War on the Middle Class? Lou Dobbs tells only part of the story.

For all you Lou Dobbs fans, I want to discuss his ongoing series about the "War on the Middle Class". Let me start by stating that I find Lou Dobbs to be somewhat intelligent, eloquent, and well informed on many topics. His efforts to maintain a focus on border security are admirable. And, his Exporting America dialog is thought provoking and something we all need to give more consideration to.  [update: his true colors eventually showed with his "birther" conspiracy theory crap and other issues, prior to his premature death]

But, I really think Lou Dobbs needs to expand the breadth of his investigation with regard to this purported war on the middle class he so often speaks of. For brevity, I will refer to the "war on the middle class" as just "war-mc" throughout. Tonight's war-mc segment discussed how the housing downturn was yet another thing responsible for putting the squeeze on America's middle-class, citing various statistics about how:

• 40% of mortgages now are zero-down or other "exotic" types
• inventories of homes on the market are rising
• 1/2 a trillion in ARMs will adjust this year
• 700 billion in ARMs will adjust next year
  
• people are facing huge increases in mortgage payments at the same time they are being squeezed by energy costs
• (and, a common theme not necessarily mentioned today is how wages have stagnated)

All of these items may very well be fact. But, how is this representative of a war-mc? I am likely to upset quite a few persons that would like to have everyone believe that their woes are all due to this supposed war on the middle class, but I must put forth another side to be considered -- I believe that a significant part of this war-mc is a self-inflicted war.

Why self-inflicted? Because so many of the issues Lou Dobbs talks about result from our own actions ("our" being the middle class generally). Though I can not fully develop my reasoning in a single blog article (it would take a book), here are some of my reasons for calling this war-mc "self inflicted":

• Mortgages. It is this simple: only you are responsible for taking on more debt that you can service, for believing that interest rates would never rise again, and to think that house prices were taking an endless upward climb that would always allow you to increase your home value and equity with little or zero effort.
• Mortgages/housing: from what I see, the "middle class" is the driving force behind the housing bubble. It's the middle class that banks and lending institutions have targeted with excessively easy of access to debt. Not a day goes by without another offer for a credit-card, home-equity loan, or the likes for most of the middle class. And, the middle class bought into it all hook, line, and sinker, taking out as large of loan as possible, pushing their finances to the edge, and acquiring the biggest and most extravagant house they could possibly "afford" (afford being a term that has lost all meaning these days - it now simply means how much a bank will let them borrow... little to do with truly afford). The belief that home prices would constantly climb has made many feel they could do no wrong with such a move. Well, this all worked as long as the Federal Reserve made money so cheap (to borrow) that the house of cards kept going higher.
  
• Housing add-ons: the large houses (and loans) are usually just the tip of the iceberg. With those homes come all sorts of products and services. The larger the house, the larger your costs - be it lawn service, landscaping, watering, heating, cooling, or simply the property taxes on that thing! Yes, one excess begets others. And, per the rules of supply and demand, the larger draw on energy resources to heat and cool those extra square-feet raises energy costs for everyone; many of the resources used (in larger amounts) to build and maintain a larger home are petroleum based too (roofing, vinyl siding, and much more), all increasing demand for limited resources.
  
• Automobiles: you have to get to that fancy house in the suburbs, and you certainly do not want to rely on public transportation (which, is of course harder to even find out in the burbs). Instead, you have to have a veritable fleet of cars to go along with that house. These cars can not be too old, or they dare not fit your image (or match your house). Instead of driving 10 year old affordable vehicles, the norm is more like 4 years or newer. Those cars bring along a host of bills: insurance, fuel, tires and consumables. Note to all: all the extra demand for fuel raises fuel prices further.
  
• Credit-Card Debt: I think everyone knows the story on this -- simply put, it is out of control.
  

Whether you want to admit it or not, many of the costs that are "waging war" on the middle-class are a matter of choice. That is what people like to forget, ignore, or make excuses in order to evade. It is your choice to purchase a 4000 square foot home, a Hummer, a Harley and all your other toys and niceties. And, even if you are nowhere near that level of expense, but still stretched to the edge, there are still likely to be many choices that you have made that led to you feeling like there is a war-mc.

We all have the worst example of all to follow when it comes to living beyond our means: our own government. They spend money far beyond what they have, and appear to have little to no concern about the long-term ramifications of ballooning debt and related obligations. The Federal Reserve, during the last recession, saw that the fastest way to make the economy look wonderful and robust was to enable the middle-class to take on excessive amounts of debt (just like our government) at low interest rates and allow a housing bubble to take shape -- and pull us out of a recession. Once could argue that it was a cure, but I believe a significant amount of this emergence from recession was simply a postponement of the inevitable adjustment that must occur when the realization that debt funding by overseas investors must eventually hit a ceiling. Until we ourselves save and control spending, we will be at the mercy of others.

I was raised in an environment where money was tight, and things had to be very strictly budgeted for. Debt was something to be avoided, as it makes you work to service it, and it introduces excess and avoidable fear when times are rough. Debt has its place in our economy for certain -- without it, growth would stagnate. But, debt abuse and easy debt has crept in and taken over for anything that I would consider sane and safe levels - for individuals, business, and government.

For those of you not already mired in excessive debt, please, think twice (and many more times) prior to entering into further debt. A simple solution is to live beneath your means (especially beneath the level of debt your income will allow you to get in today's age of easy loans). You do not have to do it forever; but, do it long enough to acquire solid savings skills and debt-avoidance skills. Then, you will not have to be part of those that interpret every negative bit of economic news (like the housing downturn) as a "war against the middle class"; instead you will see it for what it is (primarily), a war against those who chose to put themselves in the line of fire.

