Archive for September, 2007

How Far Has the Dollar Fallen? And Why?

Kurt Brouwer September 29th, 2007

For an updated version of this post click here:

How Far Has the Dollar Fallen? And Why? — What’s Next?


As you know, the dollar has been falling for a few years against major currencies such as the Euro, yen and even the Canadian dollar. When the media trumpets that the dollar has fallen to historic lows versus the Euro for example, it is sometimes hard to put that in an actual historic perspective.

For example, do you remember hearing that the Euro fell to historic lows versus the dollar? Well, as you will see from the chart below, it happened not too long ago. In fact, the Euro fell steadily versus the dollar for the first five years of its existence, beginning in January 1999. It did not get back to even until mid-November, 2003.

The Euro has gone up a total of 19.7% versus the dollar over the approximately nine years since it began trading. That’s about 2.6% per year (for the entire data series, go here). At the low point for the Euro you could have bought one for 84 cents. Now, it takes a $1.42. Here is a chart showing the fluctuations of the Euro versus the dollar since inception in 1999. This shows how many dollars it takes to buy one Euro. When the blue line is heading down, the dollar is getting stronger. When the line heads up, the dollar is getting weaker (click the chart to see full size):

The gray bar in the charts indicates the relatively brief recession we experienced in 2001 (the time period on the charts is slightly different so the gray bars do not line up perfectly). You might notice that the recession coincided with the low point for the Euro (or conversely, the strongest point for the dollar during this time period). In other words, the very strong dollar and the weak economy went hand in hand. Now, our economy has been strong for over five years and the dollar has fallen, more or less continuously during this economic upturn. Coincidence? No. Here is a chart showing the Federal Funds target rate for the same period (click the chart to see full size).

As you can see from the second chart, the Federal Reserve began raising interest rates to slow down the technology bubble in 1999. As seen on the top chart, when U.S. interest rates went up, the dollar rose versus the Euro. When the economy fell into recession in 2001, the Fed began slashing interest rates and the Euro began heading up versus the dollar. The Fed began raising rates in 2004 due to inflation concerns and the Euro stabilized versus the dollar until the Fed stopped raising rates in 2006. At that point, the Euro began climbing and the process accelerated when U.S interest rates were cut on September 18, 2020. The Fed cuts rates when it is concerned with economic weakness. That helps the economy, but hurts the dollar. No doubt the process will again repeat itself because currencies fluctuate as does our economy.

I hope this clears up some of the confusion and also allays some of your concerns. The dollar has always fluctuated against other currencies and this is nothing new. Also, speaking of historic lows versus the Euro is a bit silly since there are only nine years or so of history.

When it comes to a strong dollar or a strong economy, I pick the latter. It seems from the data that we can have a strong and growing economy or a strong dollar, but not both at the same time. Which would you pick?

Home Prices Fall — Rich Hardest Hit

Kurt Brouwer September 28th, 2007

Just kidding about the rich hardest hit, of course. However, there is evidence that prices of higher-end homes are suffering more than very low-priced homes. Here is a roundup of various items on falling home prices:

Sales of Pricier Homes Plummet (Sudeep Reddy, September 28, 2020, Real Time Economics Blog)

‘The market for higher-end homes took an especially strong blow in August as a result of the credit crunch: Sales of new homes priced above $500,000 dropped by more than a third in the latest government figures.

Today’s report on new-home sales show that 68,000 new homes overall were sold during the month, down from 74,000 in July (and off 22% from a year earlier). Sales of new homes priced at $500,000 or more plummeted: 6,000 were sold in August, after 9,000 for each of the previous three months (and 11,000 a year earlier).

The credit market turmoil, spurred by the subprime-market meltdown, has sent rates higher for “jumbo” loans — those $417,000 or more — and blocked many consumers out of mortgages. Lower demand is expected to push prices down even further for higher-end homes, whether new or previously owned…’

Home Sales and Prices Fall Sharply (Michael N. Grynbaum, September 28, 2020, New York Times)

Sales of new homes plunged in August to their slowest pace in more than seven years as tighter credit and rising inventories continued to weigh down the housing industry. The grim statistics could foreshadow further economic weakness in the fourth quarter, analysts said.

New-home purchases fell to an annual pace of 795,000, an 8.3 percent decline from July, as the number of months needed to sell off builders’ inventories rose to the highest level since March, the Commerce Department reported yesterday.

The median price for a new home was down 7.5 percent from a year earlier, to $225,700, the steepest monthly price drop since December 1970…’

Will Housing Booms Outside the US Go Bust? (Greg Ip, September 28, 2020, Real Time Economics Blog)

‘With Americans’ attention riveted on their own housing market, most may not know that many other countries actually experienced bigger booms…

Whereas home prices in the US increased by about 50% between 1990 and 2006, the average increase in the rest of the OECD was closer to 70%.”…

We are well into the most significant domestic downturn in real estate since the early 1990s. This does not mean that real estate is a bad investment, however it should be a ‘wake-up’ call. All markets — stocks, bonds, real estate — go through cycles. Real estate has been so strong for so long, that many people forgot this. Even the banks and credit ratings agencies seem to have forgotten that real estate prices can fall too.

