Money For the Rest of Us

#191 Why interest rates are rising and what could happen to bonds, stocks and the economy if rates returned to more normal levels. More information, including show notes, can be found here. Episode Summary – Has A Bond Bear Market Begun?On this episode of Money For the Rest of Us, David Stein walks you through the complex idea of a bond bear market. He explains that a market consisting of losses of 20% or more are considered a bear market type loss and that this type of loss is possible even in the bond market. David states that “It’s important to understand what drives interest rates, how high they could get, and what the ramifications of that are.” Be sure to listen to this full episode to fully understand this idea and to hear some of David’s suggestions for investing in a rising interest rate environment.When was the absolute low in interest rates and the beginning of the bond bear market?After the Brexit vote, in early July 2016, ten-year treasury bonds were yielding 1.37%. Today, they’re yielding 2.85% with an annualized return over that period of approximately negative 4.5% annualized. Ray Dalio, the founder of the hedge fund Bridgewater Associates and author of “Principles,” explains, “A 1% rise in bond yields will produce the largest bear market in bonds that we have seen since 1980-1981.” Investors around the globe are asking big questions about what these changes in interest rates mean, and David does a great job of explaining the issues on this episode of Money For the Rest of Us.The simplest way to dissect the complex idea of interest ratesWith a discussion of the bond bear market comes many moving parts. David seeks to explain the concepts while utilizing the analogy of cutting an apple. An apple can be cut in many different ways, and each method uncovers a new way of looking at the apple and its pieces – in this case, interest rates. There are two main interest components that are discussed in this episode of Money For the Rest of Us: inflation expectations and real rates (i.e. your return after inflation.)Analyzing how high interest rates could rise by decomposing the nominal yield into the expected path of future short-term interest rates and term premiumsNot only does David explain the idea behind a bear market on this episode of Money For the Rest of Us, he also examines nominal yields and how they can be dissected into the expected path of future short-term interest rates and term premiums. While the drivers behind climbing interest rates cannot always be observed directly, these two main factors shed light on just how high interest rates could climb in the coming years. Also, learn how the Federal Reserve estimates the path of short-term of interest rates and why term premiums are countercyclical and tend to rise when there is a great deal of investor uncertainty.How do supply and demand factors impact these interest rate scenarios within a global marketAs with many other industries, the reality of supply and demand impacts every aspect of the financial market. It is predicted that in 2018 the United States Treasury will have net new issue of $1.3 trillion in treasury bonds and the national debt will continue to rise. This new influx of debt will need to be purchased by the market, but the Federal Reserve is reducing the amount that it’s purchasing – their bond holdings will decrease by 10% over the next year. International buyers will become an even more important cog in the wheel, and David comprehensively explores the global supply and demand structure on this episode of Money For the Rest of Us. You also don’t want to miss his bear market investment suggestions, so be sure to listen.Episode Chronology[0:38] David poses the question for this episode, has the bond bear market begun?[3:59] When was the absolute bottom in interest rates and the beginning of the bond bear market?[5:29] The simplest way to dissect interest rates into their subcomponents.[7:41] How much higher could these rates get?[15:02] The question is, in a bond bear market, how high could interest rates go?[20:21] How global supply and demand could impact the bear market scenario[22:48] What do we do about all of this?[25:35] Why markets are becoming worried about these interest rate changesSee Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#190 What investments are best for maintaining purchasing power relative to inflation. Using the pencil as an example, how inflationary and deflationary forces work together over decades to determine the price of product. More information, including show notes, can be found here. Episode Summary – How To Keep Up With InflationBusinesses and individuals are asking questions such as “How can we protect our earnings and purchasing power? How do we invest smartly while keeping inflation in mind?” On this episode of Money for the Rest of Us, David Stein takes an in-depth look at inflation and the causes behind it by examining the issue through the lens of a case study on pencils. You don’t want to miss out on his thorough explanation, so be sure to listen to this episode.Forces that contribute to inflation and deflation as viewed through a case study on pencilsThe simple pencil is an extraordinary example of the inflationary and deflationary factors that influence