The Big Short: Have we learned our lesson?

The Big Short

I saw The Big Short the day after Christmas, and I can say without reservation that it’s the best film I’ve seen in awhile.  The story is accurate, the acting is superb and complicated financial information is explained so even your grandmother could understand it.  If I had to come up with a single complaint, I’d say the film didn’t blame the Federal Reserve for the housing bubble.  But Michael Lewis didn’t suggest that in his book either.

I went to the 10am matinee at a local cinema, so I joined only two other people in the movie theater.  I found myself gesticulating at the movie screen several times since the environment felt like my own private viewing.  I wasn’t expressing outrage over what has happened in the past because we already know how artificially low interest rates, no income/no job (ninja) loans and fraudulent appraisals wrecked the U.S. housing market.  What infuriates me is that we are doing all of the same things again!

The house flipping shows are back in full force on HGTV with programs like Property Virgins and Flip or FlopInterest only loans are back and other subprime loans have returned while banks try to scrape the bottom of the applicant barrel.  Armando Montelongo is back on infomercials and he is ready to teach you how to become a house flipping millionaire just like him! And I still hear people saying that buying a house is a “good investment.” As Mark Baum (played by Steve Carell) says in the film, “We live in an era of fraud.”

The fraud continues today, and there is no one with the courage to stop it.  Since the housing bubble, our public servants have become feckless matadors allowing bulls of deceit to distort our financial markets with impunity.  Former Attorney General Eric Holder admitted as much in 2013 stating, “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” Holder now works for Covington & Burling where he earns millions defending Wall Street firms.

Michael Blurry, played by Christian Bale in the film, now says that another crisis is looming thanks to the Federal Reserve’s money printing and ZIRP.  You don’t have to be a billionaire genius to know that, but his statements surely lends credibility to those of us who have been saying this for some time now.  The truth is that America has not learned its lesson, so we are commencing another financial crisis worse than 2008.  The collapse will gain momentum in 2016, and the worst of it should be revealed no later than 2018.  By the end of this decade, Michael Lewis will need to write another book, but hopefully he will get the real culprit right this time.

An Open Letter to the CFP® Board

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August 17, 2015
Dear CFP® BOD,

I just completed the survey, but it did not allow me to add any final thoughts.  I wanted to take a moment to share them with you.

I failed the November 2014 CFP® exam after studying for 150 hours and drilling 3,000 Kaplan questions 2-3 times each.  This is the study method that I used to be successful on the CPA exam, the CFE exam and my MBA courses.  I became even more discouraged when I discovered that I scored “medium” in every category.  Medium is defined as “around” the minimally accepted passing score.  This lack of transparency makes it difficult to muster the energy to take the exam again.

One of the reasons I think I failed is due to the fact that I don’t work in the financial services industry.  For example, I recall one of the questions asking about a 1099-R form.  This is probably a softball question for anyone working in financial services, but I answered it incorrectly because I never came across this form during my review course.  I am sure that I missed many softball questions because I’m a fraud investigator rather than a financial planner.

If the CFP® Board is interested in making the CFP® brand more appealing, then I have a few suggestions:

1.  Price-Reduce the price of the exam, especially for those taking it more than once.
2.  Experience-Allow the work experience to be more broad and accumulated over a longer period of time.
3.  Transparency-The CPA and CFE exams provide numerical scores, which allow examinees who fail to concentrate their study efforts in weaker areas.
4.  Exam-Test the ability of the examinee to identify issues and offer solutions rather than remember form names, code numbers, etc.

I may pursue the CFP® mark again when I retire in 2029.


Philip Kennedy

The Fed & The Challenger

Scott Nations bet.001After the failure to launch in September, I took to Twitter to challenge Fed faithful and Peter Schiff naysayer Scott Nations.  Schiff and Nations got into a heated argument in July over whether the Fed would raise interest rates in 2015.  Nations found it absurd that Schiff could suggest that not only would the Fed not raise rates, but QE4 was still on the table.  Nations asserted that Schiff made “outlandish predictions.”

I reminded Nations that viewers like me had not forgotten what he said, and there would be no rate hike in 2015.  To prove my certainty, I bet him one ounce American Silver Eagle.  Nations, not understanding the value of real money, agreed instead to make a $50 donation to the winner’s favorite charity.  Naturally, I selected a 501(c)(3) called the Ludwig Von Mises Institute.

When December arrived, the Fed shocked me by actually doing the right thing for the first time in nine years and raising the funds rate a quarter point.  But Janet Yellen instructed the public “I think it’s important not to overblow the significance of this first move.  It’s only 25 basis points. Monetary policy remains accommodative.”  Although I lost my public Twitter battle with Nations, it became clear that the Fed and Yellen were not proud or confident in their first step.

With the dawn of 2016, the Fed will need to add more rate hikes to prove that the U.S. economy can withdraw from its long-term artificial monetary stimulus.  I believe that after such a prolonged binge on this financial heroine that our zombie financial markets will come crashing back down to Earth before ever reaching their destination.  Like the Challenger space shuttle tragedy, the liftoff for Yellen and the Fed may have received applause and awe, but these sentiments will be turning to shock when their monetary policy blows up in mid-flight.

