Sushi Money

Economic buzzwords are all over the media these days.  How many ways can we describe what’s happening out there?   Business Week says the economy Looks a Lot Like Stagflation… a word we’re seeing more often.

A dark memory still haunts the U.S. economy: The Great Stagflation of 1973-80, a time defined by an uncomfortable mix of high inflation and stagnant growth. Well, everything old is new again, as they say: A number of recent economic reports point to an early 21st century return of the two-headed beast.

But the Fed Chairman disagrees with that view:

“I don’t anticipate stagflation. I don’t think we’re anywhere near the situation that prevailed in the 1970s,” Bernanke told the Senate banking committee as he testified for a second day in Congress on the central bank’s semiannual forecast.

Since when did economists become so popular anyway?  Well, probably since about 2005 when the housing market toppled over.  But it seems like every third financial article (or blog post!) has something to do with the economy these days, quoting the best (or most willing) of the economists available. Someone making one of the comments for the BW article above says, “I don’t understand why everybody quotes economists so much… they’re always wrong!” Well that may be true, but if you can quote other people being wrong it’s much better than making predictions and being wrong yourself! “Oh my… I can’t believe that guy predicted that… my goodness he was sooo wrong…!”

But the President believes we can avoid a recession.  Wall Street may disagree, but I think its important for him to show a constructive view, not out of any sense of political gain, but to shore up consumer confidence and provide stability in whatever way possible.  We don’t know if we’re really in a recession yet, although the U.S. economy slowed to a near stand-still in the fourth quarter of last year.

There’s too much skepticism these days for me, but I suppose that’s as much a part of the election cycle as it is the business cycle.    Do you know what the average length of a recession is, going back all the way to 1948?  It’s just under 12 months long, or about a year on average for a recession.  Yes we hear people say “This time it’s different…” and “Housing is a bigger factor.”  Could be.  I prefer to believe our nation is a lot more resilient than that.  We’ve been through some pretty tough times and will get through this one just fine.  The economy will just keep moving along, albeit a little slower.  Who knows maybe it’s even pretty healthy and will reform millions of too-big spenders and debtors.

For argument’s sake, if we assume we entered a recession in January, then by July we’ll be half-way through it already. Or maybe not.   Either way, recessions don’t last forever.  If the business cycle is contracting, then it’s going to pick up again in a matter of months.  In another year or two, it should be a whole different ball game.  Think I’ll go out and buy something- anybody for pizza?

If it seems like the price of everything at the grocery store keeps going up, you’re not alone. Wholesale inflation has risen at the fastest pace in decades, with a January surge of 7.5 percent over the past 12 months. When wholesale costs rise, so do the prices that consumers must pay of course, and the cost of food is a huge expense for most of us.

“Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.”

In recent years we’ve seen price fluctuations for all kinds of food products. Retail food purchases for consumers is primarily a local event… we shop at the corner store, and shake our head when we see prices for milk, eggs or cereal go up. In the past when I saw higher food prices I thought it was temporary. But over the last year it has become evident that the price of almost all the food we buy has continued to increase.

Here’s a CNBC screenshot from last week talking about essential food ingredient prices. I’m not sure of the data that the American Baker’s Association uses, but they’re saying we could be paying almost $5.00 for a loaf of bread next year!

And why is corn sweetener up there? Because hundreds of food producers use corn sweetener instead of sugar because it costs less. At least historically. Now corn is in high demand for a host of reasons, not the least of which is the production of ethanol.

Agricultural costs have increased tremendously throughout the world, both due to fuel costs as well as global demand. Within the U.S. a lots of folks are citing ethanol production as the primary reason for rising food prices, seeing the diversion and diminished supply of corn as a major factor. Ethanol is a huge factor affecting grain prices, but many experts see the greatest influences from global demand for food coupled with production swings and weather impacts such as drought.

But let’s look at ethanol because it’s a primary agent of influence within the U.S. agricultural sector. Based on USDA estimates, the percent of corn produced and used for ethanol production is going to double, rising from 14% to 30% over the next 10 years.

It’s like a storm of conflicting forces for which we have no easy answer. In effect, we are growing food to eat and to put in our cars! When farmers increase corn production they produce less of something else. In the U.S. that typically means alternating corn for soybeans, and if there’s less supply of one product, that usually results in greater demand and higher prices for it. Based on current global demand, the net effect is rising prices for all agricultural sectors. The USDA’s assessment of the impact of ethanol production presents clear evidence for the food price increases that we’ll see in the years ahead.

