Coffee heat rising

recession

State budgeteers continue to wrangle

by

Hauled back into session by a vetoing governor, the Arizona legislature unanimously restored funding to the public schools. The governor has agreed to sign the revised bills.

While the gov’ won this round, the budget remains incomplete, and so we state employees still can’t be assured our next paychecks will land in our bank accounts. One way or another, the fundamental problem remains: the state simply does not have enough money to pay for basic services, and other than having the legislators and state employees get together throw a giant bake sale, there’s no way to get the money without raising taxes. And the legislature is philosophically (one might even say religiously) opposed to taxation. Our elected reps want to lower taxes, not increase them.

Well, I don’t want my taxes raised, either. But then neither do I want to lose the benefits of soooo-cialism such as

• roads
• police protection
• fire protection
• unemployment benefits
• child protective services
• prisons
• state prosecutors
• public defenders
• public records
• public health protection
• water treatment plants
• libraries
• museums
• schools
• universities

…and on and on. Given a choice between sinking further into Third-World living conditions or raising taxes, I’ll take the tax increase any day.

10 ways to layoff-proof your life

by

Yesterday as Cassie and I were walking to the park, we came across a neighbor in his front yard, putting the finishing touches on a new sprinkling system. He said his father-in-law had installed it, the old man having been laid off and needing work. Then he started to count off all the people he knew who were out of work, including the guy across the street who owns a big house on a half-acre of land fronting on the park. At least, we agreed, the father-in-law had developed a way to keep a little cash flowing into his pocket. The homeowner gave me his phone number, since our house downtown needs a watering system.

You can’t really make yourself layoff-proof these days. Even if the economy doesn’t land you in the can, an injury or illness may put you out of work. A friend who’s a nurse—supposedly a recession-proof trade—was hurt when a second-floor balcony at her rented home gave way under her feet. Memory impairment from the resulting head injury has put her out of commission for the nursing business. So, you’re smart to develop a few strategies, preferably well in advance of the fact, that will blunt the worst of the damage.

1. Establish a budget and keep track of your spending.

Knowing how much you spend and what you spend it onallows you to figure, quickly, what your expenses will be, where you might cut costs, and how much you will need for bare survival.

2. Develop at least one side income stream, and preferably more than one.

Each adult in the household should have a second income stream, no matter how modest. A second job or a skill that creates occasional paying gigs brings in extra cash while you have a job and can at least help if you suddenly find yourself out of work. Responsible teens may also be encouraged to build income streams, to the extent that these don’t interfere with schooling and healthy activities. Examples include blogging, selling crafts, mowing lawns, pet-sitting, babysitting, organizing yard sales, bagging groceries.

3. Keep your résumé up to date.

Goes without saying, doesn’t it?

4. Identify job boards and bookmark HR sites of companies or agencies where you might apply for work.

Do this even if you don’t expect to be laid off. It’s always a wise idea to think about where you might turn if you need a new job or want a better-paying one. Having thought this through in advance gives you a head start if the worst should happen.

5. Join and become active in trade groups.

Maintain a presence in the business community where you work, so that people will know you and you will know them. This, too, will give you a leg up if you have to seek new employment leads.

6. Build an emergency fund.

A second income stream will help with this. You probably should stash enough to live for at least six months. Given the current economic conditions, it might be wise to make this a higher priority than paying down debt.

7. But to the extent that you can, do pay down that debt.

The fewer payments you have to make, the longer you can get by on a reduced income.

8. Don’t rack up any new debt if you can possibly avoid it.

Make it do, use it up, wear it out: this is the time to kick on every frugal habit you know. If you don’t have a budget, start one now, and don’t buy any junk that you don’t absolutely need.

9. Stockpile.

A good freezer can be had for a couple hundred bucks. The one I bought a few weeks ago is the best buy I’ve made in years. It’s already cutting my costs, just by keeping me out of grocery stores. More to the point, though, by the time my job ends in December, I intend to have at least six months of food stored in the house, perishables in the freezer and staples such as rice, beans, and canned goods in the pantry. With any luck, it’ll be quite a while before I go hungry.

