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Thread: Economucs Questions

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    Member dman's Avatar
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    Economucs Questions

    I, by far am no Economics whiz, knowing just enough to get by most times. I had a few questions I wanted to ask on here to get some input and enlightenment.

    First, I wanted to know the thoughts that folks have on supplemental retirement plans that have the options of going with a guranteed return, as opposed to putting it into actual stocks. I know there are many who feel that going with stocks works out in the long run, but in todays volatile stock market climate, it seems to me that sticking with a guranteed return options is the best way. Right now, through the State Employees Deferred Comp program I have 75% going into guranteed returns and 25% going into a Dodge and Cox stock fund.

    The second question has the potential to take this thread into murky waters, so lets keep it civil and just have good discussion about it. With the price of nearly everything going through the roof, namely gas, I hear a lot of talk for the reasons why.
    One of the main reasons is the value of the U.S. dollar against other world currencies. I have heard some so called consumer experts say that one way to force prices to come down would be to start raisning the interest rates back up, but there is a fear that will make credit much harder to get.

    I guess to me, it seems that credit being so easily accessible has been a large problem in the scheme of the economic climate that we are now in. I know the loan companies are very culpable in this also, but I feel there were many people who were in no position to get credit granted to them that did, and now it's coming back to bite them and their lenders.

    With every rate cut the Fed proposes, it seems that things are going up that much higher in price. I hear them say they are trying to stave off a recession, but it seems these rate cuts are nothing more than putting bubble gum on a leaking dam.

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    Re: Economucs Questions

    I'm no economics whiz either but I believe what you say about the dollar and interest rates is correct. This is arguably necessary to bail out the banks who have created this problem. The issue is, if you don't help the banks and some go under it sends shock waves through the market that are even worse than a weak dollar (see Bear Stearns yesterday). The other side effect of a weak dollar is that it stimulates exports because our goods become less expensive for other countries to buy due to the favorable exchange rate. I'm guessing the thought is that more exports helps many sectors such as manufacturing and will bring stability with time.

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    Score Early, Score Often gonelong's Avatar
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    Re: Economucs Questions

    Quote Originally Posted by dman View Post
    First, I wanted to know the thoughts that folks have on supplemental retirement plans that have the options of going with a guranteed return, as opposed to putting it into actual stocks. I know there are many who feel that going with stocks works out in the long run, but in todays volatile stock market climate, it seems to me that sticking with a guranteed return options is the best way. Right now, through the State Employees Deferred Comp program I have 75% going into guranteed returns and 25% going into a Dodge and Cox stock fund.
    I don't know much about Dodge and Cox, but I have my wife in 65 % stocks / 35 % guaranteed (she is 36). I am in 100% stocks/mutual funds (I am 38) in my 401K and IRAs. Your mix would depend on your guaranteed return, the stocks/mutual funds available, your age, and the level of risk you are comfortable with.

    GL

    /not a financial advisor, didn't stay at a Holiday Inn Express last night.

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    Waitin til next year bucksfan2's Avatar
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    Re: Economucs Questions

    My $.02

    As for the first question diversify. Right now may not be a bad time to be all in cash. I would say that a well run mutual fund should be a safe investment but with Bear Sterns collapsing it may not be that way anymore. I have a broker who told me that it is too difficult to invest in just stocks nowdays. He suggested diversifiying in several different types of mutual funds that are spread across several markets both foreign and domestic. In today's market I think it will be very very interesting to see what happens in the next 90 days.

    As for the second question, the dollar and interest rates are directly correlated. When the interest rate goes down that makes money more easily available which cheapens the dollar. As the interest rate goes up money isn't so easily available so the dollar gets more powerful. One of the reasons for the spike in oil prices is that oil is traded in USD. However I think that is a smaller factor. As stated above that exports are becoming cheaper which will enable the trade gap to shirnk. I even think a german car company pulled out of germany to produce in the south. I don't know if it was BMW or Mercedes.

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    Re: Economucs Questions

    There's an argument for a long bear market. Most people begin to invest from age 35 to 55, pumping up the market. After 55 they begin to draw down those savings. And that's where the baby boomers are heading.