“While the ethanol boom can be expected to bring higher incomes to farmers and reduce government outlays for farm programs, it will also most likely mean higher food prices for consumers. Retail price increases for red meats, poultry, and eggs are projected to exceed the general inflation rate in 2008-10, as the livestock sector adjusts to higher feed costs. As a result, overall retail food prices would rise faster than the general inflation rate in those years.”

And in a global economy the economic ripples of food supply and demand have far-reaching consequences.

“Most important, a period of protracted higher food prices will be bad news for many of the world™s poorest people and its poorest economies. While the share of food in the consumption basket of a rich country such as the US is relatively low, at about 10 per cent, it averages about 30 per cent in China and more than 60 per cent in sub-Saharan Africa.”

Another USDA article examines how corn production and consumer food prices are related. Although it helps explain commodity price influences, after you read the article it doesn’t seem like the USDA really looks at what’s been going on for consumers, but the research provides some key insight. In the language of academic researchers, the USDA explains that retail competition moderates food price inflation and provides stability:

Overall, retail food prices have been relatively stable over the past 20 years, with prices increasing an average of 3.0 percent per year from 1987 through 2007, just below the overall rate of inflation. The main exception occurred when sharply higher farm prices increased retail prices 5.8 percent in 1989 and 1990. Since then, food price inflation has averaged just 2.5 percent per year.

Retail prices are a function of both consumer demand and the interaction between food manufacturers, distributors, and retailers, with each group having some pricing power in the supply chain.

Well, however stable and whatever the “pricing power” of the supply chain, those of us filling up the shopping cart just see prices going up! Keeping in mind that these charts are 6+ month old data, that inflation spike for the Food CPI has continued to increase throughout 2007 and 2008.

Here’s the heart of the issue:

When there are cost shocks in the food production system due to changes in the commodity or farm product market, most retailers respond by passing on a fraction of their higher costs to consumers.

That about sums it up. We’re going to continue to see food price increases over the next few years, if not the next decade. Agriculture will also be subsized less by the government in the future, which means the increasing costs of production and transportation will be passed on to consumers. Groceries and gas are simply going to stay a lot more expensive over time.

Hence, U.S. consumers are not happy right now. Between gas and food, there are too many increases to prices that the average family sees each day. It will be interesting to see how U.S. consumers change to meet these challenges over time.

What can we do for our own families and at home? I was joking the other day about having our own chickens for eggs, although that would be pretty cool if I didn’t have to shovel you-know-what. We’ve already got too many pets as it is. But we can grow and make more food at home! If you’ve had a garden before, you know it provides a lot of home-grown food for comparably little effort (although it does take effort!). A few packs of seeds or plant starts and some TLC, and you can have a bunch of fresh vegetables. Honestly, there are few things to rival the enjoyment of eating food you’ve grown and prepared yourself. Sustainable living is going to take on new meaning for a lot of people.

Personally we’ve begun to change how we shop for food, as well as prepare food at home. As we gear up for the spring and summer gardening season my wife has been baking whole-wheat bread at home. It’s really very good, and costs about half as much as quality store-bought bread (No, you can’t compete with plain squishy white bread by making it at home… unless you’re using paper- but then again it might provide about the same nutrition!). And yes, there is the time involved in preparation, but with a little planning it still saves money and is a lot more rewarding.

Does it really make a difference financially? Yes! It saves dollars and helps foster a mindset of controlling costs and producing more at home. Admittedly it’s hard to make a real dent in the overall finances without a concerted effort though, and that’s something a garden really helps with. Frugal shopping, buying in bulk, staying healthy… it all adds up to lower costs over the long run.

So we’re reading and learning about new ways to save and do more at home. What do you do at home that makes a difference in your financial lives?

For investors, lots of smart folks have jumped on the commodity bandwagon over the past year. Between natural resource and commodity stocks and funds, investors have made a small fortune over several years. I was big into natural resources and energy stocks from ‘02 to ‘05 and then pared back my holdings. That was a mistake for which I then proceeded to miss a lot of the continuing advance. I haven’t changed my core retirement portfolio of balanced stocks/bonds for the long-term but will look a little more closely at commodities going forward. Many professionals believe there is a lot more room for the commodity bull to run and the data at present backs up that view.

For an excellent assessment of our current economic challenges, Money and Markets provides a sobering assessment in Three Great Investment Opportunities and One Grave Danger For Your Portfolio. If that’s not enough to motivate someone to re-think investment goals and tuck away some extra savings, then I don’t know what is.

If you like this post, please consider subscribing to Sushi Money in a feedreader.

Or you can subscribe by entering your email address below. Thanks for visiting!

