California's Budget - Bad For All

California's budget was finally passed last night.  The thing is nobody is happy about it, and that is probably a good thing.

Budgets are hard.  It is not something that most people understand.  I have to deal with this at work all the time.  I have a budget for the department.  I cannot simply spend more than my budget.  No matter how much work there may be I cannot just go hire a new person to do the work.  I have to to be very sure that the benefit of hiring someone, buying a new computer, or sending someone to training outweighs the problems that breaking the budget brings.  If it is not everyone ends up paying for it as the company will miss profit numbers and that results in budget cuts, i.e. layoffs.

This is a classic economics problem.  Economics deals with how to allocate limited resources against unlimited wants.  Nobody in California thinks they should give up their budget.  But California spends money on three major things.  Education,  health care, and law enforcement.  Of course nobody wants to take money away from teachers, nobody wants to turn sick people away, and nobody wants to free prisoners.  So given that, where do you expect California to cut?  When you have a budget gap like California, you cannot make a dent in it if you do not cut from the biggest ticket items.  And this is what California has done.  What else could they do?

As much as I love living here, I have to admit that things are not so great for some.  Unemployment is over 10% in the state.  Housing is still way too expensive.   Taxes are going to have to rise more than they already have (Sales tax is 9.75% in many areas).  So many great reasons to be here.  But for some, especially those in my age group, the negatives are starting to outweigh the positives.

Net Worth, Two Years Later

I was going through my computer the other day and found a spreadsheet I created almost exactly two years ago.  The spreadsheet contained the amount I held in various accounts at the time.  It was interesting to look back at how much I had and compare it to what I go today.

To give it a little bit of context, I'm going to compare it to the overall stock market.  It would be helpful if I could also throw in what has happened in housing since housing represents the vast majority of people's net worth in this country.  But housing is very hard to make a comparison to get a raw number from in terms of what it has done over the last two years.  It has for certain dropped, but still not as easy as just looking at a stock graph.  Using the S&P 500 as a benchmark I would say that it could be expected that most people would probably have less wealth than they would have two years ago.  The S&P 500 is down about 39% since June of 2007.  This even with the recent rally in the market.

Compared to this, I've done quite well. I am up  about 18% over that period of time.  Now before you think I'm some sort of stock guru, it is important to understand how I came by this number.

Net worth is the total cumulative value of all ones assets minus any liabilities.  My assets include more than just my stock portfolio.  It also includes the cash I have in the bank.  My net worth can, and does, grow in ways other than stock market gains.  For the most part, since income from this site is quite small, my net worth grows because I have a job and it pays me.   This is why I've been able to do as well as I have.

In looking at my net worth, my stock accounts have done as poorly as the market, worse in some cases.  My Roth, which has had no contributions from myself in the last two years, is down 40%. My other retirement account, my 401k, is down about 4%.  But keep in mind, I've contributed a lot of money into it over the past two years, so this stat is very misleading. If I took out my own contributions over the last two years I still handily beat the market down only 20%.  Most of that was because I have had the foresight to be in cash for a long time.  More on that in a second.

But even given this, I've done quite well.  How is this possible.  Same way I got the money in the first place.  I'm a very, very good saver.  Keep in mind, my savings two years ago was quite substantial.  Despite the ugly markets, I've been able to grow a rather large nest egg even larger by good old fashioned saving.  The cash I have on hand is quite large now.  This is partially why I have done so well why the market is bad.  I have been mostly in cash for the last several years.  It was one of those things that did not look so smart up until 2007.  In fact, it looked downright stupid as the market rallied.  But I stuck to my belief that the market was way overpriced.  I just could not understand how housing could have the run it had without a correction very very soon.  Lucky for me, it came .

So overall, I'm doing quite well over the past two years.  I actually used the chart to map out how soon I could retire given a few assumptions.  I'm a little bit off my target numbers for my current age but I'm in really great position given what the market has give us over the last two years.   However, I'm not so optimistic I can reach my original goals since much of what I calculated assumed average market returns over the next twenty years.  Honestly, I don't think that is going to happen.  I really think we are going to be in a very long economic downturn which will squash any sustained market rally.  Kind of gloomy huh?