nearly every aspect of consumerism. In 1844, U.S. made pencils sold for $0.75/dozen, or $6.25/dozen in today’s dollars, but pencil costs did not keep up with overall inflation rates. With the invention of pencil-making machines, the world soon saw a drastic increase in the number of pencils being produced, but consumers already had an “anchored price point” in their minds. Their understanding of what a pencil was valued at and what it should cost did not reflect the actual costs. Essentially, cost savings were not passed onto consumers.Why great selling environments for pencil manufacturers didn’t last longEven though the demand for pencils was drastically increasing in the early 20th century, manufacturers were quickly plagued with a number of issues: decreasing amounts of American red cedar wood, a large influx in foreign orders, and a variety of other capacity constraints. As the industry began to examine the possibility of using secondary wood sources and increasing the productivity power of machines, price points for pencils continued to shift.Additional inflationary and deflationary factors that impacted pencil productionAs the pencil industry began to move into the 21st century, there were many factors that greatly influenced its path. Deflationary pressures such as imports from low cost countries and quality and productivity improvements led to lower pencil prices. However inflationary factors such as rising raw material costs, capacity constraints due to increased demand, and higher wages also greatly impacted the industry.Consumer behavior as it relates to inflation and investment suggestions to combat inflation ratesWith the story of the pencil’s journey in mind, David shares his top suggestions for ways to invest to keep pace with inflation. Inflation not only affects hard facts and figures but influences the mindset of American consumers and businesses. Because there is no guarantee that current inflation rates will stay low, having inflation hedges in your portfolio can be helpful, including stocks, real estate, raw land and gold. Inflation indexed bonds such as treasury inflation protected securities (TIPS) are also good options even though they currently have low yields. Exchange traded funds that invest in commodities should ideally also keep up with inflation, but in the episode David explains some of the drawbacks to investing in commodity futures via ETFs.Episode Chronology[0:15] David introduces the topic for this episode, how to keep up with inflation[4:02] Forces that contribute to inflation and deflation viewed through a pencil case study[13:58] How a quality improvement to pencils changed the mindset on cost, value, and inflation[17:34] Why good times for pencil manufacturers didn’t last for long, due to capacity constraints and rising commodity prices[20:10] How the pencil cost continued to decrease because of additional wood sources[22:15] Why cheap imports continued to impact the industry[23:31] Summary of the deflationary and inflationary pressures[24:35] Consumer behavior as it relates to inflation[28:16] How stocks can be an effective inflation hedgeSee Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#189 Will increasing the minimum wage help or harm workers and businesses? How many U.S. workers are paid at or below the minimum wage? More information, including show notes, can be found here. Episode Summary – Should The Minimum Wage Be Raised?Nearly every employee in the United States has grappled with the minimum wage question at some point in their lives. High schoolers, recent college graduates, and older workers all ask themselves, “Can I survive on an hourly job making the minimum wage?” Professors, industry leaders, and government officials debate over if the national minimum wage should be raised, and if so, by how much? Join David Stein as he sheds light on this challenging episode and uncovers truths behind the minimum wage in the United States today, where the workforce is headed in the future, and some creative potential solutions.The current state of the minimum wage in the United StatesThe minimum wage was initially created in the 1930s to prevent employers from forcing workers to work for pennies on the hour. Businesses and governments at every level were asking themselves, “Can companies survive if they are forced to pay workers a set amount?” Today, that same question is being asked. While the minimum wage has come a long way from the original $0.25/hour amount – the current national minimum wage is $7.25/hour – a large portion of the workforce is still being paid hourly. According to the Bureau of Labor Statistics, 80 million workers aged 16 and up work hourly, with 701,000 making exactly $7.25/hour and 1.5 million earning less than minimum wage. For more statistics on the current state of the minimum wage workforce, be sure to check out the full episode.What is the impact on the workforce if the minimum wage is raised?There are countless short and long-term impacts on the American workforce that would arise from raising the minimum wage. While short-term impacts are nearly indistinguishable from not changing the minimum wage at all, many jobs will be lost in the long run as a result of raising the minimum wage. As explained in the “Wage Shocks and the Technological