Personal Saving Rate

After the 5 percentage drop of major stock indices on Thursday, there is once-again talk of a double-dip recession. Occasionally, I am told that the market is efficient and rational. But, every few years, the market proves that it is anything but, swinging from irrational exuberance to a crazed flight to safety. Currently, Apple's after-tax-ttm-earnings-to-enterprise-value ratio is 7.4%. Apple is a healthy, growing company by any measure. Yet, investors seem to prefer the "safety" of a 30-year bond with a yield of 3.84%. That bond will decrease in value as interest rates rise whereas Apple will continue to grow and either force its stock price to rise either because the stock market regains its sanity or through stock buybacks.

When news article talk about the idea of a double-dip recession they seem to focus on (1) GDP, and (2) jobs. GDP is reasonable, since a standard definition of recession is two consecutive quarters of negative GDP. But, the focus on jobs is silly. Jobs don't return until companies have used up the slack and are confident that they'll have work for the new employees. In other words, they're a lagging indicator. And, jobs are returning---as of July 2011, the U.S. has gained 1.3 million jobs compared to a year ago. But, it's more important to look at consumption, manufacturing and income since these most accurately reflect economic activity:

• Durable Goods Orders are up 7.9% versus a year ago (June 2011)
• Personal Income is up 5.0% versus a year ago (June 2011)
• Industrial Production is up 3.4% versus a year ago (June 2011)
• Retail Sales are up 8.1% versus a year ago (June 2011)

Frankly, I don't see a recession. These numbers have all been strong for about a year and a half and don't show signs of falling. If anything, we should be concerned about inflation as Producer Prices are up 7.0% versus a year ago (June 2011) and the Consumer Price Index is up 3.6% versus a year ago (June 2011).

One important aspect of our economy that I haven't seen discussed is savings. Hence the title of this article. Take a look at this chart showing the Personal Saving Rate in the U.S.. Notice how it fell from around 1982 to 2008. No wonder growth was so easy during that period! If people are constantly depleting their savings, economic activity increases! But, it recently bottomed out around 1-2%, and, well, you can't really go much lower. Now, the economy has reverted to a more reasonable rate of savings, around 5%. The growth we saw in recent history simply isn't going to return. It was unsustainable because it required a negative change in the personal saving rate. Many complain that the U.S. economy (GDP) only grew at a rate of 1.3% in the second quarter of 2011. But, it's unlikely that we'll see the "good 'ol days" of 3% growth that we saw 1982-2008. 2% might be the norm for the foreseeable future now that our ability to pillage the savings accounts has been lost.

How to Solve the Debt "Crisis"

I'll let you in on a little secret---there is no debt crisis.

What?!?! Then, what is all the noise about? If Congress doesn't pass a deal, the US will default on its debt and all hell will break loose.

Well, I'll admit that is one interpretation of what can happen, but most political "experts" seem to think that is the only interpretation. In fact, the "crisis" results from Congress providing contradictory instructions, on one hand requiring a certain level of spending, on the other neither providing the necessary revenues nor debt issuing authority to match those prescribed spending levels. The job of the US executive branch is to execute the instructions of Congress. But, in this case, that is impossible. The executive branch cannot follow the instructions of Congress, so it must do something reasonable. The two main choices are (1) default on bonds while cutting Social Security, Medicare and other payments, or (2) keep issuing debt. The first choice will create a shock, both to those who depend on payments from the US government, as well as to those who hold US debt. The second choice will be met with all the drama of an inchworm moving across a deck railing---snore.

Former President Clinton says that he would choose option #2. Who wouldn't? Yet, Obama and Geithner have ruled out this option. Presumably, they have made this declaration for negotiating purposes---the Republicans are less willing to negotiate if Obama is standoffish. Option #2 even has explicit legal backing. The 14th amendment clearly states that US debt shall not be questioned. This debt was created when Congress issued instructions creating a gap between spending and revenue. So, there is little reason to stop selling bonds unless one wants a true crisis.

Ethanol Sanity

Finally!  The US Senate recently voted to end ethanol subsidies and tariffs.  The Economist says that the subsidies cost the government $1.78/gallon.  This for a fuel that is less energy-dense than gasoline and barely more environmentally friendly.  The problem is that the US largely produces corn-based ethanol.  The process of converting corn to ethanol requires significant resources and releases significant amounts of carbon dioxide. The tariffs were designed to keep out Brazilian sugar-based ethanol.  But, production of sugar ethanol is much more efficient and environmentally friendly, requiring fewer resources and producing less carbon dioxide per gallon of ethanol produced.  So, for decades (since 1980), the US has been using subsides & tariffs to damage the environment.  It's like subsidizing the purchase of SUVs (!)  It sounds like the budget and debt limit crisis has finally brought at least the Senate to its senses.  I hope such sanity prevails in the House and the US can finally do away with this ridiculous waste of money and environmental harm.