The Market's Wild Ride

Yay!  The Market is up 3% today!  Let's celebrate.

On second thought, let's not.  I've said it many times but it is worth repeating.  It is not a good thing when markets move this far in any direction this fast.  It means there is panic and fear on the street.  Panic and fear on the street mean there is going to be tremendous volatility.  So as nice as it is to see a 3% gain today, we could just as easily see a 5% loss tomorrow.  Now, I don't think that is going to happen here.  I think the market is probably on a short term upswing.  Earnings season is underway and most of the people who have reported, and this is admittedly a very small sample size, have reported better than expected numbers.  If this continues, we could easily see the market rally.

On the other hand, if a few of the numbers come in soft, look out below!  I don't think this is going to happen, but the danger is definitely there.  Now, I have not made any trades for the last several weeks.  This is partially because of the job and this is partially because I've been waiting for the market to do a bigger correction.  This correction has yet to materialize and I'm in no particular hurry to rush in.  Some of my trades like TBT have been particularly weak lately so I may jump back in.  I also really do like my China trade, FXI, which is rallying nicely after taking a small break.  If I make a trade in the next few days I think it is going further long these positions.

I'm not thrilled the market has not pulled back, giving me another opportunity to buy, but these two trades have great long term value in them.  China is doing very well comparatively to the U.S.  Not great mind  you, just better than the U.S. I also really just do not like being in the dollar, which is of course why I want to short U.S. Treasuries.

Why NOT To Go To Business School

This past week, a co-worker of mine had her last day at work.  She was leaving the company to attend business school.  While I was happy for her, it got me thinking about my own experience applying to business school and my eventual decision not to attend.  Many people I know have attended business school.  I often tell people that I am the only one of my Princeton friends who did not get some sort of higher-level degree.  It is absolutely true, no exceptions.

So you would think that someone like myself, ambitious and smart, would have done like my friends and gotten an MBA.  But things for me were never that simple.  So I decided to outline why I think someone contemplating going to business school should perhaps think twice about making a decision like this.

First off, let me give you a brief account of my own decision.  I only applied to two MBA programs.  Harvard and Stanford.  These are two of the top four business schools and the hardest to get into (Penn and Northwestern being the other two).  The chance of success is quite small.   While this may seem crazy on my part I definitely had my reasons.  Like most things, it came down to money.

At the time I applied to B-Schools I was already making six-figures.  The average starting salary now for a Harvard MBA is $120,000.  When I applied five years ago it was even less, averaging right about what I made.  So just do the math.  Attending a top-tier business school will cost you somewhere in the ballpark of $200,000 for two years.  You add that to the opportunity cost of someone like me (lost salary) and now you are looking at something close to a cost of $400,000.  Yikes!  Now consider that on average, I could not expect to make more money upon graduation.  How would I ever make up the $400,000 difference?  The numbers get even worse at less prestigious universities.  Their graduates can expect to earn less.  So now you see why I did not apply to other schools.

So if I am not going to go to make more money, the only other reason I would go is to get a job I might otherwise not be able to get without an MBA.  I have two potential career paths.  I either want to start my own business or I want to be an executive at a large technology company.  The goals are similar in that I want to be the boss at a high growth and exciting technology company.  The paths are only different in the risk I'm willing to take to get there.  Do I need an MBA to do either of these two things?  Not really, but it would have made it slightly easier.

Starting my own business obviously does not require an MBA.  However, getting one has two advantages.  First, I would focus on classes in entrepreneurship.  Even today, I'm not totally sure where I should start if I really wanted to start my own business.  How would I go about making a business plan?  How would I get funding? What are the pitfalls I should avoid?  Second, it is all about the network.  It is a very big reason to go get an MBA.  The circle of friends and colleagues you will encounter will go well beyond your two years at school.  These are the people you will count on to tell you of new opportunities or help you get your own business off the ground.

But when I looked at it, the benefits just did not outweigh the cost.  If I was realistic, I thought I could get where I wanted to be without having to put everything on hold for two years.  Here is a dirty little secret of the top MBA programs.  Those who are most likely to attend are often the people who probably need it the least.  It is a strange situation in that you have to show the schools why you need to attend their schools to achieve your goals but you have to be the type of person who can succeed given almost any circumstance.  How is that for irony?