Substitution of Low-Wage Jobs” research article, automation is quickly substituting humans in routine cognitive jobs – and contrary to popular opinion these jobs are not being lost to offshoring either. To hear more about the varying impacts from raising the minimum wage, be sure to listen to this episode of Money For the Rest of Us.Three enlightening findings from the most recent study on the minimum wageAccording to the article “Industry Dynamics and the Minimum Wage: A Putty-Clay Approach” there are three major findings surrounding the minimum wage that employers need to be paying attention to. The first discovery found that the exit and entry of low-wage restaurants in the marketplace increases in the year following an increase in the minimum wage rate. But, over time, the low-wage restaurants were substituted with more capital-intensive establishments. The article also explains that in every case study examined, the cost of higher minimum wages were fully passed onto consumers in the form of higher prices. Finally, the article demonstrates that the impact of minimum wage increases grew over time.Why raising the minimum wage isn’t the solutionDavid explains that essentially, raising the minimum wage increases the level of automation in the workforce, while simultaneously increasing the level of vulnerability for hourly-paid workers. It’s no longer enough for companies to simply work to maximize their own profits. Industry leaders must begin to ask themselves questions such as: “What role do we play in the community? How are we managing our environmental impact? How are we helping our employees adjust to an increasingly automated world?” Your personal ability and your company’s ability to help create a fair work environment for all will greatly benefit from listening to this insightful episode of Money For the Rest of Us.In This Episode You’ll Learn[0:15] David asks the question for this episode, should the minimum wage be raised?[5:44] Current state of minimum wage in the United States[8:33] What is the impact on the workforce if the minimum wage is raised?[11:07] Three major findings from “Industry Dynamics and the Minimum Wage: A Putty-Clay Approach”[13:33] “People Versus Machines: The Impact of Minimum Wages on Automatable Jobs”[17:01] David shares his personal experience surrounding minimum wage jobs[21:24] Why raising the minimum wage isn’t the solution[24:30] The call-to-action for employers and industry leadersSee Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#188 How our net worth is more than our financial capital but includes our lifetime earning capacity or human capital. What role does debt play in investing in human capital and how our human capital impacts how we allocate our financial investments. Why stocks aren't less risky in the long-term. How to invest a lump sum payment and how I recently did so in today's market environment. More information, including show notes, can be found here. Episode SummaryAt some point in our lives, we all have to deal with the issue of debt. It’s a specter that hangs over our heads and gives us an uneasy feeling until it is gone. Debt has a cost, naturally so because it demands interest all the time. A question that comes up often is whether or not it is better to pay off debt immediately, primarily because it IS debt, or if a better return can be achieved, should available money be placed into investments instead? You could run the numbers and figure out what looks best on paper and go with that. But the answer is honestly not that simple. This episode is designed to walk you through many of the issues that should be considered when answering the question.If it costs you less numerically to pay interest on loans than you could make on investments, you should invest instead of paying off debt, right? Maybe it’s not that simpleLet’s do the math. If you are paying 5% for your home mortgage and have a lump sum of cash available to pay it off, but you also have the opportunity to lend the money to a real estate crowdfunding platform with a guaranteed return of 9%, isn’t it true that you would make 4% more by investing in the crowdfunding platform than you would if you paid off the mortgage? Yes, that’s what the numbers say, but there’s more to be considered. You want to think about things like human capital, the nature of the debt, and the mental cost you bear for having the debt hanging over you.Most people should try to do both: invest and pay off debt. Here’s why-When it comes to the choice between paying off debt with available funds or investing those funds elsewhere, there is no cut-and-dried answer that fits everyone. But after doing his research in thinking through the issue, David feels that most people should try to do both. While there is a psychological benefit to paying off debt, there is also the knowledge and discipline that comes from investing.In This Episode You’ll Learn[0:46] Welcome to the show – and could you help spread the word?[1:55] Should you pay off student loans first or put your cash into investments?[4:20] We’ve got to consider the cost of developing “human capital”[9:40] What is debt and how does short-term VS long-term debt apply[12:45] How do human capital issues impact how we invest?