“Money without financial intelligence is money soon gone.”

Sallie Mar

I work with a divorced mother of two who is eligible to retire, but she continues to show up to her job every day.  “Why don’t you retire,” I’ve asked her on several occasions.  “Because my kids need me to pay for college,” she retorts.  This obligation for baby boomers seems to be pervasive.  My colleague usually goes on to explain that she would rather pay for her kids now than when they are drop-outs living at home.  What she doesn’t realize though is this may happen anyway because there are plenty of graduates living with Mom and Dad.  According to Zero Hedge, “Back in 1999, a quarter of all 25-year-olds lived with their parents.  By 2013 this number doubled, and currently half of young adults live in their parents’ home.”

I’ve said it many times but apparently not enough.  This was once a time when a young person could work their way through college and graduate without any loans.  Now parents and students are both working only to be encumbered with a student loan once junior moves back home.  According to  Anthony P. Carnevale, director of the Georgetown University Center on Education and the Workforce, “Today, almost every college student works, but you can’t work your way through college anymore.  Even if you work, you have to take out loans and take on debt.”  This is the typical result of a government that sets out to make college “more affordable.”

For those lucky enough to have parents who properly saved for their college education, disaster can still strike.  Kim, a college student from Atlanta, gained national prominence when she admitted to liquidating her $90,000 college fund before reaching her senior year. “It’s not my fault.  Maybe [my parents] should have taught me to budget or something. They never sat me down and had a real serious talk about it.”  When the host suggested that Kim get a part-time job, Kim replied, “That’s embarrassing.  I know [my parents are] trying to teach me a lesson and blah blah blah and character building but, like, I hope they realize [working part-time] could have such a negative effect on my grades and as a person.” I’m not making this up dear reader!

As Robert Kiyosaki wrote in his acclaimed book Rich Dad, Poor Dad, “Money without financial intelligence is money soon gone.”

The Cowardly Treasury Secretary

JAck Lew.003

Like the political cowards who preceded him, Jack Lew has decided to take the easy road and demand that Congress raise the debt limit.  Lew is not alone though.  Every one of our elected leaders and public officials takes the expedient path when it comes to raising the debt ceiling.  You don’t have to be a mathematician to understand where this is eventually heading.

It won’t be long before even America’s official debt/GDP ratio will be 200%.  Even mainstream economists will admit that a country with debt twice the size of its GDP is bankrupt.  The reality is that America is already insolvent, but our government manufactures phony numbers that completely ignore generally accepted accounting principles.  If you don’t believe me, then just research the nation’s former top accountant David Walker.

Unfortunately, most of our appointed officials lack Walker’s integrity.  They went to the Lance Armstrong/Brian Williams/Rachel Dolezal school of honesty where if you simply say it, then it must be true.  Lew uses Orwellian speak like “honor our obligations” or “pay our bills”, but he knows this language couldn’t be further from the truth.  The fact is that America never pays its bills, so that’s why it must continue to go deeper into debt.  When this process is extrapolated to its logical conclusion, the United States will discover that it’s no different than Greece, Venezuela or any of the other failed democracies who have overpromised and under-delivered.

Spinning Gold into String

Rumpel

Freddie Mac CEO Donald Layton recently told an audience at the Mortgage Bankers Association annual convention in San Diego that loans with down payments as low as 3% are a net positive and that more low down payment products could be on their way.  Layton lauded the programs because they have boosted homeownership, but why is homeownership still at its lowest level since 1967?  Well that’s easy.  Housing is too expensive, and it’s thanks to these very loan products that Layton praises!

If were allowed to have a real market in housing, maybe housing could come down to prices that wouldn’t require these phony products to begin with.  Let me explain.  Suppose we had real prices that weren’t propped up by the government and artificially low interest rates.  Interest rates would increase to 1990 levels, and most of these housing prices would be cut by at least half.  A $200,000 house would drop to $100,000 or less.  The down payment, property taxes, and mortgage insurance would all become more affordable.  Rents for properties would drop, so Americans saving to buy a house could do so faster.  They wouldn’t have to live in a place they don’t own while coughing of up a sizable portion of their net income each month.  But none of this is allowed to happen because government has set out to make housing more “affordable.”

