The book “Aftershock” by Weidemer, Weidemer and Spitzer documents economic predictions by people who should have known better but didn’t. Here is a sampling:

• Prediction: “A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!” Richard Band, editor Profitable Investing Newsletter, March 27, 2008.

What actually happened: At the time of Band’s comment, the Dow Jones industrial average was 12,300. By December, 2008 it was at 8,500.

• Prediction: “AIG could have huge gains in the second quarter.” Bijan Moazami, distinguished analyst, Friedman, Billings, Ramsey, May 9,2008.

What actually happened: AIG lost $5 billion in the second quarter of 2008 and $25 billion in the third quarter. It was taken over in September by the U.S. Government.

• Prediction: “I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They’re not in danger of going under…I think they are in good shape going forward.” Barney Frank (D-Mass.), House Financial Services Committee Chairman, July 14, 2008.

What actually happened: Within two months of Rep. Frank’s comments, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion to each.

• Prediction: “I think Bob Steel’s the one guy I trust to turn this bank around, which is why I’ve told you on weakness to buy Wachovia.” Jim Cramer, CNBC commentator, March 11, 2008.

What actually happened: Within two weeks of Cramer’s comments, Wachovia came within hours of failure as depositors fled. Steel eventually agreed to a takeover by Wells Fargo. Wachovia lost half their value from September 15 to December 29.

• Prediction: “I think you’ll see (oil prices) at $150 a barrel by the end of the year”. T. Boone Pickens, one of the wealthiest and most respected oilmen today, June 20, 2008.

What actually happened: Oil at the time of Pickens’ prediction was around $135 a barrel. By late December it was below $40.

• Prediction: “I expect there will be some failures…I don’t anticipate any serious problems of that sort among the large international active banks that make up a very substantial part of our banking system.” Ben Bernanke, Federal Reserve chairman, February 28, 2008.

What actually happened: In September, 2008, Washington Mutual because the largest financial institution in U.S. history to fail. Citigroup needed an even bigger rescue in November.

Why don’t they tell us the truth?

How do you feel when your read these failed predictions? Angry? Confused? Miffed? Cynical? I probably feel some of all. And while I don’t claim to know another person’s motives for their actions, I have some theories about why these “experts” didn’t tell us the truth.

They do not know the truth.

They may be “experts”, but (being charitable) I concede that many really had no clue to the imminent housing, banking and stock market collapses. But then should they be called experts?

Finally: someone who tells the truth

They have agendas which are contrary to the truth.

Again, I don’t claim to know another person’s motives, but T. Boone Pickens, an oil man, is not likely to make negative predictions about oil. Richard Band, editor of Profitable Investing Newsletter, knows that dire market predictions will normally curtail investing.

Predicting failures could make a leader seem inept.

Barney Frank, as House Financial Services Committee Chairman, may have realized that failures of Fanny Mae and Freddy Mac could be reflections on his leadership ability. Same with Federal Reserve Chairman Ben Bernanke in regard to impending bank failures.

They honestly believe that knowing the truth is not a good thing.

Have you ever had someone hide the truth from you because they didn’t think you could “handle it”? Have you ever heard, “what you don’t know can’t hurt you?” If you are like me, once you learn that a friend or relative withheld the truth because it was “for my own good”, I feel patronized…and angry. It may be that certain experts simply don’t think that us normal down to earth citizens have the fortitude and integrity to deal with reality, so they keep it from us.  Is “arrogant” a fitting word here?

The doctor/disease analogy

If your doctor knew you had a life threatening disease, which of these would you prefer:

• Not telling you because your disease would reflect poorly on his ability as a doctor?
• Not telling you because he didn’t think you could deal with the truth?
• Telling you the truth?

You want the truth of course. I realize that economic forecasting is not as an exacting science as practicing medicine, but, be it a doctor, a politician, or an economic pundit, I want to know the truth.

Whom do you trust?

I don’t want to become a cynic, but recent history has given me little reason to trust the so called economic experts. I have therefore vowed to do something far too few of us do: think for myself. I might not get it right either, but at least I know my own motives. And I am the expert in one financial arena: my own finances.