Where’s your financial focus lately? Are you concerned about the economy? The stock market? Gas or food prices? Housing? Okay, for most of us- yes, all of that and more. It’s been a tough year so far and not easy to stay focused or optimistic in terms of financial goals.

Certainly the challenges in our life, or our perceived challenges, can really influence our psychological approach to each day. For many of us that’s especially true when it comes to money. And that’s also why consumer sentiment is something that economists (and investors!) watch closely. One of the most important indexes used is the University of Michigan Consumer Sentiment Index based on the Survey of Consumers. This index samples a number of households each month and asks about current and expected economic conditions. The type of questions asked are fairly broad, ranging from the individual’s personal economic conditions to his/her impressions of the overall business climate in the nation. Wikipedia shows that the Index is published with the following objectives:

• Obtain near time assessment of consumer attitudes on business climate, personal finance, and spending.
• Create capability for understanding and forecasting changes in the national economy.
• Provide means to directly incorporate empirical measures of consumer expectations into models of spending and saving behavior.
• Forecast the economic expectations and the future spending behavior of the consumer.
• Judge the level of optimism/pessimism in the consumer™s mind.

Lots of research mumbo-jumbo, but very important data. Bottom line- the survey of consumers and index data presents a wealth of information that helps economists and investors ascertain public confidence in the economy. Which has a direct correlation on spending and the strength of business throughout the business cycle. It’s interesting to look back and see how consumer sentiment has compared with past recessions, as well as with another trend such as federal interest rates. Here’s a chart of the same going back 30 years:

It’s not hard to see why so many people believe we’re facing a recession. But how does this affect us personally and what does it have to do with optimism? Over the past year my psychological investing mentality has shifted from optimistic to very defensive/ conservative. Does that mean anything practically speaking? Not really. Simply that I’ve become a little more risk-averse, but have continued to invest over time while shifting a little more money to cash and balanced funds while considering strategic opportunities. Overall I’ve stayed in the market investing in a diversified, low cost portfolio for retirement.

Does the word “optimism” signal unwarranted emotion that should be absent from any decision or action we make when speaking of investing? Some might say so, and if you’re trading I can understand a need for calculated neutrality. But I think optimism, and our psychological approach to investing is just as significant as it is to living our lives each day. I think it can be part of a fundamental approach to finding opportunity among chaos. It may be an inappropriate word for the short-term when talking about the economy or a particular stock. But optimism has to more with a mindset for how we approach life each day.

œA pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.

Sir Winston Churchill

Admittedly it has been tough to stay optimistic at times over the past year. When most of us perceive challenge or pessimism we try to focus on more positive or constructive subjects. I think that’s a natural human trait, and very important in making constructive choices about the future. Equally however, when that happens it’s also important to make sure one is not simply ignoring the reality of a situation. There is a difference between a proactive choice to act positively for the future, versus wearing “blinders” without acknowledging risks or negative situations and doing something about it. In the face of so many negatives lately it has been a little tough find constructive choices.

But we can “stay the course” and maintain our goals. Sometimes that means doing nothing, and other times it means putting a little extra money aside for a rainy day and building up that emergency fund. It might even mean making a considerable investment in a key opportunity where others see nothing. For me it means “staying the course” with our goals. By “staying the course” I mean that I remain committed to saving and investing regularly via the 401(k), IRA, stocks and mutual funds. And no, I’m not a trader.

Many experts do predict continued economic weakness this year, but unless you think the financial world is coming to an end (and some do), stock valuations really have become very attractive throughout the market, with the long term price-to-earnings ratio as low as it’s been in decades.

With stocks of course, the short-term means very little. If we’re not in a bear market right now, we’re very close. But Walter Updegrave has written an excellent response to a question about the long term returns of stocks versus other asset classes. And he’s right- so much depends upon your measure of time for comparison of returns. Ten years isn’t enough in my book, especially considering that the long term historical average return from stocks is about 10% since the mid-1920’s. Personally I think 7% is a better number going forward. The comment trail on that post is excellent by the way, and “Jim” puts a rational face on our financial pursuits:

“There are several ways to make money. One adage is to buy low and sell high. There are lots of high quality stocks that are good deals right now. And if you add in the dividend, then you make money even when the stock is down. I™m taking those dividends and buying more stocks with good dividends. It just keeps compounding regardless if the stock is up or down. When the stock is down, I can buy more. The more things change, the more they stay the same. I remember the 90™s with the new economy. Everybody said that this time it was different. But it wasn™t . Same thing with the recession in the early 90™s. Everyone said it was different, but it wasn™t. Some recessions are more severe than others. But the economy goes in cycles. It always has, and it always will.” Posted By Jim

‘Ole Jim is right! As hard as it is to stay upbeat in the face of recession fears, housing challenges, a down stock market, etc it’s simply the cycle we’re in right now. We also see that some economic pundits are now worried about Stagflation? I haven’t heard that term in a long time. Some of these folks see a lot of parallels with the 1970’s. I remember as a kid waiting in the car in a long gas line for our turn at the pump. People didn’t drive nearly as much back then, but there were real fuel shortages across the nation. Can it get that bad today? Maybe so, but if we get to that point again we’re really in trouble.