Just like health care, college and everything else the government touches, prices skyrockets leaving the poor and middle class with a lower standard of living.  Government is like a reverse Rumpelstiltskin spinning gold into string, and it’s the the youngest working generation who will pay the price.  Due to all the big government Americans now love, many millennials will be working well into their 70s before retirement is an option.  Don’t get me wrong.  I think work is great as long as you’re doing what you love.  The fact is that most millenials will be working not because they want to, but rather because the have to.  According to Landon Dowdy, “A new report predicts that young workers will need to work until they’re 75 on average to save enough for retirement.  Researchers at Nerdwallet, the financial site that published the report Wednesday, blamed rising rents and student debt levels.”

That’s just half the problem.  Millennials will also be expected to support the social security, health care and housing Ponzi schemes that their parents voted for.  Thanks Mom and Dad.  Of the three frauds mentioned, social security is probably the worst.  Money is stolen from you over the course of a 30 or 40 year career with the promise that good ‘ol Uncle Sam will support you during your golden years.  But even ordinary Americans are beginning to question Sam’s creditworthiness.  Nick Giambruno reports, “Recently, the government announced that there would be no Social Security benefit increase next year. That’s only happened twice before in the past 40 years.  You see, the government links Social Security benefit increases to their own measure of inflation. If the government says “no inflation” then there are no benefit increases. It’s like letting a student grade his own paper.”

We can only hope that this government flunks out of school soon enough to give millennials a real chance at retirement.

Education and College with John Kennedy

college-debtBack in May, I interviewed John Kennedy to discuss problems and solutions to our modern college education system.  Here’s a summary of the transcript that will appear in Financial Judo:

Phil: Welcome to Kennedy Financial.  I am your host Philip Kennedy, and today we have on the line as our guest John Kennedy to talk to us about education and specifically college.  There’s been a recent outcry to forgive student loan debt.  I even saw an article today about the uncollege movement.  We thought it would be a good idea to bring John on who holds an accounting degree from William and Mary.  He is a forensic and corporate accountant, and he has some opinions on college that he would like to share with us.  There is a bubble developing in college just like the housing bubble before it.  John, what does the high cost of college by students these days?

John:  I went to William and Mary, and it seems like most people want the college experience. But what you really see on a daily basis is college is that it’s all about having a good time.  Most of it is about entertainment, and maybe a quarter of it is about actual education.  Three quarters of it is about making new friends and meeting people.  In my experience, sports seem to be the focus of much of the college experience.  For instance, March Madness is taking place right now. That’s a good example of the hysteria that takes place not about education, but about college sports.  A lot of a university’s budget is spent on sports teams and bringing alumni to see those teams perform.  College may buy you a degree, and that degree may be valuable and it may not.  College used to be looked at as an investment, but over time that has gone down in value.  Many of these colleges have lavish eateries for 18 and 19 year old kids.  Do they really need such a fine cuisine? There’s also a perception nowadays that going to college comes with some kind of prestige.  Some people even go to Ivy League colleges and graduate with $250,000 worth of debt.  No one ever asks what would happen to someone if they skipped college and saved all that money to start a business. College will only buy you as much as you’re willing to put into it.  If you’re the type of student who is only there for parties, sports and excessive dining facilities, then you are really not going to get your money’s worth.

Phil: What message do you have for graduates who are now entering the workforce and have never heard a commentary like this before?  Maybe they were duped by their high school academic advisor into going to the most expensive college to get a worthless degree. Peter Schiff often jokes that the next time you go to a bar or restaurant, ask your waiter or bartender what they majored in.  Unfortunately, many people in the service industry nowadays are over qualified for the positions they hold.  What advice do you have for someone who may already have an overpriced agree? How can they make it worthwhile?