10. Plant a garden, even if it’s only in a few pots on the apartment balcony.

Thanks to the veggies that have grown in my yard all winter, it’s been months since I’ve had to buy lettuce. And the produce has been wonderful: fresh from the garden to the table. Freezing and canning these goodies results in a better product than I can buy at the supermarket and extends the garden’s value way beyond the growing season.

Taken together, these steps represent a strategy to prepare yourself for an unexpected job loss. Or for an expected one: they can ease your way into retirement, too.

Tough times

by

Men in a soup line, ca. 1936

Men in a soup line, ca. 1936

Here’s a sign of the times: Greg the Handyman called yesterday to see if we were ready to line up him and his son to do some of the various chores at my house and M’hijito’s. In the course of chatting, he said the two of them were totally out of work. His son, a finish cabinetmaker, was laid off his job when the construction company he worked for folded. That’s not surprising. But what is scary is that Greg himself hasn’t had any business. He said his business phone had rung all of three times in the past week.

This is a guy who was so busy he couldn’t keep up with the work. You often couldn’t get him to come do repairs at all, because he didn’t have time. He refused to work outside the North Central area—for those who don’t know Phoenix, that is not a large district—and still had more work than he could handle. He used to drive around in a Mercedes convertible.

An ancient one, but still…a Mercedes.

It suggests that not only are people not buying and selling real estate, they’re not maintaining it, either. And if you’ve been inside a Home Depot or a Lowe’s lately, you might surmise that they’re not doing the handyman tasks themselves. What that means, I think, is a general deterioration in property here. The central-city houses are pretty old—mine was built in 1971, and it’s in a relatively “new” tract for this part of town. The outlying suburbs are so cheaply thrown together as to defy belief…I remember the day one of my friends learned that rain was leaking in because the contractor hadn’t bothered to install flashing around the roof vents in her new house. And the time another couple of friends had to remove and replace the “lifetime” tile roof on their four-year-old house, built by a contractor who was not required by the state or the county to provide any warranty on his work.

So you can be sure plenty of maintenance needs to be done on these shacks. It’s just not getting done.

Greg is trying to make up for it by overcharging. He wanted $1,500 to paint the trim on the little Investment House. Plus the cost of the paint. Gimme a break! Bila the Painter offered to do it for $800, and that included Dunn-Edwards paint.

At any rate, the cost of the smaller tasks is within reason, so he’ll soon be installing a new room air conditioner for me (hope that scheme works to save on the summer power bills!), replacing the busted smoke alarm and putting in one near the kitchen here, and installing the blinds and fixing a few things at the other house.

Photo: Franklin D. Roosevelt Library

Integrity, Confidence, and Trust: A financial manager’s view of the economy and the future

by

This is a guest post by Stephen Taddie, managing partner of Stellar Capital Management, LLC, located in Phoenix, Arizona. Stellar, which manages my vast fortune, has contrived to keep my shirt and my IRA more or less intact as the economy has crumbled around our ears. The essay, which provides some insight into what capital managers and financial advisors think of the events leading up to the current recession and offers some prognostication about the near-term economic future, was Mr. Taddie’s New Year’s message to the firm’s clients.

People in positions of power often claim to have integrity, and the public needs to have confidence in those people in order to trust the system. The sheer number of “ethically challenged” individuals who have surfaced lately makes it increasingly difficult to see through the haze of hypocrisy and to trust anything. At present, we are seeing a crisis in confidence so great that many investors are willing to accept a zero return just to have the U.S. government hold their funds.

If you take a quick glance around the country, you’ll find a governor who attempted to sell a senate seat, a self-anointed savior of the masses (also a governor) patronizing a prostitution ring, a senator convicted of several felonies almost winning an election, and numerous other government officials taking liberties, receiving special treatment or deals. Those in professional sports also continue to be ethically challenged, from athletes doping to referees influencing games for personal benefit. Hollywood and the music industry provide enough content year-in and year-out to keep thousands of magazines, newspapers, and web sites in business. Remarkably, we allow this type of behavior to continue by giving candidates our votes and contributions, as we buy tickets, magazines and memorabilia for morally bankrupt celebrities. Integrity has been all but lost in political maneuvering, convenient omissions, and downright deceit.