    As for the economy and the dollar, anyone's guess. There's a strong correlation of war and inflation. We could keep interest rates low, boost exports, stem job losses and inflate away our debt or we could raise them, force a recession, kill of inflation and restore the dollar. We did the latter in the 70's.
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    Re: Economucs Questions

    Bucksfan2 describes it pretty well. As rates decrease, the dollar weakens due to the augmentation of money supply. There are different reasons for the price of oil right now; commodity trading, sale of oil in USD increases prices here (but not abroad), more demand (not as big of a factor, though due to supply's condition).

    I don't see the US economy being the only one affected with all of the credit mess; just look at how the Asian markets plummeted after the Bear Stearns news. More people are investing in euro-denominated securities, but the euro is still a fiat currency just like the dollar. It will just take time for the dollar to begin to rebound against the basket of currencies that it's depreciating against. The price of gold is increasing, but just like today it dropped 24.4; more people are investing in gold right now due to the declining dollar more than any reason, but I don't see these prices staying so high in the long run.

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    Re: Economucs Questions

    Quote Originally Posted by AccordinglyReds View Post
    The price of gold is increasing, but just like today it dropped 24.4; more people are investing in gold right now due to the declining dollar more than any reason, but I don't see these prices staying so high in the long run.
    Depends on the what the long run is. I thought the real estate market had peaked in 2005 and it continued to climb for another year and a half.
    The widow is gathering nettles for her children's dinner; a perfumed seigneur, delicately lounging in the Oeil de Boeuf, hath an alchemy whereby he will extract the third nettle and call it rent. ~ Carlyle

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    Waitin til next year bucksfan2's Avatar
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    Re: Economucs Questions

    I think the biggest worry right now is stagflation. A time of negative economic growth along with inflation. If you look at the banking and housing industry you can see huge problems. The interest rate is very low but the banks aren't lending money. There are so many bad loans out there that the banks are not lending money to anyone without perfect credit. This not only makes loanes harder to get but in return will make houses sit on the market for longer.

    I will also mention this but IMO economist are some of the most negative people out there (I don't mean to offend anyone here). There is a saying that goes like this "economist have predicted 10 of the last 2 recessions." If you ask people what a recession is many won't get the answer right. Recession is two quarters of declining economic growth.

    In reality we have to hit a bottom. As much as foreign nations don't want to admit, but their economy is tied pertty closely to the american economy. The biggest question is where is the bottom and when do we start coming back up?

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    Re: Economucs Questions

    Quote Originally Posted by bucksfan2 View Post
    I will also mention this but IMO economist are some of the most negative people out there (I don't mean to offend anyone here). There is a saying that goes like this "economist have predicted 10 of the last 2 recessions." If you ask people what a recession is many won't get the answer right. Recession is two quarters of declining economic growth.

    In reality we have to hit a bottom. As much as foreign nations don't want to admit, but their economy is tied pertty closely to the american economy. The biggest question is where is the bottom and when do we start coming back up?
    I really like that quote about predictions! And you're exactly right, people "think" we're in a recession but it has a specific definition and it doesn't matter what people think it is.

    And the US economy has performed wonderfully since the last recession regardless of many people's feelings. Foreign economies have been far worse. The US economy endured the shutdown of the primary financial center for months (post 9/11 NYC) and a major hurricane that put another city out of commission for quite some time.

    The markets (and therefore consumers) do quite well when left to work on their own without lots of tinkering.

    And I recommend "Basic Economics" by Thomas Sowell.

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    Re: Economucs Questions

    Quote Originally Posted by durl View Post
    I really like that quote about predictions! And you're exactly right, people "think" we're in a recession but it has a specific definition and it doesn't matter what people think it is.

    And the US economy has performed wonderfully since the last recession regardless of many people's feelings. Foreign economies have been far worse. The US economy endured the shutdown of the primary financial center for months (post 9/11 NYC) and a major hurricane that put another city out of commission for quite some time.

    The markets (and therefore consumers) do quite well when left to work on their own without lots of tinkering.