How about you? How do you filter economic predictions? Whom do you trust? Why?

photo credit: LowImagination

photo credit: Shot By Darko

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I know. Tax season just concluded and the last thing you want to hear about is taxes. I understand, but think of it this way – right now, while this stuff is fresh in your mind, is the best time to start considering what the future holds. So…are you ready?  Take a deep breath and read on.

We heard it over and over again from candidate Obama during the 2008 Presidential campaign: “I will not raise taxes on any single person earning under $200,000 or family making less than $250,000 a year.” Of course the implication is, “If you make over those thresholds, watch out!”

The Obama administration has a great opportunity to keep both the promise and the implication as taxes will undoubtedly go up.

According to MoneyWatch.com, we can expect the following tax changes:

1. Hike from Health Care Legislation

Starting in 2013, if your income is above the $200,000/$250,000 level you will pay an additional 0.9 percent on your federal payroll taxes, and your investment income and gains will be bumped up by 3.8 percent levy.

2. Higher Income Taxes for High Earners

This is an easy one. All Congress needs to do is nothing in order to raise taxes on high earners. “How can this be?” you ask. Unless the Bush tax cuts of 2001 and 2003 are extended, they expire this year, pushing the top incremental brackets back to the 2000 levels. Specifically, the top levels of 33% and 35% will revert to 36% and 39.6% respectively. The 36% increment will include singles with taxable incomes of $192,000 and married couples filing jointly with incomes above $232,950. The 39.6% bracket includes everyone (singles or married) earning above $375,000. If no action is taken, these higher rates start in 2011. All other brackets will become permanent.

Strategy

Mark Juscombe, senior tax analyst at CCH publications, says, “You might want to reverse the usual tactic of deferring income into the next year.” Also, higher earners who are converting a traditional IRA to a Roth IRA may want to pay the conversion tax at the 2010 level instead of spreading the tax bill out to 2012. Recommendation: meet with your tax advisor!

3. Investment Gains

This is another “do nothing” tax hike. Long term capital gains and qualifying dividends, which have been at a 15% maximum rate for several years, will automatically go up without Congressional action; the capital gains to 20% and the dividends to be treated as ordinary income. According to MoneyWatch.com, the most likely fix will be to lock in the dividends at 20 percent, which is certainly better for those in brackets above that level.  Also, keep in mind that if you are in the $200,00/$250,000 income levels, you will be adding another 3.8% of taxes to those gains starting in 2013 (see 1. above).

Strategy

Home owners of high value real estate who are considering down sizing would save considerably by doing so in 2010 instead of waiting. The first $500,000 capital gains for a married couple who has lived in the house for more than 24 months is not taxed, but what if the gain is $1 million? The capital gain tax difference between 15% (2010) and 20% (2011) is $25,000.

4. Return of Estate Tax

There is no federal estate tax this year (2010), but, without Congressional action, it will automatically revert to 2000 levels starting in 2011. What will this mean? Estates between $1 million and $10 million would be hit with a top rate of 55 percent while those above $10 million would pay 60%. However, Congressional leaders have promised to reinstate the 2009 rules – no tax on estates up to $3.5 million ($7 million for married couples) and a maximum rate of 45 percent on assets above that level, retroactive to January 1, 2010.

Strategy

Money Watch says, “Hope Congress gets its act together pronto – and talk to your attorney while you wait.” The current status is muddied by the fact that there is currently no 2010 federal estate tax but Congress is considering passing a bill that would make it retroactive to the beginning of 2010.

5. Fewer Write-Offs for High-Income Earners

The Obama 2011 budget calls for reinstating the phase-out of personal exemptions and itemized deductions for taxpayers in the two highest brackets. One proposal would cap the deduction rate for these brackets (36 percent and 39.6 percent) at 28 percent, which will certainly raise the ire of organizations who depend on charitable contributions.

For a great post and ensuing discussion on this topic, see Financial Samurai’s Why Are President Obama And The Democrats Against Charity?

Strategy

Hopefully, not getting a deduction in 2011 will not deter you from giving to charitable organizations, but reality is that the less taxes you pay, the more money you have to give. Tax wise, for those in the top two brackets, you might want to give an extra amount this year to offset the reduced deduction next year.