I left the financial industry out of the previous paragraph only because its problems have been so plentiful it needed its own paragraph! Bigger, better, more complex has been the cry from Wall Street for the last decade, and that has produced overpaid, ethically challenged executives; programs and products like hedge funds and subprime loans; and fund-of-funds and credit default swaps. The list goes on and on. As things grew more complex, investors found themselves further removed from their money and the people actually responsible for its well being. Although stockholders could always vote on the tenure and compensation of a company’s management, most investors are not in a position to do so in a meaningful way. When twice removed from the actual investment, as is the case when investing in a manager of managers program or in mutual funds, investors must rely on highly paid executives to vote on the tenure and high salary of other executives, in a more or less self-perpetuating cycle. for most individual investors, exerting shareholder control has become a thing of the past.

As Warren Buffet said, “It’s only when the tide goes out that you learn who’s been swimming naked.” Growth hides many structural problems and 2008 was a year of revelations. Take the case of hard-money lenders. In many parts of the country these firms were lending money directly to developers and builders and offering steady 12 percent returns to investors. A few years ago, Stellar interviewed two such local firms and, after substantial due diligence, decided to wait out the brewing storm. In general, we saw that these programs were losing sustainability because of lack of appreciation and new buyer interest in development projects. One firm, now in the headlines, lacked enough internal controls for our comfort, and we eliminated them from consideration. I’m sure other firms like ours made similar decisions;but some did not. More recently, Bernie Madoff’s complex “Ponzi” scheme made the headlines, leaving a mess for investors and regulators. In both cases, integrity was lacking and trust was betrayed. Other firms misrepresented the scope of their services, appearing to be sophisticated money managers on the outside, but when the tide went out, were found to be nothing more than high-priced marketers or “feeders” for the real manager of the assets, offering no real value to their clients.

To recover from the present economic ills, massive stimulus programs are being worked into the system. This has effectively put a safety net under the economy in an effort to restore confidence. As confidence replaces fear, a valid case can be made for either a “¾ V-shaped” recovery, where the economy recovers into a less leveraged, slower-growth version of itself; or a “W-shaped” recovery with a double-dip recession beginning near the end of 2010. Due to decreased leverage in the global economic system, a more typical “V-shaped,” or complete, recovery does not seem likely in this cycle.

Barring more surprises, the economy should transition from stimulus-driven economic activity to organically driven growth late in 2009, leading to a ¾ V-recovery. As we approach 2011, the prospects of higher tax rates due to “sunset” provisions in the current tax code could cause economic activity to accelerate. This would create an after-the-fact lull in economic activity, pushing it back to recessionary levels in 2011, leading to more of a W-shaped recovery. The eventual shape of the recovery depends on how and how much stimulus is deployed, the extent and timing of its removal, and other policies established to smooth the transition both here and abroad.

At some point, the investment markets will turn around. Since mid-November, the S&P 500 has risen about 20 percent, rebounding from “technical support” and building a potential “bottom” around the 900 level. Volatility has calmed down a bit, and liquidity seems to be returning to the markets. However, that has not stopped the yield on 10-year U.S. Treasury bonds from falling to levels not seen since 1955, and coming close to the lows experienced during World War II. The economy is still trying to find a stable footing, and economic data in the next few months will probably continue to be ugly, but the markets may have already discounted the expected data and may be beginning to look beyond the present abyss.

While we believe that world affairs are in better shape than they were during World War II, the bigger issue facing capitalistic societies today is “trust.” Without it, the economy will stumble; with it, it will thrive. When trust comes back to the system, investors will be less willing to park money in essentially noninterest-bearing Treasury bonds and more interested in making educated, longer-term investments.

Here’s to trust…Happy New Year!

