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Why the Fed and Obama Are Willing to Wreck the Dollar

September 30th, 2010 No comments

The rise of gold to over $1,300 is no accident. We saw a similar rise of gold in the 1970s to over $2,000 per ounce. The reason? The U.S had just dumped the gold standard (the link that makes a dollar worth a certain amount of gold) and had started to print like crazy to pay for the Vietnam war. Japanese bondholders of U.S government debt took it on the chin.

The mechanics are the same, but this time around the reasons are different. The Federal Reserve and the U.S Government will do whatever it takes to “save” the economy because governments at all levels are “invested” too much in suckling from the private economy pig.

There is a sharp contrast to the 1970s when government had gotten bigger, but not anywhere as big as it is now. You might say, well, as a percentage of GDP the government (at least at the Federal level) is taxing at about the same as it was in the past decades. This might be true, but there is a clear disconnect between what governments collect and what they spend, borrow, and have committed to in future expenditures through entitlements.

Here’s a quick run down on what has changed over the past 40 years:

  • The baby boomers are near retirement. The accrued benefit promises have outstripped expected tax revenues for Social Security, Medicare, and Medicaid.
  • 401ks and other tax deferred retirement accounts were invented and now contain 100s of billions of dollars. Governments need a good stock market so that they can reap their share of these accounts in the future.
  • It’s been bi-partisan, or non-partisan that government entitlements are expanding even though we can’t pay for the ones we have. George W. Bush (Republican) passed a prescription drug bill onto Medicare. Obama (Democrat) signed legislation that expanded the involvement (and funding) of health care for those younger than 65 (outside Medicare age).
  • We have gotten into a few wars, all put onto the credit card. No money was asked for from the taxpayer.
  • States are broke. They too have over committed on pensions and health benefits.

The message that I get from the Fed is this: start spending and investing now, otherwise I will print more and more dollars and trash the currency until you do. Governments need a strong economy and if they don’t get one, they will simply take your money by inflation.

This is why gold is so hot.

Categories: Economy, Market Analysis Tags:

Will the Prius Save The Hatchback?

September 26th, 2010 No comments




In the U.S, the hatchback is the downtrodden sibling to the sedan. All over the world hatchbacks are quite popular primarily because the higher fuel prices make these vehicles a better value. Here’s what a hatchback offers:

  •  A smaller overall package than a sedan (good for parking).
  • Better utility than a sedan, since the 3rd or 5th door makes it a wagon.
  • Hatchbacks are generally lighter than a sedan which improves fuel efficiency.
  • More configuration options to use the vehicle for cargo or passengers.
  • Hatchbacks are cars, unlike heavy SUVs/Trucks which use body on frame construction.

Why are hatchbacks so disliked in the U.S.? Primarily, this has to do with the history of this car configuration as well as the tastes of the average consumer.

  • In the 1970s, hatchbacks were imported due to high gasoline prices. These vehicle were generally low end cheaper vehicles. Hatchbacks inherited this reputation as being low end and cheap.
  • Americans have always preferred larger vehicles. Over time cars have gotten larger and heavier. Even hatchbacks. In 1980, the Honda Civic HB was a very small car only about 1300 pounds. The equivalent hatchback sold today is over 2700 pounds (this is also the weight of my 2002 Civic HB).
  • Low gasoline prices make smaller cars less desirable. This is not a uniquely American trait. When people have access to disposable income and relatively cheap gasoline, they go bigger. 

1982 Toyota Starlet. A cheap hatchback of its day.

Many Failed Attempts…

There have been many failed attempts to bring the hatchback back into the U.S market. Most are not having much success as the vehicles below are mostly off the market due to poor sales. Hatchbacks are not always cheap, there are expensive ones as well. However, still the only ones that sell consistently enough to make a profit for the automaker are still the cheap ones.

 The dead and dying list:

  • BMW briefly imports the 3-series hatchback the 318ti.
  • Mercedes briefly imported the C-series hatchback, the C230.
  • Mazda briefly imported the excellent 5door 6 series mid size sedan.
  • Audi is currently importing the A3 small 5door hatchback.
  • Chevrolet gave the hatchback a good effort with the Malibu MAXX. When it came time to upgrade the car to the new generation platform, the hatchback was dropped.

A few notable good selling and new hatchbacks. All of these cars are lower cost models, and not in the luxuary category:

  • Hyundai Accent.
  • Chevrolet Aveo.
  • Honda Fit.
  • Ford is back in the market with two new hatchbacks, the Fiesta and Focus.