    And I recommend "Basic Economics" by Thomas Sowell.
    My question is to what extent that wonderful performance was based on the fact that people had such easy access to credit? I remember thinking about five years ago that the banking industry seemed like it was nuts, however being relatively under informed economically, I figured there had to be something else to the economy that made it okay for lenders to develop all those insanely short sighted products. Now, it seems that has all come crashing down.

    So, was the strength of the economy over the last decade just paper? Or was there something more substantive to it?
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    Re: Economucs Questions

    Quote Originally Posted by SunDeck View Post
    My question is to what extent that wonderful performance was based on the fact that people had such easy access to credit? I remember thinking about five years ago that the banking industry seemed like it was nuts, however being relatively under informed economically, I figured there had to be something else to the economy that made it okay for lenders to develop all those insanely short sighted products. Now, it seems that has all come crashing down.

    So, was the strength of the economy over the last decade just paper? Or was there something more substantive to it?
    Im no economist but I am able to understand economics pretty well. I think the problem arose from interest rates being so low and a lot of people taking out lones hoping to flip a house, buy pre construction and then sell, and then people who were taking out mortgages by putting little or nothing down. What happened was the fed when on a streak of rising interest rates every quarter by a .25% and when people's mortgages reset they were paying a much much higer rate. You heard stories of mortgages resetting and the payments going up $500/month.

    Credit was easy, mortgage brokers were out there shopping for the best rates so banks were fighting each other for the lowest rates. In reality people bought houses that they couldn't afford because the inital payments were within their price range only to see the reset prices way outside of their range.

    My fiance and I bought a house in a new development about a year ago. I believe the development is around 5 years old and it is absolutly amazing to see the number of houses for sale popping up each week. Fortunatly for us we bought a house that was foreclosed on and bought it for cheap. It was shocking to us that the house had been foreclosed on and the house was only 3 years old at the time.

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    Re: Economucs Questions

    Part of the problem, too, is that the housing boom made people forget that prices traditionally rise between 1-2% annually. Housing seemed like an investment when prices were growing by 10%.

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    First Time Caller SunDeck's Avatar
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    Re: Economucs Questions

    I'm just trying to understand whether the housing boom, fueled by the easy access to credit was making it seem like the economy was much healthier than it actually was.

    Like I said, it seemed to me like a house of cards, and I largely avoided getting away from my traditional conservative view on real estate. A relative of mine bought a half dozen apartments over the last decade and I wondered then whether that was the smartest thing, partly because he has to manage them all, but also because I know he was accruing what seemed to be far too much debt for the amount of cash flow he was bringing in each month.
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    My clutch is broken RichRed's Avatar
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    Re: Economucs Questions

    Quote Originally Posted by SunDeck View Post
    I'm just trying to understand whether the housing boom, fueled by the easy access to credit was making it seem like the economy was much healthier than it actually was.
    It was absolutely a contributor, just as the tech stocks in the 90s were before they turned into Beanie Babies.
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    Re: Economucs Questions

    It's all cyclical.

    What goes up, comes down. Vice versa.

    I'm slowly working my way through Alan Greenspan's book. It's a really great read. First 200 or so pages is biographical, as well as historical perspective on domestic and global economics from a guy who, I think it's safe to assume, knows a little about the field. Second half is his take on a variety of international markets going forward. He points out some pretty troubling things about China, for example. Same with Russia. They're not in the headlines right now, but there are some fundamental issues with monetary policy, fixed currency exchange rates, etc that are going to pose big problems sooner or later.

    As far as your first issue - defined contribution vs. defined benefit - I'm in both. Making mandatory contributions to a pension plan. In my case, I'll be able to retire at 60% pay...here's the great part...at about age 52. In addition, my wife is socking away $ in her 401k (her annual bonus got paid on the same day that the market closed at its recent low water mark - cha-ching!) and I'm dumping some money into a 403b. By tapping into the pension so young, I'll be able to keep my investments invested. Furthermore, I'd like to think that I'll still have a decade-ish at my peak earning point to go get another job after retirement #1. That's effectively 2 salaries for a decade, allowing for even more retirement saving and slower withdrawls from my 403b once I do call it a career.

    I guess it depends on a lot of things - your aversion to or prediliction for risk, your investment horizon, your assumptions about when you'll start tapping into your nest egg, how long you and your spouse will live, etc.


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