January 1, 2009

Legislators propose to shoot us all in the foot

by

More scary news from the Great Desert University: Our beloved president sends an announcement that our ever-astonishing legislators yesterday recommended cutting the university systems’ funding by $243 million in what remains of FY 2009 and then by another $388 million in 2010. That is huge: the largest cuts in higher education in the state’s entire history. And this is not a state known for its support of education.

Arizona has only three public universities, and you can count the private institutions of higher education on the fingers of one hand. None of these are exactly world-class institutions. A few departments are excellent: the University of Arizona, for example, has one of the world’s leading astrophysics programs, and Arizona State University has cultivated a good business school and a research emphasis in bioengineering. But by and large the universities reflect the general quality of education in this state, which as we have seen before, is not high. In an Arizona university classroom, it’s possible to guess with some accuracy which students grew up in the Midwestern states where citizens invest in education, simply by observing the students’ basic writing and logical thinking skills. Nine times out of ten, I can identify a kid who came from Ohio, Minnesota, or Iowa just by reading a paper or two.

This is the direct result of Arizona’s chronic underfunding and neglect of education.

“Budget reductions of this magnitude,” says Arizona State University President Michael Crow, “would have a serious and immediate impact on university operations.” The $39 million that had already been cut in the 18 months leading up to FY 2009 have so far resulted in the elimination of almost 500 staff positions and more 200 faculty associates, the dismantling of two schools, and a reduction in the number of nursing students.

Arizona State University serves 67,000 students. It graduates 14,000 a year, and its president claims it pumps $3.2 billion a year into the state’s economy. The planned cuts, Crow reports, will require additional layoffs, furloughs, and reduction of programs that already have enrolled students for 2009.”The fact that the legislature has known about the state budget problems for months and failed to take appropriate and effective action to minimize harm to Arizona’s families and economy is unconscionable,” he adds.

Unconscionable, yes. But surprising or anything new? No. This kind of thing is standard operating practice, historically, for the state’s legislative leadership.

With Governor Janet Napolitano leaving to head up Homeland Security, the state loses its strongest advocate for intelligence and commonsense, one whom our legislators have resisted and fought every step of the way. Her replacement will, according to the state’s constitution, be the present secretary of state, a dim light whose politics and retrograde thinking echo those of the blessedly exiting presidential administration.

Our new governor, heaven help us, is the woman who is responsible for state employees losing all choice in health-care plans: her husband, an executive of a large insurance company, was involved in submitting a bid for the contract to insure state employees that was below the break-even point, so that Blue Cross/Blue Shield, at the time the only decent insurer we had, pulled out in protest of the blatant conflict of interest. For a time, we had just one insurer, the one for which our new governor’s husband worked. This company was so roundly hated by the medical profession that many doctors (including most of mine) would not accept it. If you wanted to go to your doctor, you had to pay in cash and then try to extract the money yourself from the insurer, a process that at best required three to six months. My dermatologist would not let me set foot in his office, even after I said I would pay in cash! To get care from the doctors I knew were reasonably competent,I had to buy my own insurance on the open market. Today the state has to self-insure its employees, thanks to that fiasco.

And she’s pretty typical, this new governor. Remember, this is the state that once elected Evan Mecham, the stupidest holder of elected office in the nation’s history. After Mecham made a laughingstock of Arizona, his predecessor, an affably muddle-headed fellow, looked smart: he was the one who announced that he had never read a book from cover to cover except the Bible and had finished school with a junior college diploma—and he didn’t see why anyone else needed to do anything any different. After all, look how far he’d gone!

That one’s favorite byword was (I kid you not!) “It’s a beautiful day in Arizona. Leave us all enjoy it.”

You can see where all this is going: straight back to the Dark Ages.

So, to personalize, it appears that the danger of a layoff where I’m concerned is still very real and very immediate. The university’s administrators are already firing library staff, and I’m sure they soon will move beyond that.

Related Posts:
The Devastation of Higher Education in Arizona
The Perqs of Penny-Pinching

Monthly budget updated; enforced “retirement” planned for

by

Well, I’m managing to stay on budget, despite a $300 reduction this month. Last week’s $223 hit from the vet will be covered by the monthly savings fund, which is fairly flush now that the Renovation Loan Payoff is fully funded and the money I was embargoing for that can go elsewhere. Right this instant I’m $26 in the black—just about the price of a gas tank refill. And I just may be able to squeak by without having to buy more gas until after this week’s mini-budget cycle ends, on the 13th.