Summary

Has Obama kept his promise to not tax singles earning below $200,000 and married couples under $250,000 range?

Not exactly. The legislation he signed raising the tobacco tax nearly 62 cents on a pack of cigarettes will most certainly hit the average working class the hardest. However, the likely hikes discussed in this post will affect high earners the most.

As we said, the promise NOT to raise taxes on those earning under the given thresholds were implied promises TO raise taxes on higher earners. To that degree, President Obama is keeping his promises.

This post was included in Yakezie Carnival hosted by Foreigner’s Finance

photo credit: Brett L.

Allow me to preface this post by referring you to some other great posts on the health care legislation.  The Amateur Financier gives a balanced look at the legislation and what it means to us.  Other bloggers who have weighed in are Financial Samurai who is in favor,  Darwin of Darwin’s Finance who is convinced that we will have buyer’s remorse, Kevin of 20s Money who is certain (based on government’s history of underestimating projected costs) that it will be way more expensive than expected and Evan of My Journey to Millions who digs into whether the bill is even constitutional.

If you want a great summary of what the bill covers and which provisions kick in when, I highly recommend jumping over to this article provided by Health Insurance Providers.

What do I think?

Did we need health care reform?  I think everyone agrees that we did.  Me too.  But I also believe that this bill will ultimately result in poorer quality of health care for all of us.

Let me explain:

What will happen to Health Insurance Companies?

Imagine the following conversations:

Homeowner, “I need to purchase some homeowner insurance.”

Insurance Agent, “Tell me where you live so we can drive by and look your home over.”

Homeowner, “My address is 100 Main St, but my house burned to the ground yesterday.”

Or…

Woman, “I would like to purchase some term life insurance for my husband.”

Agent, “I will need to ask some questions.  How old is your husband?”

Woman, “He died yesterday.”

“Ridiculous!” you say.  “No insurance company is going to issue insurance against an event after the event has already happened.”  Right.  But, starting this year, the new health care bill requires insurance companies to extend coverage to children with pre-existing conditions.  By 2014, all pre-existing conditions must be covered for all ages and (get this), higher health insurance rates cannot be levied because of health, gender, etc.

“But…but…shouldn’t everyone have health insurance regardless of their circumstances?”

Good question.  One I don’t have an answer to.  But here is my question:  How can insurance companies stay in business if they are forced to insure all pre-existing conditions and not allowed to raise their rates?  Well, they can and will pass those increased costs on to other policy holders, but my prediction is that within five years all health insurance companies will have closed their doors, forcing the single payer government health insurance to be the only insurance in town (or in the nation).

What will happen to doctors?

Our government has promised to trim heath care costs and help save money on health insurance premiums.  While I haven’t read anything specific about the new bill monitoring pay for medical treatment, they will have to find ways to hold down health care costs if we default to the public option plan.  I envision them setting limited payments per procedure, effectively stifling doctors’ incomes.  With less income incentive, current doctors are going to start leaving the system and prospective doctors will think twice before spending $250,000 and 8-10 years of their lives for the privilege of working for a capped salary.

By 2014, the new bill forces all U. S. citizens to have health insurance or else pay a fine.  In effect, the 30,000,000 who are currently uninsured will then be insured.  Even if we keep the same number of doctors, each doctor will be seeing more patients thus reducing the quality of care.  If my theory is true about fewer doctors in the future, each doctor will be seeing even more patients,  further diminishing the quality of care per patient.

What will happen to pharmaceutical companies?

Pharmaceutical companies invest hundreds of millions of dollars in research to discover new cures for our health issues.  They must recoup these investments within the patent time period in order to justify future research.  Why?  Because once the patent has expired, any and every drug company will start selling the generic version for practically nothing.  For example, I pay only $10 for three months supply of the generic blood pressure medication.

The new Health Care Reform bill requires that, starting in 2011, seniors enrolled in Medicare Advantage or the Prescription Drug Plan will receive a 50% discount on brand name drugs immediately with additional prescription drug discounts to follow.  Now…ask yourself what will happen if the Pharmaceutical companies are not allowed to recoup their research investments because they are restricted in what they can charge.  Right.  They will simply stop doing the research.  We won’t notice for years, but, without the research, no new drug discoveries will be made.