Enter The Savior – Toyota Prius

The slippery Toyota Prius

 

The best selling hatchback in the U.S is:  the Toyota Prius Hybrid! Initially, the first generation Prius model was a sedan. The second as well as the current third generation Pruis’ are hatchbacks. It’s interesting that the buyers of this vehicle don’t seem to mind that it’s not a sedan. In fact, the hatchback format has given the Prius an unintended competitive advantage: uniqueness. Because the Prius is a dreaded hatchback, most people can recognize it quickly because it stands out. It’s unique form has become synonymous with “Hybrid”. 

 Toyota probably went to the hatchback format because there was a design advantage: the hatchback format can be streamlined more easy to limit air drag. This makes the vehicle more efficient at higher speed. After all, the hybrid is sold as a ‘fuel efficient’ vehicle.

My 2002 Honda Hatchback. It is often mistaken for a hybrid.

 Can the Prius save the hatchback format? Well, another competitor, Honda, has introduced a similar Hatchback Hybrid that is a dead giveaway to the Prius. Ford, as mentioned above, is introducing two new (albeit cheap) hatchbacks. Hybrids are giving this format a new life, but I wouldn’t bet on any new love affair with the hatchback in America anytime soon.

Categories: Lifestyle Tags:

Why Low Mortgage Rates Mean Higher Cost Mortgages

September 23rd, 2010 No comments

Personal finance is very often interfered with by well meaning government policy. There is perhaps no more interference by government than the housing market. I don’t want to talk about all of the ways that the housing market is distorted (it would be quite a long post), instead I will focus today on just one distortion: very low mortgage rates.

How We Got Here

U.S Housing mortgage rates are near all time lows, as of this writing they are below 4.5% for a 30 year fixed mortgage. The reason why the rates are so low, is due to interference by the U.S Federal Reserve in the Mortgage Backed Security (MBS) market and in the U.S. Government Treasury Bond market. In a normal market, the Federal Reserve sets short term interest rate policy by expanding or contracting the money available to banks. Since we are in unusual times,  the Federal Reserve has taken additional steps to buy MBS and U.S Government debt.

Buying debt increases the price, while depressing the interest rate on the bonds. The yield on U.S debt is near all time lows. Mortgage rates are in large part tied to the interest rates on U.S Debt. The Federal Reserve expansionist policy has lead to very low mortgage rates.

How The Banks Respond

Banks write mortgages by borrowing short term and lending long term. The difference in this spread is the basis for their profit. The question is, would a bank want to lend money out at 4.5% or lower for 30 years? No they wouldn’t because they understand that the near zero interest rates don’t last forever.

So, how do you get a mortgage if banks don’t want to write them? Well, chances are you will be getting a loan held or insured by Freddie Mac or Fannie Mae. According this this NY Times article, 98% of the new mortgages are processed by these Federal agencies.

Banks have problems of their own. Their existing mortgages that they hold have credit problems, and at the same time the U.S Congress has toughened up the reserve requirements for banks which lowers the amount of money available to be lent.

Therefore, given the state of the market, banks are content to make money originating and servicing mortgage loans instead of on the loan itself. So, all the higher fees that the banks are charging to originate loans is the main way they make money today.

Categories: Market Analysis Tags:

A Very Short Primer On Bond Investing

September 22nd, 2010 No comments

The two main investment vehicles available to most investors are stocks and bonds. Bonds are thought to be “safer” and less “risky” than bonds. There is one reason why: bonds are thought to be better protectors of principal. This means that the money you put into them has a larger certainty of being returned (or not lost) than stocks. The biggest fear that investors have is losing their principal.

Bonds are more complicated than this though, and in some ways are much more like stocks than people realize. If your goal is to protect principal, you need to know which kind of bonds to buy. Otherwise, you can both make and lose money on bonds just like stocks.

Bonds Than Protect Principal

If you want to keep your principal at all costs, you will want to buy these type of instruments. All of these investments are designed to keep their value at a fixed, or par value.

  • U.S. Savings Bonds, I-Savings Bonds (inflation protected bonds). The key word here is “Savings”. U.S Debt that is a “Note” or “Bond” does not guarantee principal.
  • Money Market Funds, available at banks and credit unions.
  • In your retirement accounts (IRAs, 401K, 403b), bond funds that use the term “Stable Value”. These funds are designed to maintain par value.

Bonds That Don’t Protect Principal

Bonds that do not protect principal can be bought and sold for a capital gain or loss (high or lower price than what you bought them). The key here is that this gain or loss can occur if you sell before the bond matures. If you buy a bond and no default occurs, you hold it to maturity, then you get all your principal back. This is why even these type of bonds protect principal better than stocks do.

  • Municipal Bonds (local/state government general obligation/capital bonds).
  • U.S. Treasury Bonds/Notes.
  • Corporate Bonds.

Bond Risks

There are many risks to investing in bonds, here are the main risks that you should be aware of. Check out this complete article for a more extensive list.