In any case, the bottom line is that you should not get an MBA if it does not actually make any financial sense to do it.   Just do the math.

Lifetime incremental increase in salary > Cost of MBA + Lost Income

Keep in mind that it is the incremental increase you could not have gotten if you did not go get your MBA.   If you did not get your degree, you would still get raises at your current profession.  So you have to think of the total amount of money you could gain above and beyond what you would normally be able to do.

 

For completeness, here are some other reasons not to go get an MBA.  These are actual reasons I have heard given.

• You don't know what else to do


• Everyone else you know, friends and family, have an advanced degree


• You are tired of working and just want a two year break


• Might as well, you don't have a job currently


• It is expected of you


• You want to move across the country and your parents will foot the bill for school

Opposite Day

Not to make light of Michael Jackson's death but one positive thing did come from his passing.  Today was by far the lightest traffic day I have ever encountered on my way to work.  Amazingly, it really should have been the exact opposite.  I work about five blocks from the Staples Center, the site of today's Michael Jackson memorial.  There were numerous announcements of street closures due to the event.  They were not even going to let people with in a few blocks of Staples Center just to keep the crowds under control.   Given all this, I was fearful of what my commute would be like today.

But much to my surprise the freeways were completely empty.  I'm not kidding, it looked like a Saturday afternoon in downtown L.A.  Heck it looked better than a Saturday and I should know considering how many Saturdays I've worked lately.  Ironically, those who took the train in told me that the trains were pretty crowded in the morning.  The only think I can guess is that everyone was so afraid of how bad traffic would be, nobody decided to drive in.  That made it very easy for those of us who decided to drive in (or who had no choice).

I very much doubt that all those people could take the day off or simply work from home.  So what it really tells me is that L.A. traffic would not be nearly as bad if they really could just find a way to promote public transportation.

Quality of Life - A Comparison to My Parents

In thinking about the current financial crisis and its causes I have come to the conclusion that much of this has been a generation in the making.  While people will point to the housing bubble of the last decade as the main culprit, I tend to think this problem started well before all of this.  We as a nation, and really as a world, are for the first time in modern history going to have a generation that will be worse off than the previous one.  This has led me to drop the moniker of Generation Y for my age group and instead call us Generation Screwed.  Our problems now come not from some one time event but because the generation that came before mine lived a lifestyle that was unsustainable in a world with global competition.  In trying to recreate that world, the subsequent generation overextended themselves to the point where things just snapped.

But rather than talk about things in a general or vague sense.  I decided to sit down and write about how things have gotten worse for this generation when compared to our parents.  Since I only have my life to compare it to I figured I would start there.  Before I begin a little background on both myself and my parents.

I am 31 years old.  I was born and raised in Southern California.  I was a smart kid, always did well in school, and attended an Ivy League college.  I now have an upper management position in a technology company and make a pretty good salary.  I am engaged to be married to a beautiful sweet girl who attended a good university and who also has a very good job.   Together, our combined salaries put us in the top few percent of all income earners.  We live, with our cat, in a small two bedroom apartment.  We both drive very modest cars, I have an eight year old Accord and she a four year old Corolla.  We would like to buy a house but have held off because prices are still too expensive.  We are frugal and save over half of our income.  I have a pretty sizable retirement nest egg, something I achieved by saving diligently.

My parents were married much earlier in life.  They both immigrated here as teenagers.  Neither of them went to college, my father just barely passed high school.  Growing up, my dad owned a small successful restaurant.  My mom worked for the city.  By the time they were my age, they had three children, including myself.  They owned their own four bedroom home (and would soon add a fifth bedroom) and almost had it fully paid off.  They had at least four cars that I can remember, including a Mercedes.  They never earned more than I do (even with adjusting for inflation).  Working for the city, my mom's retirement was on the way to being secured.  She retired at the age of 53 with 1/2 her salary being paid to her and benefits for the rest of her life.