[16:13] Why most people should try to do both: invest AND pay off debt[22:50] Should a lump sum be invested all at once or dollar cost average it?See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#187 Why opportunity costs should be our primary frame for deciding what to buy instead of anchoring, mental accounting or whether we pay with a credit card or cash. More information, including show notes, can be found here. Episode SummaryWhen David noticed that a new book by Dr. Dan Ariely and Jeff Kreisler was actually titled, “Dollars and Sense,” he couldn’t believe his eyes. That’s one of the most tired and overused phrases when it comes to financial writing and publication. Yet, there it was, a best seller on Amazon. The title wasn’t enough to keep him from reading the book and he’s very glad that he did. This episode highlights some of the concepts expressed in the book including the difference between investment and speculation, what it means to do malleable mental accounting (which is not a good thing), and why we need to consider opportunity costs when making purchases. If you want to have sense in the way you use your dollars, this episode is for you.This episode is about spending dollars while maintaining your common sense… and why many of us are not able to do itAll of us fall into strange patterns of behavior when it comes to spending money. We can either be far too stingy and refuse to spend money for things we legitimately need, or we can convince ourselves that a purchase we desire to make is for our good or in our best interest when the facts reveal something different. David has a great way of explaining why those kinds of things happen and on this episode uses his own back and forth experience when buying furniture to demonstrate the good, the bad, and the expensive of making purchases for both good and bad reasons.Be careful that you don’t convince yourself that a purchase is an investment when it’s really nothing more than speculationAs David and his wife were shopping for furniture they came across many beautiful but expensive antique pieces. The outcome of their furniture shopping is quite ironic because David started out feeling a bit of pain about having to spend money at all – and he wound up purchasing some of the most expensive pieces they found in their shopping adventure. How did it happen? One of the ways was that David convinced himself that the purchase of antiques was actually an investment because the value was likely to increase over the years. But according to all rational definitions, that is not investing, it is speculating.Malleable mental accounting: How you convince yourself to spend money for reasons you never intendedIf you want to truly use common sense when spending your dollars, you need to understand a phenomenon called malleable mental accounting. It describes the way we convince ourselves that a purchase makes sense when it actually doesn’t make sense according to the budget. It’s a way we justify or convince ourselves that the purchase we are making is a good one when actually it may not look good on paper at all. Find out how David struggled with his own form of malleable mental accounting when he and his wife were purchasing furniture for their new home.Are you aware of your own confirmation bias? If you can be you will grow in your ability to change your decision making for the betterMany times after we make a purchase, we begin searching for ways to convince ourselves that it was actually a smart decision. In David’s case, he began researching the price of antique furniture similar to what he had purchased in an effort to show that he did not spend as much money as he could have, and to that end he was successful. But that’s not the point. What he was doing had nothing to do with whether or not his furniture purchase was truly a good decision, it had to do with making himself feel better about the large amounts of money he had spent. David contention is this: If we can become aware of the reasons we spend money the way we do, we can begin to change our decision-making for the better. That’s the lesson David wants to teach you through his own furniture buying experience.In This Episode You’ll Learn[0:18] Dollars and Sense – isn’t that the most “typical” and uncreative title – yet there are MANY books by that name[2:38] How furniture illustrates how irrelevant anchoring can influence decisions wrongly[8:30] Weighing opportunity costs instead of getting anchored to a number[11:49] Why we should not consider sales prices or source of funds, or ease of payment[18:00] Is an antique furniture purchase an investment? No, it’s speculation.