So far, this real estate downturn has not hurt employment significantly, but we may not have bottomed out yet, so that remains to be seen.

The final item above suggests that the falling real estate prices may soon spread to Europe and other parts of the world as they have seen higher prices increase than we have over the past couple of decades.

Retirement: Seeking Wise Counsel

Kurt Brouwer September 28th, 2007

Seeking Wise Counsel-At Home

Seeking wise counsel is probably the best way to get started with retirement planning, whether you are retired now or still planning for the future. Certainly, talking with a financial adviser is important as is talking with your accountant, attorney and your family. However, communication with your spouse is absolutely imperative, yet as this article in the Wall Street Journal shows, good spousal communication is rather rare. Glenn Ruffenach reports on a couple of studies of couples by Fidelity Investments and other organizations [emphasis added]:

‘A study published earlier this year by Fidelity Investments in Boston underscored what many financial planners already know: Wives and husbands aren’t taking time to discuss and plan for later life. In Fidelity’s survey of 502 couples — in which spouses were questioned individually — 41% disagreed when asked whether at least one partner would work in retirement, and 35% differed when asked about each other’s expected retirement age. In all, only 38% said they worked together on financial planning for later life…’

I can attest that couples often have divergent points of view on these issues. However, I was surprised that only 38% of couples in this study had worked together on planning their finances for later life. At its most basic, financial planning or retirement planning starts at home. The article continues:

‘…We asked financial advisers and couples across the country to identify the most important questions that spouses should ask each other about retirement — ideally, at least five years before leaving the office. In many cases, their suggestions focused on lifestyles first, and finances second. Here are the most-suggested conversation starters, along with some advice and observations from those interviewed…’

“What is our vision of retirement — and do we share the same vision?”

Wives and husbands should ask each other how they want to spend their time in later life (traveling? volunteering?) and what a typical day might look like. The mistake comes in assuming that your partner shares your dreams about retirement and wants to pursue the same activities. Hiking the Himalayas, in fact, may be the last thing he or she wishes to do.

“Retirement sometimes creates fissures in long-term marriages,” says Lenore Forsted, age 61, a community volunteer and retired lawyer in Wynnewood, Pa. “All those interests that people developed over decades of marriage suddenly assume more importance — and it’s not always true that they lead in the same direction.”…’

Developing a common vision is extremely important, but it should be clear that it takes time and effort and a sense of sharing and compromise in order to reach a common vision. In most cases, couples will have different views on things and discussing these in a spirit of sharing is critical. Other big issues have to do with how each person views investment risk and reward as well as balancing present spending with future needs.

The article continues:

‘…“What assets do we have for retirement — and are they invested in the most beneficial ways to achieve our goals?”

In many households, one spouse manages the finances, and the other, frequently, has little or no knowledge about retirement planning. In the event of illness, divorce or death, that ignorance can be crippling.

With that in mind, ask yourself: Do you know what retirement accounts you and your spouse have? Do you know how much money you’re contributing to each account and the size of the accounts? Do you have contact information — names, phone numbers and account numbers — for each part of your retirement savings?

Beyond knowing the contents of their nest eggs, couples should have financial goals for retirement and a plan to reach them…’

Setting clear financial and investment goals is important, but it is not enough. You need a solid, step-by-step plan for reaching those goals. But before any plan can be implemented, it has to be created and agreed upon by the couple. Both husband and wife should be active participants in creating their retirement goals and in creating a plan for achieving them.

So, if you are planning for retirement or if you are already retired, it would be useful to have regular family meetings in which you review everything associated with your financial future-budget, Social Security, investments and more. If you tend to be more knowledgeable on these matters, then take the time to share your knowledge. Your husband or wife may be forced into making important decisions if something happens to you and so he or she needs this information as well as an understanding of what your values are.

If you tend to be less involved in this area, make sure you ask good questions and get a working knowledge of everything you have. You may not have as much knowledge as your spouse, but you have many years of practical experience in living and your counsel may well help keep you on course.

So, always seek to have a meeting of the minds with your spouse. If you do, you will be a member of a rather rare group-the 38% of couples that actively seek each others’ counsel.

Why Are Older People Happier Than Younger People?

Kurt Brouwer September 27th, 2007

Andrea Coombes at MarketWatch wrote an interesting piece on happiness and aging. It turns out that older people are happier than younger people by a significant margin.

The article is based on a study by HSBC Bank. By the way, HSBC is the modern incarnation of the Hong Kong and Shanghai Bank. I guess I’m old fashioned, but I think Hong Kong and Shanghai Bank is a lot more memorable than HSBC, but that’s just me. Back to the story [emphasis added]:

‘Some people think those who are decades older have less reason to be joyful. But more people in their 60s and 70s report being happy than do those in their 40s, according to a recent survey conducted for bank HSBC of 21,000 people in 21 countries, spanning four age groups from 40 to 80.