Summary

I hope I am wrong, but it seems to me that the health care bill we passed is going to lower the quality of health care for all of us.   When the insurance companies close their doors, we will all have government run health care.  Because of our nation’s debt problems, restrictions could be capped on rates health care providers charge, which would discourage prospective doctors from entering the medical field.   The equation of fewer doctors and more patients equals metered care for all.  If pharmaceutical companies cannot profit from new medicinal discoveries, there will be no new discoveries.

An ironic silver lining: if the quality of health care is lessened, we might start taking better care of ourselves.  That would definitely be a good thing.

Please jump in and share your thoughts on the new Health Care Bill.   Do you agree that it will lower our quality of health care?  If so, is insuring the uninsured worth it?

This post has been included in the following carnivals:

Yakezie Carnival #6 hosted by Canadian Finance Blog

Baby Boomers Blog Carnival hosted by Baby Boomers US

Carnival of Financial Planning hosted by The Skilled Investor

Carnival of Financial Planning hosted by Green Panda Tree House

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It is starting again. According to CNN Money, gas prices are up 45% from last March and still rising. Prices may not reach the record high of $4.114 per gallon as reported by AAA on July 17, 2008, but people are nevertheless rumbling, “Gas prices are rising through the ceiling and there is nothing I can do about it.”

I disagree. Maybe we can’t lower gas prices, but we can minimize the impact these prices have in our lives. The following suggestions should help:

1. Adjust your budget.

How much money do you spend on gasoline every month? If you answered, “I don’t know” then you have just confessed that you don’t have a working budget. If you know the answer, then you must cut back on another item as you spend more on gasoline. Hint: If you drive 1000 miles a month at 20 MPG, you are currently spending $150 a month if gasoline is $3 a gallon.

2. Establish your priorities.

Non-negotiables in any budget are food, transportation, housing and utilities. How about eating out? Going to movies? Saving for that Hawaiian vacation? Driving a luxury car? Cable TV? Starbucks coffee? These may seem important, don’t get your wants confused with your needs. Take care of needs first, prioritize your wants and cut the ones you can’t afford.

3. Manage your miles.

Driving to work is a necessity (unless you can car pool…and you should if you can) but think of other driving as a luxury. Be selective and plan ahead so you can multi-task your trips.

4. Consider a more fuel efficient car.

No, I do not recommend that you go into debt to buy a newer car. However, selling your gas guzzler and paying cash for a more efficient one is worth considering.

Although gasoline has risen 45% in the past year, the actual increase in the average budget is only about $50 a month (assuming 1000 miles a month at 20 MPG). Face reality, make adjustments and enjoy life. You can cope.

How do you cope with rising gas prices?

This post was included in the following carnivals:

Festival of Frugality hosted by Frugal Upstate

photo credit: Andres Rueda

Also banned: Selling of students’ personal information

I applaud the Illinois lawmakers and Governor Pat Quinn for passing legislation which bans the gimmicky marketing of credit cards to college students. The bill, which won’t take effect until January, could impose fines on colleges and universities if they allow credit card companies to offer free gifts when marketing their products on campuses.

According to State Treasurer Alexi Giannoulias, who lobbied for the new law,

“Too many students have had to learn the hard way that there is nothing free about these gifts.”

Giannoulias noted that college students can run up huge debts that, when unpaid will remain on their credit histories for years after graduation, affecting their abilities to purchase homes or vehicles.

Credit Cards and College Students

I totally agree, adding this statistic: the Jump$tart Coalition for Personal Financial Literacy reported that 19% of all bankruptcies are filed by people under age 25. “How,” I ask myself, “could people this young accumulate this much debt?” Yes, they could have huge student loans, but these can’t be bankrupted, so the logical conclusion is credit card debt. And just when did this credit card debt start? These credit card predators, errr..companies, know full well that the minimum age for owning a credit card is the same age as most incoming college freshmen: 18. They also know that many of these young adults are naive about owning a credit card, so they sink their hooks into them with an innocent give-away (Tee shirt, free pizza, etc.). And, as Mr. Giannoulias points out, “too many students learn the hard way that there is nothing free about these cards”.

