Following John Henry Into The 21st Century

The entire globe is in the midst of an economic upheaval. Where will it end?

No one knows, of course. But many people, especially in the U.S., are searching for ways to stem the tide of global change. What is the likelihood that the course can be reversed?

For a possible answer to that question, I’d like to borrow/steal an illustration from Daniel H. Pink’s excellent book A Whole New Mind: Why Right-Brainers Will Rule the Future:

You’re no doubt familiar with the American folk tale of John Henry, the mythical “steel-drivin’ man.” According to the legend, John Henry was a strong, hard-working laborer who used a 20-pound hammer to drive spikes in constructing a railroad line. He was famous for his unmatched speed and strength.

Every school kid knows the story: One day, John Henry’s employer brings in a steam-powered drill and announces that it can do the job better, faster, and cheaper than any man, even the great John Henry. A race is arranged. A fierce competition ensues. After falling behind, John Henry summons a superhuman effort and rallies for the victory. But the effort is too much for the big man, and he dies “with the hammer in his hands.”

The legend of John Henry gained popularity at the dawn of the Industrial Age. It succinctly expressed the anxiety of a culture struggling with the automation of traditional labor. That culture gave way to mass production, which gave way to a knowledge- and service-based economy in the late 20^th Century.

Those transitions were traumatic and painful to the people they affected. But no matter how hard those people may have tried, they—like John Henry—could not stop the change from taking place. And, just like us today, they had no way of seeing what was coming next—they only knew what they were losing.

Ultimately, each painful transition brought about advancements that benefitted us all.

As we observe the present-day transition from the Information Age to what Pink refers to as the “Conceptual Age,” it is natural to experience angst over what we might be losing. But at the same time, we might balance that angst with a sense of hope that—if history is any guide—we just might be stumbling headlong down a bumpy road that leads to a better world.

What Are We Thinking?

2010 marks the 25th anniversary of the Certified Financial Planner Board of Standards, which grants the CFP^® certification and upholds it as the recognized standard of excellence for personal financial planning. To mark the occasion, the Board recently conducted a survey of 1,002 Americans to gauge their opinions regarding the economy, financial regulation, and their own personal financial situations.

Americans are keeping their optimism in check and preparing for a long slow return to growth, according the poll:

• Nearly two out of three Americans (65 percent) are more concerned about their finances today than they were at the beginning of the financial crisis two years ago.
• A bit more than a third of Americans (37 percent) expect to see their personal finances improve in the next six months, versus less than half (46 percent) who expect to hold onto what they currently have, and 16 percent who expect to lose money.
• 80 percent of Americans say that Congress and regulators have not done enough “to deal with the financial market problems and their impact on American investors.”
• A bright spot in the findings: 44 percent of Americans expect the U.S. economy to improve in the next six months, while only 28 percent expect things to get worse. A smaller group (22 percent) anticipates no change in the economy.
• When asked to describe how they feel about their personal finances, the #1 response from Americans was “cautious” (33 percent), followed by “calm” (26 percent), “concerned” (25 percent) and “hopeful” (25 percent). (Multiple responses were permitted to this question.)
• Interestingly, ethnicity seems to bear on the perception of the prospects for the economy, with just 38 percent of whites expecting the economy to improve, compared to 51 percent of Hispanics and 74 percent of African Americans.

The survey found the following about Americans’ attitudes toward financial planners:

• More than two out of five Americans (43 percent) think financial planners are now “more important in the last two years since the start of the financial crisis,” compared to about a third (36 percent) who see no change, and 14 percent who now see planners as being “less important.”
• Overall use of financial planners by Americans has remained almost unchanged during the first two years of the U.S. financial crisis – starting at 29 percent compared to 28 percent today.
• Of those who have started using a financial planner since the start of the financial crisis, nearly a third (31 percent) say they have done so because “I felt like I needed more financial guidance during these difficult times for investors.” A bigger percentage of those in this group (44 percent) said they have started using a financial planner during the last two years for reasons “unrelated to the financial crisis.”

For some reason, there was one question that asked respondents to describe the economy as an animal. The answers were actually quite interesting and revealing: they tend towards slow, lumbering animals like sloths, bears, turtles, and elephants, while few choose the iconic symbol of confidence, the bull.

Not sure what all this tells us beyond what we already know, but I thought it was interesting nonetheless.

Have a great week!

Dueling Views of the Economy

I hope your 4^th of July was as good as mine. This week’s video concerns the perils of forming strong opinions about the future of the economy. If you’d like to read the results of our recent survey, they are below the video link.

We had a very high response rate to the survey; the results were gratifying as well as edifying. 95% of respondents read all or part of each week’s economic update email. In addition, 84% said they liked the video updates.

The comments were very interesting and presented me with some challenges. There were a few comments indicating that the videos were too long; others thought they were too short; and still others thought they were just about the right length. In addition, there were several useful suggestions for improving the technical parts of the videos.

Finally, there were some excellent suggestions for topics to cover. Frankly, between the topics I’d like to cover, the topics that have been suggested, and the topics that come up each week, I have more than enough to write and talk about. The challenge is to decide whittle it down to one a week.

Thanks for the feedback, and have a great week!

–Andy

What's in the Financial Reform Agreement?