Just reading the two backgrounds does it not sound like something is not quite right?  Mine is a fairly typical American story.  I come from a hard-working immigrant family.  They did well given their background and hoped for more for their children.  I would be considered a success because I got into a prestigious university and I have a high paying job (my only failure being I'm not a doctor).

Given the huge advantages and success I have had when compared to my parents, one would think I live a "better" life.  But look at some of the key facts.

• I don't own my own house and subsequently am nowhere near paying a mortgage off


• I don't have multiple cars or even cars of comparable stature


• In retirement, I'm on my own.  There is no pension waiting for me.  Further, while I may be able to retire earlier, most in my age group will retire, if they get to at all, in their 70's.


• I have no children while my parents had three at my age.  I can't imagine how further behind I would be on my financial goals if I were to have had three children by now.

The story would be even sadder if I had any debt.  Most of my generation does because of the high cost of college.  While neither of my parent's went to college, their siblings did.  My aunt tells me how she went to UCLA for just a few hundred dollars a year.  My how times have changed!

I tell my story because I find it to be very relevant to the problems we now face and because it illustrates why we are not going to get out of these problems any time soon.  While the housing bubble has precipitated the current problems, it was not the cause of what we are about to go through.  The generation before mine lived a very good life.  They lived in a world where the U.S. was the dominant economic force in the world.  It was a world where U.S. citizens did not face many economic challenges from the rest of the world.  High paying manufacturing jobs were not being shipped oversee.  There was little foreign competition for financial assets.  And the U.S. got fat off of cheap goods from around the globe.  That world is not coming back.   We tried to close our eyes to it.  It is why so many my age took out zero down payment loans with adjustable rate mortgages.  It was the only way to afford what our parents had before us.  (I think the zero down actually caused our financial problems, not the adjustable mortgages but that is a different post)

The world is a tougher place now.  I do not think this is a bad thing.  In fact, I think it is a pretty good thing.  Like all competition, there will be winners and losers.  Net, a rising tide lifts all boats and there will be more winners worldwide.  Notice I did not say the U.S. will be better off.  In fact, I expect there to be a leveling off for Americans.  We have had it so good for so long that the pendulum needs to swing the other way for us to reach equilibrium.

Amazon Gives Finger to Taxman

Many states are finding that they have a revenue shortfall. Like any government, many are jumping to the simple answer. Get tax revenue anywhere you can find! For many states, they have looked at the taxes that they lose from online sales to try and make up the difference. A few weeks ago, New York issued a law that stated that despite the fact Amazon did not have any physical presence in the state, Amazon was obligated to charge New York residents taxes because of Amazon's affiliate relationship.  I am an Amazon affiliate.  I sometimes link to Amazon when I'm I want to talk about books I like or products I just bought.  New York reasoned that I as an affiliate represent a physical presence for Amazon.  I couldn't disagree with this more.

In New York, Amazon succumbed.  They now charge taxes to NY state residents even though Amazon has no physical location in the state.  When I originally read this, I was rather disappointed as I was hoping Amazon would not back down from a fight.  (In reality they haven't.  They are appealing the decision but complying for now).  But Amazon has now drawn a line in the sand.  North Carolina was about to pass similar legislation and rather than just start collecting taxes, Amazon decided to cut ties with all of its North Carolina associates.  They are planning to do the same thing in Hawaii.

This is a perfect example of government doing something extremely dumb that helps absolutely nobody.  The state will collect no additional revenue from taxes.  You could actually argue that they will lose some revenue since they will collect less income taxes from Amazon affiliates. The state might be able to collect some revenue from smaller retailers, but this will be offset by the damage they do to consumers who now have less money to spend at a time where they have less money in the pocket.

I really hope Amazon continues to take a firm stand.  I hate the fact that government often feels like it can dictate how private companies must operate.  While I think this situation is in the slightly gray area, I think the principal remains the same.  Private companies should not take "government mandates" lying down.  I often felt this way with Microsoft and the EU.  Even though I know it would never happen, I would love to see what would happen if Microsoft, rather than comply with all the EU monopoly rulings, just said, "Fine, we will stop selling Windows and Office in Europe".  I'm not sure who would be hurt more, but it would be something I would love watch unfold.