The new law, House Bill 2352…

also prohibits schools from selling student’s names and personal information to credit card lenders. Did you get that? If not, read it again and let it soak in. I ask you to consider exactly what your universities have been up to. First, they have been receiving payoffs from the credit card companies to allow them to market their students. Secondly, they have been selling the student’s names and personal information to these credit card lenders. “Why” I wonder, “has this even been an issue? Shouldn’t our colleges and universities be protecting their students from vultures instead of making deals with them?” I would like to think that our colleges have a fiduciary relationship with their students, but this is obviously not the case when the price is right. And doing the right thing only when forced by legislation doesn’t improve their credibility.

The measure, which was approved by large margins in both the House and the Senate, affects both four year colleges and community colleges. Again, I applaud Treasurer Alexi Giannoulias, our Governor and our legislators for getting this one right.

One closing thought:

the bill doesn’t go far enough. How about requiring these centers of higher learning to give full disclosure to incoming students and their parents about any and all agreements they have made with credit card companies? Of course this would be nice if done voluntarily, but based on our colleges’ track records, it is not likely to happen.

Readers:  Do credit card companies market students on campus where you live?  What kinds of free give aways do they use?  Do colleges in your state sell students’ names and personal information to credit card companies?

photo credit: Matti Mattila

President Obama recently signed into law the “Cash for Clunkers” legislation, a bill intended to boost the sagging auto industry while rewarding people for purchasing more fuel efficient vehicles.

Here is how it works: you trade in your old car (it must be less than 25 years old, drivable and get less than 18 mpg) for a new car which must have a combined fuel economy of at least 22 mpg. New small trucks and SUVs must get at least 18 mpg while large trucks are required to achieve a minimum of 15 mpg. This program will cost $4 billion and will come from TARP.

How much cash will you get paid? Depending on how much you step up in your fuel economy (and several other factors), you will either get $3,500 or $4,500.

Cash For Clunkers Sounds Alluring Doesn’t It?

photo credit: Martyn Hutchby

But is the Cash for Clunkers program good for you? For most of you, I don’t think so. If you are planning to purchase a new car anyway and pay for it with cash, take advantage of this offer. However, if you are being tantalized by the government carrot, you need to stop and think. Here are a few thoughts to help you:

• If you currently have no car payments, this program could move you back into car debt. I have a personal aversion (hatred) of debt, so I would save and pay cash for a great used car before taking on new debt. If you have to go into debt to get a great deal, it isn’t a great deal.
• Trading with a dealer costs you money. Every transaction is different, but if you can sell your car yourself, you will get more for it than if you trade with a dealer. For example, the Kelly Blue Book (www.kbb.com) difference between Private Party value and Trade In value on my 1999 Cadillac is $1,500 but with Cash for Clunkers you don’t have the option of a Private Party sale. Each state is different, but in Illinois you can easily save another $1,000 in sales tax by buying a used car from an individual instead of a new car from a dealer.
• The depreciation of a new car will eat up your Cash for Clunkers incentive. Remember: your new car is no longer new the moment you drive it from the show room floor. New cars depreciate about 60% in the first four years, so your $25,000 vehicle will lose about $15,000 in that four year time frame…over $300 a month. Even with the maximum government subsidy, your depreciation would cost you over $200 a month for those first four years.
• If your goal is to improve your fuel efficiency, you can find many great fuel efficient used cars.
• With anything, be wary of scams involving the Cash for Clunkers program.  The scammers are out there!

Can You Afford It?

In summary, buy what you can afford.  Jeff Rose from Good Financial Cents does a good rundown of the the tax rules of the Cash for Clunkers program. In addition,  ABC News Consumer Correspondent Elisabeth Leamy puts it like this:

“From a strictly consumer standpoint, the Cash for Clunkers program is not a good deal. Yes, if you are bent on buying brand new, you will save money. But the savings are nothing compared with how well you can do by buying a used car.”