 | | The Daily Reckoning | Monday, September 13, 2010 |
- Fears of global food inflation on the rise; supplies take a dive,
- When college doesn't pay: a closer look at another American myth,
- Plus, Bill Bonner with more words on the undead and indebted...
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How to Retire Rich Without Saving Your Whole Life
After decades of bills, hefty mortgage payments...and paying off their kids' college tuitions...few people have enough for retirement. But some aren't worried at all. That's because they've found a way to retire luxuriously without saving money their entire lives.
Here are the full details...
|  | | | A College Education of Diminishing Returns | | Why tuition fees and student loan debt are raising questions about the value of higher education | |  | | Eric Fry |
Reporting from Laguna Beach, California...
The Law of Diminishing Returns is a nasty little ordinance...and few aspects of life escape its tyranny.
A short list of exceptions would include sex and world peace...or at least world peace. (To be sure about sex, a poll of long-married couples might be necessary). Suffice to say that this Law wields more power over life than any formal statute in the US penal code.
For proof of this fact, consider the lamentable condition of "the college education." Once upon a time, a college education in America was a one-way ticket to a high-paying job and a lofty socio-economic status. Part of its value derived from the fact that a college education was relatively rare. In 1950, only about 5% of all Americans held a bachelor's degree.
Since this 5% tended to fare so much better than the rest of the American population, lots of folks began to ask themselves, "Why not send as many kids as possible to college?"
This simple question sparked what would become a massive "college bubble." This simple question spawned myriad scholarship programs, a college-construction boom...and Sallie Mae - née the Student Loan Marketing Association in 1972.
Today, more than 25% of Americans hold a bachelor's degree - five times more than in 1950. But guess what? A bachelor's degree ain't what it used to be. The Law of Diminishing Returns is having its way.
According to the National Association of Colleges and Employers, more than half of all 2007 college graduates who had applied for a job had received an offer by Graduation Day. In 2008, that percentage tumbled to 26%, and to less than 20% last year. Statistics like these do not inspire confidence in a college degree.
More and more Americans have Alma Maters for which to cheer; but fewer and fewer have employment prospects worth cheering about. While it's true that a college degree tends to correlate with a relatively high income, the nearby chart clearly shows that this relative high is drifting lower. During the last eight to ten years, the median income of highly educated Americans has been declining.
These statistics are troubling, even before examining their price tag. And what a price tag it is! The average annual tuition (plus expenses) at a private nonprofit four-year college is about $35,000. That's $140,000 for four years - or just a little bit less than the median cost of an American home. How did prices ever get this crazy?
Thank Sallie Mae - vendor extraordinaire of student loans. Thanks to Sallie, and the industry she pioneered, most of the nation's college graduates now possess far more debt than opportunity. According to FinAid.org, the total amount of money Americans have borrowed on government and private student loans at $830 billion has surpassed the total American consumer balance on credit cards, only $827 billion. But the problems wrought by Sallie Mae are far more pervasive and insidious than mere indebtedness.
Were it not for Sallie Mae, aspiring college graduates could never have borrowed far more money than they could ever hope to repay; universities could never have begun to believe that they are worth what they charge; professors could never have obtained their coddled lifestyles and the cost of a college education could never have appreciated well beyond any connection to its true economic value.
And herein lies the dirty little truth about an advanced degree - it doesn't always do much advancing.
"Sometimes things we believe for good reason our whole lives turn out one day to no longer be true, because circumstances have changed," writes Jack Hough in a delightful little article for SmartMoney. "Consider two childhood friends, Ernie and Bill. Hard workers with helpful families, each saves exactly $16,594 for college. Ernie doesn't get accepted to a school he likes. Instead, he starts work at 18 and invests his college savings in a mutual fund that tracks the broad stock market.
"Throughout his life," Hough continues, "Ernie makes average yearly pay for a high school graduate with no college, starting at $15,901 after taxes and peaking at $32,538. Each month, he adds to his stock fund 5% of his after-tax income, close to the nation's current savings rate. It returns 8% a year, typical for stock investors.
"Bill has a typical college experience. He gets into a public college and after two years transfers to a private one. He spends $49,286 on tuition and required fees, the average for such a track. I'm not counting room and board, since Bill must pay for his keep whether he goes to college or not. Bill gets average-size grants, adjusted for average probabilities of receiving them, and so pays $34,044 for college.