  • Interest rate risk, which is the chance that bond prices overall will decline because of rising interest rates.
  • Inflation risk, Inflation causes tomorrow’s dollar to be worth less than today’s; in other words, it reduces the purchasing power of a bond investor’s future interest payments and principal.
  • Credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

How You Lose Money With Bonds

For the typical investor, they don’t buy individual bonds, they invest in bond funds which work just like stock mutual funds: they own many different bonds which together form the fund. Just like stock funds, the bond manager can trade bonds over time which can cause both gains/losses in the fund overall. Even if they don’t trade, the mechanics of bond maturity, bonds being called affect returns. Managers can try to mitigate these affects so you need to understand their strategy.

If you have owned bond funds in the recent past you have made money because bond prices have risen as interest rates have decreased. This may or may not continue. The key concept to understand here is that bond funds don’t protect principal.

Categories: Investing Tags:

5 Technologies That Help Save You Gasoline (No Hybrids Here!)

August 27th, 2010 No comments

If you are in the market for a new car, you might think that hybrids are the way to go to get the best mileage. Hybrids in general offer the ability to get better mileage because they augment the standard gasoline engine with an electric motor that supplements that propulsion where gasoline engines are least efficient: at lower engine and driving speeds.

However, automobile efficiency in general has gotten much better than people realize over the years. The improvement in the quality, safety, and efficiency of automobiles improves all the time. This trend is about to get even more pronounced because new fuel efficiency requirements over the next 10 years will force manufacturers to increase efficiency even more than they have in the past.

So, you may ask another question: why doesn’t my car get better mileage than <insert your favorite car from 15 years ago>? The main reason is that efficiency improvements have been used to offer other benefits to consumers.

The constant fuel efficiency gains made by car manufacturers have been used primarily to add additional value to consumers over just increasing fuel economy numbers. The car from 15 years ago was lighter, less roomy, less powerful and significantly less safe than a similar car of today. Consumers have essentially demanded these improvements.

Adding to this equation is that the fuel economy estimates made by the Federal Government have changed a few times over the years, to reflect better actual driving patterns of today’s drivers. So, fuel economy numbers from 15 years ago are considered to be less accurate than the ones from today (error on the high side).

The good news is that efficiency will continue to improve due to new technologies like hybrids, as well as old technologies that have been given new life due to recent refinements. Look for these technologies that will become more popular on many vehicles because the benefits are substantial and cost effective.

Here are (5) technologies you will see more of in vehicles.

Diesel Engines

Diesel engines are as old as cars themselves. Diesel engines are very popular in Europe and are primarily used in the USA for commerical vehicles. When you look at their benefits, they have some characteristics that make them as appealing as hybrids: 30% fuel efficiency improvement over gasoline engines and more low end torque. Diesels had been falling behind due to increased emissions requirements and much higher diesel fuel prices over regular gasoline. Newer models from Mercedes and Volkswagen have improved the emissions issue. Estimated fuel efficiency improvement: 30%.

Direct Injection

You may be familiar with fuel injection (FI). FI has been around for decades (it was used in Corvettes in the 1950s). FI has really been improved with computer technologies that control it better than mechanical systems. Direct injection is a further improvement that places pressurized fuel directly in the cylinder as opposed to the intake. DI isn’t new either, but it has been optimized for commercial use by refinement. DI costs more to manufacture but those costs are getting lower. Estimated fuel efficiency improvement: 5%.

Turbocharging

The basic trade-off that a typical gasoline engine makes is to seek a balance between low speed torque and high speed efficiency. The engine needs to typically be larger enough (higher displacement) to provide enough torque, but higher efficiency at driving speeds necessitates a small displacement. Enter turbocharging, which can increase the power of a smaller engine by forcing more fuel mixture into the cylinders.

Turbochargers of the past would typically exhibit lag, which delayed the extra power release. Newer versions have pretty much eliminated this problem offering a full range of power throughout in a smaller displacement engine. Estimated fuel efficiency improvement 10-20%.

CVT/Higher Gear Transmissions

Transmission have the job of matching engine speed to vehicle speed to provide efficiency, power and responsiveness to the vehicle. Typical transmissions recently were limited to only 4 speeds, I remember that some Toyotas from as recently as 10 years ago were only 3 speed. More speeds enable an engine to offer responsiveness as well as lower gearing at the top to improve efficiency. Now, 5 speed is very common, 6 speeds are available and transmissions that have as many as 8 speeds are found in some high end luxury vehicles. Continuously variable transmissions have not gears at all, they match engine speed real time providing a more efficient transfer of power. Estimated fuel efficiency improvement: 5-10%.

Electric Power Steering

Electric power steering (EPS) is one of those small improvements that can help to improve economy when taken together with other improvements. Instead of a hydraulic system of typical power streering systems, EPS uses an electric motor. Estimated fuel efficiency improvement: 1-2%.

Categories: Lifestyle Tags: