do that. They know they don’t want to get screwed on taxes, but don’t know what they might owe or when or how.

 

This is my other favorite part of this stage. Because I get to take all that worry off of them. Not because I do it all for them (which I can do), but because 9 times out of 10, I tell them:

 

“Have you started making any money yet?”

“No”

“Then don’t worry about”

 

We way too often let the tax tail wag the dog. At this stage of a business, focus on refining your offering. Focus on getting that offering in front of people and getting them to buy. Focus on refining the offering as you gather intelligence on what people like and don’t like.

 

Because here is a secret: If you don’t make any money, taxes wont be a problem.

 

So many people get so focused on not paying any taxes, they make dumb decisions. I constantly have to remind people: Tax rates are marginal. This means that, even at a 45% tax rate, in many cases you can end up with more money if you just pay the taxes and keep what is left. Never spend money to avoid taxes. Because spending isn’t marginal. You loose 100% of the dollars you spend. You will likely only lose 30% to 40% on taxes.

 

So, don’t let the tax tail wag the dog!

 

LIBOR and a Reality Check

A friend asked me what I thought about the LIBOR scandal and specifically, the Tim Geithner quote saying that he had sent “a detailed memo to regulators expressing his concern” some time before the actual scandal came to light. I thought the rest of the world might enjoy hearing my response:

 

I have a couple of thoughts:

On this article specifically, yes this makes perfect sense. Everyone knew that the system was corrupted, or at least corruptible (everyone meaning regulators and governmenty people in the know) but so much was based on it that no one wanted to do anything. In that situation, they likely believed that shaking confidence in the number would likely do as much or more damage than the actual manipulation. So they send “memos” to each other that they can point to when it blows up, which “proves” they were the good guy.

That being said, LIBOR was never designed to be a metric that we base almost all fixed income things on. What the hell does a mortgage in Argentina have to do with what rate London Bankers are offering each other? It is an old system that created decades ago and the designers never dreamed it would be used this way.

No one thought far enough ahead. It seemed like as good a thing as any to use at the time, so they did. And then one day, they woke up and realized they had built a house of cards  and said “well shit, no one sneeze”.

 

Well, someone sneezed.

 

But it illustrates what is something that I tell clients all the time. There are powers that be out there that wield WAY more influence than us mere mortals could ever understand, let alone control. I do not mean in a conspiracy theory kind of way. I just mean that our world is very, very large. And very, very, complex. And the wealth that any one individual (the 1% aside) is basically worth nothing overall. So thinking that you are “in the know” and have the scoop, and aren’t going to get taken for a ride is crap. If George Soros or Warren Buffet want to flatten the price of gold, they can do that. You, however, simply don’t wield that kind of influence. And this is probably good. Our world has built so much wealth by getting very specialized in what we do. So much so, that it is unreasonable to think that you can understand all the ins and outs of everything. If every banker could fix their own car, mechanics wouldn’t be worth much. If every mechanic can do their own investment analysis, bankers wouldn’t be worth much. But they both agree to specialize and understand that, by relying on the other person, they can both produce more value (which means become wealthier).

So all you can do is invest smart, diversify, work hard, and you have a little faith. Trust that there are experts out there who know what they are doing. And that you cannot do everything yourself.

Also, at the end of the day, manipulating LIBOR is still just a shell game. Those who have capital are making money on it. Those that can create value will be compensated for that value. Those that consume less value than they produce will become wealthier. And those rules NEVER change. So blame the capitalists pigs if you want, but at the end of the day, if you are in the same lousy place as you were yesterday, it is (99% of the time) NOT anyone elses’ fault but yours.

 

Investing From a Place of Fear

A client emailed to ask me about a book they had seen. It talked about how the only way to invest was to put money into gold, how house prices were still not done falling, but that REITs were the way to go. That the dollar was about to collapse because of the government printing money and gold was the place to be. They also said to turn your dollars into other currencies (Canadian dollars) since the dollar was going to be unstable. Here is the response I wrote back, and thought some of you might find it interesting:

 

The premises are not dissimilar from what a dozen pundits are throwing out there. Most mainstream folks will agree, conceptually, with some of his thoughts. The difference is that he ignores certain checks and balances that would come into play so he can take the thoughts to their theoretical extremes (you know how well fear sells!). But some thoughts I have on it are this:

 

Long-Term Treasuries: Obviously rates are going to go up. They are at nearly zero which means they have to go up at some point. But we know this, which is why most of our bond portfolios are more heavily weighted toward shorter duration bonds which have less timing risk. But in the meantime, we still want some longer term ones because they are yielding pretty decent. Running away from completely from an asset class just seems extreme to me.

 

Real Estate: This one confuses me, he says the real estate is going to drop, but recommends you buy REITs? Sounds like a great hedge on being right no matter what happens! But yes, I do think that there is still some instability in residential real estate but that it is still a historic low time. So not over investing in real estate right is a good idea, but the low prices can still make it an attractive long-term investment.

 

US Currency: The scale of the capital market in America, and for Dollars, is more vast than most people can even comprehend. I do think there will be inflation coming, but that inflation will not necessarily be just in dollars. Europe is going to inflate their way out of debt as well and the emerging economies are already showing some signs of overheating (China has been steadily increasing its core interest rate recently to combat inflation.) The point is, America is still the largest market for basically every economy on earth. Looking at Canada is a great example. How much of Canada’s economy is based on exporting to the US? And if the dollar “weakens” against other goods, then all it does it make it more profitable to produce here instead of importing (which, conversely, will create jobs and spending IN the US, which strengthens the economy and the dollar). To not risk collapsing their economy, other countries will have to weaken their currency to match the dollar, to compete with our local manufactures. And this story repeats all over the world.

 

Gold can be a great investment, but the price of gold has two components: hard demand and speculative demand. Hard demand is the demand for real uses (e.g. manufacturing). Speculative demand is the amount that speculators have bid the price up. It has been a little while, but the last time I saw some research nearly 80% of the price of gold was based on speculative demand, not hard demand. So, it might be a great investment, but it can be a HIGHLY volatile investment. This is neither good nor bad, and it should (and is) a part of your portfolio. But we cannot put a huge chunk of your money into something that can turn on a dime like gold can. Speculators can change their mind quick and when they do, that price of gold can drop to the hard demand lever QUICK.

 

These folks like to use fear and statistics to sound academic and sell books. And MANY of the things he is pointing out are correct. But it is rarely, if ever, the whole story. I like to take a step back when I get entrenched in these types of things and do a reality check. What country has one of the most productive work forces? What country has one of the highest standards of living? What country has the largest, bar none, capital markets? Which country is still one of the most advanced in research and technology? What country has the largest economy, by orders of magnitude, than any other country in the world? (Fun fact, if you took New York City by itself, just within the city limit, its GDP would make it 13th largest economy in the WORLD. Only 12 COUNTRIES have a larger economy than the city of New York.)

 

My point being: This guy’s investments could be a good plan, but they are a risky plan because they are an extreme bet on one thing. I always advocate a more measured approach. Which is why you should have some commodities, but are not 40% in gold, which is why your bonds should probably be weighted towards shorter term bonds, and why you might have a strong showing in international equities, as well as US equities. But people should not bet the farm on one idea.

 

And if America fails, your money won’t be worth anything anyways, so I wouldn’t worry about it! I would say that if you want to read the book, go for it. More education can’t hurt, just make sure to take it with a grain of salt. There are lots of great books out there that can help you understand this stuff better. I usually like to go right to source though, and read pure economics books so I can interpret data for myself.

 

Hope this helps!