"He leaves school with an average-size student loan and a good interest rate: $17,450 at 5%. The $16,594 he has saved for college, you see, is precisely enough to pay what his loans don't cover.
"Bill will have higher pay than Ernie his whole life," Hough relates, "starting at $23,505 after taxes and peaking at $56,808. Like Ernie, he sets aside 5%. At that rate, it will take him 12 years to pay off his loan. Debt-free at 34, he starts adding to the same index fund as Ernie, making bigger monthly contributions with his higher pay. But when the two reunite at 65 for a retirement party, Ernie will have grown his savings to nearly $1.3 million. Bill will have less than a third of that.
"How can that be?" Hough asks rhetorically. "College degrees bring higher income, but at today's cost they can't make up the savings they consume and the debt they add early in the life of a typical student. While Ernie was busy earning, Bill got stuck under his bill."
"The great enemy of the truth," John F. Kennedy declared in a 1962 commencement address at Yale University, "is very often not the lie - deliberate, contrived and dishonest - but the myth - persistent, persuasive and unrealistic."
Fifty years later, a Yale education, itself, may be one small part of a vast American myth. Send your kids to Yale if you want; but don't be surprised if the grads over at New Haven High are faring better financially a few years from now.
As a well-heeled acquaintance from Manhattan quipped recently, "Hey it's gonna cost me $250,000 to send my kid to an Ivy League school. I'd rather just use the money to buy him a business, and let him figure it out in the real world."
The logic is compelling. In today's edition of The Daily Reckoning, we present insights from Alan Knuckman, a guy who's all about figuring things out in the real world. Alan, as the mind behind The Resource Trader Alert, keeps a watchful eye on the commodity markets, and seizes opportunities as they present themselves.
At the moment, Alan is keeping a very close eye on the beef and poultry markets. Read on...
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| | The Daily Reckoning Presents | | Home on the Range | |  | | Alan Knuckman |
"Home on the Range" is regarded as the unofficial anthem of the American west. It's also a slogan available on vanity license plates in Kansas - where few Buffalo now roam. The wide-open spaces are now rangeland for the final installment of commodity critters: chicken, hogs and cattle.
As I've said before, it's important to know the market relationship between livestock and the grain market. The price of livestock plays an important role in the grain market and vice versa. That's exactly why this chart caught my eye:
As you can see from the chart, livestock demand has been tricky to forecast over the past few years. That's partially because so many factors influence consumption: income, diet, price, just to name a few. Overall livestock consumption since 2006-2007 is down - but a resurgence looks to be on the horizon, led by strong demand for chicken.
And that's only one side of the story - the other side is supply.
Much like the expedited hog harvesting mentioned last week, cattle farmers also stepped up slaughter when economic conditions turned bad with the financial crisis. The cycle from birth to maturity is longer with beef than with chicken. So it's difficult to increase supply quickly. The dramatic herd reduction in 2008-2009, sending off even milk cows, is being felt now in reduced supply.
As the chart above shows, we're at the lowest supply level of beef cows in 25 years. And even though beef consumption is lower, the mass reduction in cattle head has now supported price recovery that looks to pressure $100 per hundredweight on the upside once again.
This from The Financial Times:
Americans face higher beef prices for their traditional end-of-summer Labor Day barbecues following a late-night stampede by meat packers this week that helped send cattle futures to their highest levels in nearly two years.
Negotiations between slaughterhouses and feedyard operators with cattle to sell took on a frantic tone this week, with talks stretching late into the night on Wednesday - a rare occurrence for cattlemen used to wrapping up their affairs by sundown.
"[Wednesday] night may have been the latest bidding I have ever seen," said John Josserand, president of AzTx Cattle in Hereford, Texas, which operates facilities that can feed 250,000 cattle at a time. By Thursday, the frenzy spread to the Chicago Mercantile Exchange, where live cattle trading volume broke records and futures prices jumped to $1 a pound, the highest level in 22 months.
The tumultuous trading came after rallies in markets for other agricultural commodities have raised fears about global food price inflation. Wheat prices have soared as a drought in Russia destroys grain crops. CME pork bellies, used for bacon, have hit all-time highs this month.
