Fed Watching – December 15th

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10 minute long breakdown of the week’s events in markets and the economy.

Markets slightly down, little economic news and decent numbers, we await next week’s FOMC meeting.

And a new segment! Weekend reading:
In Defense of Finance: https://putanumonit.com/2018/12/14/defense-of-finance/
Bitcoin is not a bubble: https://www.econlib.org/bitcoin-is-not-a-bubble/
Good News & Bad News About Saving For College: https://awealthofcommonsense.com/2018/12/good-news-bad-news-about-saving-for-college/
Lambda School: https://lambdaschool.com/

Monetary Offset

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People are always enthralled with stories of the man behind the curtain, a force that doesn’t get much recognition, but actually runs the world. I think this is why the Narcos shows on Netflix are so popular.

Enter the ultimate economic version of this, monetary offset. In the last episode of my weekly market and economy recap show, I talked about how Trump is complaining about the Fed.

Monetary offset is the reason why.

We often hear about fiscal policy, whether you are for it or against it, the government spending dollars undeniably has an inflationary effect. However, fiscal policy has an older brother that is actually pulling the strings, and that’s monetary policy. Monetary policy is what the Fed sets, and the Fed has the luxury of seeing exactly what the government is doing with fiscal policy, and then can factor that in when deciding whether to tighten or loosen borrowing conditions.

This is the essence of monetary offset. Of course, if the Federal government pays people to dig holes and fill them back in, that will still happen, so clearly an economy is best served by having both sides doing a good job. However, just one doing a bad job can derail the other, and at the end of the day, the Fed controls inflation because the Fed can offset anything that the treasury does.

8 Reasons People Hate Stock Buybacks

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With stock buybacks taking heat and even crazy uncle Bernie getting in on the action, I figured the time was right for me to join the chorus of finance professionals happy to give you their two cents about them.

I won’t focus much on the theoretical side, other than to briefly cover the main points that have been fleshed out many times. Here, here, here.

The theoretical argument goes pretty much as follows: a stock buyback is exactly the same as a dividend, except instead of cash landing in your account (as a taxable event, mind you), there are fewer shares outstanding and therefore the price of your stock goes up (ceteris paribus).

As the saying goes, in theory, there is no difference between theory and practice, in practice, there is.

So let’s talk about the differences.

As a brief refresher, dividends are pretty simple, and most of them are recurring (monthly, quarterly, or annual), and (mostly amateur) investment theses have been built around them. The company periodically takes some cash and distributes it to the shareholders, a certain amount per share that you own. This is taxable to you (usually between 15-24% Federally depending on your tax bracket).

Buybacks differ from dividends in a few key ways:

  1. They aren’t typically regularly recurring. This makes them feel special and unpredictable.
  2. They may be equivalent to many years of cash build-up, so you can get a nice headline grabbing number like $100 billion.
  3. They don’t show up as cash in your portfolio, you have to make the cash available yourself by selling a portion of your shares.
  4. It is hard to keep track of how much value is being returned to you via share buyback. Your portfolio does not have a section that tells you how much of the appreciation of your shares is due to the fact that you now own a larger portion of the company.
  5. The value of a buyback is small compared to the daily fluctuations of the market. A stock could easily be down the day of a substantial share buyback for reasons related to the economics of the company.
  6. Somehow dividends seem to escape scrutiny here (see #5 above), despite stocks losing value when the dividends become payable.
  7. Dividends have acquired a sheen of being deserved, we work hard at something and it pays dividends this is good.
  8. Buyback has a negative mood affiliation. I’m not sure if it is the ‘buy’ that sounds greedy, or ‘back’, where it also sounds greedy, or a combination of the two, but somehow share buybacks sound greedy to most people. It manages to bring out the Australian in all of us.

However, even given these concrete reasons, I think the most likely reason people dislike buybacks is simple misunderstanding. Dividends are simple. Own shares, get cash. Buybacks are complicated, and somewhat unseen.

Most people do not have the mental energy to spare on the thought exercise of a share buyback (see example at bottom here). To them, stock ownership is some form of gambling, and therefore buybacks do not confer value to the shareholders while dividends clearly do.

Fed Watching – November 24th

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10 minute long breakdown of the week’s events in markets and the economy.

Stocks are down for Thanksgiving, Trump is sticking his nose where it doesn’t belong, and a special section on bitcoin.

How the Athlete Retirement Calculator Works

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I built an athlete retirement calculator, and here is the breakdown of what the inputs are and how to use it, as well as a few caveats.

Let’s start with a walk through of what the inputs mean:

Annual Spending During Career: Just what it sounds like, outside of taxes and commissions/fees, how much do you spend each year while you are under contract?

Current Assets: Your current investment savings, probably doesn’t make sense to count the value of a house or anything.

% of Contract You Keep: Athletes only keep 40-60% of what they make after taxes and other costs are factored in. If you know what you keep, punch it in.

The rest of the sections are simple, they are current contract length and earnings per year (before taxes and fees) and there are two more identical sections so you can look at two additional contracts after your current one.

A few important comments. I made no attempt to factor in capital gains taxes over time, which would start to be a bigger factor decades down the line. I made no allowance for pensions or social security or the retirement account that is being maxed out each year by some of the leagues. Those would all be additive.

I assumed the portfolio gets 7% returns for the length of the combined contracts. Once the final contract is done, the balance of the portfolio is divided by 25, in other words, allowing the spend of 4% of the portfolio each year. Very simplified version of planning, but also very practical.

If you wanted to add in something like a house purchase, but didn’t want to mess up the other calculations, you could factor it in by subtracting the amount you pay for it from “Current Assets”, yes, it will work even if that makes the Current Assets number negative.

How much can an NBA player retire on?

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Everyone has heard the stat that 60% of NBA players and 80% of NFL players are bankrupt 5 years after they leave the league. Most people are incredulous — how could someone who makes millions spend it all?

I decided to run the numbers for myself and see just what kind of lifestyle an NBA career could guarantee somebody for the rest of their life.

The average NBA player is making about $7.7 million this year, and the average NBA player plays for about 5 years.

Now, NBA players only take home between 40-55% of their headline salary after taxes and fees are taken out.

So, I built a calculator to assist in answering my question. Using assumptions detailed on the calculator page, we can see that an NBA player’s ability to spend in retirement matters greatly on how much they spend during those NBA years.

If the player makes $7.7 million for five years and keeps 50% of that after taxes, agent fees, etc., if he spends $1 million per year, he would end his career with about $17.5 million put away, and be able to spend about $700,000 per year throughout the rest of his life.

According to Time, the average NBA player spends about $500,000 per year. In that case, the player would retire with over $20 million saved up and be able to spend $825,000 per year – more than when he was playing!

Of course, the numbers go the other way as well, a player who spends $2 million per year while he is playing would have to adjust his lifestyle to less than a quarter of that, below $500,000 per year to make it last in retirement.

Let’s have a little fun. What do the numbers look like for a number one pick? Markelle Fultz is set to make about $15 million guaranteed for the first two years, followed by a couple of team option years.

If all he gets (and I hope greatly that this is not the case) is this $15 million, and he’s spending $1 million per year while he plays, he can set himself up to spend about $250,000 each year for the rest of his life. Not bad. If the team picks up both of those options, that doubles – $500,000 per year! What if he buys a $2 million house in addition to his regular spending? That reduces his future spending by about $100,000 per year!

Fed Watching – November 17th

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Weekly review of markets and the economy. Down week for stocks, decent economic news, and a couple of ridiculous proposals from progressives. My notes on Jay Powell’s press conference.