It takes character to admit when one is wrong, and I am happy to do that here.  Now that the Fed has finally made a move, the world will get to witness the full consequence of Keynesian monetary policy.  By the Fed’s second or third meeting of 2016, it should be clear that the U.S. economy can’t handle increasing rates anymore than the Challenger could handle frozen O-rings.  My $50 bet with Scott Nations was a small price to pay for admission to this upcoming spectacle.

Renting: The New American Dream

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Janet Yellen thinks the economy is doing so well that next week she may raise interest rates for the first time in nine years.  But many of America’s renters would probably beg to differ.  Twenty-five percent of Americans spend more than 50% of their take home pay on rent.  This amounts to 11.4 million people who are simply working to pay their landlord’s mortgage.  With less than 50% of their take home available, many of these rent burdened folks have little to contribute toward an emergency fund or retirement account.

What’s more frightening is that over half of all renters are over the age of 40!  The number of Americans now renting is at a 30 year high while the homeownership rate currently sits at a 48 year low.  Many of these renters are unemployed or underemployed with insurmountable credit card, student loan and vehicle loan debt.  It’s now clear to everyone that the National Association of Realtors dream of homeownership for all Americans is dead.  Well, at least temporarily.

The sustainability of this system is as likely as Bernie Madoff’s investment fraud.  Eventually, market forces will reveal that home prices are too high for real American incomes.  In many markets, home prices will need to fall by 40-50% to reasonably turn renters into homeowners again, and I can prove it.  Currently, the median priced American home is around $280,00, but the median income is only about $55,000.  This means that a typical house is about 5 times a typical income, which is 2-3 times greater for you than it was for your grandparents (1.5-2 times income).

Let’s say that you are lucky enough to have the $56,000 (20%) down payment for a $280,000 house.  Your monthly mortgage payment will be approximatley $1,400.  You earn $2,300 a pay day 24 times a year, but it’s only about $1,700 after Uncle Sam steals his “fair share.”  This typical American will need to spend over 40% of his take home pay on their mortgage, and that’s why Americans are renting.  Most of them can’t even come up with $500 for an emergency, let alone a 20% down payment.  And even if they could, 40% of their take home pay doesn’t leave room to make burdensome debt payments.

In order for our median income renter to be able to afford a home, he should only have to spend 25% or about $850 a month.  To accomplish this at today’s rates (3.75%), the home would have to cost about $165,000 or 40% less than it does now.  This will still be three times greater than the median income, but that will be a much needed improvement to what we have now.  A $165,000 home price would have a down payment of $33,000, which is $23,000 lower (40% off) than it is now.

Renters will become owners again, but not until the U.S. experiences another inevitable correction like we did in 2008.

Binghamton: A Case Study in Economics


After accepting a transfer in the late 1970’s, my Dad’s father moved his wife and eight children to Binghamton, N.Y.  My grandfather’s decision to take this transfer is probably the reason that I am alive to write this post.  It is in Binghamton where my father met my mother, who grew up just outside of town.  The couple eventually moved to Washington, D.C. to seek better job opportunities, but our extended family still lives in this upstate New York city.  Because we travel up to my mother’s hometown every couple of years, the slow deterioration in this once typical American town is readily apparent.  But it wasn’t always this way.

In the mid-19th century  the Endicott-Johnson Shoe Corporation employed more than 20,000 people who produced more than 52 million pairs of shoes every year.  Broome County was also home to one America’s first major producers of photography film and equipment. Ansco preceded Kodak in the film industry and had been a fixture in Binghamton since 1901 when the company opened its headquarters there.  By April 2000, Brandenburg Industrial Service Co. began demolishing the former Ansco facilities to clear the land for development.  The Binghamton visitor center now holds one of the few reminders that Ansco ever provided jobs there.

Many of the problems in Binghamton started with the loss of manufacturing jobs in the late 20th century.  According to the New York State Department of Labor, about 34,100 people in the Binghamton Metropolitan Statistical Area held manufacturing jobs in 1990, but that number fell to about 12,000 by 2014.  One of the companies that must be addressed in Binghamton’s slow demise is International Business Machines (IBM).

In this millennium, IBM has continued to suffer with the creative destruction occurring in the information technology sector.  According to Binghamton University professor Clifford Kern, “As IBM gradually morphed from a computer maker into an IT services giant in the mid-2000’s, most of the company’s 15,000 local workers lost their jobs.”  The loss of these technology jobs have helped drive Binghamton unemployment up to 9.6%, or two points above the national average.  With little to offer newcomers, Kern said, “It’s (Binghamton) not attracting people for the quality of life nor for the weather.”

People naturally have an emotional attachment to their surroundings, and they are usually quick to defend their hometown when anyone suggests that it is no longer a great place to live.  (I’ve witnessed this first hand whenever I suggest that my hometown of Frederick and the state of Maryland in general is not the best place to raise a family.)  But even Binghamton residents are starting to see that this manufacturing powerhouse will not be coming back anytime soon.  According to a 2012 Gallup pole, residents of Binghamton are the least likely (27.8%) to say their city or area is getting better as a place to live.

Binghamton is a case study in economics that teaches a valuable lesson.  Once manufacturing jobs start to leave an economy, then they are difficult if not impossible to get back.  The United States has lost most of its manufacturing base in recent decades, and the situation portends austere conditions for much of the country.  Like my parents did in the late 1970s, Americans will eventually have to move their families to where the jobs are from where the jobs are not.