"There is growing concern that food prices are going to head north," said Bob Goldin of Technomic, a Chicago food industry consultant. US cattle supplies have declined as ranchers culled herds to offset losses during the recession and calves emerged from the hard winter with less meat on their bones than usual.
However, exports from the US, the world's largest producer, are expected to rise 13 per cent this year, led by shipments to Japan and South Korea. Americans also appear to be regaining a taste for beef after cutting back during the economic downturn.
"What's exciting is beef demand has stabilised into the summer," said Rich Nelson, director of research at Allendale, a futures broker in McHenry, Illinois. Meat packers bought heavily this week to secure supplies for the September 6 Labor Day holiday, Mr Nelson said.
By Thursday, meat packers had bought 201,000 head of cattle across the central US, up 11 per cent from the previous week, the agriculture department said. Cargill, JBS, National Beef and Tyson Foods account for three-quarters of US beef packing activity, analysts say. Supply and demand will help show the way for livestock - but pricing and risk/reward payouts will ultimately decide if we should saddle up and wrangle a cattle position. I'm watching this situation closely.
Alan Knuckman,
for The Daily Reckoning
| | | | New Presentation: If This Iran News Leaked, There'd Be Panic in the Streets |
Nobody in the Pentagon knows how to handle this. Nobody in the White House has a clue what to do.
This epic, 1,354-year old conflict could be about to boil over - bringing suffering on par with what Europe experienced during the 1930s.
Watch this new presentation before it's too late, right here.
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| | | | Bill Bonner | | Losing Faith in the Zombie-Run Government | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Zombies run wild!
Yesterday's market trends were nothing to talk about. Dow up 47. Gold down $4. No real landmark news. So let's go back to the zombies.
Yes, the zombies are taking over. But you knew that. They're everywhere, of course. In the big banks. In the big companies. In the universities. In the military. In line for food stamps. In line for bailouts. In line for promotions. And in line to be elected to high public office.
And the government? Heck, Washington is wall-to-wall zombies.
"Bill, aren't you going a little overboard...maybe even losing it a little?" writes an earnest Dear Reader. "I mean, this zombie thing... Don't you think you're taking it a little too far?"
Bill answers: No... Zombies represent a major threat to the republic and everything for which it stands. Zombies are a much bigger menace than, say, terrorists. Much bigger than obesity or smoking. Much bigger than littering. Much bigger than music in public places or public education. You name it, zombies are a bigger danger. And we're not alone in this. Here's the publisher of US News and World Report, telling it like it is...in The Financial Times:
America's public servants are now its masters
By Mort Zuckerman
There really are two Americas, but they are not captured by the standard class warfare speeches that dramatise the gulf between the rich and the poor. Of the new divisions, one is the gap between employed and unemployed that President Barack Obama seeks to close with yet another $50bn stimulus programme. Another is between workers in the private and public sectors. No guesses which are the more protected. A recent study by the Mayo Research Institute found that "private-sector workers were nearly three times more likely to be jobless than public- sector workers".
Political tension is bound to grow when jobs disappear faster in the private than the public sector, just as compensation in the former is squeezed more. There was a time when government work offered lower salaries than comparable jobs in the private sector, a difference for which the public sector compensated by providing more security and better benefits. No longer. These days, government employees are better off in almost every area: pay, benefits, time off and security, on top of working fewer hours. Public workers have become a privileged class - an elite who live better than their private-sector counterparts. Public servants have become the public's masters.
Take federal employees. For nine years in a row, they have been awarded bigger average pay and benefit increases than private-sector workers. In 2008, the average wage for 1.9m federal civilian workers was more than $79,000, against an average of about $50,000 for the nation's 108m private-sector workers, measured in full-time equivalents. Ninety per cent of government employees receive lifetime pension benefits versus 18 per cent of private employees. Public service employees continue to gain annual salary increases; they retire earlier with instant, guaranteed benefits paid for with the taxes of those very same private- sector workers.
More troubling still is the inherent political corruption. Elected officials tend to be accommodating when confronted by powerful constituencies such as the public service unions that agitate for plush benefits and often provide (or deny) a steady flow of cash to election campaign funds. Their successors will have to cope with the inherited debt burden - and ultimately the nation's taxpayers are stuck with the bill.