John:  I would consider it a sunk cost. If you are working as a barista at Starbucks, then consider it your college education a sunk cost.  This means that the money you spent on the degree you will never get back.  It does not make any sense to base future decisions on your college degree.  If your degree is in Chicano studies and it is difficult to find a job, then you should abandon that path.  You would be better off trying to start a business.  A restaurant, advisory business, or even a landscaping company would be a better idea.  The goal is to start something as soon as soon as tomorrow with the long term goal of making it profitable. Starbucks will probably never pay you enough to start a family.  I agree that it is difficult to start a business instead of just remaining an employee.  Unfortunately, there are many people out there who are working in a field unrelated to their college major.  This new generation is discovering that unlike their parents, they cannot afford a home or even a car in some circumstances.  When they are confronted with this situation, many of them erroneously think that the only way to fix the problem is with more education.  So they decide to go back to college for a masters degree or PhD since there are no jobs available for Chicano Studies majors.  These people then decide to become professors who then teach the next generation of students, and the vicious cycle repeats itself. If you are unable to work outside of the educational sphere, then you are forced to work with in it.  And this scheme is heavily controlled by professors who encourage you to major in something that they teach that is not profitable in the free market.  Then you find yourself doing the same thing to your students, and the cycle continues.  This is the choice that many students are left with.  Do I want to take a risk and start a business?  Or would I rather join the insular world of education where I won’t have to worry about paying back my student loans someday?

Phil: Right.  Even the professors will tell incoming masters degree candidates to not pursue a particular degree unless the university is willing to pay for it.  Even the professors know that the degree they are offering is not worth anything in the marketplace.  This begs the question then.  Who is really paying for these degrees?  This can only be done through the intergenerational education Ponzi scheme that requires incoming bachelor degree candidates to encumber themselves with huge student loans to pay for the degrees of their professors who did the same thing 15 or 20 years earlier.

John: Right. That is well stated and is what I was referring to earlier.  It’s interesting because these are intelligent people who don’t seem to understand that they are not getting their money’s worth.  Even if you are getting a free education, there is still an opportunity cost.  Don’t get me wrong.  There are good professors who want to provide students with an education that they can use in the real world.  Not all professors push their students to major in something that can only be taught in a university.  Another thing I would like to address is the fact that when our parents went to college, it was a much different time.  When our parents went to college, they were able to work their way through it and possibly even graduate without any student loans.  The price of college has increased so much that this is no longer possible today.

Phil:  There was a time when a college degree really meant something.  When I got my MBA, I sat next to a brilliant classmate.  He was the kind of student who could deliver an impromptu answer that seemed as if he were reading from a teleprompter.  He had a ridiculous GMAT score, probably in the 700s.  What I asked him why he was pursuing an MBA, he told me that it was because a bachelor’s degree is what a high school diploma used to be.  In order to distinguish himself, he had to go get a masters degree.  There was a time in this country’s great history when a student could work his way through college and graduate without any student loan debt.  Who is to blame for this system that requires students to take out massive loans? Why was this not the case for previous generations?

John:  People who survived the Great Depression knew how to save and not spend beyond their limits.  They would not have been as supportive of taking on huge loads of debt.  No one would have taken on huge debts in order to pay for their child’s college education.  This is a major contributing factor.  People today are willing to take on a lot of debt without an assurance that there will be a good payoff.  This is a cultural shift.  It’s very similar to the housing bubble, Fannie Mae and Freddie Mac.  Just take a look at Sallie Mae. They give loans to students who think that they will eventually pay it back.  The difference is that a student loan can follow you for life even if you go bankrupt.  People seem to go to college, take out a loan and do very little investigation.  Students think this is a less risky system then starting a real business. They think that would be a better idea than to take up a trade or become their own boss.  Becoming a plumber is out of the question for them.  It is far more popular to go to college because that is considered the safe route.  It is the same philosophy that we see across the economy.  The conventional wisdom is go to college, put money in your 401k and don’t take any risks.  Even though we came from previous generations of Americans who crossed the Atlantic and battled the Native Americans, this generation doesn’t want to take on risks.  This is an aspect of our country that has really changed.  Any discussion on college and student loans needs to include a discussion on the Federal Reserve.  The Fed is the institution that makes all of this possible. Sallie Mae would not be able to provide student loans without the Fed constantly printing dollars for the Treasury to spend.  The Fed devalues the currency, which means you are able to purchase significantly less.  This means that it takes two incomes to run a household when one formerly sufficed.  Thanks to the Fed, Sallie Mae and the current generation, most people think that the only way to survive is to go to college.