We do face challenges, there’s no question about it. One area of the economy that has been crazy over the past year is food prices. When food prices strike the average consumer as excessive, then inflation has become a real factor in the economy. The other day I was in Costco and the price of eggs has almost doubled in the last month! What’s up with that? Something to do with grain and other commodity prices I’m sure. Nationally I’ve read the price of a dozen eggs has risen from an average of $1.19 to $1.92 per dozen over the past year. Costco sells a double pack of 36 total eggs that used to be $2.99. A good price, but not exceptional for Costco. Yet as of Tuesday this week those same 36 eggs cost $4.99! Holy omelet Batman! At this rate it may be time to buy a few chickens.

Of course as Laura Rowley discusses, everything is relative:

“Relativity makes us do weird things,” Dan Ariely of MIT says. “We might not think twice about paying $3,000 to upgrade to leather seats in a $25,000 car, but we won’t spend $3,000 on a new leather sofa — even though we might actually spend more time couch surfing than driving. We’ll add $200 to the cost of a $5,000 renovation project for upgrades, but also clip a 25¢ coupon for a $1 can of soup.”

Is it the same way with eggs? Sure. What about stocks? Absolutely… it’s just that I want my retirement to be relatively comfortable. To get there I need to stay on track, keep saving and make constructive choices. I think keeping an optimistic mindset helps us do that, especially among the uncertainty of the challenges we face.
I strongly believe in the long-term strength of our nation and economy. We set financial goals and do our best to minimize debt and keep saving money. We’re getting there, although sometimes it seems like one step forward and two steps back. But it’s all learning isn’t it?

“What is important is to keep learning, to enjoy challenge, and to tolerate ambiguity. In the end there are no certain answers.” Martina Horner

Maybe there are no certain answers to the questions we ask. But in uncertain times, we can choose to do something about our future! Best regards-

There may be some good news for consumers this year as Congress will weigh a new Credit Card Bill of Rights that will help provide more protection from arbitrary decisions by credit card companies. The bill was introduced by Rep. Carloyn Maloney from New York, and primarily focuses on requiring credit card companies to treat the agreement with consumers more like a contract and to provide greater notice for any changes in rates, fees or billing cycles. It’s hard to see how this bill could be opposed from a consumer viewpoint, and as we’ve mentioned before it’s something long overdue.

œIn recent years the playing field between credit card companies and credit cardholders has become very one-sided, Maloney said. œA credit card agreement is supposed to be a contract, but what good is a contract when only one party has the power to make decisions?

Many of the credit card companies have begun reforming certain practices, but the nickel and dime stuff continues unabated. I don’t think most banks and credit card companies really understand.

The banking industry says it is committed to consumer protection and responsible lending, yet it opposes many of the provisions in the bill. In a statement, Edward Yingling, president of the American Bankers Association, says he has œserious concerns that certain aspects of this legislation œwould have unintended consequences such as more expensive and less accessible credit.

The Consumer Federation of America cites the key provisions of the œCredit Card Bill of Rights Act would prohibit:

o Bait-and-switch interest rate and fee hikes for any or no reason at all during the life of the card;
o Assessing hidden and unfair interest rate charges by charging interest on balances already paid off;
o Unjustifiably maximizing interest charges by requiring consumers to pay off balances with lower
interest rates before those with higher rates;
o Charging late fees when consumers mail their payments seven days in advance of the due date; and
o Applying certain unfair interest rate hikes retroactively to balances incurred under the old rate.

œWe™re seeing a groundswell of consumer outrage about credit card practices, says Jeannine Kenney, senior policy analyst at Consumers Union. œPeople are fed up.

Well, that’s how reform takes place right? After enough people demand change, the legislators usually come around. Will this affect the bottom line for banks and financial institutions that issue credit cards? Maybe, but there will always be fees, charges and money to be made in business. Personally I’ll take a lesser dividend cut if the credit card agreements were easier to understand and little more consumer friendly. It should be pretty simple: Agree to a card, rate and billing cycle. And don’t change anything unless the consumer defaults on payments. And if something is going to change? Then let us know in plain english.

For specific details, you can review the .pdf press release from the Consumer Federation of America (3-page pdf).