As Governor Arnold Schwarzenegger has pointed out, spending on retirement benefits for California's state employees is growing at three times the rate of state revenues, now exceeding $6bn annually and growing at the rate of 15 per cent a year. In other states, however, the politics of public pensions appear to be changing. In Michigan, Governor Jennifer Granholm, a Democrat, recently enacted a teacher pension reform that should save about $3bn over 10 years by increasing the amount workers must contribute. Illinois raised its retirement age for newly hired public workers from as low as 55 to 67. Chris Christie, the Republican governor of New Jersey, decided that even if it took bruising clashes with public worker unions, public service compensation reform was essential for the fiscal health of the state. His stance surprised many, but it made him a national figure.
There is no quick fix to deal with the billions in unfunded liabilities. Public service employees are almost impossible to fire, except after a long process and only for the most grievous offences. What is more, the courts have ruled in many states that pension increases granted by elected bodies are vested benefits that must be paid no matter what, precluding politicians from going back and changing past agreements.
A fundamental rethinking of the public workforce is necessary. Americans cannot maintain their essential faith in government if there are two Americas, in which the private sector subsidises the disproportionate benefits of this new public sector elite. He's got that right. Faith in the government is on the wane. And as faith declines so should the dollar and the US government's debt.
But wait. You say US bonds are selling near record highs? You say yields are at record lows? You say there were never so many people so eager to trade their money for a promise from the feds?
Well, I guess we were wrong...
And more thoughts...
But hold on. What's this? Here's another news item: The capital of Pennsylvania has gone broke. Yes, it's official. The city fathers told their lenders not to bother going to the mailbox. The check that doesn't show up is the one from them.
We have a suggestion for Governor Ed Rendell. Think Gerald Ford to New York City. Tell Harrisburg to drop dead.
Instead, poor Rendell is playing the part of Barack Obama. He's coming to the rescue.Bloomberg tells the story:
"They have a chance to dig themselves out of this without going into bankruptcy, and that's something I'd like to see," he said today. "Harrisburg has some assets they can sell."
Harrisburg Mayor Linda Thompson, who took office in January, yesterday proposed closing one of the city's four firehouses, furloughing senior staff members, raising parking fees and negotiating pay cuts with public employee unions to address a deficit in this year's $118 million city budget. Tax revenue is coming in about $9 million below projections, a June 30 report from Thompson shows.
City Council members balked at tax increases and the sale of parking garages and other assets that Thompson proposed in January. Bankruptcy is a "real option" for the city of 47,000, Council Vice President Patty Kim said Sept. 1, after the city notified the trustee of its 1997 D and 1997 F zero-coupon bonds that it wouldn't make the Sept. 15 payments.
The city also has skipped $8 million in payments it guaranteed this year on bonds issued by the Harrisburg Authority for a trash-to-energy incinerator built in the 1960s. Rendell said the debt the city faces from that project makes Harrisburg's situation "an aberration." There, we suspect the poor governor is delusional. Debt is no aberration. It's the norm.
We can't lay our hands on the research report right this minute...but we'll find it. And what it tells us is that states and municipalities are up to their eyeballs in debt. Harrisburg may be the first. But it won't be the last.
Got municipal debt, dear reader? You should get rid of it.
And you know why? Zombies. The zombies know where the soup is. And they're bankrupting state, local, and federal governments.
Zombies join government because it's a good place to work if you're brain dead and all you can do is slouch and shuffle. The feds can earn a living without actually doing very much. Well, no one knows whether they are doing anything or not. That's the beauty of government. It doesn't have to turn a profit. So, there's no pressure to show a profit or hold down salaries.
In fact, just the opposite. The people who are on the payroll are also on the voter registration lists. And they're also the people with the time on their hands - and the self-interest - to lobby for more government spending, higher salaries, more perks for government employees, and generally less control over public spending.
When the economy is bubbly hot nobody cares anyway...everybody is getting rich; why not share the wealth with the people who patrol the streets and pick up the trash? And then, when the bubble pops and the economy goes into a slump, they have the cheek to call for even more public spending as a stimulus measure.
Zombies. Gotta luv 'em.
Regards,
Bill Bonner,
for The Daily Reckoning |
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