As an added bonus, eliminating these subsidies/tariffs should reduce food inflation pressures in the US since farm land which was being used to produce corn ethanol will now be available to produce corn foodstuffs.

Where to Expense Professional Development

My wife is attending the TechMunch conference in Boston. I do her accounting, so my first instinct was: how do I file this expense? :-) After some Googling, I found this very useful Motley Fool blog post about filing small business expenses. I learned that such training (aka professional development) expenses don't have a pre-defined category and can be listed as miscellaneous expenses on the second page. The post explains in English what expenses belong in each of the major categories listed on 1040 Schedule C. In addition to the main post, there are many questions and answers in the comments for edge-cases like my issue. It seems like an excellent tax time resource.

How to use a Prepaid Rebate Card

My wife recently bought MetroPCS phones. Both had rebates associated with them. But, instead of sending us a check, MetroPCS sent us Prepaid Credit Cards. What's annoying about such cards is that if you try to charge more than the remaining balance, the charge is rejected. And, if you don't use up the balance within a few months, they start charging fees. For the first card, I tried to use it at brick-and-mortar retailers for relatively small purchases. Bad idea. You have to keep track of exactly how much you've used so you know how much to ask to be charged if the purchase is more than the balance. I got lucky and made two purchases that totaled just barely less than the total balance. The extra $.14 just wasn't worth the bother. But, with the second card, I realized my foolish ways---why not just buy myself a gift certificate. In fact, why not just buy myself an Amazon gift certificate. We buy stuff from Amazon almost every week and if you have applied a GC to your account, Amazon will apply any remaining GC funds first before charging your credit card. We were in the market for a Sous vide machine, so I managed to burn the entire GC about 30 seconds after I purchased it. Woo hoo!

Sudden Drop? Another Earthquake.

Around 10:45am EDT this morning, I noticed that the markets had taken a pretty sharp tumble, knocking 0.7% of the S&P 500 in a matter of minutes. Markets have certainly seen worse, but it looked sharper than I'd expect for a not-particularly-eventful day. I didn't see any relevant news stories on Google Finance and got caught-up with work shortly thereafter. So didn't find a satisfactory explanation---until a few minutes ago, that is. I learned of the 7.1 earthquake near Sendai, Japan. 14:32 UTC translates to 10:32am EDT. I imagine markets briefly feared the worst until details rolled in that it wasn't nearly as strong as the 9.0 quake and there were no serious adverse effects at the Fukushima nuclear plant. Phew.

How did that 8814 get in my return?

I normally fill-out my tax returns by hand and do the calculations using custom spreadsheets. But, this year, I decided to try e-filing options. The Massachusetts e-filing option worked well. The only hiccup was mediocre 1099-R instructions. But, the fix was easy and customer service communicated the fix to me quickly by email. There was a more serious issue with Federal e-filing. I used the free fillable forms provided by the Free File Alliance. A minor annoyance was that I had to use MS Windows to fill out the forms since the system uses Microsoft Silverlight. My return was "accepted" a few days after I submitted it. But, when checking status, I noticed that the IRS had changed my refund amount. I got my return about 3 weeks later with the modified refund amount. What was going on? I can't recall ever having my amount due/refund amount adjusted in 15+ years of filing Federal returns.

A phone call to the IRS didn't reveal much. After being transfered to a Schedule D specialist, he told me that I had to wait to receive a letter formally communicating the adjusted refund. I received the adjustment letter over the weekend and called again today. I learned that the IRS adjusted my Qualified Dividend amount because of the 8814 in my return. What? I had to have the IRS agent explain what he meant by "8814" as I had never heard of it. He said that an 8814 Form was included in my return indicating that my dividends were reported as child's dividends. Apparently, something went wrong between the Free Fillable Forms web site and the IRS processing center. The agent said that if I want the error to be fixed in less than 3 months (about how long a paper amended return would take to be fully processed), I would have to call back when I am ready to fax my correct 1040. I told him I could email it to him immediately since I have a scanner but no fax. He said the IRS doesn't accept such email due to "security concerns". Puh-lease. Why does "e-filing" have to be so frustrating?