After an all-night negotiating session, a special committee of Senators and House Members reached agreement early Friday morning on a financial reform bill. The House and Senate still have to approve it, of course, but it is likely to become law. This is important stuff—President Obama calls it the biggest change in financial regulation since the Great Depression—and while it is not perfect by any stretch, I do believe the 21^st Century financial landscape requires such an overhaul. Here are the key features of the agreement:

#1: The Bureau of Consumer Financial Protection. This new consumer agency answering to the Federal Reserve would supervise mortgages, credit cards, student loans and the banks, credit unions and private lenders that issue them. Institutions holding less than $10 million in assets wouldn’t be regulated by the BCFP – but they would have to follow its rules. The BCFP would aim to make these products easier to comprehend for consumers and crack down on any possible deceptive practices.^1,2

#2: See your credit score for free. If you are turned down for a mortgage or a loan, the new reforms would give you the power to see the credit score supplied to your lender. Right now, you can request three free credit reports each year but you can’t see your actual score.^1,2

#3: Tougher rules for mortgage lenders. These rules should have come into play years ago, of course, but better late than never. Mortgage lenders would need to verify the assets and income of borrowers, thwarting any surreptitious comeback for “liar loans”. Loan officers and mortgage brokers would not be able to receive bonuses for guiding you into this or that loan. Borrowers with ARMs and other types of complex home loans could not be hit with prepayment penalties should they want or need to pay off a mortgage before the end of its term.^1,2

#4: Retail minimums for the use of credit cards. Score one for retailers, who don’t want to see people make $2 credit card purchases when the swipe fee alone cancels out the revenue. Under the new legislation, stores could set minimums for credit card use. The minimum transaction level could be as high as $10 if a store chooses; the Federal Reserve could raise that $10 limit on the minimum with time.^1,2

Alternately, stores could offer consumers discounts if they pay for items with cash or debit cards. (They wouldn’t be able to vary the discounts for different debit cards.)²

Additionally, the proposed reforms could allow colleges and universities and the U.S. government to set maximums for credit card transactions.²

#5: Brokers could be held to a fiduciary standard. This is an important one for me. Under the new reforms, the Securities and Exchange Commission now has the chance to hold brokers to the same fiduciary standard common to registered investment advisor firms such as ours. What that means is that brokers would have to put a client’s best interest first and not simply recommend a “suitable” investment to a client. That new standard may or may not come into play, however; the SEC is undertaking a six-month study to see if such a rule would amount to regulatory overlap or not.³

#6: The “Volcker Rule” would be put into play. This is the rule that would prevent banks from trading with their own money. It would kick in with small concessions. While the reforms would halt most proprietary trading by banks, some limited investment would be permitted – they could provide up to 3% of a fund’s equity, and invest up to 3% of Tier 1 capital in hedge or private equity funds.⁴

The big banks got another key concession from Congress: they don’t have to get rid of their swaps-trading desks (some legislators had contended that this decision would drive such trading to foreign markets). They can still be involved in foreign-exchange and interest-rate swaps dealing.⁵

#7: An Office of Credit Ratings would appear. It would oversee the actions of Moody's, Standard and Poor's and other big names, and one of its objectives would be to flag potential conflicts of interest that could influence ratings judgements.¹

#8: The SEC would no longer regulate equity-indexed annuities. This is one area where I believe the legislators got it wrong. The promotion and sale of these annuity contracts has generated much flak in recent years. Interestingly, they would be overseen by state insurance regulators if the reform bill passes, and treated strictly as insurance products.²

Now, what about Fannie Mae and Freddie Mac? Good question. Nothing made it into the final reform bill to address that dilemma. Some analysts expect another bill will emerge in 2011 to propose their restructuring or elimination.⁵

Have a great week!

–Andy

Video Commentary

This week’s commentary comes in the form of a video. It covers three topics and is five minutes long. Now, I know that five minutes is too long, and I apologize. My goal is to limit the videos to three minutes, and I will try very hard to keep the next one that length.
Enjoy the week!

-Andy

There's Never Enough

The response to last week’s video commentary has been phenomenal. It received by far the greatest amount of positive feedback of any update I have done. The comments included several helpful suggestions, which I plan to incorporate into future videos.

This week, I’d like to relate a quick story about the relative importance of money.

While volunteering at the 17^th annual Blue Ridge BBQ and Music this past weekend, I had the opportunity to work with the outstanding young people of the Foothills Community (Mennonite) Church, who did an admirable job handling parking duties for the event.

Rob Painter is the youth group’s adult leader. During a break, we talked a bit about our respective professions. Rob provides counseling services for individuals and couples, and when the conversation turned to the troubles people have with money, Rob shared the following anecdote:

A young couple came to see him with money worries. They were just starting out, and had a modest income of about $21,000. They confided to Rob that it just wasn’t enough; they needed a little more than that. Rob inquired as to the level that they thought would be sufficient; after thinking for a moment, they answered that they believed they’d be able to make it on about $28,000.

The next week another young couple came to see Rob. Their circumstances and problems closely paralleled those of the first couple. They also were not earning enough to get by, but as it happened, their income was $28,000—precisely the level to which the first couple aspired.

I see the same issues in my practice. The amounts may be different—and my clients often worry about their investments as much as their income—but the basic situation is no different. For many people, it seems there’s not quite enough to provide the sense of security they seek.

I have news. There’s never enough. It’s been said that the more you’re used to having, the higher the level at which you feel poor. That holds true whether you have $28,000 or $28 million. You may have a hard time believing that, but I’ve seen it played out many times with many different people from all walks of life. Rare indeed is the person who is content with what they have.

The moral, of course, is simple: Put money in its proper perspective. Spend less than you make. And above all, realize how fortunate you are, and count your blessings.

Have a great week!

Playing on Fear in the Marketplace

This week's blog is on video. Take a look: