MONEY The Economy

A Key Fed Official Says the Job Market is Just Fine. But is He Right?

Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas
Richard Fisher, president of the Federal Reserve Bank of Dallas. Jose Luis Magana—Reuters/Corbis

With a little help from Jonathan Swift, Shakespeare, and World War II, Dallas Fed President Richard Fisher makes the case for why interest rates need to rise soon.

In between references to Shakespeare, beer goggles and Wild Turkey, Dallas Federal Reserve Bank President Richard Fisher— a member of the Federal Open Market Committee that sets the nation’s interest-rate policy— expressed concern Wednesday about the risks caused by the Fed’s ongoing stimulative policies.

Thanks to a dramatically improving jobs picture, according to Fisher, the Fed should not only cut off its bond-purchasing program (known as “QE3″) by October, but the central bank should also shrink its portfolio of assets and begin raising interest rates early next year or sooner.

Whether or not the economy can withstand monetary tightening — fewer jobs means fewer people able to buy stuff — is open for debate. The real question, though, is if the jobs picture is really that strong?

First some context.

In his colorful speech, Fisher, one of the Fed’s leading “inflation hawks,” reiterated his belief that the Fed’s rapidly escalating balance sheet (now at approximately $4.4 trillion) in combination with a near-zero federal funds rate has led to investors having “beer goggles.” (As Fisher explains it, “this phenomenon occurs when alcohol renders alluring what might otherwise appear less clever or attractive.”) This is what he says is happening with stocks and bonds, which are both relatively expensive.

To make his point Fischer quoted Shakespeare’s Portia in Merchant of Venice: “O love be moderate, allay thy ecstasy. In measure rain thy joy. Scant this excess. I feel too much thy blessing. Make it less. For fear I surfeit.”

Portia’s adjectives (joy, ecstasy and excess) describe “the current status of the credit, equity and other trading markets that have felt the blessing of near-zero cost of funds and the abundant rain of money made possible by the Fed and other central banks that have followed in our footsteps,” Fisher said.

Of course, the Federal Reserve hasn’t bought trillions of dollars of debt, and cut the main interest rate to nothing, for no reason. There was something called, you know, the Great Recession — the once-in-a-lifetime cataclysmic economic event from which the country is still recovering.

But, said Fisher, things are improving, especially in the labor market. Not only did businesses add almost 300,000 employees last month, but there are more job openings, workers are quitting more often and wages are rising. Is he right?

Let’s check out some graphs:

Job openings:

ycharts_chart-1

Fisher is right that job openings “are trending sharply higher.” This time last year, there were a little less than 3.9 million job openings. Right now there are more than 4.6 million – an 18% increase.

“Quits”:

quits

The healthier an economy, the higher the number of employees who quit their job to either find another or start a new business. Therefore a higher so-called quits rate, means a healthier labor market.

Like job openings, the number of quits has been rising since bottoming out during the recession. The major difference though is that the number of job openings has almost reached pre-recession levels, while quits has not.

Wages:

wage growth
BLS

Fisher admits that wages aren’t growing “dramatically.” Nevertheless, he cites the Current Population Survey and the most recent National Federation of Independent Business survey to show that wages are on the rise.

However, wage data from the Bureau of Labor Statistics shows that Americans in the private sector are earning $24.45 an hour, only up 1.9% from last year.

But these three metrics aren’t the only metrics to gauge the health of the labor market.

Long-Term Unemployed:

l-t unemployment
BLS

Before the recession, about 1.3 million workers were without a job for longer than 27 weeks. Today, that number is slightly more than 3 million. While that’s significantly better than the post-recession high of 6.8 million in August 2010, there are still a lot of workers who’ve been without a job for a long time.

“Long-term unemployment is still a significant source of slack in the economy and is accounting for a historically large share of the total unemployment rate,” says Wells Fargo Securities economist Sarah House.

Broader unemployment:

l-t2
BLS

And while the unemployment rate may signify the economy is moving closer to full employment, the picture is less sanguine if you look at a broader unemployment rate that takes into account the underemployed (part-time workers who want to work full-time) and discouraged workers. Before the recession that number hovered a little over 8%. It’s now 12.1%. And while it’s trending down, it’s not coming down fast enough. At least according to recent testimony by Federal Reserve Chair Janet Yellen.

Conventional wisdom says inflation will come when wages really start to rise. Some, like Fisher, think we’re getting really close to that point. But if you take into account wage data from the BLS and look at the millions of Americans who aren’t working to their full capacity, it’s not hard to see how tightening monetary policy might make life harder on lots of workers.

MONEY stocks

WATCH: What’s the Point of Investing?

In this installment of Tips from the Pros, financial advisers explain why you need to invest at all.

MONEY stocks

WATCH: The Problem With Investing in Penny Stocks Like CYNK

MONEY's Pat Regnier explains what's behind the phenomenon of the stock that rose 25,000% in days, and why you should beware.

+ READ ARTICLE
TIME stocks

Why a Portuguese Bank’s Problem Is Costing You Money

Explaining the Banco Espirito Santo SA problem

You don’t have money deposited at Banco Espirito Santo SA. You probably don’t own its bonds, or its stock. Or stock in Espírito Santo Financial Group SA, which apparently controls the bank or in Espirito Santo International SA, the Luxembourg holding company that issued the now-faltering commercial paper that is at the center of all this. You probably have never even heard of Banco Espirito Santo, which has been described as one of Portugal’s leading financial institutions, which would be significant if Portugal’s economy was significant. But that nation’s GDP of $220 billion makes it bit player in the European zone. Even Greece is bigger.

Still, troubles at Banco Espirito Santo have spread to other segments of the European banking system and then reverberated across the pond to Wall Street, sending the Dow down 180 points in Thursday morning trading. So even if you owned the bluest of blue chip stock with no exposure to European banking, you still lost money.

How does that work? It’s just another reminder that everything financial in the world is connected in one way or the other. So a seemingly containable problem in a Portuguese bank can quickly find a way into your pocketbook. “The event has hit European financials like a torpedo and has revived investors’ darkest nightmares about Europe,” the Financial Times quoted one equity strategist as saying.

The issue for investors is to decide whether this is a one-off problem or a hint of bigger troubles in Europe, whose economic recovery has lagged that of the U.S. While some are looking for other evidence, others aren’t waiting to find out. They headed for the exits, pushing gold higher and the yield on ultra-secure German bonds lower. Portugal’s stock market took a hit as Banco Espirito Santo’s shares tumbled 17%. Shares of Spanish and Italian banks fell sharply, too. Spain and Italy are bigger economies than Portugal but they’ve had similar problems. So bond yields on Italian and Spanish debt rose and Greece, not surprisingly, finds the market for its own bonds shrinking.

And if a trader for an institution held a long position on Spanish and Italian debt, say, he might forced to sell some other assets to cover that position. Those other assets might be U.S. stocks.

It’s a Portuguese problem, but it’s now your loss too.

MONEY Portfolios

For $50 You Can Push For More Female CEOs — But Is It a Good Investment?

Indra Nooyi, chairman and chief executive officer of PepsiCo.
Indra Nooyi, chairman and chief executive officer of PepsiCo. Bloomberg—Bloomberg via Getty Images

Two new products let you invest in companies led by female executives. Whether this is a good idea depends on what you hope to achieve.

On Thursday, Barclays is launching a new index and exchange-traded note (WIL) that lets retail investors buy shares — at $50 a pop — of a basket of large U.S. companies led by women, including PepsiCo, IBM, and Xerox. This should be exciting news for anyone disappointed by the lack of women in top corporate roles.

After all, female CEOs still make up less than 5% of Fortune 500 chiefs and less than 17% of board members — despite earning 44% of master’s degrees in business and management.

The new ETN is not the only tool of its kind: This past June, former Bank of America executive Sallie Krawcheck opened an index fund tracking global companies with female leadership — and online brokerage Motif Investing currently offers a custom portfolio of shares in women-led companies.

The big question is whether this type of socially-conscious investing is valuable — either to investors or to the goal of increasing female corporate leadership. Is it wise to let your conscience dictate how you manage your savings? And assuming you care about gender representation in the corporate world, is there any evidence that these investments will actually lead to more diversity?

Here’s what experts and research suggest:

Getting better-than-average returns shouldn’t be your motivation. Beyond the promise of effecting social change, the Barclays and Pax indexes are marketed with the suggestion that woman-led companies tend to do better than peers. It’s true that some evidence shows businesses can benefit from female leadership, with correlations between more women in top positions and higher returns on equity, lower volatility, and market-beating returns.

But correlation isn’t causation, and other research suggests that when businesses appoint female leadership, it may be a sign that crisis is brewing — the so-called “glass cliff.” Yet another study finds that limiting your investments to socially-responsible companies comes with costs.

Taken together, the pros and cons of conscience-based investing seem generally to cancel each other out. “Our research shows socially responsible investments do no better or worse than the broader stock market,” says Morningstar fund analyst Robert Goldsborough. “Over time the ups and downs tend to even out.”

As always, fees should be a consideration. Even if the underlying companies in a fund are good investments, high fees can eat away at your returns. Krawcheck’s Pax Ellevate Global Women’s fund charges 0.99% — far more than the 0.30% fee for the Vanguard Total World Stock Index (VTWSX). Investing only in U.S. companies, the new Barclays ETN is cheaper, with 0.45% in expenses, though the comparable Vanguard S&P 500 ETF (VOO) charges only 0.05% — a difference that can add up over time:

image-29
Note: Projections based on current expenses and a $10,000 investment.

If supporting women is very important to you, you might consider investing in a broad, cheap index and using the money you saved on fees to invest directly in the best female-led companies — or you could simply donate to a non-profit supporting women’s causes.

If you still love this idea, that’s okay — just limit your exposure. There is an argument that supporting female leadership through investments could be more powerful than making a donation to a non-profit. The hope is that if enough investor cash flows to businesses led by women, “companies will take notice” and make more efforts to advance women in top positions, says Sue Meirs, Barclays COO for Equity and Funds Structured Markets Sales in the Americas. If investing in one of these indexes feels like the best way to support top-down gender diversity — and worth the cost — you could do worse than these industry-diversified offerings. “Investing as a social statement can be a fine thing,” says financial planner Sheryl Garrett, “though you don’t want to put all of your money toward a token investment.” Garrett suggests limiting your exposure to 10% of your overall portfolio.

TIME Economy

Stocks Fall for a Second Day; Nasdaq Slumps

(NEW YORK) — U.S. stocks declined in afternoon trading Tuesday as investors waited for corporate earnings reports due out this week. Technology and small companies fell sharply. The Dow Jones industrial average dropped below 17,000 from the open after crossing that threshold last week on news that employers have been hiring more.

KEEPING SCORE: The Dow fell 88 points, or 0.5 percent, to 16,935 as of 2:21 p.m. Eastern time. The Standard & Poor’s 500 fell 10 points, or 0.5 percent, to 1,967.

The tech-heavy Nasdaq composite fell 50 points to 4,401, a loss of 1.1 percent. It hasn’t fallen that much in two months. Pandora Media, a music streaming service, fell 6 percent. Two other tech stars, Facebook and Netflix, fell more than 3 percent each.

BUY SAFETY, SELL RISK: Utilities rose 0.7 percent, the only sector of the 10 in the S&P 500 that rose. Telecommunications stocks fell the most, 1.3 percent. The Russell 2000, which tracks small-company stocks, fell 12 points, or 1 percent, to 1,174.

WATCH THOSE EARNINGS: With major stock indexes near record highs, investors will be scrutinizing second-quarter earnings reports for evidence the run-ups have been justified.

Financial analysts expect earnings per share for the S&P 500 rose 6.6 percent from a year earlier, according to S&P Capital IQ, a research firm. That is about double the increase in the first quarter. They expect earnings growth to accelerate for the rest of the year, topping 11 percent in the fourth quarter.

The earnings reporting season unofficially kicks off after the close of U.S. stock markets Tuesday when aluminum producer Alcoa reports its results. Wells Fargo, the No. 1 home mortgage lender in the U.S., reports Friday.

BULL MARKET PETERING OUT? Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, doesn’t think so. But he’s not surprised investors are jittery and selling a bit. He notes that the S&P 500 has risen for 1,940 days since its 2009 low, the fourth longest bull market since World War II.

“The longer it gets out of line with historical patterns,” he says, “the closer we get to fizzling out.”

DEAL SWEETENER: Drugmaker AbbVie fell $1.60, or 2.8 percent, to $55.80 after news that it raised its offer to buy another drug company, Shire. The target, known for its rare-disease drugs, has rejected three AbbVie offers.

EUROPE: France’s CAC-40 fell 1.4 percent and Germany’s DAX fell 1.3 percent. Britain’s FTSE 100 dropped 1.2 percent.

BONDS AND OIL: U.S. government bond prices rose. The yield on the 10-year Treasury note fell to 2.57 percent from 2.61 percent late Monday. In energy markets, U.S. crude for August delivery fell 45 cents to $103.09.

MONEY stocks

7 Marijuana Stocks for a Buzzworthy (But Risky) Pot-folio

Agricultural Facility Recent Planting, Medical Marijuana Inc.

With marijuana legalization riding high, investors are looking for ways to play the trend. So far, though, even the biggest companies in this green rush have yet to turn a profit.

Earlier today, pot went on sale legally in Washington state for the first time ever, following in the footsteps of Colorado. A day earlier, New York became the 23rd state to permit the use of medical marijuana.

Throughout the country, marijuana legalization is going ganja-buster — leading many to wonder how they can profit from this trend.

Several private equity funds recently launched to invest in marijuana-related companies and startups, including one led by none other than the bobo bible, High Times magazine.

But what about retail investors? You’d think that the mutual fund and exchange-traded fund industries would have jumped on this green rush already. After all, there are specialty ETFs that let investors bet on such niche trends as fertilizer, fishing, and even water. But so far such an investment vehicle remains a pipe dream.

In the absence of a simple, off-the-shelf fund, investors can turn to individual equities. But be careful: Many stocks that are trying to ride the Pineapple Express are tiny micro-cap companies or penny stocks that are quite volatile and risky. Moreover, regulators have begun warning investors to watch out for pot-related “pump-and-dump” schemes, in which speculators talk up a stock and then sell before their inflated projections lose air.

In the Ganja universe, here are some of the biggest companies, based on market value, with their strategies and risks highlighted. Keep in mind that all of these “big” marijuana stocks are actually shares of tiny, still-profit-less companies.

GW Pharmaceuticals (Ticker: GWPH; share price: $92.60; market value: $1.4 billion)
Strategy: Cannabis-based pharmaceuticals. The company’s Sativex is already being used in several countries to treat spasticity related to multiple sclerosis. GW is also working on a treatment for severe childhood epilepsy based on cannabis extract.
YTD Performance: +132.3%
2013 Performance: N/A
2012 Performance: N/A
Profitable: No
Valuation: Price/sales ratio: 29.0 (S&P 500′s P/S ratio: 1.8)

Medbox (MDBX; $17.75; $537 million)
Strategy: Dispensary services. The company manufacturers self-service kiosks that dispense
medicines including marijuana.
YTD Performance: —0.3%
2013 Performance: —70.1%
2012 Performance: +4,819.4%
Profitable: No
Valuation: Price/sales ratio: 77.5

Cannavest (CANV; $11.37 $381 million)
Strategy: Makes and markets cannabis related products, including hemp oil.
YTD Performance: —60.0%
2013 Performance: +470.0%
2012 Performance: +150.0%
Profitable: No
Valuation: Price/sales ratio: 44.8

Advanced Cannabis Solutions (CANN; $7.50; $101 million)
Strategy: Leases growing space and related facilities to licensed marijuana business operators.
YTD Performance: +138.5%
2013 Performance: +221.8%
2012 Performance: —99.0%
Profitable: No
Valuation: Price/sales ratio: N/A

Medical Marijuana (MJNA; $0.20; $105 million)
Strategy: A holding company with diversified businesses ranging from consumer products to services, including security and surveillance for cannabis-related businesses.
YTD Performance: +27.1%
2013 Performance: +53.5%
2012 Performance: +512.1%
Profitable: No
Valuation: Price/sales ratio: N/A

GrowLife (PHOT; $0.10; $81 million)
Strategy: A marijuana equipment maker that sells hydroponic gardening gear.
YTD Performance: —27.8%
2013 Performance: +308.1%
2012 Performance: —75.3%
Profitable: No
Valuation: Price/sales ratio: 11.4

Cannabis Sativa (CBDS; $6.40; $75 million)
Strategy: The former sun-tanning company is pushing into the marijuana industry, producing cannabis-based oils and edibles. Its new CEO is Gary Johnson, the former Libertarian Party presidential candidate and a two-term governor of New Mexico.
YTD Performance: +990.0%
2013 Performance: —11.0%
2012 Performance: +12.4%
Profitable: No
Valuation: Price/sales ratio: 1000.0

MONEY Hit Peak Performance

The Stock Market Correction That Nobody Noticed

201407_INV_1
Jason Hindley

All-time highs for the S&P 500 are masking soft spots on this peachy market. Here's how to keep your portfolio safe from decay.

From a certain angle the stock market sure looks sweet. Both the S&P 500 index and the Dow Jones industrial average are setting new record highs seemingly on a daily basis. The number of winning stocks also continues to swamp the losers, historically a sign of strength for equities. Yet if you look at the market from a slightly different vantage point, you’ll start to see blemishes. During one stretch from early March to mid-May, for instance, the Russell 2000 index of small-company stocks slid more than 9%, while the fastest-growing companies in that part of the market slumped nearly 13%. Plus, among the worst performers were last year’s biggest darlings: biotech and social media stocks. “We’re in a stealth correction,” says Craig Johnson, managing director at Piper Jaffray. He thinks the damage could bleed into blue chips as well. Why? In the past, when small stocks significantly lagged large-caps, there’s been a broad selloff—with typical losses of 12% for the S&P 500. Plus, a pullback is overdue. A stock market correction—defined as a loss of 10% to 20%—occurs on average every 26 months, according to InvesTech Research. We’re now at month 32 and counting. Markets like this can be tricky because it’s difficult to tell how much defense to play. For instance, while Johnson cautions of the possibility of a near-term slide in the broad market, he expects the S&P 500 to end this year 8% above its early June level. History offers you clues to the key dos and don’ts: Don’t assume a correction will lead to a bear Small-stock weakness led to major pullbacks for the broad market in 2011, 1999, 1998, 1997, 1996, and 1994. None of those years, though, witnessed full-fledged bear markets, defined as a 20% or more decline in stock prices. “The case for the bull market to continue remains surprisingly firm, given how far we are in this expansion,” says James Stack, president of InvesTech Research. Among positive economic signs: rising consumer confidence and manufacturing, combined with a still-stimulative Federal Reserve. Do seek a smoother ride The market has been about as steady as it’s been since before the global financial crisis. So what’s the point of tilting toward low-volatility stocks, shares of companies that bounce up and down less than the broad market? Well, AllianceBernstein took a look at global stock performance since 1989, comparing the broad market against the slice of stocks with below-average rockiness. In months when the broad market lost value, “low vol” outpaced the rest of the market 83% of the time. This strategy has been popular lately, so the stocks aren’t all cheap. Go with low-cost ETFs with portfolios sporting relatively attractive valuations, such as PowerShares S&P 500 Low Volatility (SPLV) and iShares MSCI All Country World Minimum Volatility (ACWV). Don’t buy the small-cap dip While small-company stocks have been beaten down, they remain expensive. Small-cap shares have historically traded at about the same price/earnings ratio as the S&P 500, based on five years of median profits. Today they’re 35% more expensive. Also, when blue chips falter, small-caps tend to fall more. “This late in the bull, I’d be taking profits in small-caps and focusing more on large-cap stocks, which represent better value,” says Doug Ramsey, chief investment officer of the Leuthold Group. Do focus on late-stage winners “I don’t know if we’re in the seventh inning, the eighth, or the ninth,” says Ramsey. “But I do know it’s one of those—and late stages of bulls are different.” In the final 12 months of past bull markets, for instance, energy, tech, and health care stocks have typically thrived (see chart). For exposure to these sectors, InvesTech recommends Conoco­Phillips (COP), Qualcomm (QCOM), and Express Scripts (ESRX). If you prefer a mutual fund, Money 50 pick Primecap Odyssey Growth (POGRX) has 70% of its stock portfolio invested in health care and technology, double the S&P’s exposure. Sound Shore (SSHfX), another MONEY 50 pick, also has a bigger-than-average exposure to these three key areas. What if this isn’t the bull’s final year? No problem: Over the past three years, Sound Shore has delivered 115% of the S&P 500’s gains in periods when the market is up, according to Morningstar. So either way, you win.

MONEY financial independence

Financial Lessons of America’s Founding Fathers

Benjamin Franklin on hundred dollar bill
Roman Samokhin—Fotolia via AP

What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation.

In theory, the founding fathers should be the ultimate financial role models. After all, they’re literally on the money. Warren Buffett might be every investor’s hero, but even he can’t count his earnings without seeing the faces of Washington, Hamilton, Franklin, and Jefferson. Even John Adams, perhaps the most neglected of the founding fathers, has been commemorated on the dollar coin.

What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation. Jefferson, for example, amassed a great fortune but later squandered it and ended his life all but penniless (despite, of course, the economic advantages of being a slaveholder). But others, including Washington — a shrewd and even ruthless businessman — died very wealthy men.

Here are some of the lessons, still applicable today, that can be drawn from these historic financial lives.

Have a Back-up Plan

Alexander Hamilton may have been the greatest financial visionary in American history. After the Revolutionary War, as Washington’s Treasury Secretary, Hamilton steered the fledgling nation out of economic turmoil, ensured the U.S. could pay back its debts, established a national bank, and set the country on a healthy economic path. But it turned out that he was far better at managing the country’s finances than his own.

When Hamilton was killed in a duel with vice president Aaron Burr, his relatives found they were broke without his government salary. Willard Sterne Randall, biographer of multiple founding fathers, recounts that Hamilton’s wife was forced to take up a collection at his funeral in order to pay for a proper burial.

What went wrong? Hamilton’s law practice had made him wealthy and a government salary paid the bills once he moved to Washington, but he also had seven children and two mistresses to support. Those expenses, in addition to his spendthrift ways, left Hamilton living from paycheck to paycheck.

The take-away: Don’t stake your family’s financial future on your current salary. The Amicable Society pioneered the first life insurance policy in 1706, well before Hamilton’s demise in 1804, and term life insurance remains an excellent way to provide for loved ones in the event of an untimely death. Also, don’t get into duels. Life insurance usually doesn’t cover those.

Diversify Your Assets

Conventional wisdom holds that investors shouldn’t put all their eggs in one basket, and our nation’s first president prospered by following this truism.

During the early 18th century, Virginia’s landed gentry became rich selling fine tobacco to European buyers. Times were so good for so long that few thought to change their strategy when the bottom fell out of the market in the 1760s, and Jefferson in particular continued to throw good money after bad as prices plummeted. George W. wasn’t as foolish. “Washington was the first to figure out that you had to diversify,” explains Randall. “Only Washington figured out that you couldn’t rely on a single crop.”

After determining tobacco to be a poor investment, Washington switched to wheat. He shipped his finest grain overseas and sold the lower quality product to his Virginia neighbors (who, historians believe, used it to feed their slaves). As land lost its value, Washington stopped acquiring new property and started renting out what he owned. He also fished on the Chesapeake and charged local businessmen for the use of his docks. The president was so focussed on revenues that at times he could even be heartless: When a group of revolutionary war veterans became delinquent on rent, they found themselves evicted from the Washington estate by their former commander.

Invest in What You Know

Warren Buffett’s famous piece of investing wisdom is also a major lesson of Benjamin Franklin’s path to success. After running away from home, the young Franklin started a print shop in Boston and started publishing Poor Richard’s Almanac. When Poor Richard’s became a success, Franklin reinvested in publishing.

“What he did that was smart was that he created America’s first media empire,” says Walter Isaacson, former editor of TIME magazine and author of Benjamin Franklin: An American Life. Franklin franchised his printing business to relatives and apprentices and spread them all the way from Pennsylvania to the Carolinas. He also founded the Pennsylvania Gazette, the colonies’ most popular newspaper, and published it on his own presses. In line with his principle of “doing well by doing good,” Franklin used his position as postmaster general to create the first truly national mail service. The new postal network not only provided the country with a means of communication, but also allowed Franklin wider distribution for his various print products. Isaacson says Franklin even provided his publishing affiliates with privileged mail service before ultimately giving all citizens equal access.

Franklin’s domination of the print industry paid off big time. He became America’s first self-made millionaire and was able to retire at age 42.

Don’t Try to Keep Up With the Joneses

Everyone wants to impress their friends, even America’s founders. Alexander Hamilton blew through his fortune trying to match the lifestyle of a colonial gentleman. He worked himself to the bone as a New York lawyer to still-not-quite afford the expenses incurred by Virginia aristocrats.

Similarly, Thomas Jefferson’s dedication to impressing guests with fine wines, not to mention his compulsive nest feathering (his plantation, Monticello, was in an almost constant state of renovation), made him a life-long debtor.

Once again, it was Ben Franklin who set the positive example: Franklin biographer Henry Wilson Brands, professor of history at the University of Austin, believes the inventor’s relative maturity made him immune to the type of one-upmanship that was common amongst the upper classes. By the time he entered politics in earnest, he was hardly threatened by a group of colleagues young enough to be his children. Franklin’s hard work on the way to wealth also deterred him from excessive conspicuous consumption. “Franklin, like many people who earned their money the hard way, was very careful with it,” says Brands. “He worked hard to earn his money and he wasn’t going to squander it.”

Not Good With Money? Get Some Help

In addition to being boring and generally unlikeable, John Adams was not very good with money. Luckily for him, his wife Abigail was something of a financial genius. While John was intent on increasing the size of his estate, Abigail knew that property was a rookie investment. “He had this emotional attachment to land,” recounts Woody Holton, author of an acclaimed Abigail Adams biography. “She told him ‘Thats all well and good, but you’re making 1% on your land and I can get you 25%.’”

She lived up to her word. During the war, Abigail managed the manufacturing of gunpowder and other military supplies while her husband was away. After John ventured to France on business, she instructed him to ship her goods in place of money so she could sell supplies to stores beleaguered by the British blockade. Showing an acute understanding of risk and reward, she even reassured her worried spouse after a few shipments were intercepted by British authorities. “If one in three arrives, I should be a gainer,” explained Abigail in one correspondence. When she finally rejoined John in Europe, the future first lady had put them on the road to wealth. “Financially, the best thing John Adams did for his family was to leave it for 10 years,” says Holton.

As good as her wartime performance was, Abigail’s masterstroke would take place after the revolution. Lacking hard currency, the Continental Congress had been forced to pay soldiers with then-worthless government bonds. Abigail bought bundles of the securities for pennies on the dollar and earned massive sums when the country’s finances stabilized.

Despite Abigail’s talent, John continued to pursue his own bumbling financial strategies. Abigail had to be eternally vigilant, and frequently stepped in at the last minute to stop a particularly ill-conceived venture. After spending the first half of one letter instructing his financial manager to purchase nearby property, John abruptly contradicted the order after an intervention by Abigail. “Shewing [showing] what I had written to Madam she has made me sick of purchasing Veseys Place,” wrote Adams. Instead, at his wife’s urging, he told the manager to purchase more bonds.

Make A Budget… And Stick To It

From a financial perspective, Thomas Jefferson was one giant cautionary tale. He spent too much, saved too little, and had no understanding of how to make money from agriculture. As Barnard history professor Herbert Sloan succinctly puts it, Jefferson “had the remarkable ability to always make the wrong decision.” To make matters worse, Jefferson’s major holdings were in land. Large estates had previously brought in considerable profits, but during his later years farmland became extremely difficult to sell. Jefferson was so destitute during one trip that he borrowed money from one of his slaves.

Yet, despite his dismal economic abilities, Jefferson also kept meticulous financial records. Year after year, he dutifully logged his earnings and expenditures. The problem? He never balanced them. When Jefferson died, his estate was essentially liquidated to pay his creditors.

 

MONEY

One Reason Today’s Jobs News Isn’t Great for Your Money

Crowd of commuters walking in midtown New York
Mitchell Funk—Getty Images

Great jobs numbers have stock investors cheering. But what about bonds?

We’re heading into the 4th of July weekend with reasons to be cheerful. The jobs report from the Bureau of Labor Statistics came in surprisingly strong. Unemployment is down to 6.1%, the lowest level since before the financial crisis. And employers reported adding 288,000 new jobs, considerably more than the roughly 212,000 economists had forecasted, according to a Reuters survey.

At the same time, the stock market continued it’s rally. After the report the Dow climbed past 17,000 for the first time. So the story here — more jobs, stronger economy, good news for investors — is clear, right?

Well, actually, that’s if you care only about the stock market. The bond market had a different reaction this morning: Yields on Treasuries ticked up, which means that their prices fell. And while most of us consider bonds the ho-hum, steady part of our portfolios, they stand to take a big hit if employment continues to come back more quickly than expected.

The reason? In the upside-down world on bond investing, a really strong and sustained recovery means the Fed is more likely to raise interest rates — and rising interest rates cause bonds to fall in value. In this case, the potential slide could be worse because bonds gained in value this year as investors bet that the status quo of low interest rates would hold.

Of course, the jobs report wasn’t perfect. There are still plenty of signs of economic slack. Wage growth is still slow. And then there’s this:

fredgraph

Remember, the unemployment rate only captures people who say they are still looking for work. The graph above shows that the number people either working or trying to work is historically low. That partly reflects demographic changes, but also a large number of people so discouraged in their job searches they’ve stopped looking. Numbers like these are one reason Janet Yellen and the Fed may continue to hold rates low despite the better numbers.

Still, after a long period of low rates and strong returns for bonds, people who run mutual funds are worried that many investors are unprepared for rising interest rates. Speaking yesterday, before the jobs numbers came out, T. Rowe Price chief economist Alan Levenson noted that the risk of losses on long-maturity bonds is unusually high. “I don’t know that retail investors are aware, as they’ve ridden this bond market down to lower yields, that the duration of their assets and vulnerability to capital losses is extraordinary by historical standards,” he said.

How big a loss are we talking about? An exchange-traded fund owning long-maturity bonds has a “duration” of about 14 years, which roughly translates to a 14% capital loss should rates rise a full percentage point. A more typical fund used as a core bond holding, the Vanguard Total Bond Market Fund, has a duration of 5.6, so would face roughly a 5.6% decline in a one-point rate spike.

This doesn’t mean investors should be running away from bonds. Rates could stay low for a long time. And compared to stocks, bonds are still likely to be less volatile, especially in the lower-duration bonds you might have in a short- or intermediate-term bond fund. But today’s happy job news is reminder that the era of strong bond returns is likely coming to a close.

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