Okay, I’ll admit it- my wallet is usually a mess. It’s filled with coupons, receipts, notes and sometimes even money. In no particular order of course. I wasn’t always this way however. I think when I was younger my wallet was much more organized. Probably because I didn’t have very much money in it.

But according to Bankrate.com I am most like the Unruly Receipts money personality:

Unruly receipts — Your wallet is stuffed with receipts, but there’s no sense of order to them and you never really do anything with them. This is the person who is trying, says Thakor.

“You want to know how to keep tabs on your money — otherwise you would have thrown the receipts away. But you just can’t take it to the next step to get them all organized and do something with them. You are like the person that buys all the latest exercise equipment but doesn’t get around to using it,” she says.

Hmmm. Well, I’ll take Unruly Receipts over the Chaotic Cash or Running on Empty personalities. And truth-be-told, I’m never going to be the File Folder Funds type where every single receipt or financial item is meticulously organized, with money in the wallet organized by bill type. More power to those of you who are so organized, but I find it hard to find the time to do that every day. I probably go through everything a couple times a month, and I do organize receipts in a shoe box to save for taxes each year. I like the part above that says “This is the person who is trying…” That’s me alright, always trying!

But I think I also have a split personality when it comes to my wallet! How? Well, my regular wallet doesn’t hold credit cards in it, just the normal bills and receipts, etc.. For the fancy stuff I have a second wallet. “What?!” I can hear you say. Well, it’s true. I use one wallet for the paper stuff, and things I can “afford” to lose. But I keep a separate little credit card wallet that I hold in my front pants pocket. Why do I do this? Glad you asked… primarily because I like to have all the ID, credit cards and other important plastic cards in one safe place. But also because as I’ve traveled around the world for many years, I found it best when visiting foreign cities to safeguard important belongings from pickpockets, etc. Now besides keeping a little extra money in my shoe (or other strategic place), I would keep the important cards and money in my front pants pocket. It’s harder for someone to try and “pick” your pocket when it’s up front. So that’s it… a messy wallet, and an extra credit card wallet. Just a habit I’ve become used to.

So what’s your money personality? Are you well organized? By the way, I’m really glad I don’t have a purse, and I don’t envy you ladies. That’s just more room to accumulate stuff. Who knows how many of those I’d have! Oh- and sometimes I actually do use my exercise equipment.

Lots of ways to look at the challenges out there. If you’re curious how the tax rebate plan will affect you, the WSJ provides The Skinny on the Stimulus Plan. Also an interesting look at the most bubbly real estate markets across the U.S.

Lenders are also taking a new look at how to work with consumers.
But even with all the challenges, Anya has it right with how a down market brings both reality and opportunity to the table.

Emotions and frustration are still running high among eBay sellers over changes the company is making. The situation has received a lot of attention from both the blog community and now the major media sites. When U.S. News starts showing boycotting sellers the alternatives to eBay, it makes you wonder if eBay really understands how concerned their community is. Today eBay reacted to some of the anger by cutting fees for some merchants, but not really responding to seller concerns.

Ms. Norrington said the seller™s concerns are simply less important that counteracting the widespread view that shipping costs on eBay are often sky high.

œLet me be clear: our goal is to improve the buyer experience, she wrote. œWe will closely monitor the data. If buyer trust in the marketplace is not improving as intended within the next six months, we will take action.

What does that mean? It really seems like eBay is making a bad situation worse, and acting like a corporate bully. Why on earth would they be so dismissive of seller concerns? Because they can I suppose. Nobody really likes arrogant corporate or political types who forget “the little guy.” And eBay’s sellers are “the little guy” who happen to be their strongest assets. The little guy is now trying to boycott.

EBay isn’t too worried about the possibility of a seller’s strike, according to spokesman Usher Lieberman. He said the company isn’t considering altering or postponing its policies due to the outcry.

“We’ve had hundreds of threats in the past, and they don’t seem to have had much impact,” he said.

Has eBay forgotten the long-held secret about auctions? A lot of buyers are also either sellers, or would-be sellers. Countless millions of eBay’s buyers also sell stuff, or secretly want to sell stuff. That’s the eBay magic… “Wow! Maybe I can sell my stuff too? Maybe I should try it… Look what I found! This looks easy… I wonder if…”

Lately its been more like “Why bother?”

I wonder in a few years if the advertising slogans from eBay will say, “We want you back!”

* Full Disclosure:

** Update: Long position in eBay was closed in early 2008 after company dynamics and policies changed. Our current view is neutral yet may change again in the future if the company fundamentals deteriorate further, or are convincing enough to warrant further investment.**