Phil:  Suppose you would rather defy the conventional wisdom.  My favorite example these days is a guy named Parker on the television show Gold Rush.  I agree that most kids will not have an opportunity like he has, but Parker skipped college and his parents used his college savings to invest in is gold mining equipment.  At the age of 18, Parker is hiring people and learning the business from Alaskan mining veterans.  Why should a kid like that go to college when he can be making millions of dollars doing what he loves?  My advice to most people is if you are a C student, then you shouldn’t go to college.  Ignore your academic advisors. There are plenty of trades that could use your skills.  What advice do you give to people who are debating whether they should go to college?

John:  Hopefully an entrepreneurial attitude doesn’t begin when you’re 18 or 19.  This attitude should really be developed when you are a child who wants to start a lemonade stand, mow some lawns or work as an apprentice.  Your story proves that you do not have to sit in a classroom to learn how to dig gold.  You can learn from people who have done it for a living.  But I know what the elites will think.  They say things like, “He doesn’t have a college degree so he is not as smart as the rest of us. We have a piece of paper on the wall.”  This is the kind of haughty sentiment you get.  I am usually unimpressed with people who think this way.  It’s unfair to say that someone is not intelligent just because they didn’t go to college.  Unfortunately, people go to college because they want to do when everyone else did and they think they would be ashamed to work in a job that is labeled blue collar.  I work in the accounting department of a commercial real estate firm, but many times I interact with our folks on the engineering side.  These folks know how to do so many things that are valuable in the real world, and most millennials are clueless on how to perform any of these tasks!  Let’s face it. No one really remembers much from what they learned in college. Most of what I know about my field of accounting I learned at work.  It reminds me of a classmate I had at William and Mary.  He already had a 4.0 going into college. There was nothing they were going to teach him there that he could not learn on his own.  He went ahead and started a business advising people on how to play poker.  He was so good at math that he realized he could teach people how to do well at Texas Holdem.  Just like the college basketball player who realizes there’s nothing left for him in the NCAA, you too should realize that college is a waste of time if you have a better plan for yourself.  Take the time to better yourself getting another kind of education.  We seem to think that the only kind of education can be obtained while sitting at a desk.  You can always get it somewhere else.

Phil:  Sure. You can get an education listening to a podcast, watching YouTubes or plenty of other ways.  It’s never been a better time to educate yourself.  The only limitation is your curiosity.  You brought up a point that proponents of college love to bring up every time a debate on the worth of a college degree comes up.  Proponents like to remind everyone that people who go to college end up making more money over a lifetime. But they seem to confuse causation versus correlation.  You mentioned your friend who dropped out and started his own poker advising business.  The kind of person who goes to college may just be more talented, and that’s why they make more money.  The college had nothing to do with it!  People who decide to go to college may just be more talented than those who do not.  They may be more driven, and that’s why they are making more money.  You brought up another point that reminds me of a story my dad shared with me.  He lives out in West Virginia, and he had an electrician come over to install some solar panels. The electrician drove up to my dad’s house in a brand new Ford f-150, and he He went on to say that he owned his own home.  It turned out the young man was not even 30 years old!  He had no college debt. So this begs the question. Who is really living the American dream?  This young man may have only made $60,000 a year, but he is doing far better than the typical college graduate who is waiting tables, tending bar and has $30,000 in student loan debt.