As a close, I must acknowledge the fact that there are a significant number of expenses that could be considered part of a war-mc. These expenses will nearly always exhibit some commonality in that: they are difficult to avoid; are for services/products you can not live without (and I do not mean your cell-phone); there are few supplier options (leading to easy and widespread price-fixing opportunity); their average rate of annual increases will far outpace inflation as a whole. Some examples include: health care and prescription drugs, food, other insurances, fees (e.g., banking fees), and taxes (or other government fees). I did not mention energy simply for the fact that we consumers control demand (though we do not exercise that control very well) for the most part.

Currency Hedging with American Depository Receipts (ADRs)

For those of you who have already read my May, 2006 posting about Investing in ADR (American Depository Receipt) Stocks, you may have been able to make impressive investment returns, for two reasons. If you watched both the currency-rates and the stock prices during this time and jumped in when the stock market had a mini correction that bottomed out early-mid June:

• the stock markets, both here and abroad, performed rather well since that bottom;
• the United States Dollar (USD) tanked against the British Pound (GBP) and other currencies worldwide during that same period.

The overall stock market move is a bit irrelevant to the ADR thing, but the second ROI reason is all about currency fluctuations and how they affect your ADR share-price returns.

A couple of London Stock Exchange stocks that have ADRs here in the USA that I regularly follow are Barclays PLC and HSBC Bank (which I used as an example in the 5/13/06 article). Let's say you timed things very well and got into each at roughly their bottom in mid-June, and examine what your returns would be and why:

• Barclays (ADR ticker: BCS) - on the London Exchange, it was trading at 586 Pence at its low, and closed today at 653.5 Pence. Return on the London market: 11.52% . . . Impressive, but, the BCS ADR during the same time hit a $43.23 bottom, and a $49.64 close today, or a whopping 14.83% return, which is quite nice, especially considering we are talking about large blue-chip type banks that roll off a healthy 3-4% dividend! Your ADR returned an extra 3.3% on your investment during the same period! The difference in returns reflects the tanking USD during this period.
• HSBC (ADR ticker: HBC) - on the London Exchange, it was trading at 913 Pence at its low, and closed today at 951.5 Pence. Return on the London market: 4.22% ... and, the HSBC ADR during the same time hit a $84.34 bottom, and a $90.35 close today, or a 7.126% return, which is darn solid too for such a short timeframe. Your ADR returned an extra 2.9% on your investment during the same period! That extra return reflects the substantial drop in the purchasing power of the USD during this period.

Now, you may be asking why both stocks did not return the same 3.3% "extra" due to currency swings: simple, one stock hit its low on a different (later) date than the other, and the currency exchange rates had already changed some.

So, keeping these examples in mind, there can be opportunity to hedge against the falling dollar by purchasing American Depository Receipts (ADR) stocks. This is not as direct as simply playing the currency market on a ForEx trading platform or such, but it is probably less likely to cause you to lose all your money doing risky currency-swing trades. Do some research, and consider the options that are available. There are ADRs for UK stocks as well as German, Japanese, Israeli, and many other firms.

Keep in mind, as I pointed out in my prior article, you can play this swing both directions. If the US Dollar strengthens greatly while you hold an ADR, you can just as quickly see the multiplier working against you. If you want more information, read that first posting of mine. If you still need more, let me know and I will try to dive deeping into investing in foreign stocks in this manner, especially in order to hedge against any devaluation in the US currency.

Increasing prices to remain competitive?

According to the dictionary, competition (in business) is referred to as "Rivalry between two or more businesses striving for the same customer or market." Now, common sense dictates that this rivalry for the customer would be by offering a better service / product, or the same service / product for less money.

Well, you and I understand this, but do the companies that are competing for us consumers understand it? What got me started on this blog were a couple of rate increases from our cable TV company over the prior year or two; in particular, the small plain white piece of paper with a list of old and new prices, plus a quick explanation of why ". . . in order to remain competitive, we are raising our rates . . ." Gee, excuse me??! Did I hear right? You are raising prices in order to remain competitive?

Only marketing "experts" could try to put such a spin on increasing the price of a commodity such as cable TV and feel OK about telling us how it is all about remaining competitive. I guess that sounds better than all of the more likely real reasons for an increase, such as:

• We know you have limited choice in who provides this service to you, so we do not have to be competitive at all, since there is barely anything left that could truly be called competition; (most likely imho)
  
• We have aging infrastructure that needs updated or you may leave for a competitor - and, we have not planned accordingly and now need funds to pay for it; (at least this may have been somewhat honest);
• Our debt burden is now your problem -- sorry, but we grew too quickly using debt to make us look like a fast growing, high flying company that is best for everyone, at least long enough to push others out of the market; (common place)
  
• Our top directors have taken advantage of the company through excessive pay, stock options, and the likes, and well, you get to pay for their mistakes and greed; (in this case, their is truth to this scenario, since the company we have is Adelphia, and we all know about how the founding family got in a bit of a legal jam for fraud).
• We do not care about being competitive on the price offered to you, our customer, but we do know we want our stock price, P/E ratio, and the likes to be competitive and need to increase cash flow to do so (oh, and some bonuses will certainly have to be paid to top management as soon as this plan works).
  

Regardless of the real reason for price increases, please keep in mind, you do not raise prices in order to remain competitive - you do so because you can, because a competitor has recently raised the price on a similar service, or perhaps your raw material and labor costs have increased. But, do not consider the consumer ignorant enough to accept a price increase as a means of competition! Then again, maybe I need to increase my prices to remain competitive? Hmmm... sounding a bit better now. heh.