[22:21] How credit cards seduce us to purchase things when we normally wouldn’t[25:16] Are you aware of your own confirmation bias?See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#186 Why paying taxes has very little to do with funding the federal government. We also explore the potential impact of the U.S. tax reform on households, businesses and the economy. More information, including show notes, can be found here.Episode Summary – Why Do We Pay Taxes?They say the only things certain in life are death and taxes. While that’s probably true it’s also likely that many people who have resigned themselves to paying taxes don’t truly understand why taxes are necessary. In this episode, David covers the issue extensively in light of the new Tax Cuts and Jobs Act the U.S. Congress has passed. If you take the time to listen you’ll not only understand the recent tax legislation better, you’ll also understand why you have to pay taxes in the first place, and what it does for the nation. Consider it a 30-minute lesson in economics and government spending that actually applies to your life.Comparing the U.S. tax system to other countries like Denmark makes you wonder why taxes have to be so complicatedOne of David’s friends lives in Denmark. In a recent conversation, this friend mentioned that it took him less than 10 minutes to prepare and file his taxes. Really? It’s true. But there are other things about the tax system in Denmark that might not be so attractive, like a 36% to 52% tax rate. When David started looking over his tax liability in light of the recently passed Tax Cuts and Job Act, the contrast between the two systems was obvious. After 45 minutes David couldn’t understand the implications of the legislation so he asked his tax accountant whether he’d get a tax cut or not. The answer? Maybe. It’s complicated. In this episode, David explains some of the basic principles behind how our economy and national budget work, including why taxes are necessary at all.One reason we pay taxes is to prevent inflation. Here’s how it works:When a government spends more than it takes in, it runs a deficit and then issues debt in order to balance its accounting books. If the federal government spends and spends and spends, the capacity of the private sector to produce goods and services is constrained and prices rise. That’s how inflation happens. Paying your taxes can help prevent inflation because it can keep federal government from overspending, particularly during a period when the economy is growing quickly. As the economy expands, households and business get more income, which means they have to pay more taxes, which keeps the federal budget deficit at a reasonable level.What will be the overall impact of the 2017 Tax Cuts and Jobs Act?It’s expected that the new tax legislation for 2017 is going to stimulate the economy by encouraging more production and creating incentives for more workers to join the workforce. Lower taxes mean more money for households and businesses to spend and invest. But it also means the government receives less tax revenue – which will cause the national debt to increase. Nobody knows exactly how much either of those things will grow, but David has some insights to share about the legislation’s impact, on this episode.The new tax code is expected to impact businesses in a positive wayThere are many arguments for why the new tax code passed in 2017 should benefit business. First off, corporate taxes were cut from 35% to 21%. That will make the U.S. more attractive for business to operate in. The next positive aspect for businesses is that the new legislation establishes what is called a territorial system where businesses will no longer be taxed on their overseas earnings. Previously, U.S. businesses were taxed on any earnings they made overseas if they brought those earnings back into the U.S., and businesses want to keep their tax bill as low as possible, so they kept that money overseas to the tune of $2.6 trillion dollars worth. Now they can bring that money back into the U.S. economy through a one-time repatriation tax of 15% for cash, and for other things like property, it’s 10%. David covers a handful of other benefits businesses should experience into the new tax code on this episode.In This Episode You’ll Learn[0:51] Residents of Denmark are able to prepare and file their taxes in 10 minutes – Wow![1:40] Are you going to get a tax cut from the recent legislation that was passed?[4:01] Foundational principles about why we pay taxes in the first place[8:44] Assessing the new tax laws after the fact: They were trying to simplify. But does it?[17:32] What impact is the new tax legislation going to have on the economy?[21:10] Corporate income taxes have changed from 35% to 21%, and no more taxes on overseas earnings[27:39] Technicalities that still need to be worked out regarding the recent tax reformSee Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

There is no regular episode of the podcast this week, but there is a new podcast you can subscribe and listen to: Topics by Money For the Rest of Us. This is a seasonal show released monthly that categorizes existing episodes into topics with a newly recorded introduction. Please subscribe so you automatically get the seasons as they are released. See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

A wide ranging discussion on retirement math, sequence of return risk, investing buckets, scaling exposure to Bitcoin and gold, and creating a lifestyle business. See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#185 How Illinois and other states can suffer a debt crisis like Greece but why it wouldn't lead to an economic depression similar to what Greece suffered.See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#184 Why technology eliminates jobs but doesn't increase the level of unemployment even though for more than 50 years that has been the worry.See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.