John:  There is another factor to that story.  That young man is younger than I am. I am 29, and he already owns his own house.  That’s amazing to me because most of my friends are not even considering buying a house.  They are all renting.  They are all barely hanging on.  Many college graduates fall victim to the standard of living that is required to live in a big city.  That electrician probably lives out in the country, so he does not participate in all of these foolish things.  That is why he has more assets than most people who are even older who happen to have a college education.  Who has the better lifestyle?  It’s really about living where you want. I read an article recently in the Washington Post that said in order to live comfortably in the Washington DC area, I need about $125,000 a year.  That’s just to live comfortably.  That may not even be enough to buy a house if you want to live in DC proper.  So the conventional wisdom says first you have to go to college, then you need to go to where the jobs are located. This means moving to some major metropolitan area.  In Washington DC, all of the jobs are in some way related to government.  Politicians tell us that without these jobs our economy will not function.  They insist that we need all of these people circulating through the bureaucracy.  I am far more impressed with people who find a way to work outside of this game.  People need to learn that there is a problem with our economy and our college system.  If we can spread this message, then maybe people will begin to investigate it for themselves.

Phil:  John is there anything you would like to plug today? Do you have a new book coming out?

John: Possibly. The next time we meet I will discuss some of my side projects.

Phil:  Good. Well, John Kennedy, education expert, thank you for joining us on Kennedy Financial.

John: Thanks Phil. Have a good one.

Millennials are in Trouble

Millennials
Today, Jessica Dickler asked the question “Are millennials financially doomed?”   Unfortunately, the answer is yes.  Many millennials are underemployed, paying massive student loans and some are trying to support a parent at the same time.  As a result of the poor job market and burdensome financial obligations, many millennials are postponing major life decisions like marriage, kids and a house.

When it comes to retirement, millennials feel even more unprepared.  According to Dickler, “Nearly two-thirds of millennials surveyed by T. Rowe Price earlier this year said they believe they’re more likely to win the lottery than to receive any money from Social Security.”  Millennials know they can’t depend on the social security Ponzi scheme, but that doesn’t mean they’re actually saving for retirement.  According to a survey conducted by Bankrate in January of this year, Eighteen percent of adults between the ages of 18 and 29 report that they have too much student loan debt to consider saving for retirement.

When it comes to finding a job to pay for anything, millennials are not too optimistic.  A January 2015 Monster.com study found, “…the recession made it difficult for younger workers to find full-time work, and as a result, the majority of them are feeling pessimistic or uncertain about their employment future. Only 45 percent of young workers say they feel optimistic about their future employment. The report also found that young workers have been settling for contract, part-time or temporary work while they search for full-time jobs.”

Before you go to bed tonight, say a prayer for the millennials.  They’re going to have a tough time in the Greater Depression ahead.

 

 

The Economics of Welfare

Here’s an excerpt from my interview with Bernardo Bieler Romero in April.  It’s an excellent lesson to teach us what happens when socialism is carried out to its logical conclusion.  Click the photo above to see the interview.

Phil: Back to gold.  It’s a shame Venezuela is going to sell its gold at $1,200 an ounce.  Great Britain sold its gold for $250 an ounce, and I suspect they did it in order to pay for the promises made to their people.  I can assure that the gold price is going to rise and Venezuela will no longer have any gold.  What do you think?

Bernardo: Just as they are going into debt with China, Venezuela is also going to sell its gold to pay for populist or social programs.  The government tells the people that they have a right to them, but the message that the government is sending is that the Venezuelan people have rights but no obligationsThis government has taught Venezuelans that they have something to claim but nothing to offer.  People think they have the right to be fed but no obligation to work.  In fact, the worst way to earn money in Venezuela right now is by working for it.  For example, look at my case.  I am a civil engineer working in a consulting company.  If I worked for a engineer’s salary in Venezuela, it would not provide me with the purchasing power I need to buy the things I need for my family.  I would need a second job.  The government has fixed prices on items that everyone needs, so manufacturers lose money when they sell these items.  The smarter thing for me to would be to buy things for a fixed price and then find a way to sell them for a 400-500% markup on the black market.