Among U.S. respondents, 89% of those in their 70s and 87% of those in their 60s said they were happy most of the time in the previous week versus 78% of those in their 40s who said that.

What’s their secret to aging happily? Good health and a decent standard of living don’t hurt — but those factors don’t play as big a part as you might think, researchers say.

The truth is, people generally get happier as they age, said Laura Carstensen, director of the Stanford Center on Longevity and a professor of psychology at Stanford University.

“How often one feels sad, angry, disgusted, contemptuous — that frequency declines. And in addition to that, when negative emotions occur, they don’t last as long,” she said, citing research from her studies of people age 18 to 100-plus…’

This finding-that people generally get happier as they age-is a bit counterintuitive, although as I thought about it, the finding began to make more and more sense. As we age, we come to terms with our own pluses and minuses. We also see events and people in a long-term perspective, with fewer emotional peaks and valleys.

My two boys are 7 and 9 and they are continually striving to learn more, to do more and to fit in with their friends. When they are happy, their high point is generally pretty darn high-much higher than mine. However, when they are sad, they are very, very sad.

In that sense, if you charted my moods, it would be a relatively smooth line. Whereas their chart would have much higher peaks and valleys and lots more mood swings-daily, hourly or minute by minute. The article continues:

‘…Of course, individuals’ happiness varies. Studies of twins indicate your genes likely make you more or less optimistic, and the happiness of your parents affects you, said Peter Ubel, a professor of medicine and psychology at the University of Michigan, who has conducted research on happiness.

But unhappiness is generally not connected to aging, Ubel and other researchers say. “I know a lot of unhappy 80-year-olds, but if you look, on average there are a lot more grumpy young men than grumpy old men. We just don’t call them grumpy. We call them angry or irritable,” Ubel said…’

I thought this last point was a key insight into how language is used. In this case, unhappy old men are labelled ‘grumpy’ while unhappy young men are labelled angry or irritable. And, it is true that I have run into more angry young men than grumpy old men.

These points are very important. When time is short, people focus on well-being, but also on what is most important. And what is most important generally has to do with family and friends, with making a contribution to our community and with having good times.

‘…“When people perceive time is limited, they focus more on well-being,” she said. For instance, “they get rid of the riff-raff in their lives and select the people who are most important,” she said.

Others agreed. “You figure out what makes you angry and how to avoid that and what you can do in your life to adjust,” said Susan Turk Charles, associate professor in the University of California at Irvine’s department of psychology and social behavior. “People get better at doing this over time.”

What a great finding. I had not really thought about this until I read the article, but it really clicked when I did. People get better at doing this-that is living and managing moods-over time.

‘…If you connect happiness with a longer life span, try staying active. Longer lives are correlated with people continuing to engage in activities they feel are important, said Robert Butler, president of the International Longevity Center in New York.

It has to be “something that’s substantive and matters, such as taking care of a grandchild, volunteer activity three days a week, continuing to work rather than retiring,” Butler said…’

Finally, the article points out that there is a correlation between the type of life we lead and longevity. Doing activities that matter to you and that bring value to others is an important factor in living longer and living better.

Kudos to HSBC for doing this study in such a comprehensive manner-thousands of people over many countries.

Hot Links: Health Insurance, GM and Unions

Kurt Brouwer September 27th, 2007

GM Labor Deal Ushers in New Era for Auto Industry (Wall Street Journal, September 27, 2020, Joseph B. White, John D. Stoll and Jeffrey McCracken)

‘…The proposed contract allows GM to shift to an independent trust $51 billion in liabilities for UAW retiree health care. GM has argued that it cannot shoulder that burden and remain viable. The auto maker could eventually contribute as much as $35 billion to that trust, called a voluntary employees’ beneficiary association, or VEBA, people familiar with the bargaining process say.

For Detroit’s Big Three, which together lost more than $15 billion last year, the establishment of such independent trusts would constitute a major step toward avoiding the fates of the steel and airline industries, where crushing pension and health-care costs forced major players to seek bankruptcy-court protection. Ford and Chrysler are also engaged in contract talks with the UAW — talks that are now likely to accelerate. The UAW retiree health-care obligations of Detroit’s three auto makers total between $90 billion and $95 billion…’

A Turning Point for Healthcare (Wall Street Journal, September 27, 2020, Chad Terhune and Laura Meckler)

‘The labor agreement reached by General Motors Corp. is the most striking example of a bigger trend sweeping U.S. health-care: employers renouncing their decades-old role as chief health-care buyer.

The auto maker’s iconic status in American industry, and the example it sets as one of the biggest U.S. employers, is likely to speed this shift — and drive discussion in the presidential campaign about overhauling the health system. Polls find health care is the top domestic issue for voters, as more Americans are on the hook for getting their own coverage…’


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