120708budget

Along about the middle of last month, I decided that I’d better start getting used to living on less than I’ve been accustomed to, just in case the rumored Christmas layoffs actually happen. So I cut my weekly allowance from $375 to $300, just to see if I could do it. In November, that worked fine: came in $2.29 in the black at the end of the third week (because I’d had an unexpected bill of $225 the previous week) and $75.19 at the end of the fourth week, for a $349 underrun of November’s$1,500 budget. This month I’ve budgeted $1,200, and it remains to be seen how that will go.

Actually, it’s going better than it looks. Tomorrow I will return a $50 space heater to Lowe’s, having found a much better model at Costco. That will put this week’s budget enough in the black to handily afford a tank of gas. And then some.

The Board of Regents met on Thursday and Friday. We are told this was the Fateful Meeting in which Our Beloved Leader was to faze his plan to declare a financial emergency past the citizen bosses. If layoffs are going to come down soon, they should be announced by the 15th. So, I figure if I still have a job by the end of this month, I’m probably good through the end of June, when my contract runs out.

One way or another, the exercise of trying to live on a reduced budget should serve me well. If I escape the predicted layoffs this time and find I can live on less without much pain, then I’ll continue to do so and bank the extra $300 a month in the emergency fund, the better to have something to fall back on if future rounds of layoffs catch me in their net. At that rate, in five months I will have set aside the equivalent of one full paycheck.

Since December of 2007, I’ve lost over $100,000 from my retirement nest egg (that I know of: I still haven’t seen my 403(b) statements). A 4 percent drawdown from what remains will generate $18,748 a year, of which $9,600 goes toward servicing a mortgage, leaving $8,878 to supplement Social Security of $12,480, for a projected post-layoff gross income of $21,258 a year. I probably wouldn’t owe much tax on that, and so we could think of that as pretty close to net.

My net income right now is about $39,700.

If I earn the highest amount allowed before Social Security starts to penalize you ($13,500), I could bring my total gross to $34,758. State and federal income taxes would take about 20 percent of that, leaving me with about $27,800 to live on: an $11,900 cut in net income!

If I succeed in reducing my budget by $3,600 a year, that will supplement the $6,888 I can cut out of the regular monthly savings set-asides I’m making now plus the $170/month I’ll recover from no longer having to pay the loan, for a total cut in spending of $10,488. So…that will cut my living standard by a de facto $1,412 a year.

And I probably can live with that. Elsewhere, I’ve estimated that the minimum annual net I’ll need for bare survival is about $25,980. It’s going to be a challenge, and it will mean that I will have to teach miserable composition courses and generate income from freelance editing until I’m 66, when I can turn back the amount I will have collected from Social Security to the feds and reset my SS payments to the “full” amount, which is about $25,128 a year.

Assuming I don’t lose an awful lot more in the market, though, these desperate straits will only last for 29 months, until I reach age 66 and am eligible for so-called “full” Social Security entitlement. At that time, I can go back and raid my savings again to repay the $30,160 I will have collected between ages 63 1/2 and 66, which will permit me to reset my Social Security payments to the “full” amount of about $2,094 a month. This will give me a $16,408 drawdown from my reduced savings plus a $25,128 annual Social Security income, for a total gross of $41,536. Suck 28 percent out of that, and you have a net of $29,905, still not a comfortable income by any means (especially given that Medicare will cost nine or ten times what I’m paying for health insurance now), but livable. There’s some chance, though, that my tax rate may not be quite that high, since Social Security is taxed with byzantine complexity—the only way to know what it will be is to have my tax lawyer figure it out, which I ain’t a-gunna pay for until the time comes. Butof course, there’s also a chance that taxes will actually be higher in two or three years, given the bailouts and other extravaganzas our nation is financing.

Time will tell.